FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
GOLDEN QUEEN MINING CO. LTD.
(Exact name of small business issuer 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $74,646. The
aggregate market value of the voting stock held by non-affiliates at March 2,
1999 was $9,161,822. The number of shares of common stock outstanding at such
date was 34,796,641.
Transitional Small Business Disclosure Format. Yes [ ] No [X]
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GOLDEN QUEEN MINING CO. LTD.
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
SAFE HARBOR STATEMENT
GLOSSARY
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Page
PART I
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Item 1: Description of Business........................................................1
Item 2: Description of Property........................................................9
Item 3: Legal Proceedings.............................................................12
Item 4: Submission of Matters to a Vote of Security Holders...........................12
PART II
Item 5: Market for Common Equity and Related Stockholder Matters......................12
Item 6: Management's Discussion and Analysis or Plan of Operation.....................13
Item 7: Financial Statements..........................................................17
Item 8: Changes in and Disagreements with Accountants and Financial Disclosure........17
PART III
Item 9: Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act........................17
Item 10:Executive Compensation........................................................19
Item 11:Security Ownership of Certain Beneficial Owners and Management................22
Item 12:Certain Relationships and Related Transactions................................24
Item 13:Exhibits and Reports on Form 8-K..............................................25
SIGNATURES
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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 December
31, 1998 of approximately $3,941,000. 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 anticipates that it
will need approximately $77,600,000 in additional financing to put the Soledad
Mountain Project into production; an anticipated $66,300,000 will be used for
capital expenditures and $11,300,000 will be used as working capital and for
start-up expenditures. 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. However,
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 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
December 31, 1998, world gold prices were approximately $287 per ounce, a
reduction of approximately 2% from prices a year ago, and a reduction of
approximately 22% from prices two years ago. If gold prices remain weak, 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. The Company is also subject to the uncertainty about its ability to
identify and address all Year 2000 issues. 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.
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GLOSSARY
Certain terms used throughout this report are defined below.
ADVANCED MINIMUM ROYALTY. Cash royalty payments made in advance of production to
hold a mining lease. Advanced minimum royalties are usually but not always
credited against production royalties arising after production commences.
AG. The symbol for silver.
AU. The symbol for gold
AUEQ. Gold equivalent, being a measurement of gold and silver on a combined
basis calculated to reflect the price and recovery differentials between the two
metals.
CALDERA. A large diameter crater caused by the collapse or subsidence of the
central part of a volcano, or as the result of a violent explosion.
COMPANY. Golden Queen Mining Co. Ltd., a British Columbia corporation, and its
wholly-owned subsidiary, Golden Queen Mining Company, Inc., a California
corporation.
CRETACEOUS PERIOD. A period in geologic time approximately 65 to 141 million
years ago.
DEVELOPMENT STAGE. Activities related to the preparation of a commercially
mineable deposit for extraction.
EXPLORATION STAGE. Activities such as drilling, bulk sampling, assaying and
surveying related to the search for mineable deposits.
FAULT or FAULTING. A fracture in the earth's crust accompanied by a displacement
of one side of the fracture with respect to the other and in a direction
parallel to the fracture.
FLOATING CONE and INVERTED CONE. A computerized methodology used to approximate
the shape of a near-optimal economic open pit mine plan based on applied cutoff
grade criteria and pit slopes.
GRADE. A term used to assign value to reserves, such as ounces per ton or carats
per ton.
HDPE. High density polyethylene, which is a plastic used to create an impervious
membrane.
HEAP LEACHING. A gold extraction process involving the percolation of cyanide
solution through crushed ore heaped on an impervious pad or base.
HECTARE. A metric measurement of area equivalent to 10,000 square meters.
LINEAR KRIGING. A geostatistical method of resource analysis.
MAGNETIC SURVEYING. A mineral exploration technique which employs a magnetometer
to measure the magnetic intensity of an area to determine possible
mineralization.
MERRILL-CROWE PROCESS. A process used to recover soluble gold and silver from a
leaching solution by precipitating with zinc dust after the solution has been
clarified and deoxygenated by vacuum treatment.
METALLURGY. The science and technology of extracting metals from their ores.
MIDDLE MIOCENE EPOCH. A period in geologic time approximately 6 to 22 million
years ago.
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MINERAL DEPOSIT. A mineral deposit is a mineralized underground body which has
been intersected by sufficient closely-spaced drill holes or underground
sampling to support sufficient tonnage and average grade(s) of metal(s) to
warrant further exploration or development activities. A mineral deposit is
sometimes also referred to as MINERALIZED MATERIAL or as MINERALIZED MATERIAL
inventory. A mineral deposit does not qualify as a commercially mineable ore
body (reserves) under standards promulgated by the Securities and Exchange
Commission until a final, comprehensive economic, technical and legal
feasibility study based upon test results has been concluded.
MINERALIZATION. The presence of minerals in a specific area or geological
formation.
ORE. A natural aggregate of one or more minerals which at a specified time and
place, may be mined and sold at a profit or from which some part may be
profitably separated.
OROGENIC. Of or pertaining to an orogen, which is a mountain mass that is a unit
with respect to origin or uplift.
OVERBURDEN. Waste rock and other materials which must be removed from the
surface in order to mine underlying mineralization.
PIT PHASING ANALYSIS. A method used to optimize the mining sequence in an open
pit mine design.
PLUTONIC. Originating or situated deep within the Earth.
PRODUCTION STAGE. Activities related to the actual exploitation or extraction of
a mineral deposit.
RESERVES. That part of a mineral deposit which could be economically and legally
extracted or produced at the time of determination. Reserves are subcategorized
as either PROVEN (MEASURED) RESERVES, for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes, and grade
and/or quality are computed from the results of detailed sampling, and (b) the
sites for inspection, sampling and measurement are spaced so closely and
geologic character is so well defined that size, shape, depth and mineral
content are well-established; or PROBABLE (INDICATED) RESERVES, for which
quantity and grade and/or quality are computed from information similar to that
used for proven (measured) reserves, yet the sites for inspection, sampling and
measurement are farther apart.
STRIPPING RATIO. The tonnage of waste material removed to allow the mining of
one ton of ore in an open pit.
TREND. The directional line of a rock bed or formation.
VOLCANICS. Rock composed of clasts or pieces that are of volcanic composition.
[The balance of this page has been left blank intentionally.]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS. The Company was incorporated under the laws of
the Province of British Columbia in November 1985, and is presently engaged in
the development of mineral properties located in the Mojave Mining District of
Kern County, California known as the Soledad Mountain Project. The Company
acquired its initial interest in the project in 1986; since then, it has
acquired additional interests in the area and explored for gold and other
minerals. These activities are conducted through Golden Queen Mining Company,
Inc., a California corporation and wholly-owned subsidiary of the Company.
The Company first outlined a gold deposit at the project in 1988, although the
size of the deposit was insufficient to justify further development. Further
exploration work was conducted from 1989 through 1991. Thereafter, the project
remained dormant, until 1994 when the Company renewed exploration activities
with funds derived from several offshore private placements of its common stock.
A mineable ore reserve was generated as part of a feasibility study completed by
M3 Engineering and Technology of Tucson, Arizona in early 1998. This study
estimated the mineable ore reserves, based on a gold price of $350 per ounce and
a silver price of $5.00 per ounce, at 48.6 million tonnes (53.6 million tons)
averaging 0.86 grams of gold per tonne (0.025 ounces per ton) and 12.7 grams of
silver per tonne (0.371 ounces per ton) for a gold equivalent grade of 1.04
grams per tonne (0.030ounces per ton), or a total of 1.585 million ounces of
gold equivalent. Based on extensive sampling and other exploratory activities
conducted through 1998, an update of proven and probable mineable ore reserves
at the project was estimated internally at a gold price of $325 per ounce and a
silver price of $6.00 per ounce. This reserve update totals 45.0 million tonnes
(49.6 million tons), at an average grade of 0.99 grams per tonne (0.029 ounces
per ton) of gold and 14.34 grams per tonne (0.42 ounces per ton) of silver for a
gold equivalent grade of 1.21 grams per tonne (0.035 ounces per ton). Total
contained ounces are estimated at 1,437,000 ounces of gold and 20,757,000 ounces
of silver, or approximately 1,748,000 ounces of gold equivalent.
The Company has determined to develop the project using open pit mining methods
and a cyanide heap leach recovery process. Development plans include the
construction of facilities capable of mining and processing precious metals ores
at a rate of up to 5.76 million tonnes (6.35 million tons) per year for at least
nine years, followed by heap detoxification and reclamation of the project site.
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 was not able to obtain financing for construction.
As a consequence, production will be delayed until gold prices improve.
The registered office of the Company is located at 1600 - 925 West Georgia
Street, Vancouver, British Columbia V6C 3L2, and its executive offices are
located at 104 S Freya Street, Suite 211-A, Green Flag Building, Spokane,
Washington 99202.
PROJECT BACKGROUND. The Soledad Mountain Project is located within the Mojave
Mining District along with the nearby Cactus Gold Mine, Standard Hill Mine and
Tropico Mine. Mining in the area dates back into the late 19th century, but the
most significant production occurred from the 1930s to 1942 when Gold Fields
Mining Company of South Africa operated a 272-ton per day cyanide mill,
evidenced by the large piled tailings on the north slope of Soledad Mountain. No
historical operators attempted open pit mining in the project area.
The project was brought to the Company's attention in the mid-1980s by George
Phelps, who held an interest in mining properties in the area through Golden
Queen Mining Company, Inc., a California corporation. Management obtained and
reviewed old maps of underground mining activities in the project area and was
impressed with the horizontal extent to which significant precious metals
extended into the foot and hanging walls of major veins. The Company acquired
all of the outstanding shares of Golden Queen Mining Company, Inc. in 1986,
thereby obtaining Mr. Phelps' property interests in the project area. Shortly
thereafter, the Company began consolidating its land position and commenced an
initial program of 12 diamond drill holes and limited underground check
sampling. The next phases of exploration, lasting through 1990, consisted of
reverse circulation drilling and more extensive underground check sampling.
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More extensive exploration activities commenced in 1994, and by the end of 1995
a total of 587 surface drill holes had probed the numerous structures of the
project area for ore reserves. In addition, assay information from 7,435 meters
(24,394 feet) of underground drilling and cross-cuts was used to bolster the
understanding of surface drilling results and provide assay data in deeper
portions of ore-bearing structures. This was augmented in 1996 and 1997 by an
additional 142 surface drill holes and the sampling of 4,282 meters (14,050
feet) of additional underground drilling and cross-cuts.
EXPLORATION.
GENERAL. Several major drilling campaigns and a program to resample the
underground workings have been completed, along with metallurgical testing for
process amenability. Aerial survey topographic mapping and collection of
baseline data for environmental permitting have also been conducted.
High grade precious metal mineralization is associated with steeply-dipping
epithermal fissure veins occupying faults and fracture zones that cross-cut the
rock units in a general north-west trend. This is the ore that was mined and
processed by the previous mining operation of Gold Fields Mining Company in the
1930s and early 1940s, but a considerable amount of this material remains and is
incorporated into the present reserves. Surrounding the veins are siliceous
envelopes that contain lower grade, but still ore-grade, material that forms the
major portion of the reserve tonnage.
SAMPLING AND BLOCK MODEL CONSTRUCTION. The economic viability of the mineral
deposit at the Soledad Mountain Project is based on industry-accepted and block
model computer analysis. The Company constructed a three dimensional computer
model of the project area using simulated "blocks" of mineralized material
measuring 7.6 meters (25 feet) by 7.6 meters (25 feet) by 6.1 meters (20 feet);
substantial data derived from drill hole samples, underground crosscuts, and
other exploratory methods was then introduced into the model to determine the
gold and silver content and average grades of the simulated blocks. Finally,
different economic variables, such as metals prices and mining and ore
processing costs, were introduced to determine the viability of mining all or a
portion of the deposit.
The data employed in the block model analysis was derived from Gold Fields
Mining Company's production records and the Company's more recent exploration
activities, and consists of 103,068.4 meters (338,148 feet) of assayed material
taken from more than fourteen different vein systems in the district. The
sources and extent of this data are summarized below:
Diamond drilling 9,403.3 meters (30,848 feet)
Reverse circulation drilling 80,603.4 meters (264,447 feet)
Old cross-cuts (1930s) 6,813.0 meters (22,352 feet)
Underground drilling (1930s) 4,909.7 meters (16,108 feet)
Recent cross-cuts (1980s) 1,339.0 meters (4,393 feet)
---------------- -------------
103,068.4 meters (338,148 feet)
================ =============
The model is based in part on the Company's geological interpretation of this
data. Rock types, high grade zones, low grade zones, mined-out stopes and zones
of internal waste were delineated on cross sections, transferred to bench plans,
digitized, and loaded into the model. Plan maps were plotted from the block
model to check the block code assignments and corrections were made where
necessary. High grade zones were defined as outlined areas containing grades
greater than 3.43 grams per tonne (0.100 ounces per ton) of gold equivalent and
low grade zones enclosing areas that ranged from 3.43 to 0.41 grams per tonne
(0.100 to 0.012 ounces per ton) of gold equivalent. Each mineralized block was
then assigned a percentage for their volume of high grade, low grade, and stope
material. All the remaining blocks in the model that did not fall into one of
the described ore categories were considered waste. Since ore and waste zones
were defined in the model blocks but not in the drill hole composites, the code
of the block penetrated by the drill hole was assigned back to the composite to
ensure a consistent one-to-one match during the grade interpolation process.
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Linear kriging was used to estimate gold and silver grades in the model. Grades
were interpolated for the high grade and low grade zones independently, to
maintain the integrity of each zone. The separation of high grade, low grade and
waste zones was maintained by allowing only composites coded as high grade to be
used to interpolate high grade zones and similarly, only low grade composites
were used to interpolate low grade zones. Gold equivalent grade for each block
was calculated based on the following equation:
AuEq = AuKrg + [(AgKrg/54.17)*(60%Ag recovery/78% Au recovery)].
This calculation was done for all blocks containing interpolated gold and silver
grades and the resulting value was stored back into the block. Mineable reserves
and all subsequent mine planning work were based on kriged gold and kriged
silver values.
Mineralized material includes all blocks within the model limits, but with no
assumptions as to economic viability. Based on a cut-off grade of 0.41 grams per
tonne (0.012 ounces per ton) of gold equivalent, the mineralized material is
estimated to be 86,552,964 tonnes (95,408,810 tons) averaging 0.871 grams per
tonne (0.025 ounces per ton) of gold and 14.198 grams per tonne (0.4156 ounces
per ton) of silver, or 1.073 grams per tonne (0.031 ounces per ton) of gold
equivalent.
An independent manual estimate of mineralized material (cross section polygonal
resource estimate) was also completed and validates the Company's block model
mineralized material. The data employed in the manual estimate was also derived
from Gold Fields Mining Company's production records and the Company's more
recent exploration activities.
The manual mineralized material estimation is based, in part, on an independent
geological interpretation of this data. Rock types, mineralized zones, mined-out
stopes and zones of internal waste were delineated on cross sections.
Mineralized polygonal shapes were defined as areas of at least 6.1 meters (20
feet) width and containing grades equal to or greater than 0.34 grams per tonne
(0.010 ounces per ton) of gold equivalent. A polygonal shape was drawn (along
dip) around each mineralized portion of a drill hole or cross cut to
mid-distance to the nearest intercept or up to 400 feet, which ever was less.
Average gold and silver grades, along with volume of mineralization were then
calculated for each polygon.
The manual estimate of mineralized material includes all mineralized polygons
within the project area, but with no assumptions as to economic viability. Based
on a cut-off grade of 0.34 grams per tonne (0.010 ounces per ton) of gold
equivalent, the manual estimate of mineralized material is 82,037,406 tonnes
(90,431,233 tons) averaging 1.013 grams per tonne (0.030 ounces per ton) of gold
and 14.850 grams per tonne (0.433 ounces per ton) of silver, or 1.224 grams per
tonne (0.036 ounces per ton) of gold equivalent.
FLOATING CONE AND PIT PHASING ANALYSES. A floating cone analysis is a
computer-aided means of designing an optimal open pit mine plan. The "floating
cone" is an inverted cone model that is first superimposed over the mine area
without regard for practical mining or economic considerations. The model is
then refined to take into account cut-off grades, pit outlines, final ore
reserve calculations, until it resembles a mineable pit, following which it is
refined further to reflect the smoothing of abrupt changes in pit wall
configuration for slope stability, and the smoothing of intermediate benches and
pit floors for efficient equipment utilization and the addition of haul roads.
Once these refinements have been made, further analysis is undertaken to
determine "pit phasing" or the sequence of mining operations. Among the factors
considered in this analysis are haul profiles, load-haul match-ups of mining
equipment, and ore grades delivered to the crusher. It is an iterative process
involving a comparison of multiple scenarios and having as its goal the
maximization of production at the lowest possible cost. The analysis is critical
to the development of capital and operating costs.
The internally-generated ore reserve portion of the recently updated mineralized
material inventory at the Soledad Mountain Project was calculated by applying
the following economic cut-off criteria to the floating cone analyses for
preliminary pit design: a gold price of $325 per ounce; a silver price of $6.00
per ounce; mining costs for waste and ore of $0.68 per tonne ($0.62 per ton);
processing costs of $2.24 per tonne ($2.03 per ton); general/administrative
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costs of $0.56 per tonne ($0.51 per ton); process recovery rates of 78% for gold
and 60% for silver; a refining recovery rate of 100%; a design cut-off grade of
0.41 grams per tonne (0.012 ounces per ton) of gold equivalent.
An internal cut-off grade of 0.31 grams per tonne (0.009 ounces per ton) of gold
equivalent was calculated by deleting mining costs from the above on the premise
that material within the pit that must be removed needs only to support the
incremental costs for processing to be considered ore.
ORE RESERVES. The Soledad Mountain Project internally-generated mineable ore
reserve estimate, classified as proven and probable, is 45.0 million tonnes
(49.6 million tons) averaging 0.99 grams per tonne (0.029 ounces per ton) of
gold and 14.34 grams per tonne (0.42 ounces per ton) of silver. Total contained
ounces are 1,437,000 ounces of gold and 20,757,000 ounces of silver, or
approximately 1,748,000 ounces of gold equivalent. This estimate updates the
previous estimate that was a basis for the M3 Engineering and Technology (M3)
feasibility study completed in early 1998. In the M3 study, the development of
the computer model for the Soledad Mountain deposit was completed as a
cooperative effort between Golden Queen staff and Mine Reserves Associates of
Wheatridge, Colorado. The following table sets forth information concerning
proven and probable mineable ore reserves based on an average cut-off grade of
0.41 grams per tonne (0.012 ounces per ton) of gold equivalent.
PROVEN AND PROBABLE RESERVE ESTIMATE
CATEGORY ORE TONNES AUEQ G/MT AUEQ OZ AU G/MT AU OZ AG G/MT AG OZ
- -------- ---------- --------- ------- ------- ----- ------- -----
Proven and
probable 45,019,000 1.21 1,748,000 0.99 1,437,000 14.34 20,757,000
The Company estimates that the current mineable ore reserve will support ore
production at a rate of up to 5.76 million tonnes (6.35 million tons) per year
for at least nine years. Considering a possible four-year period of heap
detoxification, gold production could extend the life of the project to thirteen
years. Further extension is a possibility if additional drilling provides better
definition of mineable reserves in those areas that currently have limited
drilling intercepts and/or limited underground sampling. The average stripping
ratio is projected to be approximately 4.57 to 1. The projected mine life,
stripping ratios and ore production rates at the project are believed by the
Company to be well within industry standards.
METALLURGY. There are three principal types of ore represented in the mineral
deposit of the project: quartz latite, rhyolites and pyroclastics. Metallurgical
testing has been performed on more than 200 samples of these ore types from the
project area over a period of ten years.
Four ore processing methods were evaluated in developing an operating plan for
the Soledad Mountain Project: slurry cyanide leaching, gravity separation,
flotation and heap leaching. Tests confirmed heap leaching as the best
processing method for the project, largely because the ore deposit is of
relatively low grade. The location and climate of the project area are well
suited to heap leaching, and the process has been successfully applied by other
mining companies to nearby ore bodies. Because of the high ratio of silver to
gold in the deposits, recovery of these metals from the leaching solution will
be accomplished using the Merrill-Crowe process. Trace elements of mercury in
the ore will be removed from the precipitate using a mercury retort. Test data
indicate that crush size is the most important factor affecting metal recovery,
and that crushing the ore to a size of 8 mesh (which is about the finest size
attainable without milling) will be required to realize optimal recoveries. It
is anticipated that the ore will be agglomerated with cement as a binding agent
at the rate of 4.5 kilograms of cement per tonne (10.0 pounds per ton) of ore
processed. The tests indicate average expected ultimate gold and silver
recoveries of 80% and 65% respectively.
MINING AND ORE RECOVERY PLAN.
MINING. Mining at the Soledad Mountain Project will be conducted using
conventional open pit techniques. It is anticipated that operations will be
carried out by the Company's own employees. Open pit mining is generally
associated with a spiral haulage ramp that is extended as the pit deepens. At
the project, the majority of the ore will be excavated by cutting back into
canyons or along hillsides; the ore is not in a single pit, but in a network of
smaller
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pits, with frequently overlapping pit walls. The current mine plan involves
initial low elevation mining for the first two years of production, followed by
higher elevation mining in subsequent years. The road extending from the ore
stockpile area at the processing plant site up to the highest elevations of the
mountain must be built before any excavation can begin on the highest benches in
each pit area. A total of about 6,400 meters (20,992 feet) of road will be
required: 2,500 meters (8,200 feet) to facilitate the first two years of mining
at low elevations, followed by further extensions to the highest benches of the
mountain during the remaining mine life.
The Company plans to mine at a rate of up to 5.76 million tonnes (6.35 million
tons) of ore per year on the basis of three eight-hour shifts per day, 360 days
per year. This schedule would provide ore to the crusher at a rate of 16,200
tonnes (17,881 tons) per day and an average of 74,034 tonnes (81,715 tons) of
waste per day. All waste will be deposited on a series of dump sites east, south
and west of the pit areas.
Ground water has been reported only in the deepest gold mine workings below 823
meters (2,699 feet) in elevation. All open pit mining is therefore expected to
be dry, except for occasional rains and very occasional winter snows. Old
workings from historical underground mining will be encountered from
time-to-time, but are not expected to interfere significantly with mining
operations.
CRUSHING, CONVEYING AND STACKING. A 900 tonne (993 tons) per hour four-stage
crushing circuit will be installed at the Soledad Mountain Project. The primary
crushing system will be comprised of a vibrating grizzly feeder with 103
millimeter (4.0 inch) apertures and a 950 millimeter (37 inch) by 1,250
millimeter (49 inch) jaw crusher with a closed side setting of 103 millimeters
(4.0 inches). The grizzly undersize and the jaw crusher product will be combined
and conveyed to a secondary crushing circuit. Secondary crushing will be done in
a 2.13 meter (7 foot) short head cone crusher. Third stage crushing will be done
in two 2.13 meter (7 foot) short head cone crushers and fourth stage crushing
will be done in seven 990 millimeter (38.5 inch) vertical shaft impact crushers.
Third and fourth stage crushing will be done in closed circuit with a double
deck screen producing a final product of 100% minus 2.36 millimeter (8 mesh)
crushed ore.
Crushed ore will be combined on a single belt conveyor for sampling and
agglomeration. Cement will be added to the belt conveyor by a variable speed
screw conveyor. The belt conveyor will discharge directly into an agglomeration
drum. Water and barren solution will be added in increments in the agglomerator
to bring the ore to an 8% moisture content. A totalizing belt scale on the final
product belt will control the cement and water additions and record daily
tonnages. The agglomeration drum will discharge onto a conveyor that feeds the
heap conveying and stacking system.
In the primary crushing circuit, dust will be controlled by low pressure water
sprays. In the secondary, tertiary and quarternary crushing circuits, dust will
be controlled by central dry bag dust collectors. Individual dry dust collectors
will be used on the cement silo and at outlying conveyor transfers.
The agglomerated ores will be conveyed to a radial stacking system by a series
of portable and semi-portable conveyors. The conveying system will consist of a
series of 0.914 meter (3 foot) wide semi-portable and portable conveyors. The
semi-portable conveyors will transport the crushed ore to the central area of
the leach pad and the portable conveyors will transport crushed ore to the
stacker. The stacking system will consist of a self-propelled bin conveyor and a
39.6 meter (130 foot) long radial stacker with a 6.1 meter (20 foot) long
slinger. The radial stacker will be equipped for lifting and hydraulic wheel
positioning. The hydraulic drive will be sized for the slopes of the leach pad.
LEACHING. The initial heap leach pad will be located on the north slope of the
mountain, and a second leach pad will be located on the west slope. Each will be
a side hill pad with a perimeter dike to support the toe of the heap and create
solution storage capacity. In addition, each is designed to minimize its effect
on the surrounding environment, wildlife and waters. Both pads are designed as
dedicated pads, meaning that the ore will be stacked, leached, rinsed and left
in place on the pads for reclamation. The pads will be located downslope of the
proposed mine pit along the base of Soledad Mountain and will be divided into
cells to correspond to ore production and pad capacity requirements. The
capacity of the pool in each cell is designed to have sufficient storage for up
to eight hours of solution application and 12 hours of drain down in the event
of a pump or power failure and to store the estimated precipitation from a
100-year 24-hour storm event.
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Leach solution will be distributed over the heap by a system of pipes and
emitters. Once the solution is applied to the ore and percolates throughout the
heap, it will drain along the base of the heap. The solution flow will be
intercepted and collected by 10 centimeter (4.0 inch) diameter perforated pipes
installed on top of the liner system and routed into one of three solid manifold
pipes. The manifold pipe will then route the solution to the solution collection
sump. This drainage system is designed to minimize the hydraulic head applied
over the composite liner system and increase the rate of solution recovery.
Solution will be recovered from the heap by a submerged sump pump in the low
area of the cell. The sump pump will be used to recover solutions to a tank and
booster pump station that will then pump solution to the solution storage tanks
at the Merrill-Crowe plant. The pipelines will be located within the lined cell
for containment in the event of a pipe leak. The pad for the pump will be
designed to drain into the leach pad to control leaks from the pump.
The pad liner system will consist of four components: the prepared subgrade, the
liner material, a solution collection system on top of the liner and a
protective overliner material. The prepared subgrade will be a well-graded
material prepared and compacted to a permeability of at least 10-6 centimeters
per second. The pad liner will be constructed as a composite system. An 80
millimeter thick geomembrane HDPE material will overlay the prepared soil
subgrade, and a leak detection system will be installed under the geomembrane.
Protective overliner material consisting of crushed ore or waste will then be
placed in a 460 millimeter (18 inch) thick lift over the lined area. This
protective overliner will serve to secure the solution collection piping and
provide direct access in the pad area for lightweight vehicles and the conveyor
system. Initial placement of the material will be integrated with pad
construction to create a working area of sufficient size for production. Pipe
laying and spreading of the overliner will be done thereafter, in conjunction
with the pad loading plans.
The leach recovery schedule is based on three parameters: the metallurgical
characteristics of the ore, physical delays in the handling of ore and solutions
and the retention of values in solution within the heap. Once the heap has been
under leach for a complete leach cycle and a constant daily tonnage is being
stacked, estimated recoveries are as follows:
PERCENTAGE OF 80% GOLD, 65% SILVER
Days Au Ag
---- ------- -------
30 83.5 79.4
60 5.8 7.2
90 3.2 4.0
275 5.7 7.1
400 1.8 2.3
------- -------
100.0 100.0
The modification for each year's production, particularly in the first year,
schedule must take into account the load-to-leach delays, delays from the
additional lifts and, most importantly, the values retained in heap solutions.
The heaps will be detoxified prior to closure by a rinse of a combination of
fresh water and peroxide-treated recycled water. The heap will be rinsed by
cells. Each cell is estimated to require a two-year period to detoxify to
required cyanide levels. The amount of fresh water available is limited by the
well source and the other demands of production: agglomeration and dust
suppression. During the production years, 18.9 liters (5 gallons) per second
will be available. After mining has ceased, 37.9 liters (10 gallons) per second
will be available. The addition of fresh water must be matched by the loss of
water to evaporation. Production during the detoxification period will come from
two sources. Gold and silver will be recovered as a result of extending the
leach cycle and from the solutions entrained in the heap that are rinsed during
the period.
RECOVERY. The gold recovery plant at the project will be a conventional
Merrill-Crowe circuit, due to the high silver content of the ore. The average
silver content of the ore body is 14.34 grams per tonne (0.42 ounces per ton),
but the silver content of the feed will occasionally exceed 34.3 grams per tonne
(1.0 ounces per ton). During heap detoxification, when cyanide levels drop below
levels suitable for Merrill-Crowe processing, a small carbon plant will be used.
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RAW MATERIALS. Electricity will be delivered to the project site using a
dedicated line by the utility company which currently supplies power in the
vicinity. A process water well has been developed from underground sources on
land controlled by the Company. Other materials necessary for mining and
processing, such as sodium cyanide, cement, diesel fuel and ammonium nitrate,
are available for purchase from more than one supplier and management believes
that there will not be a problem in securing these materials.
PERMITTING AND ENVIRONMENTAL ISSUES. The Soledad Mountain Project is located on
private and federally-controlled lands in an incorporated area of Kern County,
California. Current and proposed mining activities on these lands are thus
subject to extensive federal, state and local regulations. These regulations and
the Company's compliance efforts are summarized below.
CEQA/NEPA ISSUES. The project is subject to the California Environmental Quality
Act ("CEQA") and the National Environmental Policy Act ("NEPA"), each of which
requires written analysis of proposed mining activities and their effect on the
physical, biological, social and economic resources of the area. This analysis
is known under CEQA as an environmental impact report ("EIR"), and under NEPA as
an environmental impact statement ("EIS").
The Company submitted its combined EIR/EIS to the Kern County Planning and
Development Department in February 1996, in accordance with a memorandum of
understanding between Kern County and the Bureau of Land Management ("BLM")
which gave the county department primary responsibility for review. The EIR/EIS
took the form of a combined conditional use permit application, environmental
information statement, surface mining reclamation plan and plan of operation.
Several comments were received in response to the EIR/EIS concerning ground
water quality and quantity, air quality, the effect of development on native
species of plants and animals, the visual impact of the project and the
potential hazards associated with transporting supplies and chemicals to the
project site. These comments were incorporated into a revised EIR/EIS released
for public comment in June 1997. In September 1997, the Company received a
favorable notice of determination regarding the EIR/EIS, as well as approval of
its conditional use permit application and surface mining reclamation plan
(required by the California Surface Mining and Reclamation Act and applicable
Kern County zoning ordinances). This was followed in November 1997 by a record
of decision from the BLM approving the Company's plan of operation under NEPA.
AIR QUALITY ISSUES. The project lies within the Southeast Desert Air Basin,
which is under the jurisdiction of the Kern County Air Pollution Control
District. The district is empowered to regulate stationary sources of air
pollution within the basin, pursuant to authority granted under the federal
Clean Air Act.
The Area is designated as unclassified for PM10 emissions (that portion of the
total suspended particulates less than 10 microns in size) and as a
non-attainment area for ozone. The typically windy conditions and very dry
nature of the area are probably responsible for the high PM10 background levels
recorded at several nearby monitoring stations. On-site air sampling was
conducted for approximately one year with high background PM10 levels found.
Fugitive dust, when combined with the background dust may cause unacceptable
levels of PM10 emissions off-site, and may represent the greatest potential
environmental issue. A PM10 level of 44 micrograms per cubic meter is projected
by computer modeling utilizing a mining rate of 30 million tons per year of ore
and waste. This level is below the California attainment standard of 50
micrograms per cubic meter and the Federal standard of 150 micrograms per cubic
meter. However, the Company believes that it will achieve compliance with
applicable standards by a greater margin, as a result of the fact that the
modeling methodology assumes worst likely case conditions which are considered
unlikely to be encountered in actual operations and based on the use by the
Company of commonly-accepted dust control techniques in all phases of mining and
crushing. The Company submitted an application to the Kern County Air Pollution
Control District for authority to construct the project, and based upon the
dispersion modeling discussed above, the application was approved in February
1998.
WATER QUALITY ISSUES. The project is in the northern portion of the Antelope
Valley ground water basin and experiences an average annual rainfall of less
than 14.5 centimeters (5.7 in.). There are no surface waters of any kind, other
than the periodic runoff that follows the rare heavy rains that typically occur
during the winter months.
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Drainage in the area of the project is controlled by a series of deeply incised
gullies and channels that ultimately drain to the north-west into the Chaffee
hydrologic area. The water that does not evaporate typically percolates in the
Antelope Valley ground water. No water quality data is available for surface
runoff. Ground water in the bedrock underlying the area is almost certainly very
modest in quantity and is restricted to fractures. The alluvial cover on the
valley fill are known sources of important amounts of ground water. Water in
these cases is typically at 55 to 61 meters (180 to 200 feet) in depth.
Wells in the shallow alluvium are historically low yield in nature, while those
in areas with a substantial amount of alluvial fill can be important producers.
Water quality data is limited; however, sufficient data is available to confirm
that the water is acceptable for the process applications proposed.
Once mining at the project has commenced, control of surface water in the area
will be achieved through the construction of intercept trenches to preclude the
uncontrolled runoff from coming into contact with the leach heaps or other
materials that might degrade water quality. Also, the heap leach process that
the Company intends to employ does not include direct or indirect waste water
discharges. Ground water protection from leaching solutions will be achieved
through the use of a double liner system augmented by a leachate collection and
recovery system. A monitoring system below the liner will also be incorporated
for leak detection. Additional monitoring wells will be placed down gradient in
the direction of probable flow as an additional protective feature.
The Lahontan Water Quality Control Board is responsible for ensuring compliance
with the federal Clean Water Act and California's Porter-Cologne Water Quality
Act. The Company submitted a comprehensive application to the control board in
June 1997, detailing waste characteristics of the project, the geology and
climate of the area, containment facility design specifications, operating
plans, drainage plans, mine closure procedures, and post-closure maintenance of
the project site. The application has undergone technical and administrative
review, and was approved at the March 1998 meeting of the control board.
CLOSURE, RECLAMATION AND BONDING ISSUES. Reclamation requirements for the
project include removal of all structures, shaping and seeding of the heaps,
seeding of portions of the waste dumps and the ripping up or removal of all
roads. The mine pits will require little or no reclamation. Reclamation
requirements are influenced by the fact that the project is located in a desert
climate, with less than 14.5 centimeters (5.7 in.) of annual rainfall.
In 1996 the Company commissioned Bamberg Associates to prepare a reclamation
plan for the project. This plan was later submitted to the Kern County Planning
and Development Department, as part of the Company's conditional use permit
application and surface mining reclamation plan. The reclamation plan meets the
requirements of California's Surface Mining and Reclamation Act and applicable
Kern County zoning ordinances, and federal requirements designed to prevent
degradation of federal lands.
The objective of the reclamation plan is to return the project site to its
pre-mining status as wildlife habitat and open space. The plan obligates the
Company to demolish and remove physical mine structures; neutralize the leach
pads and detoxify and dispose of leachate solution; recontour the overburden
piles, leach pads, roads and production support facilities; and prepare the
surface of the project area for revegetation; and seed and replant the area with
native species. Reclaimed slopes must be at an angle that is stable and there is
no requirement for demonstration of re-vegetation. Growth media (generally, the
top 5.0 centimeters or 2 inches of cover) will be removed from the waste dump
and heap leach sites and stockpiled for final reclamation. It is expected that
the growth media will contain most of the seeds necessary for the reclamation.
The waste dumps and heaps will be benched by bulldozer upon the completion of
mining and roadways will be ripped up. The growth media will be distributed
along the benches and in the roadways.
Understandably, a key component of the reclamation plan is neutralization of the
leach pads and detoxification and disposal of the leachate solution, also known
as leach pad closure. The plan provides that closure will begin in the sixth
year of mine operation and continue for approximately four years after active
mining has ceased. The leach pad closure process involves four steps: first, a
fresh water rinse is periodically applied to those portions of the leach pads
that have completely leached, furthering the natural degradation of the cyanide
solution; next, the leachate solution is sequentially moved from one active pad
cell to another, minimizing the amount of solution required by the system; once
leaching operations are concluded, the remaining leachate solution is chemically
neutralized using
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hydrogen peroxide, and applied to reclaimed waste rock pile surfaces. The leach
pad surfaces are then covered with soil or other medium and revegetated. Because
the pad liners remain intact, minor quantities of seepage can be expected to
collect in the leach pad sumps; this will be pumped out periodically during the
post-closure monitoring period and applied to revegetated areas, either directly
or after additional neutralizing has occurred. Depending upon the quality and
quantity of this solution, the pad liners eventually may be perforated to allow
direct seepage, thereby alleviating the need for further pumping and
application.
The Company is required to obtain several bonds for the project: a Surface
Mining and Reclamation Act bond, to be held by Kern County, to cover the general
reclamation of the site, including the waste dumps, roads, mine pits and
building removal; a detoxification and closure bond, to be held by the Lahontan
Regional Water Quality Control Board, relating to the heap back process areas;
and an "unforeseen event bond", to be held by the water quality board, which is
intended to bond for a catastrophe that would contaminate surface or ground
water with processed water. Since there are no surface streams at Soledad
Mountain, the bond would apply to ground water only. The amounts of these bonds
will be determined by the regulatory authorities when permits are granted for
the project. The Company expects to meet these bonding requirements by
purchasing surety bonds from one or more insurers. Alternatively, the Company
may post money market securities, such as certificates of deposit, or bank
letters of credit in lieu of, or in addition to, such surety bonds. Based on
currently available information, the Company estimates that the costs of
complying with environmental requirements, including land reclamation, will be
approximately $3,000,000 at the time production at the mine commences,
increasing to a total of $5,410,000 by the end of the life of the mine.
FACILITIES AND EMPLOYEES. The Company's principal executive offices are located
in a 1,200-square foot facility at 104 South Freya Street in Spokane,
Washington, and its Soledad Mountain field office is located at the mine site in
Mojave, California. At December 31, 1998, the Company employed three full-time
management, finance and administrative employees at its Spokane office, and 12
full-time employees at its Mojave office.
MISCELLANEOUS. Four of the Company's directors, Edward G. Thompson, Gordon C.
Gutrath, Chester Shynkaryk and Jerrold Schramm, are residents of Canada.
Consequently, it may be difficult for United States investors to effect service
of process within the United States upon those directors, or to realize in the
United States upon judgments of United States courts predicated upon civil
liabilities under the United States 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.
ITEM 2. DESCRIPTION OF PROPERTY.
LOCATION AND ACCESS. The Soledad Mountain Project is located in the Mojave
Mining District in Kern County in southern California, approximately 2.4
kilometers (1.5 miles) from Highway 14, a paved, four-lane highway. Los Angeles,
California is about 100 kilometers (62 miles) south of the project and the
metropolitan area of Lancaster/Palmdale, California is less than 35 kilometers
(22 miles) to the south by Highway 14. Secondary paved access roads extend from
Highway 14 and encircle Soledad Mountain, providing access to the project site.
Major power lines come to within a few hundred meters of the proposed plant
electrical substation on the north-east corner of the project.
There is no source of naturally-occurring water on the project site in
quantities deemed sufficient for mining operations. However, the Company
controls an area to the north of Soledad Mountain and because of previous
testing, believes sufficient water can be found at an estimated depth of 61 to
122 meters (200 to 400 feet). The Company also controls an alternate site to the
west of the mountain, and believes water can be found there at a depth of
approximately 213 meters (699 feet).
The population centers of Mojave, Lancaster, Bakersfield and Los Angeles, all
located within a 161-kilometer (100 mile) radius of the project, are sources for
the labor, supplies, material and equipment needed for the project. The Santa Fe
Railway line runs parallel to, and just east of, Highway 14. The town of Mojave,
California provides a
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convenient railhead for delivery of large pieces of equipment. Other aspects of
regional infrastructure already in place and available to support the Soledad
Mountain Project include hospitals, ambulance service, fire fighting service,
garbage disposal, schools, living accommodations, shopping, airline services and
recreational areas.
Local climatic conditions reflect the high desert environment of the Mojave
Desert in southern California. Conditions are variable, with temperatures
ranging from below freezing in the winter to more than 40.6o Celsius (105oF) in
the summer. Wind is a factor with respect to structural stability, as gusts
frequently reach 100 to 130 kilometers (62 to 81 miles) per hour. Flora and
fauna are sparse in the project area, reflective of the Mojave Desert
environment. No perennial streams or springs exist in the project area and the
only surface run-off occurs during the heavy rainstorms that are most prevalent
from December through March of each year
LAND OWNERSHIP AND MINING RIGHTS. Golden Queen's property is west of California
State Highway 14 and largely south of Silver Queen Road in Kern County,
California 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. Most of the mining processing facilities will
be located in Section 6 in Township 10 North, Range 12 West. The project area is
a 497-hectare (1,228 acres) contiguous block within an area of approximately
1,012 hectares (2,501 acres) held by the Company. The project property is
comprised of 33 patented lode mining claims, 123 unpatented lode mining claims,
one unpatented placer mining claim, one patented mill site claim, six unpatented
mill site claims and 379 hectares (937 acres) of fee land. One hectare is
approximately 2.471 acres.
The project property is held by the Company (through its United States
subsidiary) under a variety of agreements with 65 property owners. These
agreements include 56 mining leases, two exploration agreements with options to
purchase and seven purchase agreements that are in various stages of completion.
Most of these agreements were entered into during the five-year period preceding
the date of this report, at a total cost to the Company of approximately
$3,800,000.
The Company commissioned a formal title summary covering the project property
which was rendered in August and September 1996. It was updated in February 1998
and again in March 1999. With such a complicated ownership history as is common
in historic mining districts, it is typical for title problems to exist with
respect to properties in the area in which the project is located. The few title
questions which exist with respect to the property have been determined by the
Company to not present a material threat to the project. The Company is
attempting to resolve the title issues of which it is currently aware with the
assistance of its California counsel, a law firm with experience in title
matters relating to properties in the Mojave Mining District.
A comprehensive land survey of the project area has not yet been undertaken.
Since 1993, the whole of the project area and much of the immediate surrounding
area has been segregated from appropriation under the United States General
Mining Law of 1872. The segregation terminates May 8, 2000 and is additional
protection to the Company in the event open ground exists in the project area.
The various property purchase agreements to which the Company is a party
typically require payment by the Company of the purchase price over an extended
period of time. In most cases, a somewhat larger advance payment was made at the
time the agreement was entered into and, in some instances, a larger payment is
due at the time the purchase is completed. Certain of the property purchase
agreements require the payment by the Company of royalties upon the commencement
of commercial production from the project. As of December 31, 1998, $859,000
remained to be paid by the Company under these various property purchase
agreements; $52,000 of this amount is due within the ensuing twelve months.
The leases to which the Company is a party typically require payment in the form
of advance minimum royalties. With one exception, these payments are subject to
a credit when production from the project starts. In both the leases and the
purchase agreements, applicable royalties are restricted to the property covered
by the lease or agreement, as the case may be. Most of the royalties are of the
net smelter return ("NSR") type and are based on a sliding scale, with the
percentage amount of the royalty being a function of the ore grade on the
property to which the royalty relates. Typically, the royalties are 5% NSR or
less, with an expected average of 3.1% NSR based on the
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sliding scale royalty percentage and the modest grade of the deposit. Many of
the leases provide that the royalty payable to the lessor is subject to
adjustment in the event that the interest of such lessor in the property leased
to the Company is greater or less than represented by the lessor in such lease.
A number of the agreements have an additional modest royalty consideration which
applies in the event that non-mineral commodities, such as aggregates, from the
property are sold.
In addition to these agreements, the Company is also obligated under the terms
of an April 1, 1995 option agreement to purchase all of the issued and
outstanding shares of a privately-held California corporation owning a 80.9
hectare (200 acre) tract of land near the Soledad Mountain project site. The
Company has paid $850,000 toward the purchase of these shares as of the date of
this report, and is obligated to pay an additional $750,000 on or before July 1,
1999. Once commercial production begins, the Company is also to pay a royalty
equal to 1% of gross smelter returns.
The Company does not require additional properties to put the Soledad Mountain
Project into production, and has no present plans to acquire any properties
within the mine area. The Company continually evaluates other precious metals
mining opportunities for possible acquisition or joint venture, and from
time-to-time engages in exploratory discussions regarding such opportunities. As
of the date of this report, the Company has no agreement, undertaking or other
arrangement with any person regarding the acquisition of mining properties
outside the Soledad Mountain Project area.
GEOLOGY.
REGIONAL GEOLOGY. The structural history of the western United States is
complex, with orogenic events occurring from the Late Cretaceous Period to the
Middle Miocene Epoch (approximately 74.5 to 16 million years ago). The Sierra
Nevada Range and the San Bernardino Mountains, the principal arcs surrounding
the Soledad Mountain area, are relatively narrow, with well-defined zones of
calc-alkaline volcanic and plutonic activity. Deposits of copper, iron,
molybdenum, tungsten, gold and silver are associated with these orogenic events.
Miocene volcanic units rest unconformably on Late Cretaceous quartz monzonite
(Sierra Nevada Batholith) basement. This suggests that the volcanic center at
Soledad Mountain may lie in a domed or tectonically-elevated area, perhaps the
topographic margin of a caldera with the central collapsed area represented by
the accumulation of tuffaceous sediments south of Soledad Mountain in the
Rosamond Hills area.
SITE GEOLOGY. Soledad Mountain is a moderately-eroded silicic volcanic center of
Middle-to-Late Miocene epoch (approximately 21.5 million to 16.9 million years
ago) and is interpreted as part of a large caldera. Volcanics consist of felsic
flows, tuffs and breccias with rock types ranging from quartz latite to
rhyolite. Faults have disrupted all major rock types with the major faults
trending N10oE to N40oW. The faults dip from 70o to 99o near the surface and 45o
to 60o at depth. On the north-east side of the project area, the faults tend to
dip toward the north-east, while the faults on the south-west side tend to dip
towards the south-west. From east to west, the principal veins crop out within a
north-west trending belt about 1,219 meters (3,998 feet) wide and about 1,981
meters (6,498 feet) long.
The mountain consists of coalescing and interpenetrating volcanic domes, along
with lava flows and pyroclastic ash-fall tuffs and flows. Volcanic compositions
range from quartz latite to rhyolites with ages ranging from 21.5 to 16.9
million years. Other past gold producing structures in the district show similar
characteristics to Soledad Mountain. Common features are an epithermal hot
spring style of mineralization, host rocks consisting of calc-alkaline volcanics
and structurally controlled mineralization. The gold mines within the Mojave
Mining District appear to line the rim of a collapsed caldera. The center of the
caldera is south-east of Soledad Mountain, north of the Tropico Mine and
south-east of the Cactus Gold Mine.
The Standard Hill Mine, north-east of Soledad Mountain, consists of faults
filled with quartz veins that cross-cut quartz monzonite and quartz latite
volcanics. The veins strike north to north-west with shallow dips towards the
east and north-east, respectively. This deposit represents a mineralization
lower in the system than Soledad Mountain. The Tropico Mine, seven miles to the
south, consists of Cretaceous quartz monzonite overlain by volcanics of quartz
latite flow-banded rhyolite and rhyolite porphyry similar to those of Soledad
Mountain. The veins strike east to west and dip 65 to 70 degrees to the south.
Quartz veins fill pre-mineral faults, with movement continuing during and
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after mineralization. The Cactus Gold Mine, five miles to the west, consists of
quartz latite to rhyolite flows, resting unconformably on quartz monzonite. The
strikes of the veins vary from north-east to north-west with the dips varying
from the south-east to north-east. Mineralization is associated with
quartz-filled faults, fault breccia and zones of silicification and
argillization of the wall rock.
The mineralized faults at Soledad Mountain show two distinct dip directions. The
faults on the north-east portion of Soledad Mountain dip 60 to 80 degrees to the
north-east. Faults on the south-west portion of Soledad Mountain dip 60 to 85
degrees to the south-west. The area between these sets of faults represents a
vent axis trending north-west, forming an elevated crest with an underlying
competent root system. Upon the collapse of the caldera, block faulting along
the slopes was deflected away from the vent axis and its competent root system.
Mineralization occurs in a series of epithermal veins, faults and shear zones.
Vein widths vary up to fifteen meters and are consistent along strike and down
dip. Some of them have been mined to a vertical depth of 305 meters (1,000
feet). Testing has shown that the principal ore minerals are native gold,
electrum and a suite of silver minerals consisting of acanthite, native silver,
pyrargyrite and polybasite in a gangue of oxidized, brecciated, quartz with
minor pyrite. Traces of sphalerite, chalcopyrite and galena are also present.
The lateral extent of mineralization in the different volcanic units at Soledad
Mountain varies. Mineralization of the volcanic flow units of quartz latite,
flow-banded rhyolite and porphyitic rhyolite is generally confined to faults and
fault breccias and shows a weak lateral potential for mineralization into the
wall rock. Where mineralized faults and veins cross-cut the middle and upper
pyroclastic units, a wider halo of mineralization into the host rock occurs.
This indicates penetration of hydrothermal solutions into the more permeable and
porous tuffaceous units of the Soledad Mountain complex.
The Company believes the geology of the Soledad Mountain Project area is
conducive to its intended operations.
ITEM 3. LEGAL PROCEEDINGS.
A wholly-owned subsidiary of the Company has been named in a complaint filed on
December 9, 1997 (although the Company did not become aware of the complaint
until September of 1998) in the Superior Court of the state of California for
the county of Kern. The principal parties in the complaint are George Creque, Jr
(plaintiff) and Cactus Gold Mines Company, Inc. (defendant). The complaint
contains a claim for unspecified compensatory and punitive damages associated
with the introduction of various toxic substances into the general environment
by a mining property located approximately five miles from the Soledad Mountain
project and unrelated to the Company. The Company believes that the complaint is
without merit; and, furthermore, is not applicable to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
PRICE RANGE OF COMMON SHARES. The Common stock of the Company is listed and
traded on The Toronto Stock Exchange. The following table sets out the price
range of the common stock as reported by The Toronto Stock Exchange for the
calendar periods indicated. All prices are reported in Canadian dollars.
Year Ended December 31, 1997 High Low
First Quarter C$ 3.95 1.90
Second Quarter 3.02 1.90
Third Quarter 2.50 1.50
Fourth Quarter 2.05 0.50
12
<PAGE>
Year Ended December 31, 1998 High Low
First Quarter C$ .90 .54
Second Quarter .89 .39
Third Quarter .92 .36
Fourth Quarter .69 .36
DIVIDEND POLICY AND RECORD. The Company has never paid dividends on its common
stock. The Company's present policy is to retain any earnings for use in its
business and it does not intend to pay dividends on the common stock in the
foreseeable future. Payment of any cash dividends in the future will depend upon
the earnings and financial condition of the Company, any covenants in loan
documents and other factors the board of directors of the Company may consider
to be appropriate. As of December 31, 1998 there were 287 holders of record of
the Company's common stock.
SALES OF UNREGISTERED SECURITIES. Sales of securities by the Company in 1998
which were not registered under the Securities Act were as follows:
(a) On February 28, 1998, 1,834,300 of unregistered common shares of the
Company were issued upon the exercise of warrants, which were issued on May
23, 1996, at a price of C$0.68 per share for gross proceeds of $879,264
(C$1,247,324). The shares were issued to a small group of sophisticated
investors with exemptions granted under Section 4(2) and Regulation S of
the Securities Act.
(b) On May 14, 1998, 5,236,000 of unregistered common shares of the Company
were issued at a price of C$0.68 per share for aggregate proceeds of
$2,437,753 (C$3,525,256). The shares were issued to a small group of
investors with exemptions granted under Section 4(2) and Regulation S of
the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
STATEMENTS OF OPERATIONS AND DEFICIT AND CHANGES IN FINANCIAL POSITION DATA.
RESULTS OF OPERATIONS.
OVERVIEW. During the periods indicated in the discussion which follows, the
Company has been in the exploration and development 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 and development 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. Please see "Plan of
Operations" below.
Operating results of the Company are summarized as follows:
Year Ended Year Ended Cumulative Since
December 31, 1998 December 31, 1997 Inception
--------------------------------------------------------
General and
administrative
expense $ 1,001,062 $ 1,095,943 $ 4,238,862
Interest expense 20,583 96,320 323,485
Interest income 74,646 154,704 940,370
Net loss (971,595) (1,047,869) (3,940,503)
13
<PAGE>
For the year ended December 31, 1998, the Company incurred general and
administrative expenses of $1,001,062, as compared to $1,095,943 for the year
ended December 31, 1997. The decrease is primarily due to decreased expenditures
for marketing and professional fees. Interest expense for the year was $20,583,
as compared to $96,320 for the year ended December 31, 1997. The decrease is due
to the interest bearing convertible debentures being converted to 2,017,941
common shares on March 18, 1998. Interest income for the year was $74,646, as
compared to $154,704 for the year ended December 31, 1997. The decrease is due
to a decrease in the Company's average cash balance during the year. As a result
of the foregoing factors, the Company incurred a net loss of $971,595 for the
year ended December 31, 1998, as compared to a net loss of $1,047,869 for the
year ended December 31, 1997.
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 necessary to 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 was not
able to obtain financing for construction. As a consequence, production will be
delayed until gold prices improve.
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 December 31, 1998, the Company has used $3,233,000 in operating
activities, primarily as a result of cumulative losses of $3,941,000. During the
same period, the Company has used $26,514,000 in investing activities; these
consisted of $25,217,000 in expenditures related to the Soledad Mountain Project
and fixed asset purchases of $1,306,000. These operating and investing
activities were financed by net borrowings of $2,672,000 under various long-term
debt arrangements and from the sale of $28,273,000 of equity securities.
At December 31, 1998, the Company held $1,197,000 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 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 December 31, 1998, world gold
prices were approximately $287 per ounce. The project is not economical at
current world gold prices and will not be economical until prices strengthen.
On May 23, 1996, the Company issued 5,500,000 special warrants, at a price of
$1.37 (C$2.50) per warrant, and received aggregate gross proceeds of $10,004,000
(C$13,750,000). Each special warrant was exercisable for one share of common
stock of the Company and one-half of a warrant which, under its original terms,
entitled the holder to purchase one-half additional share of common stock of the
Company at the price of C$2.90 at any time prior to November 28, 1997. On
November 18, 1997, the exercise price of these warrants was reduced to C$1.525
and the exercise period extended to February 28, 1998, and on February 19, 1998,
the exercise price was further reduced to, C$0.68 per share. Warrants for the
purchase of 1,834,300 shares of common stock were thereafter exercised,
generating gross proceeds of $879,264 (C$1,247,324) to the Company.
On May 14, 1998, the Company completed a private placement of 5,236,000 common
shares at an issue price of $0.47 (C$0.68) per share for aggregate proceeds of
$2,439,753 (C$3,525,256).
14
<PAGE>
YEAR ENDED DECEMBER 31, 1998. During the year ended December 31, 1998, the
Company used $1,093,000 in operating activities, primarily as a result of a
$972,000 net loss during the year. $3,248,000 of this amount was provided by
financing activities, and consisted primarily of $3,297,000 raised through the
sale of equity securities. $2,085,000 was used in investing activities:
$1,770,000 of this amount was expended on exploration, $303,000 was expended on
property acquisitions and $13,000 was expended on fixed asset purchases. As a
result of the foregoing, the Company's cash balance increased by $70,000, to
$1,197,000, at December 31, 1998.
YEAR ENDED DECEMBER 31, 1997. During the year ended December 31, 1997, the
Company used $937,000 in operating activities, primarily as a result of a
$1,048,000 net loss during the year. $5,079,000 of this amount was provided by
financing activities, and consisted primarily of $5,444,000 raised through the
sale of equity securities. $8,450,000 was used in investing activities:
$6,882,000 of this amount was expended on exploration, $1,020,000 was expended
on property acquisitions and $548,000 was expended on fixed asset purchases. As
a result of the foregoing, the Company's cash balance decreased by $4,309,000,
to $1,127,000, at December 31, 1997.
PLAN OF OPERATIONS.
PROPOSED ACTIVITIES AND ESTIMATED COSTS. As is more specifically disclosed in
Item 1 of this report, 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 processing precious metals ores at a rate of up
to 5.76 million tonnes (6.35 million tons) per year for at least nine years.
Concurrent heap detoxification will be employed by reclamation of the project
site.
The initial capital costs of bringing the project into production are estimated
to be $78,000,000; 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. The Company presently cannot secure the financing needed to bring the
project into production, and will not be able to do so unless gold prices and
the conditions in the gold equity markets improve. Based on the current project
cost information, the Company believes world gold prices would have to achieve
sustained levels of $325 per ounce or better before such financing could be
obtained. The Company believes it is well-positioned to obtain this financing
when market conditions improve.
The Company estimates that total average operating costs will be $6.03 per tonne
($5.47 per ton) of ore processed, based on a stripping ratio of 4.57 to 1. These
operating costs consist of mining costs of $3.74 per tonne ($3.39 per ton),
processing costs of $1.73 per tonne ($1.57 per ton) and general and
administrative costs of $0.56 per tonne ($0.51 per ton). The Company also
estimates that average annual production rates of 130,000 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 $176 per ounce
of gold, net of silver credits.
These development plans are based on a February 1998 feasibility study that was
updated by the Company in December 1998, The early 1998 study was prepared for
the Company by M3 Engineering and Technology Corporation incorporating the
results of the Company's 1997 drilling program. The updated study included the
results of the 1998 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 Reserves Associates, in collaboration with the Company; basic
engineering information was prepared by Batemen Engineering, Inc., and
supplemented by M3 Engineering and Technology. The total cost of the feasibility
study and update was $1,549,618.
The M3 Engineering and Technology study modifies and supersedes an earlier
feasibility study completed in January 1997 by Pincock, Allen and 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.
15
<PAGE>
Pending successful completion of a US$3.5 million financing during the first
half of 1999, a work program is planned that includes up to 25,000 meters
(82,020 feet) of exploration drilling and studies relative to exploring the
development of an aggregates business. Following completion of the 1999 work
program, the mineralized material inventory and ensuing ore reserve estimation
is planned to be fully audited by an independent consultant.
At December 31, 1998, the Company had a deferred tax asset of $582,000, from
which the Company has provided a 100% valuation allowance as management cannot
determine that it is more likely than not that the Company will receive the
benefit of the asset.
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 nor any other
revenue and cost figures contained in this report take such business into
account.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk, or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized as income in
the period of change. SFAS No. 133 is effective for all fiscal quarters and
fiscal years beginning after June 15, 1999. Based on its current and planned
future activities relative to derivative instruments, the Company believes that
the adoption of SFAS No. 133 on January 1, 2000 will not have a significant
effect on its financial statements.
In June 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98,
Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 requires
all start-up and organizational costs to be expensed as incurred. It also
requires all remaining historically capitalized amounts of these costs existing
at the date of adoption to be expensed and reported as the cumulative effect of
a change in accounting principle. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The Company believes that the adoption of SOP
98-5 on January 1, 2000 will not have a significant effect on its financial
statements.
In February 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 135, Rescission of Financial Accounting
Standards Board No. 75 and Technical Corrections ("SFAS 135"). SFAS 135 rescinds
SFAS 75 and amends Statement of Financial Accounting Standards Board No. 35.
SFAS 135 also amends other existing authoritative literature to make various
technical corrections, clarify meanings, or describe applicability under changed
conditions. SFAS 135 is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that the adoption of
SFAS 135 will not have a significant effect on its financial statements.
THE YEAR 2000 ISSUE. An issue exists for all companies that rely on computers as
the year 2000 approaches. The year 2000 problem is the result of the past
practice in the computer industry of using two digits rather than four to
identify the applicable year. This practice can result in incorrect results when
computers perform arithmetic operations, comparisons or data field sorting
involving years later than 1999. The Company has reviewed its business and
processing systems and determined that the majority of the systems, consisting
mostly of microcomputers and financial and computer aided design applications,
are already year 2000 compliant. The Company continues to work with internal
staff and outside consultants to address the scope of the year 2000 issue and
implement necessary solutions.
The Company is also making inquiries of its suppliers on which the current
development activities and potential operations of the business are critically
dependent to determine their year 2000 readiness. An analysis of the
16
<PAGE>
responses from suppliers and vendors received so far indicates substantial
compliance with year 2000 issues, so that any effect of a third party's
non-compliance is expected to be immaterial to the Company as a whole.
In the last year, the Company has expended approximately $2,000 on its year 2000
review, included with general and administrative expense. It has budgeted $2,000
over the next year to upgrade, gather information, and further integrate its
business systems in order to avoid disruption of its operations, liquidity, and
financial condition due to the year 2000 problem.
ITEM 7. FINANCIAL STATEMENTS.
See the Consolidated Financial Statements of the Company and the notes thereto
at pages 28 through 43 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The names, ages, business experience for at least the past five years and
positions of the directors and executive officers of the Company as of January
31, 1999 are as follows. The Company's board of directors consists of five
directors. All directors serve until the next annual meeting of the Company's
stockholders or until their successors are elected and qualified. Executive
officers of the Company are appointed by the board of directors.
<TABLE>
<CAPTION>
NAME AND AGE OF DIRECTOR OR
EXECUTIVE OFFICER POSITION WITH THE COMPANY PRINCIPAL OCCUPATION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steven W. Banning (1) President, Chief Executive Officer Officer of the Company.
Age: 47 and Director
Bernard F. Goodson Vice President - Administration and Officer of the Company
Age: 61 Controller
Richard W. Graeme Vice President - Operations Officer of the Company
Age: 57
Gordon C. Gutrath (1) Director President of Atled Exploration
Age: 61 Management Ltd.
Jerrold W. Schramm (2) Director Partner, Lawson Lundell Lawson &
Age: 38 McIntosh (barristers and solicitors)
Chester Shynkaryk (2) Secretary and Director President of Visionary Mining
Age 54 Corporation (a mineral exploration
company)
Edward G. Thompson (2) Director and Chairman of the Board President of E.G. Thompson Mining
Age: 62 Consultants Inc.
</TABLE>
(1) Member of the audit committee of the board of directors.
(2) Member of the compensation committee of the board of directors.
17
<PAGE>
BIOGRAPHICAL INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS.
STEVEN W. BANNING has been president and chief executive officer of the Company
since 1995. From 1986 through 1995, he was employed by Pegasus Gold Inc., last
serving as its vice president of operations. Mr. Banning graduated from Montana
College of Mineral Science and Technology in 1974 with a degree in mineral
dressing engineering. He is also a director of Emgold Mining Corporation.
BERNARD F. GOODSON has been vice president of administration and controller of
the Company since April 1996. From May 1991 to January 1996, he was vice
president of finance of Pintlar Corporation, a mining company headquartered in
Kellogg, Idaho. Mr. Goodson graduated from Lewis and Clark State College in 1981
with a degree in management technology.
RICHARD W. GRAEME has been vice president of operations of the Company since
February 1996. From January 1994 to February 1996, he was principal mine
engineer for Mine Development Associates, and from January 1991 to January 1994,
he served as chief executive officer of Mining Remedial Recovery Corp. Mr.
Graeme graduated from the University of Arizona in 1972 with a degree in
geological engineering. He is also a director of Nevada Star Resources.
GORDON C. GUTRATH has been a director of the Company since 1987. Since November
1995, he has also served as chairman of Queenstake Resources, which he founded
in 1977; he served as its president from 1977 until November 1995. Mr. Gutrath
is a professional geologist and a registered professional engineer in British
Columbia. He graduated from the University of British Columbia in 1960 with a
degree in geology. Mr. Gutrath is President of Atled Exploration Management Ltd.
and serves on the board of directors of AME Resource Capital Corp., Americana
Gold & Diamond Holdings, Inc. and Visionary Mining Corporation.
JERROLD W. SCHRAMM has been a director of the Company since 1996. He is also a
partner in the law firm Lawson Lundell Lawson & McIntosh, a position he has held
since February 1994, and for approximately six and one-half years prior to that
was an associate of the firm. He obtained an undergraduate degree in commerce
from the University of British Columbia in 1983 and a law degree from the
University of Toronto in 1986.
CHESTER SHYNKARYK has been a director of the Company since 1985, and from 1985
to 1995, served as its president. In 1996 he was elected Secretary. Also, since
1996, he has served as president of Visionary Mining Corporation, a mineral
exploration company. He also serves as a Director of Pacific Star Resources
Corporation and Markatech Industries Corporation.
EDWARD G. THOMPSON has been a director of the Company since 1994, and was
elected its chairman effective January 29, 1997. Since 1990 he has also served
as president of E.G. Thompson Mining Consultants, Inc., which he owns. Mr.
Thompson graduated from the University of Toronto in 1959 with a degree in
mining geology and in 1960 earned a degree in economic geology. He is also
president of Consolidated Thompson-Lundmark Gold Mines Ltd., and Sparton
Resources, Inc. He also serves on the Board of Directors of Adrian Resources
Ltd., Aurogin Resources, Dakota Mining, Freewest Resources (Canada), Geomaque
Explorations Ltd., Laminco Resources, Inc., Western Troy Capital Resources,
Inc., Orvana Minerals Corporation, Visionary Mining Corporation and Windy
Mountain Exploration, Ltd.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Based solely upon its
review of Forms 3 and 4, as amended, furnished to it during its most recent
fiscal year, and Forms 5, as amended, furnished to it with respect to such year,
the Company believes all directors and executive officers timely filed all
reports required to be filed pursuant to section 16(a) of the Securities
Exchange Act of 1934.
[The balance of this page has been left blank intentionally.]
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE.
The following table discloses compensation received by the Company's president
and chief executive officer, its vice president of administration and
controller, and its vice president of operations for the year ended December 31,
1998, the year ended December 31, 1997, the seven-month period ended December
31, 1996 and the prior fiscal year ended May 31, 1996. The Company had no other
executive officers during 1998.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
OTHER SECURITIES
ANNUAL UNDERLYING
EXECUTIVE COMPEN- OPTIONS/
OFFICER YEAR SALARY SATION SARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven W. Banning (2) 1998 $ 220,000 $ 3,600(3)
President &Chief Executive Officer 1997 220,000 3,600 -
1996 116,667 2,100 190,000(4,9)
1996 100,000 1,800 810,000
Bernard F. Goodson(5) 1998 86,000 3,600(3) -
Vice President Administration & 1997 86,000 3,600 -
Controller 1996 46,669 2,100 -
1996 6,667 300 100,000(6,9)
Richard W. Graeme (7) 1998 125,000 - -
Vice President of Operations 1997 125,000 - -
1996 64,167 - -
1996 36,667 - 200,000(8,9)
</TABLE>
(1) The first two years shown in the foregoing table for each of the named
executive officers covers the year ended December 31, 1998 and December 31,
1997 respectively. The third and fourth years shown in the table are for
the seven-month period ended December 31, 1996 and the year ended May 31,
1996, respectively.
(2) Mr. Banning was employed by the Company for six months during the fiscal
year ended May 31, 1996.
(3) Represents automobile allowances paid to Mr. Banning and Mr. Goodson.
(4) These options were granted pursuant to the terms of Mr. Banning's
employment agreement: options for the purchase of 680,000 shares,
exercisable at C$1.35 per share were granted on December 1, 1995; options
for the purchase of an additional 130,000 shares, exercisable at C$1.51 per
share were granted on February 21, 1996; and options to purchase the
remaining 190,000 shares, exercisable at C$2.43 per share, were granted in
November 1996 following shareholder approval to certain amendments to the
Company's stock option plan.
(5) Mr. Goodson was employed by the Company for one month during the fiscal
year ended May 31, 1996.
(6) These options were granted on May 21, 1996 and were exercisable at C$3.00
per share.
(7) Mr. Graeme was not employed by the Company until February 1, 1996 and,
accordingly, was employed by the Company for four months during the fiscal
year ended May 31, 1996.
(8) These options were granted on February 21, 1996 and were exercisable at
C$1.51 per share.
(9) On June 2, 1998, the exercise price on all options priced greater than
C$1.00 was changed to C$1.00.
TABLE OF AGGREGATE OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED DECEMBER 31,
1998 AND FISCAL YEAR-END OPTION VALUES. The following table sets out certain
information with respect to options to purchase shares of the common stock of
the Company exercised during the year ended December 31, 1998 by the Company's
named executive officers, and options held by such persons at the end of such
year. Values are set forth in Canadian dollars, which is the currency in which
the options are denominated. At December 31, 1998, each Canadian dollar was
approximately equal to $1.5333.
19
<PAGE>
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
(#) (C$)
- -----------------------------------------------------------------------------------------------------
SECURITIES AGGREGATE
ACQUIRED ON VALUE
EXERCISE REALIZED
NAME (#) (C$) EXERCISABLE UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Steven W. Banning 0 0 1,000,000 0 (See Note 1)
Bernard F. Goodson 0 0 100,000 0 (See Note 1)
Richard W. Graeme 0 0 200,000 0 (See Note 1)
</TABLE>
(1) The closing price of the common stock of the Company on The Toronto Stock
Exchange on December 31, 1998 was C$0.52 ($0.34). None of the options were
in-the-money at such date, and consequently, none had any value.
TABLE OF OPTIONS GRANTED DURING THE YEAR ENDED DECEMBER 31, 1998. No options
were granted to the named executive officers during the year ended December 31,
1998.
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS.
EMPLOYMENT AGREEMENTS WITH STEVEN W. BANNING, BERNARD F. GOODSON AND RICHARD W.
GRAEME. The Company has entered into employment agreements with Mr. Banning, its
president and chief executive officer, Mr. Goodson, its vice president of
administration and controller, and Mr. Graeme, its vice president of operations
in May 1996. The agreements with Mr. Goodson and Mr. Graeme were amended in
March 1997 and the agreement with Mr. Banning was amended effective in December
1998.
Each agreement provides for the payment of salary and bonuses, the grant of
options to purchase shares of common stock, and the provision of certain other
benefits, including those offered to employees generally. Mr. Banning receives
an annual salary of $220,000 pursuant to his employment agreement with the
Company. Mr. Goodson and Mr. Graeme receive annual salaries of $86,000 and
$125,000, respectively, pursuant to their agreements.
The employment agreements also provide for compensation in the event the
employee is terminated other than for cause; should this occur, the Company is
required to pay the terminated employee an amount equal to 24 months' salary.
The agreements provide that if there is a "change in control" (as defined in the
agreements) of the Company and the employee's employment is subsequently
terminated (unless such termination is for cause or by the employee for other
than "good reason" as defined in the agreements), the employee is entitled to
receive a lump sum severance payment equal to two times the employee's then
current annual base salary, plus continued benefits for a period of 24 months.
The agreements also provide that any existing stock options held by the
terminated employee vest immediately upon termination and may be exercised by
the employee for three months thereafter. The employment agreements are for an
unspecified period. Each provides that the employee may terminate his employment
upon six months' prior notice to the Company.
CONSULTING AGREEMENT WITH ERIC E. KINNEBERG. Pursuant to the terms of a
consulting agreement dated February 1, 1996 between the Subsidiary and Mr.
Kinneberg, Mr. Kinneberg has agreed to serve as a consultant to the Subsidiary
with respect to financial and related matters, and to perform such other
consulting services to the Subsidiary, as the Subsidiary may propose. As
consideration for such services, the Subsidiary has agreed to pay Mr. Kinneberg
at the rate of $1,000 per day for services rendered and has further agreed to
reimburse him for out-of-pocket expenses incurred in the performance of his
services. The consulting agreement obligates Mr. Kinneberg to submit invoices to
the Subsidiary no less often than monthly, specifying the services rendered
during the month, and allows the Company to deduct $325 per month from amounts
otherwise payable to Mr. Kinneberg for use of the Company's offices. The
consulting agreement with Mr. Kinneberg is for a term of one month and is
thereafter
20
<PAGE>
renewable, unless terminated either by the Company or Mr. Kinneberg, on a
month-to-month basis. Since February 1, 1996, the Company has paid Mr. Kinneberg
approximately $190,560 pursuant to the agreement.
REPORT ON REPRICING OF OPTIONS. On January 28, 1998, the board of directors
approved a resolution reducing, to C$1.00 per share, the exercise price of all
outstanding options held by directors and employees of the Company or its
subsidiaries having a greater exercise price. The resolution was proposed and
adopted by the board in recognition of historically low gold prices and their
effect on the market price of the Company's common stock, and out of concern
that the Company could lose key employees during a critical stage of its
development in the absence of such an incentive. The repricing provision was
approved by the Company's stockholders and The Toronto Stock Exchange.
COMPENSATION OF DIRECTORS. The Company's articles of incorporation provide that
the directors are entitled to be paid reasonable travel, hotel and other
expenses incurred by them in the performance of their duties as directors. The
articles also provide that if a director is called upon to perform any
professional or other services for the Company that are outside of the ordinary
duties of a director, the director may be paid remuneration to be fixed by the
directors, and such remuneration may be in addition to or in substitution for
any other remuneration the director may be entitled to receive.
The Company does not pay directors' fees, and while it has no written policy or
standard arrangement in this regard, its current policy is to grant options to
its directors pursuant to the stock option plan described below. Generally, each
director has been granted options to purchase an aggregate of 115,000 shares of
common stock, and such additional options as the plan's compensation committee
deems appropriate, taking into account the responsibilities and contributions of
the directors. During the year ended December 31, 1998, the Company granted
options to purchase 25,000 shares of its common stock to each of its
non-employee directors. The options are exercisable on or before January 28,
2003, at an exercise price of C$1.00 per share. Furthermore, on June 2, 1998,
the previously granted options were repriced to C$1.00 per share for all options
with an exercise price which exceeded C$1.00 per share. 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.
STOCK OPTION PLAN. The shareholders of the Company approved the establishment of
a stock option plan for directors, officers and employees of the Company and its
subsidiaries in November 1992. A maximum of 10% of the number of shares of
common stock issued and outstanding from time to time are reserved for issuance
pursuant to options granted under the plan, and no person is entitled to be
granted options constituting more than 5% of the number of then outstanding
shares.
The exercise price of each option granted under the plan is not to be less than
the market price of the common stock on The Toronto Stock Exchange as of the
date of grant. All options granted under the plan expire not later than five
years after the date of grant. The options are not transferable, other than by
will or other testamentary instrument or pursuant to the laws of succession. If
an optionee is dismissed, removed or otherwise ceases to be a director, officer
or employee of the Company or its subsidiaries (other than for cause or as a
result of his or her death), then his or her unexercised options terminate;
termination is effective on the normal expiration date of the unexercised
options or 30 days after the person's relationship with the Company or its
subsidiaries has ended, whichever is earlier. In the event an optionee is
dismissed as a director, officer or employee of the Company or one of its
subsidiaries for cause, all unexercised options terminate immediately.
In February 1996 the board of directors approved an amendment to the plan,
replacing the current "rolling maximum" limitation on the number of shares of
common stock issuable pursuant to options granted under the plan with a fixed
maximum of 3,300,000 shares of common stock. The directors also approved a
"vesting" amendment to the plan which provided that one-third of the options
granted to officers and employees of the Company and its subsidiaries would
vest, or become exercisable, on the date of grant and that an additional
one-third would vest on each of the next two anniversaries of the date of grant.
These amendments were approved by the stockholders of the Company at the annual
general meeting held on November 13, 1996, and were also subsequently approved
by The Toronto Stock Exchange.
21
<PAGE>
The plan is administered by the compensation committee of the board of
directors, currently comprised of directors Schramm, Shynkaryk and Thompson.
Options to Purchase Securities. As at December 31, 1998, options to acquire an
aggregate of 2,195,000 shares of common stock were outstanding under the
Company's stock option plan, as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
COMMON PER COMMON
SHARES UNDER SHARE
CLASS OF OPTIONEES DATE OF GRANT EXPIRY DATE OPTION (1) C$
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Executive officers of Golden December 1, 1995 December 1, 2000 680,000 $1.00
Queen (three persons) February 21, 1996 February 21, 2001 330,000 $1.00
May 21, 1996 May 21, 2001 100,000 $1.00
October 4, 1996 October 4, 2001 190,000 $1.00
Directors of Golden Queen who August 24, 1994 August 24, 1999 100,000 $0.55
are not also executive officers September 21, 1994 September 21, 1999 90,000 $1.00
of Golden Queen (four persons) December 2, 1994 December 2, 1999 70,000 $1.00
February 21, 1996 February 21, 2001 20,000 $1.00
January 29, 1997 January 29,2002 130,000 $1.00
January 28, 1998 January 28, 2003 100,000 $1.00
Executive officers of the February 21, 1996 February 21, 2001 90,000 $1.00
Subsidiary who are not also
executive officers or directors
of Golden Queen (one person)
All other employees of the August 24, 1994 August 24, 1999 30,000 $0.55
Subsidiary (nine persons) July 20, 1995 July 20, 2000 60,000 $1.00
June 27, 1996 June 27, 2001 50,000 $1.00
November 19, 1996 February 19, 2000 85,000 $1.00
March 25, 1997 June 25, 2000 70,000 $1.00
</TABLE>
(1) Consists of all shares of common stock issuable upon the exercise of
options granted as at December 31, 1998. including those that had not
vested at such date.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of January 31, 1999, the names of, and number
of shares of common stock of the Company beneficially owned by, persons known to
the Company to own more than five percent (5%) of the Company's common stock;
the names of, and number of shares beneficially owned by each director and
executive officer of the Company; and the number of shares beneficially owned by
all directors and executive officers as a group. At such date, the number of
shares of common stock of the Company's outstanding or deemed outstanding
pursuant to presently exercisable options, warrants and conversion privileges
was 37,043,309 shares.
22
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP (ALL DIRECT UNLESS
NAME OF OWNER OTHERWISE NOTED) PERCENT OF CLASS
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Steven W. Banning (1), (2) 1,062,000 2.97%
104 S Freya, Suite 211-A
Spokane, WA 99202
Bernard F. Goodson (3) 100,000 0.29%
104 S Freya, Suite 211-A
Spokane, WA 99202
Richard W. Graeme (4) 200,000 0.57%
11847 Gempen Street
Mojave, CA 93501
Gordon C. Gutrath (1), (5) 220,000 0.63%
1111 Melville Street, Suite 250
Vancouver, B.C. V6E 3V6
Jerrold W. Schramm (1), (6) 115,000 0.33%
925 W Georgia Street, Suite 1600
Vancouver, B.C. V6C 3L2
Chester Shynkaryk (1), (7) 414,508 1.18%
900 W Hastings Street, Suite 700
Vancouver, B.C. V6C 1E5
Edward G. Thompson (1), (8) 213,300 0.61%
55 University Ave., Suite 1210
Toronto, ON M5J 2H7
All directors and executive officers
as a group (7 persons) 2,324,808 6.34%
Harris Clay (10) 2,554,139 7.34%
Landon T. Clay (11) 3,279,122 9.42%
Goodman and Company (12) 5,621,800 16.16%
</TABLE>
(1) A director of the Company.
(2) Includes presently exercisable options for the purchase of 1,000,000 shares
(3) Includes presently exercisable options for the purchase of 100,000 shares.
(4) Includes presently exercisable options for the purchase of 200,000 shares.
(5) Includes presently exercisable options for the purchase of 115,000 shares
(6) Includes presently exercisable options for the purchase of 115,000 shares.
(7) Includes presently exercisable options for the purchase of 200,000 shares.
(8) Includes presently exercisable options for the purchase of 155,000 shares.
(9) See notes 2 through 8 above.
(10) Consists of: 1,178,672 shares held directly by Mr. Clay; 577,250 shares
held by Arctic Coast Petroleum Ltd., with which Mr. Clay is affiliated; and
798,217 shares held by the estate of an individual of which Mr. Clay is the
executor. Harris Clay and Landon T. Clay are brothers.
(11) Consists of: 2,671,095 shares held directly by Mr. Landon T. Clay; 4,663
shares held by the LTC Corp. Profit Sharing and Retirement Plan, of which
Mr. Clay is a trustee; 26,114 shares held by LTC Corp., with which Mr. Clay
is affiliated; and 577,250 shares held by Arctic Coast Petroleum Ltd., with
which Mr. Clay is affiliated. In addition, Mr. Clay is related to three
charitable trusts, The Landon T. Clay Charitable Lead Trust Dated 11/30/83,
The Landon T. Clay Charitable Lead Trust II and the Monadnock Charitable
Lead Annuity Trust which hold an aggregate of 6,439,842 shares. Mr. Clay
has no beneficial interest in the trusts, and does not directly or
indirectly exercise control over the direction of the trusts, and therefore
disclaims beneficial ownership of these shares.
(12) Goodman and Company is a Canadian investment dealer. The shares noted in
this table are held by various funds that are managed by Goodman and
Company.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH LANDON T. CLAY AFFILIATES. On March 19, 1996, the Subsidiary
issued two debentures in the aggregate principal amount of $1,000,000 to the
Landon T. Clay Charitable Lead Trust II and the Landon T. Clay Charitable Lead
Trust dated 11/30/83. The debentures accrued interest at a rate of 9.5% per
annum and matured March 19, 1998. Each was convertible into shares of common
stock of the Company, at the option of the holder, at a conversion price of
C$2.00 ($1.46) per share, subject to customary "anti-dilution" provisions set
out in the debenture instruments.
Mr. Clay agreed to convert the debentures into shares of common stock provided
the conversion price was reduced to C$0.68 ($0.49) to reflect the current price
of the stock. If the debentures were converted into shares of common stock at
the reduced conversion price, an aggregate of 2,017,941 shares of common stock
would be issued, compared to 686,100 shares at the stated conversion price. On
January 28, 1998, the board of directors approved a resolution reducing the
conversion price, which was subsequently approved by The Toronto Stock Exchange.
On March 18, 1998 the debentures were converted to common shares.
In May 1998, the Company completed a private placement of 5,236,000 shares of
common stock at a price of C$0.68 ($0.47) per share. Of these shares, 800,000
were issued to The Landon T. Clay Charitable Lead Trust, 600,000 were issued to
The Landon T. Clay Charitable Lead Trust II, 2,000,000 shares were issued to the
Monadnock Charitable Lead Annuity Trust and 800,000 shares were issued directly
to Landon T. Clay.
TRANSACTIONS WITH LAWSON LUNDELL LAWSON & MCINTOSH. Jerrold W. Schramm, a
director of Golden Queen is a partner of the law firm of Lawson Lundell Lawson &
McIntosh, counsel to the Company. During the year ended December 31, 1998, the
year ended December 31, 1997 and the seven-month period ended December 31, 1996,
the Company paid Lawson Lundell Lawson & McIntosh $46,649, $104,749 and $133,841
for legal services rendered on behalf of the Company and its subsidiary. No
members of the firm of Lawson Lundell Lawson & McIntosh other than Mr. Schramm
owned any shares of common stock of the Company, or rights or options to
purchase such stock, at December 31, 1998.
[The balance of this page has been left blank intentionally.]
24
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibits are filed as part of this report. Exhibits
previously filed are incorporated by reference, as noted.
EXHIBIT
3.1 Certificate and Articles of Incorporation of the registrant
under the Company Act of British Columbia, as amended.
Previously filed as Exhibit 3.1 to the registrant's
registration statement on Form 10-SB and incorporated by
reference herein.
10.1 Warrant Indenture dated May 23, 1996 between the registrant
and Montreal Trust Company of Canada as trustee. Previously
filed as Exhibit 10.1 to the registrant's registration
statement on Form 10-SB and incorporated by reference herein.
10.2 Employment agreement dated April 2, 1996 among the registrant,
Castle Group, Inc. and Steven W. Banning. Previously filed as
Exhibit 10.2 to the registrant's registration statement on
Form 10-SB and incorporated by reference herein.
10.3 Employment agreement dated May 8, 1996 between the registrant
and Richard W. Graeme. Previously filed as Exhibit 10.3 to the
registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.4 Employment agreement dated May 24, 1996 between the registrant
and Bernard F. Goodson. Previously filed as Exhibit 10.4 to
the registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.5 Lease dated October 20, 1994 between the Subsidiary and
William J. Warner with respect to certain property within the
project area. Previously filed as Exhibit 10.5 to the
registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.6 Lease dated September 19, 1994 between the Subsidiary and
Western Centennials, Inc., with respect to certain property
within the project area. Previously filed as Exhibit 10.6 to
the registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.7 Purchase agreement dated March 8, 1995 between the Subsidiary
and William and Dorothy Meier with respect to the acquisition
by the Subsidiary of certain property within the project area.
Previously filed as Exhibit 10.7 to the registrant's
registration statement on Form 10-SB and incorporated by
reference herein.
10.8 Stock option purchase agreement dated April 1, 1995 between
the Subsidiary and Grace W. Meehl, Madge W. Wolff, Stephen G.
Wegmann, Michael L. Wegmann, John G. Hodgson, Virginia L.
Sigl, Patrick L. Wolff and George P. Wolff with respect to the
acquisition by the Subsidiary of an option to purchase all of
the outstanding shares of KWC. Previously filed as Exhibit
10.8 to the registrant's registration statement on Form 10-SB
and incorporated by reference herein.
10.9 Purchase agreement dated September 22, 1995 between the
Subsidiary and the Paveen Gupta Medical Corporate Defined
Benefit Pension Plan with respect to the acquisition by the
Subsidiary of certain property within the project area.
Previously filed as Exhibit 10.9 to the registrant's
registration statement on Form 10-SB and incorporated by
reference herein.
10.10 Purchase agreement dated March 29, 1996 between the Subsidiary
and the Meehl Family Trust and others with respect to the
acquisition by the Subsidiary of certain property within the
project area.
25
<PAGE>
Previously filed as Exhibit 10.10 to the registrant's
registration statement on Form 10-SB and incorporated by
reference herein.
10.11 Mineral exploration agreement and option to lease or purchase
dated January 25, 1996 between the Soledad-Mojave Mining
Syndicate and the Subsidiary with respect to the potential
acquisition by the Subsidiary of 129.5 hectares of fee land
within the project area. Previously filed as Exhibit 10.11 to
the registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.12 Purchase agreement dated August 1, 1996 between the Subsidiary
and Southwestern Refining Corporation with respect to the
acquisition by the Subsidiary of certain property and mill
tailings within the project area. Previously filed as Exhibit
10.12 to the registrant's registration statement on Form 10-SB
and incorporated by reference herein.
10.13 Stock option plan of the registrant, as amended. Filed as
Exhibit 10.13 to the registrant's registration statement on
Form 10-SB and incorporated by reference herein.
10.14 Management agreement dated June 30, 1986, as amended January
30, 1990, between the registrant and Chester Shynkaryk. Filed
as Exhibit 10.14 to the registrant's registration statement on
Form 10-SB and incorporated by reference herein.
10.15 Forms of debentures issued by the registrant to Landon T. Clay
Charitable Lead Trust II and Landon T. Clay Charitable Lead
Trust dated November 30, 1983. Filed as Exhibit 10.15 to the
registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.16 Consulting agreement dated February 1, 1996 between the
registrant and Eric E. Kinneberg. Filed as Exhibit 10.16 to
the registrant's registration statement on Form 10-SB and
incorporated by reference herein.
10.17 Amendment to employment agreement dated March 28, 1997 between
the registrant and Richard W. Graeme filed as Exhibit 10.17 to
the registrant's registration statement on Form 10KSB for the
year ended December 31, 1997 and incorporated by reference
herein.
10.18 Amendment to employment agreement dated March 28, 1997 between
the registrant and Bernard F. Goodson filed as Exhibit 10.18
to the registrant's registration statement on Form 10KSB for
the year ended December 31, 1997 and incorporated by reference
herein.
21.0 Subsidiaries of the Registrant. Previously filed as Exhibit
24.0 to the registrant's registration statement on Form 10-SB
and incorporated by reference herein.
24.0 Power of attorney and consent on Form F-X. Previously filed as
Exhibit 24.0 to the registrant's registration statement on
Form 10-SB and incorporated by reference herein.
27.0 Financial Data Schedule. Filed herewith.
99.0 Report of MacKay & Partners with respect to May 31, 1996
financial statements of the registrant filed as Exhibit 99.0
to the registrant's registration statement on Form 10KSB and
incorporated by reference herein.
FORM 8-K REPORTS. No reports on Form 8-K were filed by the registrant during the
fourth quarter of 1998.
26
<PAGE>
Report of Independent Auditors
To the Shareholders of
Golden Queen Mining Co. Ltd.
Vancouver, B.C.
We have audited the accompanying consolidated balance sheets of Golden Queen
Mining Co. Ltd. (a development stage company) as of December 31, 1998 and 1997,
and the consolidated statements of loss, changes in shareholders' equity, and
cash flows for the years then ended. We have also audited the statements of
loss, shareholders' equity and cash flows for the period from inception
(November 21, 1985) through December 31, 1998, 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 consolidated
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 generally accepted auditing standards
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes 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, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects the financial position of Golden Queen Mining Co. Ltd. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended and the period from inception (November 21, 1985)
through December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
BDO Dunwoody LLP
Chartered Accountants
February 8, 1999
(Except for Note 10, March 12, 1999)
Vancouver, British Columbia
27
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,197,029 $ 1,127,234
Receivables 12,692 14,798
Prepaid expenses and other current assets 72,942 77,773
------------ ------------
Total current assets 1,282,663 1,219,805
Property and equipment, net (Note 1) 1,090,536 1,164,651
Mineral properties (Notes 2, 5 and 8) 24,148,316 22,104,335
Other assets (Note 3) 921,576 892,928
------------ ------------
$ 27,443,091 $ 25,381,719
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 87,201 $ 384,388
Accrued liabilities 43,948 69,427
Current maturities of long-term debt (Note 5) 51,686 45,034
------------ ------------
Total current liabilities 182,835 498,849
Long-term debt, less current maturities (Notes 5 and 6) 807,750 1,857,189
------------ ------------
Total liabilities 990,585 2,356,038
------------ ------------
Commitments and contingencies (Notes 3 and 8)
Shareholders' equity:
Preferred shares, no par, 3,000,000 shares
authorized; no shares outstanding -- --
Common shares, no par, 100,000,000 shares
authorized; 34,796,641 and 25,708,400
shares issued (Notes 6 and 7) 30,805,074 26,400,594
Deficit accumulated during the development stage (4,352,568) (3,374,913)
------------ ------------
Total shareholders' equity 26,452,506 23,025,681
------------ ------------
$ 27,443,091 $ 25,381,719
============ ============
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
28
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF LOSS
(U.S. DOLLARS)
<TABLE>
<CAPTION>
Cumulative
Amounts From Date
of Inception
Year Ended (November 21,
December 31, Year Ended 1985) through
1998 December 31, 1997 December 31, 1998
------------ ------------------ -----------------
<S> <C> <C> <C>
General and administrative expense $ 1,001,062 $ 1,095,943 $ 4,238,862
Interest expense 20,583 96,320 323,485
Interest income (74,646) (154,704) (940,370)
Other expense, net 24,596 10,310 41,275
Abandoned mineral interests -- -- 277,251
------------ ------------------ -----------------
Net loss $ (971,595) $ (1,047,869) $ (3,940,503)
============ ==================
Net loss per share $ (0.03) $ (0.04)
============ ==================
Weighted average shares outstanding 32,179,179 23,325,823
============ ==================
See Accompanying Summary of Accounting Policies
and Notes to Consolidated Financial Statements.
</TABLE>
29
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS)
<TABLE>
<CAPTION>
From the Date of Deficit
Inception Accumulated
(November 21, 1985) During the Total
through Common Development Shareholders'
December 31, 1998 Shares Amount Stage 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
See Accompanying Summary of Accounting Policies
and Notes to Consolidated Financial Statements.
</TABLE>
30
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS)
<TABLE>
<CAPTION>
From the Date of Deficit
Inception Accumulated
(November 21, 1985) During the Total
through Common Development Shareholders'
December 31, 1998 Shares Amount Stage 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>
See Accompanying Summary of Accounting Policies
and Notes to Consolidated Financial Statements.
31
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS)
<TABLE>
<CAPTION>
From the Date of Deficit
Inception Accumulated
(November 21, 1985) During the Total
through Common Development Shareholders'
December 31, 1998 Shares Amount Stage 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 upon exercise
of 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 -- -- (6,060) (6,060)
Issuance of common
shares for cash 5,236,000 2,439,753 -- 2,439,753
Options and re-priced
options to non-
employee directors -- 107,444 -- 107,444
Net loss for the period -- -- (971,595) (971,595)
------------------------------------------------------
Balance, December 31, 34,796,641 $30,805,074 $(4,352,568) $ 26,452,506
1998 ======================================================
</TABLE>
See Accompanying Summary of Accounting Policies
and Notes to Consolidated Financial Statements.
32
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative Amounts
From Date of
Year Ended Year Ended Inception (November
December 31, December 31, 21, 1985) through
1998 1997 December 31,1998
----------- ----------- ------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (971,595) $(1,047,869) $ (3,940,503)
Adjustments to reconcile net
loss to cash used in operating
activities:
Abandoned mineral interests -- -- 277,251
Amortization and depreciation 86,969 66,962 195,841
Loss on disposition of property
and equipment -- -- 10,949
Options to directors 107,444 70,200 177,644
Changes in assets and liabilities:
Receivables 2,106 118,366 (12,692)
Prepaid expenses and other
current assets 4,831 (22,170) (72,942)
Accounts payable and accrued
liabilities (322,666) (122,944) 131,149
----------- ----------- ------------
Cash used in operating activities (1,092,911) (937,455) (3,233,303)
----------- ----------- ------------
Investment activities:
Deferred exploration and
development expenditures (1,769,780) (6,881,711) (19,631,275)
Purchase of mineral properties (274,201) (480,946) (4,664,081)
Deposits on mineral properties (28,648) (539,428) (921,576)
Purchase of property and
equipment (12,854) (548,303) (1,305,818)
Proceeds from sale of property
and equipment -- -- 8,492
----------- ----------- ------------
Cash used in investment
activities (2,085,483) (8,450,388) (26,514,258)
----------- ----------- ------------
Financing activities:
Borrowing under long-term debt -- -- 3,766,502
Payment of long-term debt (42,787) (202,472) (1,094,784)
</TABLE>
See Accompanying Summary of Accounting
Policies and Notes to Consolidated Financial Statements.
33
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Cumulative Amounts
From Date of
Year Ended Year Ended Inception (November
December 31, December 31, 21, 1985) through
1998 1997 December 31, 1998
----------- ----------- ------------------
<S> <C> <C> <C>
Issuance of common shares for cash 2,439,753 157,050 13,086,902
Share issuance costs (6,060) (163,313) (412,065)
Issuance of special warrants -- 5,287,315 14,740,752
Issuance of common shares upon
exercise of warrants 857,283 -- 857,283
----------- ----------- ------------
Cash provided by financing activities 3,248,189 5,078,580 30,944,590
----------- ----------- ------------
Net change in cash and cash
equivalents 69,795 (4,039,263) 1,197,029
Cash and cash equivalents,
beginning balance 1,127,234 5,436,497 --
----------- ----------- ------------
Cash and cash equivalents,
ending balance $ 1,197,029 $ 1,127,234 $ 1,197,029
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 126,458 $ 199,114 $ 675,177
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
Common shares for mineral property $ -- $ -- $ 280,211
Mineral property acquired
through the issuance of long-
term debt $ -- $ -- $ 1,084,833
See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements.
</TABLE>
34
<PAGE>
GOLDEN QUEEN MINING CO. LTD
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION. Golden Queen Mining Co. Ltd.
("Golden Queen" or the "Company") is engaged in acquiring and maintaining gold
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 development stage. Planned activities involve bringing to operation
a precious metals mine located in Kern County, California. These consolidated
financial statements include the accounts of Golden Queen, a British Columbia
corporation, and its wholly-owned subsidiary, Golden Queen Mining Company, Inc.
(the "Subsidiary"), a United States (State of California) corporation.
The underlying value of the Company's mineral properties and related deferred
exploration and development expenditures is dependent on the existence and
economic recovery of ore reserves, confirmation of the Company's interest in the
underlying mineral claims, the ability to obtain necessary financing to complete
the development, and future profitable production or proceeds from the
disposition thereof.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States.
FISCAL-YEAR CHANGE. The board of directors approved a change in the Company's
fiscal year-end from May 31 to December 31, effective calendar year beginning
January 1, 1997. A seven-month fiscal transition period from June 1, 1996
through December 31, 1996 preceded the start of the new calendar-year cycle.
Fiscal years presented and referred to in these consolidated financial
statements and notes thereto are on a December 31 fiscal-year basis unless
otherwise noted.
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.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation
is provided by the straight-line method with a half-year convention over the
estimated service lives of the respective assets, which range from 5 to 29 1/2
years.
MINERAL PROPERTIES. Mineral properties include the cost of advance minimum
royalty payments, the cost of capitalized property leases, share payments, and
the cost of property acquired either by cash payment or the issuance of term
debt. Expenditures for exploration and development on specific proven properties
are also capitalized. These costs will be amortized against subsequent revenues
or charged to operations at the time the related property is determined to have
an impairment of value.
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of", management of 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. Reductions to the carrying value, if necessary, are
recorded to the extent the net book value of the property exceeds the estimate
of future undiscounted cash flow.
FOREIGN CURRENCY TRANSLATION. Golden Queen has adopted the United States dollar
as its reporting currency for its financial statements prepared after May 21,
1996 as the United States dollar is the currency of the primary economic
environment in which Golden Queen and the Subsidiary conduct business and is
considered the appropriate functional currency for the Company's operations.
Balances held in Canadian dollars are remeasured into the functional currency in
accordance with SFAS No. 52, "Foreign Currency Translation," ("SFAS 52"). Assets
and liabilities in foreign currencies are generally translated into dollars at
the rates ruling at the balance sheet date. Revenues and expenses are translated
at average rates for the year. Where amounts denominated in a foreign currency
are converted into dollars by remittance or repayment, the realized exchange
differences are included in
35
<PAGE>
other income. The exchange rates prevailing at both December 31, 1998 and
December 31, 1997 were 1.53 and 1.43 respectively. The average rates of exchange
during the year ended December 31, 1998 and the year ended December 31, 1997
were 1.48 and 1.39 respectively.
NET LOSS PER SHARE. The Company computes and discloses earnings and loss per
share in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), which
requires dual presentation of basic earnings per share and diluted earnings per
share on the face of all income statements presented for all entities with
complete capital structures. Basic earnings per share is computed as net income
divided by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur from common shares issuable through stock options, warrants and
convertible debt. Since the Company's stock options, warrants and convertible
debt are anti-dilutive for all periods presented, only basic earnings per share
is presented. A total of 2,195,000 common shares were issuable pursuant to such
stock options at December 31, 1998 and a total of 2,300,000 common shares were
issuable pursuant to such stock options at December 31, 1997.
ENVIRONMENTAL AND RECLAMATION COSTS. The Company currently has no active
reclamation projects, but expenditures relating to ongoing environmental and
reclamation programs would either be expensed as incurred or capitalized and
depreciated depending on the status of the related mineral property and their
future economic benefits. The recording of provisions generally commences when a
reasonably definitive estimate of cost and remaining project life can be
determined.
ESTIMATES. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount reported in the balance
sheets for cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of long-term debt
approximates its carrying value because the stated rates of the debt reflect
recent market conditions or because the rates are variable in nature.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998 the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133 Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133
requires companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk, or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized as income in
the period of change. SFAS No. 133 is effective for all fiscal quarters and
fiscal years beginning after June 15, 1999. Based on its current and planned
future activities relative to derivative instruments, the Company believes that
the adoption of SFAS No. 133 on January 1, 2000 will not have a significant
effect on its financial statements.
In June 1998 the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98,
Reporting on the Costs of Start-up Activities ("SOP 98-5"). SOP 98-5 requires
all start-up and organizational costs to be expensed as incurred. It also
requires all remaining historically capitalized amounts of these costs existing
at the date of adoption to be expensed and reported as the cumulative effect of
a change in accounting principle. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The Company believes that the adoption of SOP
98-5 on January 1, 2000 will not have a significant effect on its financial
statements.
In February 1999 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 135, Rescission of Financial Accounting
Standards Board No. 75 and Technical Corrections ("SFAS 135"). SFAS 135 rescinds
SFAS 75 and amends Statement of Financial Accounting Standards Board No. 35.
SFAS 135
36
<PAGE>
also amends other existing authoritative literature to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. SFAS 135 is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that the adoption of
SFAS 135 will not have a significant effect on its financial statements.
RECLASSIFICATIONS. Certain amounts in the December 31, 1997 financial statements
have been reclassified to conform to the December 31, 1998 presentation.
[The balance of this page has been left blank intentionally.]
37
<PAGE>
GOLDEN QUEEN MINING CO. LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT.
Property and equipment consists of:
December 31, December 31,
1998 1997
---------- ----------
Building $ 145,948 $ 145,948
Furniture and fixtures 74,186 74,186
Equipment 256,387 243,533
Automobiles 129,986 129,986
Rental properties 707,600 707,600
---------- ----------
1,314,107 1,301,253
Less accumulated depreciation 223,571 136,602
---------- ----------
Property and equipment, net $1,090,536 $1,164,651
========== ==========
2. MINERAL PROPERTIES.
The Company has capitalized the amounts which have been paid to acquire property
rights 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 certain mining claims known as
the Soledad Property ("Soledad"), Mojave Mining District, Kern County,
California.
The Company's investment in mineral properties consists of the following:
December 31, December 31,
1998 1997
----------- -----------
Deferred exploration and development expenditures,
beginning of period $16,681,550 $ 9,799,839
Costs capitalized during the period:
Engineering 154,547 1,226,118
Geology/drilling 445,660 3,739,064
Permitting/environmental 91,314 671,362
Metallurgical testing 69,191 96,582
Other direct costs 1,009,068 1,148,585
----------- -----------
Deferred exploration and development expenditures,
end of period 18,451,330 16,681,550
Properties 3,813,008 3,813,270
Advance minimum royalty 1,883,978 1,609,515
----------- -----------
Mineral properties $24,148,316 $22,104,335
=========== ===========
38
<PAGE>
OTHER ASSETS.
On April 1, 1995, the Company acquired an option to purchase all of the issued
and outstanding shares of a privately held California corporation holding an
interest in a previously uncontracted tract of land located near the Soledad
site. The option called for an initial non-refundable payment of $100,000 in
exchange for access to the property for a period of nine months to evaluate the
presence of mineral reserves. At the end of the nine-month period, the Company
chose to exercise its option to purchase the shares of the corporation by making
the initial purchase payment of $250,000. This was followed by a second payment
of $500,000 on July 1, 1997. An additional $750,000 is due upon reaching
sustained production or July 1, 1999, whichever comes first. The Company has no
legal obligation to continue making payment and cannot perfect its rights as a
shareholder of the corporation until full payment under the option is made. Upon
commencement of commercial production, the Company will pay a royalty of 1% of
gross smelter returns for a period of up to 60 years, not to exceed $60,000,000.
4. INCOME TAXES.
At December 31, 1998 and December 31, 1997, the Company had deferred tax assets
of approximately $587,000 and $364,000, respectively, principally arising from
net operating loss carryforwards for income tax purposes offset by development
costs expended for income tax purposes but capitalized for financial reporting
purposes. As management of the Company cannot determine if it is more likely
than not that the Company will receive the benefit of this asset, a valuation
allowance equal to the deferred tax asset has been established at both December
31, 1998 and December 31, 1997.
As at December 31, 1998, the Company had net operating loss carryforwards
available to reduce taxable income in future years as follows:
Country Amount Expiration Dates
------- ------------ ----------------
United States $ 16,000,000 2002 - 2008
Canada $ 1,100,000 1999 - 2005
The potential effect on future income taxes which may result from the
application of these losses has not been reflected in these financial
statements.
[The balance of this page has been left blank intentionally]
39
<PAGE>
5. LONG-TERM DEBT.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-----------------------------------------
<S> <C> <C>
Note due to a corporation, payable in monthly
installments of $9,275, including interest
at prime plus 2% (9.75% at December 31, 1998),
estimated to mature in June 2012 and collateralized
by mineral property. $ 803,230 $ 826,694
9% note due an individual, payable in monthly
installments of $600 including interest,
maturing June 2006, collateralized
by mineral property. 39,139 42,638
10% note due to a collective group of
individuals, payable in monthly installments
of $1,500 including interest, maturing
at the earlier of April 1999 or commencement
of production, collateralized
by mineral property. 13,067 28,891
Non-interest bearing note payable to an individual,
due on July 1, 1999, secured by a grant deed,
collateralized by well and related water rights. 4,000 4,000
Debentures convertible at the option of the holders
into common shares which were retired through
the issuance of 2,017,941 common shares
on March 18, 1998. -- 1,000,000
------------- ------------
Total long-term debt 859,436 1,902,223
Current maturities 51,686 45,034
------------- ------------
Long-term debt, less current maturities $ 807,750 $ 1,857,189
============= ============
</TABLE>
Scheduled long-term maturities at December 31, 1998 are as follows:
Year ending December 31, Amount
----------
1999 $ 51,686
2000 35,877
2001 39,763
2002 44,070
2003 48,844
Thereafter $ 639,196
---------
$ 859,436
==========
6. SHARE CAPITAL.
On January 28, 1998, the conversion price of the debentures in the principal
amount of $1,000,000 was reduced from C$2.00 per share to C$0.68 per share. Such
conversion price reduction was approved by The Toronto Stock Exchange. On March
18, 1998, the convertible debentures were converted into 2,017,941 common
shares.
40
<PAGE>
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 per share from C$1.525 per share. Such exercise price
reduction was approved by The Toronto Stock Exchange. In 1998, 1,834,300
warrants were exercised at $0.49 (C$0.68) for 1,834,300 common shares. The
Company received net proceeds of $857,283 (C$1,216,142).
On May 14, 1998, the Company completed a private placement of 5,236,000 common
shares at an issue price of $0.47 (C$0.68) per share for aggregate net proceeds
of $2,439,753 (C$3,525,256). 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.
On May 29, 1997, the Company issued 3,500,000 special warrants in exchange for
$5,287,315. All of the special warrants were exercised on September 6, 1997,
without any additional payment for 3,500,000 common shares.
7. STOCK OPTION PLAN.
Under its amended 1996 stock option plan, the Company may grant options to
purchase up to 3,300,000 shares of common stock to officers, directors and
employees. The exercise price for all stock options is the closing price of the
Company's common shares (in Canadian dollars) as traded on The Toronto Stock
Exchange on the date of grant. Options issued to directors who are not employees
vest immediately. For all other options, the right to exercise vests over a two
year period in equal increments on the date of grant and on each of the first
two anniversaries of such date. All stock options issued and outstanding as of
December 31, 1998 expire at a date determined by the Company's Board of
Directors, not exceeding five years from the date of grant, or after 39 months
from the date of grant if not specified.
On January 28, 1998, additional stock options to purchase up to 25,000 shares
were granted to each of the Company's five non-employee directors. The options
are exercisable at the price of C$1.00 per share and expire on January 28, 2003.
Also, 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 per share was reduced to C$1.00 per share. The Toronto Stock
Exchange approved the repricing of the options subject to shareholder approval
and, at the Annual General meeting of shareholders held on June 2, 1998, the
shareholders approved the repricing.
The following is a summary of all stock option activity:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Shares Price Range Shares Price Range
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of period 2,300,000 C$0.55-3.20 2,257,000 C$0.55-3.00
Options granted 125,000 C$1.00 200,000 C$2.70-3.20
Options exercised -- -- (157,000) C$0.55-1.51
Options expired (230,000) C$0.55-1.00(1)
---------------------------------------------------------------
Options outstanding, end of period 2,195,000 C$0.55-1.00(1) 2,300,000 C$0.55-3.20
Options exercisable 2,171,668 C$0.55-1.00(1) 2,018,334 C$0.55-3.20
</TABLE>
(1) Reflective of the June 1998 repricing.
41
<PAGE>
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
C$0.55 130,000 0.7 C$0.55 130,000 C$0.55
C$1.00 2,065,000 2.1 C$1.00 2,041,668 C$1.00
- ----------------------------------------------------------------------------------------------------------------------
C$0.55 - $1.00 2,195,000 2.0 C$0.97 2,171,668 C$0.97
</TABLE>
The Company accounts for stock-based compensation plans by applying APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
Under APB Opinion No. 25, because the exercise price of the Company's employee
stock options approximates the market price of the underlying stock at the date
of grant, no compensation cost is recognized. The weighted average fair value at
date of grant for options granted to employees in 1998 and 1997 was C$1.00 and
C$3.20 per option.
SFAS Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock option plans
had been determined in accordance with the fair value based method prescribed in
SFAS 123. The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997, respectively: no
dividend yield for each year; expected volatility of 51 and 40 percent; and
risk-free interest rates of 5.0 percent.
Under the accounting provisions of FAS 123, the Company's net loss and loss per
share would have been adjusted to the pro forma amounts indicated below:
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Net loss:
As reported $ (971,595) $(1,047,869)
Pro forma $(1,231,452) $(1,108,669)
Loss per share:
As reported $ (0.03) $ (0.04)
Pro forma $ (0.04) $ (0.05)
8. COMMITMENTS AND CONTINGENCIES.
The Company's investment in mineral properties includes an exclusive lease to
explore, develop and mine the Soledad site. The lease is for a minimum twenty
year period, continuing on as long as the property remains in production subject
to processing a minimum of 12,000 tons of ore per year. The lease is also
subject to production royalties of 3% to 7.5% of net smelter returns depending
on the quality of ore eventually extracted. All advance minimum royalties paid,
amounting to $100,000 per year, are applied against any future production
royalties. The Company has agreed to issue 100,000 common shares upon
commencement of commercial production in connection with certain property
acquisitions.
The Company has entered into various exploration right, lease option and
property acquisition agreements on the above claims. The lease agreements have
various terms and expiration dates, and require annual payments of approximately
$275,000. All are subject to a sliding scale royalty on net smelter returns
beginning at 3%.
During the year ended May 31, 1996, the Company entered into employment
contracts with three of its executive officers. The agreements provide for the
payment of salary and bonus, the granting of options, and certain employee
42
<PAGE>
benefits. The agreements also contain provisions for lump-sum payments based on
the employee's salary upon termination for reasons other than for cause, up to
an aggregate amount of $862,000.
On September 19, 1994, the Company entered into a mining lease agreement
granting exclusive exploration and development rights on property adjacent to
claims previously described. The term of the agreement is for 20 years and
consideration included a cash payment of $30,000 and annual minimum lease
payments of $10,000.
On November 8, 1995, the Company signed an option to purchase certain mining
claims and millsites for a total purchase price of $65,000. $13,000 has been
paid and a note payable for $52,000 at 10% interest with monthly payments of
$1,500 is outstanding. All principal will be due in three years or at the start
of production, whichever occurs first. The Company will pay a 3% net smelter
return royalty not to exceed $500,000.
On December 30, 1994, the Company signed an amendment to a September 25, 1989
agreement of purchase for certain leasehold interests and unpatented claims.
Under the terms of the amendment, the outstanding balance on the $150,000 note
was canceled and production royalty granted on all products produced from the
property up to a maximum payment of $300,000 plus simple interest. The
outstanding balance on the canceled note was credited to mineral properties.
The Company is involved in various lawsuits arising in the ordinary course of
business. Management of the Company is of the opinion that the outcome of these
lawsuits will have no material impact on the Company's financial condition,
results of operations or liquidity.
9. RELATED PARTY TRANSACTIONS.
Jerrold W. Schramm, a director of Golden Queen is a partner of the law firm of
Lawson Lundell Lawson & McIntosh, counsel to the Company. During the years ended
December 31, 1998 and 1997, the Company paid Lawson Lundell Lawson & McIntosh
$46,649 and $104,749 respectively on behalf of the Company and its subsidiary.
No members of the firm of Lawson Lundell Lawson & McIntosh other than Mr.
Schramm owned any shares of common stock of the Company, or rights or options to
purchase such stock at December 31, 1998.
9. SUBSEQUENT EVENTS.
On January 19, 1999, additional stock options to purchase up to 75,000 shares
were granted to a non-employee director. The options are exercisable at the
price of C$0.50 per share and expire on January 19, 2004.
On March 12, 1999 in connection with a private placement the Company issued
13,250,000 special warrants, exchangeable into common shares of the Company at
no additional cost, at C$0.40 per warrant for gross proceeds of approximately
$3,478,000 (C$5,300,000). At closing, the Company paid agent fees of
approximately $121,730 (C$185,500) and issued broker warrants to purchase common
stock at a conversion price of C$0.60. The Company received approximately
$671,280 (C$1,022,900) on March 12, 1999 and the remaining funds were placed in
escrow to be released 50% pending shareholder approval of the transaction and
50% upon receipt of the final prospectus.
[The balance of this page has been left blank intentionally.]
43
<PAGE>
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.
By: /s/ STEVEN W. BANNING
---------------------
Steven W. Banning, its President
Date: March 19, 1999
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.
By: /s/ GORDON C. GUTRATH
---------------------
Gordon C. Gutrath, a Director
Date:
By: /s/ JERROLD W. SCHRAMM
----------------------
Jerrold W. Schramm, a Director
Date:
By: /s/ EDWARD G. THOMPSON
----------------------
Edward G. Thompson, a Director
Date:
By: Chester Shynkaryk
----------------------
Chester Shynkaryk, a Director
Date:
By: /s/ BERNARD F. GOODSON
----------------------
Bernard F. Goodson, its Principal
Financial and Accounting Officer
Date:
44
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of the Company for the year ended December 31, 1998, and
should be read in conjunction with, and is qualified in its entirety by, such
financial statements.
</LEGEND>
<CIK> 0001025362
<NAME> GOLDEN QUEEN MINING CO. LTD.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,197,029
<SECURITIES> 0
<RECEIVABLES> 12,692
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,282,663 <F1>
<PP&E> 26,160,428 <F2>
<DEPRECIATION> 223,571
<TOTAL-ASSETS> 27,443,091
<CURRENT-LIABILITIES> 182,835
<BONDS> 807,750<F3>
0
0
<COMMON> 30,805,074
<OTHER-SE> (4,352,568)<F4>
<TOTAL-LIABILITY-AND-EQUITY> 27,443,091
<SALES> 0
<TOTAL-REVENUES> 74,646 <F5>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,025,568 <F6>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,583
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (971,595)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<FN>
<F1> Includes prepaid expenses and other current assets of $72,942.
<F2> Consists of properties and equipment, net of depreciation of $1,090,536;
mineral properties of $24,148,316; and other long-term assets of $921,576.
<F3> Consists of $807,750 of notes payable, net of current maturities of
$51,686 included in current liabilities.
<F4> Consists of $4,352,568 of deficit accumulated during the development
stage.
<F5> Consists of interest income of $74,646.
<F6> Consists of general and administrative expenses of $1,001,062 and other
expenses of $24,596.
</FN>
</TABLE>
