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1/26/18

On Golden Queen (GQM.to): From IKN453 last weekend

Please note:

1) I was not long this stock when writing this piece in IKN453 last weekend.
2) I am not long this stock now, either (in fact I've never owned it). 
3) I'm not averse to a trade on it in the future because I found the case interesting enough to write up in the Weekly, but for the time being the temptation isn't too strong. This was not a reco for GQM either, more a potential trade idea for a certain type of subscriber that trawl for the unloved, out of fashion gold producer idea.
4) Above all, it's a treatise on balance sheets that was to show that not all bad ones are the same. In the case of other juniors that get an airing at this humble corner of cyberspace (RPM, P, etc) the company tries its very hardest to cover up the cruel reality of its financial position. But in GQM's case reality isn't as bad as appearances.

The following from IKN453, last Sunday:

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Golden Queen (GQM.to): One to watch for a spec gold trade
Here’s one I’ve been looking at recently and, though not a trade or a buy yet, if news comes out about a restructuring or re-capitalization of the company there may be real value here. Golden Queen Mining Ltd (GQM.to) is the publically quoted company that (slightly confusingly) owns 50% of “Golden Queen Mining LLC” (the other 50% in private hands). Its main asset is the "Soledad Mountain Mine” in California USA, an operating mine producing gold and silver.

With 111.15m shares out and a price of C$0.195,  this weekend its market cap is around C$21.7m (U$17.3m) and as the mine (on a 100% basis, 50% due to GQM.to) produces and sells around 12,000 oz of gold per quarter, that immediately looks cheap.

“Too cheap dude, what’s the catch?”, I hear you ask and the answer is simple: One dog’s dinner of a balance sheet.


GQM is in a financial mess, with low levels of cash and financial debt, including large chunks of debt to pay back this year. Those payments are set out at the top of the latest set of financials, because they are a reason to cast doubt on GQM as a going concern. Here’s the quote:

The Company is required to pay the following to the Clay Group on the following dates: $5.4 million of accrued interest and principal on January 1, 2018; $3.1 million of interest and principal on April 1, 2018; $3.0 million of interest and principal on July 1, 2018; $3.0 million of interest and principal on and October 1, 2018. The Company will need to receive cash distributions from GQM LLC to service its debt and such distributions are contingent on GQM LLC’s ability to generate positive cash flows. The Company reviewed the mine plan in light of the nine months ended September 30, 2017 results and has determined it is unlikely it will receive sufficient distributions from GQM LLC during this fiscal year to service its debt in early 2018. This situation raises substantial doubt about the Company’s ability to continue as a going concern. Consequently, discussions with the Clay Group to restructure the reimbursement schedule have been initiated. While the Company has been successful in re-negotiating the debt reimbursement schedule with the Clay Group on previous occasions, there can be no assurance that will be achieved going forward.

At first sight that sounds pretty dire, but it’s also the point where the story gets potentially interesting. The Clay Group is in fact the Clay family who have been the major owners of this mine for many years (and hold director posts at the company) The Clay family owns in effect over 50% of the Golden Queen mine, via their approx 35.6% holding in GQM.to (50% owners of the mine) plus their 29.5% holding in Gauss LLC (owners of the other 50%). That’s the first thing, to understand that The Clay Group isn’t about to pull the plug on GQM and its mine, there’s a deal to be done here.

The second thing is to take into account is what happened to this stock last year:




At the time in October 2017 both my blog and Alphamining Blog (29) (30) covered the way in which John Doody of Gold Stock Analyst unceremoniously dumped GQM from his coverage and called sell to his subbers. As GQM had been a long-term position in Doody’s universe (he’d been long the stock since at least 2009 and often pumped it) and as GSA had a lot of subscribers (and it must be said, some of them rather unsophisticated about the ways of the mining market), the sudden dump into thin bids caused the stock price to break and it’s remained broken ever since.

I wonder if Mr. Doody was on the Clay family’s Christmas card list this year?

Anyway, cut to today and we have a broken stock on top of a company that needs a significant cash injection. That’s why in November last year GQM announced it was running a rights offering (31), giving the chance to current shareholders to buy 1.7 shares at a price of U$0.1325 per share (in other words, 22.5c for 1.7 shares). If fully taken up, this would mean 188m or so new shares added to the GQM count and U$25m in its treasury.

However, the reality is that this is the way the Clays have decided to inject capital into GQM; if anyone else goes along with the plan then fine, but this was designed for their 35% holding in the company. That will bring around C$10.5m into treasury and allow GQM to pay off its debts to the Clays, in other words the controlling family is getting more percentage control in return for capitalizing the company. It would also mean GQM’s share count moving to around 178m, though we need to see the final score in the rights issue before anything.

Therefore, to round that lot into a couple of bullet points, we have:

  • A company with 50% of an operating gold mine in California USA, that’s high cash cost (just about producing free cash flow) but is clearly highly leveraged to the price of gold at this level with a ton of financial debt on board.

  • A stock price that was broken in two by a newsletter writer (and to put it as diplomatically as possible I have very little time for John Doody, therefore anything he sells is immediately interesting)

  • But long-standing family backers who are the counterparty to that debt and are not walking away or squeezing the company dry; au contraire, they’re putting in more of their own cash to revive its fortunes.

Assuming the final shares out count at GQM post-rights comes in at around 180m, its pro-forma market cap would be around C$35m. That for a company with a far healthier balance sheet, plus (hopefully) the cash treasury it needs to improve operations and efficiency. This is a potentially (repeat, potentially, underscore, potentially) interesting leverage play on gold, particularly because its share price was blown to bits and its main owners now believe they’re getting a real bargain. I’m going to be watching for both 4q17 and then 1q18 financials, as well as the final results of the rights offering because once those documents are in, I can make a better informed decision.