Golden Queen Mining Ltd GQMNF

Canaccord Genuity: Sell rating & $0.70 target price for GQM

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According to Canaccord Genuity:

https://personal.crocodoc.com/Vrr8hNz

Golden Queen Mining Co.

Rating: SELL (unchanged)

PRICE TARGET: C$0.70 (unchanged)

Company Update

Financing funding gap is next significant catalyst

Investment thesis

Golden Queen Minerals reported on a consolidated basis a cash and working capital position of US$69.0 M (vs. our est. of US$59.4 M) and US$41.4 M (vs. our est. of US$34.3 M). Deltas were related to timing of project expenditures. At the company level, GQM currently holds US$4.5 M in cash. We maintain our Sell recommendation as our target price still represents a significant negative return to current levels. In our view, the next significant catalyst is financing (debt/equity/other) to address the funding gap (US$37-40 M).

Highlights

• Cash flow on a consolidated basis after adjusting for working capital was US$1.3 M (vs. our est. of US$2.5 M) whereas cash flow using in investing was US$7.1 M less than our forecast at US$18.2 M due predominantly to timing of expenditures. Cash flow used in financing activities was a smaller drain (US$1.2 M) than forecast at US$2.7 M.

• The company has committed to construction contracts valued at US$59.2 M to the end of March 31, 2015 of which US$26.2 M (44%) was paid. Commissioning and first pour is expected by late Q4/15 from the open pit, heap leach project and we anticipate commissioning in Q1/16E and steady state by 2017.

• An infill drill program was completed recently whose objective was to cover the first two phases of mining (4,400 m of RC drilling) targeting areas lying both within and outside the limits of the North-West and Main pit Phase 1 mineralization.

• To the end of Q1/15, we estimate that US$45 M (31%) has been spent of the forecast US$145 M upfront capital expenditure required to build the Soledad Mountain project and construction is about 40% complete. Future funding includes a top contribution of US$30 M (our est.) from the JV partners on a 50/50 basis.

• From end of Q1/15 to steady state (end of 2016), we forecast that GQM (50% basis) will need US$15 M for project development, US$29 M in debt payments and G&A and interest expense (US$6.0 M) for a total of US$50 M.

• Sources of funding their stake in the project (50%) and their debt obligations include their cash on hand (US$4-5 M). We are modeling the conversion of their C$10 M (US$9.7 M) debt facility at C$0.75 (Q3/15E). To fund their additional needs we have modeled a debt (US$20 M, Q2/15E, 3 year, 10%) and equity facility (C$20 M or US$17M, C$0.60, Q2/15E).

Valuation

Our target price is based on the asset valuation for the Soledad Mountain open pit, heap leach gold-silver project in California (NPV@7%, C$138 M, P/NPV 1.0x, C$0.95) adjusted for negative balance sheet forecasts (C$0.14) and negative corporate G&A and interest expenses (C$0.11) over a financially diluted share count of 146.6 M shares.