Update: Golden Queen Mining's Q2 Earnings

| About: Golden Queen (GQMNF)


Golden Queen Mining's Q2 Earnings reflect progress towards production at Soledad Mountain including site preparation and construction of the workshop and warehouse.

This development demonstrates that my investment thesis regarding Soledad Mountain's near-term production is progressing.

The stock and the gold market are both flat in the 6 weeks since my last article, which means that there is still opportunity in Golden Queen shares.

Golden Queen Mining (OTCQX:GQMNF) just reported its second quarter figures. Given that Golden Queen is developing a mine, and given that it isn't financing this development, the actual financial data isn't as important as the progress made during the quarter, however let's take a brief financial snapshot. The company lost $700,000 or $0.01/share in the quarter versus a gain of $1.2 million or $0.01/share in the second quarter of 2013. The company currently has $5 million in cash, ($7.5 million) in working capital, and ($1.6 million) in shareholder equity.

While this doesn't look so great what is essential is the company's 50% stake in the Soledad Mountain Project, which is nearing production next year. During the second quarter as the company completed building the workshop and warehouse it also made a deal with Gauss LLC whereby it would contribute the Soledad Mountain Project to a JV partnership while Gauss LLC would contribute capital and the JV partnership would move forward with the mine's construction. In short Golden Queen Mining gave up half of the project in exchange for financing.

As I argued shortly after the deal this may not have been the most prudent move, although it made an analysis of the company far more reliable given that the financing unknown was eliminated from the picture. With this in mind I came to the conclusion that the company has potential upside as production approaches even if a relatively conservative discount rate is used. Given that this is a high grade mine that is fully financed in a low-risk mining jurisdiction I think that we can see the company trade at a valuation that reflects a 5% discount rate as production approaches, meaning that the company is substantially undervalued. Even at an 8% discount rate I argued that shares have 30%+ upside, making the stock relatively compelling. Since then the valuation and the price of gold have both remained flat, although we have seen that progress has been made while the company is burning through its capital very slowly. At this point in the Soledad Mountain Project's development there aren't any glaring risks, and as production approaches this will be reflected in the company's valuation. Therefore, I continue to like the stock in the intermediate term going into production next year.

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