Asset Retirement Obligations and Financial Reclamation Assurance

Financial Reclamation Assurance

The Company is required to provide the Bureau of Land Management, the State Office of Mine Reclamation and Kern County with a revised reclamation cost estimate annually. The financial assurance is adjusted once the cost estimate is approved. The Company’s provision for reclamation of the property is estimated each year by an independent consulting engineer. This estimate, once approved by state and county authorities, forms the basis for the reclamation financial assurance. The reclamation assurance provided as at June 30, 2016 was $624,142 (December 31, 2015 - $624,142). This amount is expected to increase to $1,460,496 during the 3rd quarter of 2016.

The Company is also required to provide financial assurance with the Lahontan Regional Water Quality Control Board (the “Regional Board”) for closure and reclamation costs related to the lined impoundments, which are defined as the Stage 1 heap leach pad, the overflow pond, and the solution collection channel. The reclamation financial assurance estimate for as of June 30, 2016 is $1,210,889 (December 31, 2015 - $Nil).

In addition to the above, the Company is required to obtain and maintain financial assurance for initiating and completing corrective action and remediation of a reasonably foreseeable release from the Project’s waste management units as required by the Regional Board. The reclamation financial assurance estimate for as of June 30, 2016 is $278,240 (December 31, 2015 - $278,240).

In January 2016, the Company entered into $2.1 million in surety bond agreements in order to release its reclamation deposits and post a portion of the financial assurance due in 2016. The Company pays a yearly premium. Golden Queen Ltd. has provided a corporate guarantee on the surety bonds.

Asset Retirement Obligation

The total asset retirement obligation as of June 30, 2016 is $1,171,845 (December 31, 2015 - $978,453).

The Company estimated its asset retirement obligations based on its understanding of the requirements to reclaim and clean-up its property based on its activities to date. During the three and six months ended June 30, 2016, there was an increase of $96,696 and $193,392 (Three and six months ended June 30, 2015 - $278,240 and $278,240) to the asset retirement obligations. Of these totals, $74,167 and $170,863 was capitalized to property, plant, equipment and mineral interests as the asset portion of the asset retirement obligation for the three and six months ended June 30, 2016 (Three and six months ended June 30, 2015 - $278,240 and $278,240). The remaining amount of $22,529 for the three and six months ended June 30, 2016, was expensed to operations as accretion expense (Three and six months ended June 30, 2015 - $Nil and $Nil). The Company estimates that the cash outflows related to these reclamation activities will be incurred primarily in 2028. Reclamation provisions are measured at the expected value of future cash flows discounted to their present value using a credit adjusted risk-free interest rate and adjusted for inflation. The Company used a credit adjusted risk-free rate of 9.20% (December 31, 2015 – 9.20%) and an inflation rate of 2.27% (December 31, 2015 – 2.27%).

The following is a summary of asset retirement obligations:

	June 30, 2016		December 31, 2015
Balance, beginning of the period	$	978,453	$	624,142
Accretion		45,058		-
Changes in cash flow estimates		148,334		278,240
Balance, end of the period	$	1,171,845	$	978,453