Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to in this
annual report as the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this
annual report as the Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current
expectations, estimates and predictions about future results and events. These statements may use words such as “anticipate,”
“believe,” “estimate,” “expect,” “intend,” “predict,” “project”
and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on
our management’s beliefs and assumptions, using information currently available to us. These forward-looking statements are
subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties and assumptions discussed in
this annual report. Factors that can cause or contribute to these differences include those described under the heading “Management
Discussion and Analysis and Plan of Operation.”
If one or more of these or other risks
or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what
we projected. Any forward-looking statement you read in this annual report reflects our current views with respect to future events
and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth
strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or individuals acting on
our behalf are expressly qualified in their entirety by this paragraph. You are cautioned not to place undue reliance on forward-looking
statements, which speak only as of the date of this annual report. The Company expressly disclaims any obligation to release publicly
any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company can
give no assurances that such forward-looking statements will prove to be correct.
CAUTIONARY NOTE TO UNITED STATES INVESTORS—INFORMATION
CONCERNING PREPARATION OF RESOURCE AND RESERVE ESTIMATES
The Company is an “OTC Reporting
Issuer” as that term is defined in BC Multilateral Instrument 51-105, Issuers Quoted in the U.S. Over-the-Counter Markets,
promulgated by the British Columbia Securities Commission.
In Canada, an issuer is required to provide
technical information with respect to mineralization, including reserves and resources, if any, on its mineral exploration properties
in accordance with Canadian requirements, which differ significantly from the requirements of the United States Securities and
Exchange Commission (the “SEC”) applicable to registration statements and reports filed by United States companies
pursuant to the Securities Act or the Exchange Act. As such, certain disclosures of mineralization under Canadian standards may
not be comparable to similar information made public by United States companies subject to the reporting and disclosure requirements
of the SEC and not subject to Canadian securities legislation.
While these terms are recognized and
required by Canadian securities legislation (under National Instrument 43-101 (“NI 43-101”), entitled Standards
of Disclosure for Mineral Projects), the SEC does not recognize these terms. Investors in the United States are cautioned not
to assume that any part or all of the mineral deposits in these categories will ever be converted to reserves. In addition, inferred
mineral resources have a great amount of uncertainty as to their existence and economic and legal feasibility. It cannot be assumed
that all or any part of a measured mineral resource, indicated mineral resource or inferred mineral resource will ever be upgraded
to a higher category. Under Canadian securities legislation, estimates of inferred mineral resources may not form the basis of
feasibility or pre-feasibility studies, although they may form, in certain circumstances, the basis of a “preliminary economic
assessment” as that term is defined in NI 43-101. U.S. investors are cautioned not to assume that any part or all of any
reported measured, indicated, or inferred mineral resource estimates referred to in the DynaMéxico NI 43-101 Technical Report
and DynaMéxico 43-101 Mineral Resource Estimate (compiled for DynaResource de Mexico SA de CV) are economically or legally
mineable.
Under
U.S. standards, as set forth in SEC Industry Guide 7, mineralization may not be classified as a “reserve” unless a
determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve
determination is made. The SJG Property as described in this Annual Report on Form 10-K is without known reserves. Mineral resources
which are not classified as mineral reserves do not have “demonstrated economic viability.” The quantity of resources
and the quality (grade) of resources reported as “Indicated” and “Inferred” mineral resources in the DynaMéxico
43-101 Mineral Resource Estimate compiled for DynaResource de Mexico SA de CV, under Canadian National Instrument 43-101 and filed
by the Company with SEDAR, are not disclosed in this Form 10-Q. There has been insufficient exploration to define any mineral
reserves on the SJG Property, and it is not certain if further exploration will result in the definition of mineral reserves.
Company
The Company is a minerals investment,
management, and exploration company, and currently conducting test mining and pilot milling operations through an operating subsidiary
in México, with specific focus on precious and base metals in México. The Company was incorporated in the State of
California on September 28, 1937, under the name West Coast Mines, Inc. In November 1998, the Company re-domiciled from California
to Delaware and changed its name to DynaResource, Inc. (“DynaUSA”).
We currently conduct operations in México
through our operating subsidiaries. We currently own 80% of the outstanding shares of DynaResource de México, S.A. de C.V.
(“DynaMéxico”). DynaMéxico owns 100% of mining concessions, equipment, camp and related facilities which
comprise the San Jose de Gracia Property, in northern Sinaloa State, México. We also own 100% of Mineras de DynaResource
S.A. de C.V. (“DynaMineras”), the exclusive operator of the San José de Gracia Project, under contract with
DynaMéxico.
In 2000, the Company formed DynaResource
de México S.A. de C.V. (“DynaMéxico”) for the purpose of acquiring and holding mineral properties and
mining concessions in México and, specifically for acquiring and consolidating the Mining District of San Jose de Gracia.
DynaMéxico completed the consolidation of the entire SJG District to DynaMéxico in 2003 (approx. 15 sq. km. at that
time), with the exception of the San Miguel Mining Concession (7 Hectares, for which DynaMéxico is proceeding towards accomplishing
the transfer of title, under previously signed sale and purchase agreements).
In 2005, the Company formed Mineras de
DynaResource S.A. de C.V. (“DynaMineras”), a wholly owned subsidiary. DynaMineras entered into an operating agreement
with DynaMéxico on April 15, 2005. As a consequence of that agreement and subsequent amendments to that agreement, DynaMineras
is the exclusive operating entity for the SJG Project.
Also in 2005, the Company formed another
wholly owned subsidiary, DynaResource Operaciones, S.A. de C.V. (“DynaOperaciones”). DynaOperaciones entered into a
personnel management agreement with DynaMineras and, as a consequence of that agreement, is the exclusive management company for
personnel and consultants involved at the SJG Project.
DynaMéxico currently owns a portfolio
of mining concessions, equipment, camp and related facilities which comprise the San José de Gracia Project (“SJG”).
The mining concessions cover 69,121 hectares (170,802 acres) on the west side of the Sierra Madre mountain range, in northern Sinaloa
State.
The Company currently owns 80% of the
outstanding shares of DynaMéxico. We also own 100% of Mineras de DynaResource S.A. de C.V. (“DynaMineras”),
the exclusive operator of the San José de Gracia Project, under contract with DynaMéxico, and we own 100% of DynaResource
Operaciones de San Jose de Gracia, S.A. de C.V., (“DynaOperaciones”), a company which manages the personnel registered
to work at the San Jose de Gracia Project.
San Jose de Gracia - History
Historical production records from San
Jose de Gracia (“SJG”) report 1,000,000 Oz gold production from a series of underground workings. The major areas report
471,000 Oz. produced at the La Purisima area of SJG, at an average grade of 66.7 g/t.; and 215,000 Oz. produced from the La Prieta
area, at an average grade of 27.6 g/t. Mineralization at SJG has been traced on surface and underground over 15 sq. km.
DynaMéxico was formed in March
2000, for the purpose of acquiring the concessions comprising the SJG District, and to consolidate all ownership of SJG under DynaMéxico.
DynaMéxico focused on acquisition and consolidation work through 2003, and reported a virtually clear title and consolidated
ownership to the district at December 31, 2013.
Drilling – Exploration Programs
(1997 – 2000)
A drill program was conducted at SJG
in 1997 to 1998 by a prior majority owner. Approximately 6,172 meters drilling was completed in 63 core drill holes. Significant
intercepts, including bonanza grades, outlined the down dip potential of the Northeast section (150 Meter NE to SW extent of the
Drilling) of the Los Hilos to Tres Amigos Trend of SJG. Surface and underground sampling in 1999 to 2000 confirmed high grades
in historic workings and surface exposures throughout the project area. These high grades outline the presence of mineralization
shoots developed within the veins. The mineralized shoots appear to be controlled by dilational jogs and/or vein intersections.
A total of 544 samples were collected in 1999 to 2000, and assayed an average 6.51 g/t gold.
Structure of Company / Operations
Activities in México are currently
conducted by DynaMineras; with the management of personnel being contracted by DynaMineras through to DynaOperaciones. Executive
Management of DynaResource, Inc. and consultants manage the operating companies in México; while the Chairman/CEO of DynaUSA
is the President of each of DynaMéxico, DynaMineras and DynaOperaciones. Fees for management and administration are charged
by DynaMineras and DynaOperaciones, which are eliminated in consolidation.
Exclusive Operating Entity at San
Jose de Gracia
Under agreement with DynaMéxico,
Mineras de DynaResource S.A. de C.V. (“DynaMineras”) has been named the exclusive operating entity at the San Jose
de Gracia Project. DynaResource owns 100% of DynaMineras.
DynaMéxico General Powers of
Attorney
The Chairman-CEO of DynaUSA also serves
as the President of DynaMéxico. The President of DynaMéxico holds broad powers of attorney granted by the shareholders
of DynaMéxico which gives the current President significant and broad authority within DynaMéxico.
Company Ownership and Description
of Subsidiaries
A description of the subsidiaries owned by the Company and
its ownership in each is summarized below:
|
DynaResource de México S.A. de C.V.:
|
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80% Owned by DynaResource, Inc.;
|
|
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100% owner of the San Jose de Garcia Property;
|
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Mineras de DynaResource, S. A. de C.V.:
|
|
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|
|
|
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100% Owned by DynaResource, Inc.;
|
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|
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Exclusive Operator of the San Jose de Gracia Project;
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Entered into Exploitation Agreement (“EAA”) with
|
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DynaMéxico (See EAA below);
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Entered into a 20-year Surface Rights Agreement
|
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with the Santa Maria Ejido (See Surface Rights Agreement below);
|
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DynaResource Operaciones de
|
|
100% Owned by DynaResource, Inc.;
|
|
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San Jose de Gracia, S.A. de C.V.:
|
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Personnel Management Company at San Jose de Gracia;
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Pilot Production Activities (2003
– 2006)
DynaMéxico, conducting operations
through DynaMineras, mined high-grade veins at the San Pablo area of SJG from mid-2003 to June 2006. 18,250 Oz. gold was produced
and sold from mill feed tonnage of 42,000 tonnes, at an average grade of approximately 15-20 g/t. Production costs were reported
at approximately $175/Oz. gold in this small scale, pilot production operation (See results in table below). The pilot operations
at SJG consisted of the installation of a gravity/flotation processing circuit to an existing mill, and initial test runs with
tailings were completed in 2002. Actual test mining at the high-grade San Pablo area of the property commenced in March 2003.
Mined and Milled Tonnage
|
42,000 tonnes
|
Production (Oz Au)
|
18,250 Oz
|
Average Grade
|
15-20 g/t
|
Recovery Efficiency (Plant)
|
85%
|
Recovery in Concentrate (Sales)
|
90%
|
Production Cost (Average, 4 Years)
|
$175 / Oz
|
Year 2006 Suspension of Test Mining and Pilot Milling Activities
The Company initiated the test production
activity in 2003 and, at that time, gold prices were depressed. Exploration funding opportunities, while available, were deemed
to be too dilutive by Company management. Subsequently, in 2006, commodities prices were improving and the Company was able to
negotiate financing in order to fund exploration activities. Therefore, the Company suspended test mining activities in 2006 in
order to focus on the exploration of the vast SJG District. While the test mining and pilot milling operations were considered
successful (see results in the table above), a small-scale production operation was not expected to provide the necessary capital
in order to fund exploration of the vast SJG District. The limited-scope pilot production activity provided significant benefits
through confirmation of production grades, metallurgy and process, efficiency of recoveries, and production costs.
Drilling programs (2007 – 2011)
Drilling programs completed by the Company’s
subsidiaries produced a total of 298 drill holes covering 68,741 meters of drilling from 2007 through March 2011. Results of the
drilling activity, including the results of previous drilling in 1997-1998, appear in an “SJG Drill Intercepts Summary File
through 11-298”, as Exhibit 99.1 to our Form 10-Q for the period ended June 30, 2011 filed with the SEC on August 22, 2011,
and available on EDGAR at: [http://www.sec.gov/Archives/edgar/data/1111741/000112178111000241/ex99one.htm]. Additionally, the updated
Drill Summary File is posted on the Company’s web site at www.dynaresource.com.
Technical Report According to Canadian National Instrument
43-101 (2012)
In 2012, DynaMéxico commissioned
Servicios y Proyectos Mineros (“SPM”) for the production of a Technical
Report according the Canadian National Instrument 43-101 (“the DynaMéxico NI 43-101 Technical Report”) at San
Jose de Gracia. Additionally, DynaMéxico commissioned Mr. Robert Sandefur, a senior reserve analyst for Chlumsky, Armbrust
& Meyer LLC, Lakewood, CO (“CAM”) to produce a mineral resource estimate for the 4 main vein systems at the property
(the “DynaMéxico NI 43-101 Mineral Resource Estimate”).
Parameters Used to Estimate the DynaMéxico
NI 43-101 Mineral Resource Estimate--The data base for the San Jose de Gracia Project consists of 372 drill holes of which
361 are diamond drill holes (“DDH”) and the remaining 11 were reverse circulation holes “(RC”), with a
total drilling of 75,878 meters. The DynaMéxico NI 43-101 Mineral Resource Estimate, prepared in 2012, concentrates on four
main mineralized vein systems at SJG: Tres Amigos, San Pablo, La Union, and La Purisima. Of the 372 drill holes, 368 were drilled
to test these four main vein systems and the remaining four holes tested the Argillic Zone. Technical personnel of Minop S.A. de
C.V. (“Minop”), a subsidiary (or affiliate) of Goldgroup Mining Inc. built three dimensional solids to constrain estimation
to the interpreted veins in each swarm. The 172 holes most recently drilled (2009-2011), were allocated as follows: Tres Amigos
(64 holes), San Pablo (49 holes), La Union (24 holes), La Purisima (32 holes) and Argillic Zone (3 holes). The data base also includes
rock and chip sampling, regional stream sediment sampling, and IP Surveys.
Density--A total of 5,540 pieces
of core were measured for specific gravity using the weight in air vs. weight in water method. This represents an additional 3,897
measurements taken in the 2009-11 drill seasons with density measurements taken from all mineral zones. Dried samples were coated
with paraffin wax before being measured. The results tabulated have been sorted by lithology and mineralized veins. The average
specific gravity of 5,051 wall rock samples was 2.59 while the average specific gravity for 489 samples of vein material is 2.68.
CAM and Servicios y Proyectos Mineros have reviewed the procedures and results, and opine that the results are suitable for use
in mineral resource estimation.
DynaMéxico NI 43-101 Mineral
Resource Estimate - Construction of Wireframes--Mineral Resources were estimated by Mr. Sandefur within wireframes constructed
by technical personnel of Minop. Minop was contracted by DynaMineras.
DynaMéxico NI 43-101 Mineral
Resource Estimate - Explanation of Resource Estimation--Resource estimation was done in MineSight and MicroModel computer systems
with only those composites that were inside the wireframe used in the estimate. Estimation was done using kriging with the omni-directional
variogram derived from all the data in each area for gold using the relative variogram derived from the log variogram. High grades
were restricted by capping the assays at a breakpoint based on the cumulative frequency curves. Estimation was done using search
radii of 100 x 100 x 50 m “blocks” oriented subparallel to the general strike and dip of the vein system in each area.
A sector search, corresponding to the faces of the search box with a maximum of two points per sector was used in estimation. A
density of 2.68 based on within ‘vein density’ samples was used in the resource estimate. Within each of the four areas
there are approximately 20 to 40 veins in the vein swarm. Resources were estimated by kriging using data from all veins in the
swarm. In general, gold accounts for at least 80% of the value of contained metal at the SJG Project, so the variograms for gold
were used in estimation of the four other metals.
The veins at San Jose de Gracia have
been historically mined for many years and historic mined volumes are not available. The one exception is the approximate 42,000
tonnes of ore processed by DynaMéxico during its pilot production activities in 2003-2006. The resource table is not adjusted
for any historic mining. To validate that historic mining had not significantly reduced the resource, CAM reviewed the database
for all assays greater than 1 gram per ton gold that were next to missing values at the bottom of drill holes. Only four assays
satisfying this criterion were found, and on the basis of this review, Mr. Sandefur does not believe that significant mining has
occurred within the volumes defined by the wireframes.
Servicios
y Proyectos Mineros performed a database review and considers that a reasonable level of verification has been completed,
and that no material issues have been left unidentified from the drilling programs undertaken.
DynaMéxico NI 43-101 Mineral
Resource Estimate and DynaMéxico NI 43-101 Technical Report - Data Verification--Mr. Ramon Luna Espinoza (“Mr.
Luna”) initially visited the San Jose de Gracia Project in November 2010, and conducted site inspections at SJG in November
2011 and January 2012. Mr. Sandefur conducted a site inspection of the SJG Project in January 2012. While at the Property in November
2011, Mr. Luna inspected the areas of Tres Amigos, La Prieta, Gossan Cap, San Pablo, La Union, and La Purisima, and historic mining
sites. In January 2012, Mr. Sandefur and Mr. Luna inspected the areas of Tres Amigos, San Pablo, La Union, and La Purisima. Pictures
of the areas were taken. Many of the drill pads for the drilling programs of 2007 to 2011 were clearly located and identified.
Mr. Luna also inspected San José de Gracia’s core logging and storage facilities, the geology offices, the meteorological
station, the plant nursery, and the mill. Mr. Sandefur also inspected San José de Gracia’s core logging and storage
facilities.
The Company received from DynaMéxico
on February 14, 2012, a Mineral Resource Estimate according to Canadian National Instrument 43-101 for San Jose de Gracia (the
“DynaMéxico NI 43-101 Mineral Resource Estimate’). The DynaMéxico NI 43-101 Mineral Resource Estimate
was prepared by Mr. Robert Sandefur, BS, MSc, P.E., a Qualified Person as defined under NI 43-101, and a senior reserve analyst
for Chlumsky, Armbrust & Meyer LLC, Lakewood, CO (“CAM”). The DynaMéxico NI 43-101 Mineral Resource Estimate
concentrates on four separate main vein systems at SJG: Tres Amigos, San Pablo, La Union, and La Purisima.
The DynaMéxico NI 43-101 Mineral
Resource Estimate prepared by Mr. Robert Sandefur for the DynaMéxico NI 43-101 Technical Report included Indicated Resources
at Tres Amigos and San Pablo. The “DynaMéxico NI 43-101 Mineral Resource Estimate also included an Inferred Resource
for the four vein systems. Table summaries of Indicated and Inferred Resources are contained in the DynaMéxico NI 43-101
Mineral Resource Estimate. The DynaMéxico NI 43-101 Mineral Resource Estimate has been filed, along with the DynaMéxico
NI 43-101 Technical Report, on SEDAR; but is not disclosed in this Form 10-Q.
Updated Technical Report According
to Canadian National Instrument 43-101 (2012)
The Company received from DynaMéxico,
an updated Technical Report according to Canadian National Instrument 43-101, which included the DynaMéxico NI 43-101 Mineral
Resource Estimate (the “Updated DynaMéxico NI 43-101 Technical Report”). The Updated DynaMéxico NI 43-101
Technical Report was approved by DynaMéxico, and filed by the Company on SEDAR; but is not disclosed in this Form 10-Q.
No Known Reserves
The SJG property is without known reserves.
Under U.S. standards, mineralization may not be classified as a “reserve” unless a determination has been made that
the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.
Exploitation Amendment Agreement
(“EAA”)
On May 15, 2013, DynaMineras entered into an
Exploitation Amendment Agreement (“EAA”) with DynaMéxico. The EAA grants to DynaMineras the right to finance,
explore, develop and exploit the SJG Property, in exchange for:
(a) Reimbursement of all costs associated
with financing, maintenance, exploration, development and exploitation of the SJG Property, which costs are to be charged and billed
by DynaMineras to DynaMéxico; and,
(b) After Item (A) above, the receipt
by DynaMineras of 75% of gross receipts received by DynaMéxico from the sale of all minerals produced from SJG, to the point
that DynaMineras has received 200% of its advanced funds; and,
(c) after items (A) and (B) above;
the receipt by DynaMineras of 50% of all gross receipts received by DynaMéxico from the sale of all minerals produced from
SJG, and throughout the term of the EAA; and,
(d) in addition to Items (A), (B),
and (C) above, DynaMineras shall receive a 2.5% NSR (“Net Smelter Royalty”) on all minerals sold from SJG over the
term of the EAA.
The total unpaid advances made by DynaMineras
to DynaMéxico as of March 31, 2017 is $2,125,000. The EAA is the third and latest Amendment to the original Contract Mining
Services and Mineral Production Agreement (the “Operating Agreement”), which was previously entered into by DynaMineras
with DynaMéxico in April 2005, wherein DynaMineras was named the Exclusive Operating Entity at SJG. The Operating Agreement
was previously amended in September 2006 (the “First Amendment”), and amended again at July 15, 2011 (the “Second
Amendment”). The Term of the Second Amendment is 20 years, and the EAA (Third Amendment) provides for the continuation of
the 20 Year Term from the date of the Second Amendment (July 15, 2011).
Surface Rights Agreement
On January 6, 2014 DynaMineras entered
into a 20-year surface rights agreement with the Santa Maria Ejido Community surrounding
the San Jose de Gracia Property (the “20 Year SRA”). The 20 Year SRA covers an area of 4,399 hectares surrounding the
main mineral resource areas of SJG, and provides for annual lease payments by DynaMineras of $1,359,443 Pesos (approx. $72,000
USD), commencing in 2014. The 20 year SRA provides DynaMineras with surface access to the core resource areas of SJG, and
allows for all permitted mining, pilot production and exploration activities from the owners of the surface rights (Santa Maria
Ejido community).
Additionally,
DynaMineras expects to construct a Medical Facility and a Community Center within the SJG community in year 2015. DynaMineras reports
that land and building for which the medical facility and community center will be constructed have been approved for re-zoning
by the local community; and plans are being drawn for constructing the facilities.
Structure of Company / Operations
Activities in México are conducted
by Mineras de DynaResource S.A. de C.V. (“DynaMineras”); with the management of personnel being contracted by DynaMineras
through to the personnel management subsidiary, DynaResource Operaciones, S.A. de C.V. (“DynaOperaciones”). Management
of DynaResource, Inc. and consultants continue to manage the operating companies in México; while the Chairman/CEO of DynaUSA
is the President of each of the operating companies in México. Fees for Management and administration are charged by DynaMineras
and DynaOperaciones, which are eliminated in consolidation.
Activities under Exploitation Amendment
Agreement
In 2013, DynaMineras, in accordance
with the terms of the Exploitation Amendment Agreement, commenced the rehabilitation of the San Pablo Mine and the refurbishment
of the pilot production facility at SJG. DynaMéxico received permits as discussed above for the rehabilitation and operation
of the pilot mill facility and the exploitation and mining of the San Pablo area of SJG. The basis for the mining activity and
the operation of the pilot mill facility are the NI 43-101 Mineral Resource Estimate, the Technical Report, the block models prepared
as a result of the recent drilling activity, and the recent production history of 2003-2006.
Competitive Advantage
The Company, through its subsidiaries,
has been conducting business in México since March 2000. During this period the Company believes it has structured its subsidiaries
properly and strategically, and during which time the Company has retained key personnel and developed key relationships and support.
The Company believes its experience and accomplishments and relationships in México give it a competitive advantage, even
though many competitors may be larger and have more capital resources.
DynaMéxico retains 100% of the
rights to concessions over the area of the San José de Gracia property and it currently sees no competition for mining on
the lands covered by those concessions. The sale of gold and any bi-products would be subject to global market prices, which prices
fluctuate daily. DynaMéxico was successful in selling gold concentrates produced from SJG in prior years, and the Company
expects a competitive market for produced concentrates and/or other mineral products in the future. Actual prices received by DynaMineras
in the sale of concentrates or other products produced from San Jose de Gracia would depend upon these global market prices, less
deductions.
Capital Requirements
The mining industry in general requires
significant capital in order to take a property from the exploration, to development to production. These costs remain a significant
barrier to entry for the average company but once in production, there is a ready market for the final products, In the case of
SJG, the final product would be mainly gold, the price of which is determined by global markets, so there is not a dependence on
a customer base.
Gold
Gold Uses.
Gold generally is used for fabrication or investment. Fabricated gold has a variety of end uses, including jewelry, electronics,
dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins
and jewelry.
Gold Supply. A
combination of current mine production, recycling and draw-down of existing gold stocks held by governments, financial institutions,
industrial organizations and private individuals make up the annual gold supply. Based on public information available for the
years 2008 through 2014, on average, current mine production has accounted for approximately 64% of the annual gold supply.
Gold Price. The
following table presents the annual high, low and average daily afternoon fixing prices for gold over the past ten years on the
London Bullion Market ($/ounce):
Year
|
High
|
Low
|
Average
|
2009
|
$1,213
|
$810
|
$972
|
2010
|
$1,421
|
$1,058
|
$1,225
|
2011
|
$1,895
|
$1,319
|
$1,572
|
2012
|
$1,792
|
$1,540
|
$1,669
|
2013
|
$1,694
|
$1,192
|
$1,411
|
2014
|
$1,380
|
$1,140
|
$1,265
|
2015
|
$1,303
|
$1,057
|
$1,175
|
2016
|
$1,366
|
$1,151
|
$1,251
|
2017
|
$1,379
|
$1,101
|
$1,236
|
2018
|
$1,355
|
$1,178
|
$1,288
|
2019 (through September 30, 2019)
|
$1,540
|
$1,269
|
$1,301
|
Source: Kitco, Reuters and the London Bullion Market Association
On September 30, 2019, the afternoon fixing gold price on
the London Bullion Market was $1,485.30 per ounce and the spot market gold price on the New York Commodity Exchange was $1,485.30
per ounce.
Condition of Physical Assets and Insurance
Our business is capital intensive and
requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. We and our subsidiaries
maintain insurance policies against property loss. Such insurance, however, contains exclusions and limitations on coverage, particularly
with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance
policies in connection with a particular event.
Environmental Matters
Our activities are largely outside the
United States and subject to governmental regulations for the protection of the environment. We conduct our operations so as to
protect public health and the environment and believe our operations are in compliance with applicable laws and regulations in
all material respects. DynaMéxico is involved with maintaining tailings ponds and test mining and pilot production activities
(through DynaMineras) with the oversight of SEMARNAT, the federal environmental agency of México.
Rehabilitation and Start-up of Pilot
Mill Facility at San Jose de Gracia
Under the terms of the Exploitation Amendment
Agreement (“EAA”), as described above, DynaMineras has rehabilitated the pilot mill facility at SJG and it has rehabilitated
the San Pablo mine. The SJG pilot mill facility (a gravimetric-flotation circuit) is designed to process bulk samples mined from
selected target areas of SJG, including San Pablo. Operations at SJG are managed by DynaMineras, and are projected to be similar
to those conducted by DynaMéxico during 2003-2006.
Test Underground Mining and Pilot Mill Operations
Capital Investment Program (2015 and
2016)
In July 2015, the Company commenced a
capital investment program designed to increase tonnage from the test mining operations and, to increase volume and output through
the pilot mill facility. Through DynaMineras, the Company was engaged in the implementation of this capital investment program
from July through December 2015. And, in 2016, the Company was carrying out operations utilizing the improvements and increased
outputs from test mining and pilot milling activities. The capital investment program consisted of a net total of $3,565,000 USD
as generally described below:
|
Contract Mining;
|
|
$713,000; including $250,000 Deposit (advance for services);
And $513,000 in direct mining costs, explosives, and payments
to contractor;
|
|
Mine related Costs;
|
|
$290,000; including mine plan development, permits, assays, consulting, mine supplies, and equipment items;
|
|
Mill and Camp;
|
|
$613,000; Improvements to the Mill and Camp, including pre-operation expenses;
|
|
Personnel Costs;
|
|
$673,000; including payroll and consulting expenses;
|
|
Equipment;
|
|
$636,000 long term equipment purchases including transportation, mine loading and hauling, generators, compressors and pumps;
|
|
Overhead;
|
|
$285,000; including legal expenses, consulting, and administration;
|
|
IVA Taxes;
|
|
$272,000; Value added taxes paid, and refundable;
|
|
Land Use and Rental;
|
|
$83,000;
|
|
Total:
|
|
$3,565,000
|
Project Improvements, Expansion and
Increased Output (2017, 2018 AND 2019)
The Company continues its business plan
of operations at San Jose de Gracia, which is to improve, increase and expand test mining and pilot milling operations and generally,
to increase production output. Since 2015 startup of the test mining and milling activities, the Company has increased daily output
from an initial 75 tons per day, to a current 200 tons per day, and during fiscal year 2019 the Company expects to achieve production
output of 250 tons per day. (Note the Summary of Test Mining and Pilot Mill Operations for 2015, 2016, 2017, and 2018 below).
Since January 2017, the Company has expended
over $8.8 million USD in non-operating costs, generally classified as project improvements and expansion costs which have been
expensed in the company’s financial statements. These funds have been provided primarily from cash flows from operations.
An itemized list of these non-operating costs is described below:
Mill Expansion;
|
|
$
|
1,606,000
|
|
Tailings Pond Expansion
|
|
|
265,000
|
|
Machinery and Equipment
|
|
|
593,000
|
|
Mining Camp Expansion
|
|
|
146,000
|
|
Medical
Facility
|
|
|
123,000
|
|
Mine
Development - San Pablo
|
|
|
2,709,000
|
|
Mine
Expansion - San Pablo East
|
|
|
926,000
|
|
SJG
Mining Concessions
|
|
|
1,199,000
|
|
Surface
Rights and Permitting
|
|
|
238,000
|
|
Debt
Retirement
|
|
|
125,000
|
|
Legal
Fees
|
|
|
896,000
|
|
Total
|
|
$
|
8,826,000
|
|
The Company is currently reporting all
costs of mine operations, improvements, and expansion as expenses in accordance with United States General Accepted Accounting
Principal (GAAP) requirements. The results of expensing all costs is that the Company has accumulated a net loss carry forward
from Mexico operations of $28 million USD which amount is available to offset future taxable earnings.
Summary of Test Mining and Pilot Mill Operations for 2015,
2016, 2017 and 2018:
Year
|
Total Tonnes
Mined & Processed
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
%
|
Gross Gold Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
2015
|
7,180
|
8.30
|
78.0%
|
1,495
|
1,308
|
2016
|
33,172
|
12.70
|
79.7 %
|
10,836
|
8,668
|
2017
|
35,170
|
12.95
|
85.00 %
|
12,636
|
10,740
|
2018
|
52,038
|
9.82
|
86.11%
|
14,147
|
13,418
|
DynaMineras expects to continue to increase its test underground
mining activity and pilot milling operations in 2019; and projects the increased output to 250 tons/day from the mine(s) and mill
during 2019.
Summary of Test Mining and Pilot Mill
Operations for the three months ended March 31, 2019 and 2018:
|
Total
Tonnes
Mined &
Processed
|
Reported
Mill Feed
Grade
(g/t Au)
|
Reported
Recovery
%
|
Gross Gold
Concentrates
Produced
(Au oz.)
|
Net Gold
Concentrates
Sold (Au oz.)
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
17,599
|
5.17
|
86.0%
|
2,517
|
2,366
|
Three Months Ended March 31, 2018
|
11,025
|
8.90
|
79.9%
|
2,525
|
2,372
|
|
|
|
|
|
|
Test pilot operations in Q1 2019 yielded
17,599 tonnes mined and processed from underground mining activity and pilot mill operations; and the production of approximately
2,517 gross Oz Au (and net of dry weights, buyer’s price discount and refining and treatment costs, approximately 2,366
Oz. Au) contained in gold-silver concentrates, and the receipt of $2,329,563 in revenues from the sale of gold-silver concentrates.
Additional Test Mining and Mill Operations
Disclosure
The flow sheet for obtaining and processing mineralized material
is described below:
Contract Mining: Mineralize
material is mined from San Pablo mine by the contract miner, and according to the formal mine plan developed by the Company.
Mining Patio: Freshly mined
mineralized material is transported by the contract miner outside the San Pablo Mine to the mine patio;
Pilot Mill Facility
– General Description and Flow Sheet;
Mill Patio: Mineralized material
is transported by Company dump trucks and articulated dump truck to the mill patio.
Crushing Circuit: Freshly
mined mineralized material is loaded from the mill patio into the crushing circuit, comprised of a jaw crusher and cone crusher;
and 1/2” crushed material is fed by conveyor belt to the fine mineralized material bin. The mineralized material is then
sent by conveyor belt to the primary ball mill, which is a Hardinge conical mill.
Hardinge Mill: The mineralized
material is then ground to -100 mesh particle size; and then fed to a holding tank;
Holding Tank: The
mineralized material is pumped from the holding tank to the cyclone;
Cyclone: The course material
plus (-100 Mesh) is fed to the Ball Mill #2, the Denver Mill; and fine material less (-100 Mesh) is fed to another holding tank.
Fine Screening System (Sweco Screen):
The fine mineralized material is fed from the holding tank to the Sweco Screen; the fine mineralized material less (-200 Mesh)
is fed to the spirals; the oversized material is fed to Ball Mill# 2.
Denver Mill: All mineralized
material reground in the Denver Mill, is then fed to the holding tank prior to the Cyclone.
Spiral Gravity Concentration:
Approximately 25% of the mineralized material is fed from the spirals to the Wifley table. Approximately 75% of the mineralized
material is fed from the spiral concentration to the flotation conditioning tank.
Wifley Shaking Table: The
concentrate from the spirals feed the Wifley shaking table, producing a high-grade gravity concentrate. The high-grade gravity
concentrate is bagged and shipped for sale. (There are no chemicals present in the gravity concentrate.) It is estimated that the
gravity concentrate produced is approx. 40% of the total recovered gold; and estimated that a 300-400 g/t Au would be the final
gravity concentrate grade.
Flotation Conditioning Tank:
The tailings from spirals and from the Wifley table are fed to the flotation conditioning tank. A low calculation of chemicals
is added, with metered feeder, directly to the flotation feed tank. Sodium sulfide, a granular solid, is added also to the agitated
flotation feed tank.
Flotation
Chemicals: The following chemicals are added to the flotation feed tank: Na2S
(Sodium Sulfide), 400 g/mt (solid); Aero 343 Xanthate Collector 40-80 g/mt (liquid); Cytec 7249 conditioner 50 g/mt (liquid); Cytec
4037 Conditioner 20–40 g/mt (liquid); and Aerofroth 70 or 73 Frother 30 g/mt (liquid).
Rougher Flotation: The Rougher
flotation consists of a bank of 8 flotation cells (or Hybrid float cell), which is fed by the conditioning tank. The rougher concentrate
recovered from the rougher float cells or the first hybrid cell is bagged for shipment and sale. A very low percentage of chemicals
remains in the rougher concentrate.
Scavenger and Cleaner Concentrate:
The tailings of the rougher concentrate could be fed to the scavenger and cleaner float cells (or, a second hybrid cell). The cleaner
concentrate would then be bagged and shipped for sale. A very low percentage of chemicals remains in the cleaner concentrate.
Circuit Tailings: The tailings
from the flotation area are fed to the tailings impoundment area. Less than 10% of chemicals added at the conditioning tank remain
in the tailings slurry. Chemicals do not appear in the water of the tailings; as confirmed by analysis.
Power: A 45 KW efficient diesel
generator will supply power to the camp, mill lights and to the laboratory. Two 50 KW back-up diesel generators (Selmec, Kamag)
are also available for camp use.
The mill primary generator is a 310
KW Cat Diesel and there is a 455 KW Cat Diesel mill back-up generator.
Diesel fuel is stored in a 10,000-liter
storage tank that feeds the two large generators by gravity flow to a common 500-liter head tank. The fuel storage tank is contained
within a secondary cement impoundment with controlled and oil-trapped drainage.
Electrical: The Company is
in process of connecting electrical power sufficient to supply electrical power for the camp and mill.
Competitive Advantage
The Company, through its subsidiaries,
has been conducting business in México since March 2000. During this period the Company believes it has structured its subsidiaries
properly and strategically, and during which time the Company has retained key personnel and developed key relationships and support.
The Company believes its experience and accomplishments and relationships in México give it a competitive advantage, even
though many competitors may be larger and have more capital resources.
DynaMéxico retains 100% of the
rights to concessions over the area of the San José de Gracia property and it currently sees no competition for mining on
the lands covered by those concessions. The sale of gold and any bi-products would be subject to global market prices; which prices
fluctuate daily. DynaMéxico was successful in selling gold concentrates produced from SJG in prior years, and the Company
expects a competitive market for produced concentrates and/or other mineral products in the future. Actual prices received by DynaMineras
in the sale of concentrates or other products produced from San Jose de Gracia would depend upon these global market prices, less
deductions.
The Company’s operating subsidiaries,
DynaMineras and DynaOperaciones, receive monthly fees for management of the SJG activities and personnel. These fee amounts are
eliminated in consolidation. Other than those intercompany fees, the Company reported revenue of $2,329,563 and $2,517,766 for
the three months ended March 31, 2019 and March 31, 2018 respectively.
Capital Requirements
The mining industry in general requires
significant capital in order to take a property from the exploration, to development to production. These costs remain a significant
barrier to entry for the average company but once in production, there is a ready market for the final products, In the case of
SJG, the final product would be mainly gold, the price of which is determined by global markets, so there is not a dependence on
a customer base.
Condition of Physical Assets and Insurance
Our business is capital intensive and
requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. We and our subsidiaries
maintain insurance policies against property loss. Such insurance, however, contains exclusions and limitations on coverage, particularly
with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance
policies in connection with a particular event.
Environmental Matters
Our activities are largely outside the
United States and subject to governmental regulations for the protection of the environment. We conduct our operations so as to
protect public health and the environment and believe our operations are in compliance with applicable laws and regulations in
all material respects. DynaMéxico is involved with maintaining tailings ponds and test mining and pilot production activities
(through DynaMineras) with the oversight of SEMARNAT, the federal environmental agency of México.
Results for the Three Months Ended March 31, 2019 and 2018
In the three months ended March
31, 2019 and 2018, the Company, through its wholly owned subsidiary DynaMineras, continued full test mining and pilot mill operations
at San Jose de Gracia.
DynaMineras conducted test mining
and milling operations in the first quarter of 2019 and 2018. During the three months ended March 31, 2019, the test mining and
pilot milling operations have yielded the underground mining and mill processing of approx. 17,599 tonnes of mineralized material,
the production of approximately 2,516 gross oz. Au (and net of weight and value adjustment) approximately 2,366 oz. Au) contained
in gold-silver concentrates. DynaMineras realized the receipt of $2,329,563 in revenues from the delivery and sale of gold-silver
concentrates in the first quarter, 2019.
REVENUE. Revenues for the three months
ended March 31, 2019 and 2018 were $2,329,563 and $2,517,766, respectively. The decrease was due to a lower yield per ton from
the current years mining. The g/t yield dropped from 8.9 g/t to 5.2 g/t.
PRODUCTION COSTS RELATED TO SALES. Production
costs related to sales for the three months ended March 31, 2019 and 2018 were $451,291 and $326,847 respectively. These are expenses
directly related to the milling, packaging and shipping of gold and other precious metals product and are comparative with the
revenue figures above.
MINE PRODUCTION COSTS. Mine production
costs for the three months ended March 31, 2019 and 2018 were $1,055,940 and $454,861 respectively. These costs are directly related
to the extraction of mine tonnage for processing. The increase is due to the increase tonnage mined.
MINE EXPLORATION COSTS: Mine Explorations
costs for the three months ended March 31, 2019 and 2018 were $862,300 and $827,299 respectively. These are the cost of extracting
waste material to reach the materials to be extracted for processing.
MINE EXPANSION COSTS: Mine expansion costs for the three months
ended March 31, 2019 and 2018 were $217,223 and $379,200, respectively. The 2018 cost included the cost associated with preparing
the San Jose de Gracia East Mine for production. The Company began actively mining the San Jose de Gracia East mine in the second
quarter of 2018. In addition these cost includes all cost of expanding the Company’s mining and support operations which
are expensed under United States General Accepted Accounting Principles because the Company has not established proven and probable
reserves.
TRANSPORTATION. Transportation costs for the
three months ended March 31, 2019 and 2018 were $250,826 and $87,668, respectively. These are the costs of transporting the product
to the customer for treatment and sale.
CAMP, WAREHOUSE AND SUPPORT FACILITIES. Camp,
warehouse and support facility cost for the three months ended March 31, 2019 and 2018 were $671,774 and $666,409 respectively.
These are the support cost of the mining facilities including housing, food, security and warehouse operations.
PROPERTY HOLDING COSTS. Property holding
costs for the three months ended March 31, 2019 and 2018 were $105,962 and $152,387 respectively. These costs are concessions taxes,
leases on land and other direct costs of maintaining the property. The decrease in a result of final settlement of prior year concession
taxes on the Francisco Arturo property and the reduction of the concession.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses for the three months ended March 31, 2019 and 2018 were $644,677 and $594,443 respectively.
The above expenses exclude depreciation and amortization amounts of $2,027 and $1,309 for the three months ended March 31, 2019
and 2018, respectively.
OTHER INCOME (EXPENSE). Other income for the
three ended March 31, 2019 and 2018 was $635,836 and $2,733,825, respectively. Included in this category in 2019 is interest expense
of $(126,389), other income of $373, change in derivative liability of $622,500 and currency transaction gain of $139,352. Included
in this category in 2018 is interest expense of $(55,551), other income of $380, change in derivative liability of $1,982,482 and
currency transaction gain of $806,514.
NON-CONTROLLING INTEREST. The non-controlling
interest portion of the net loss for the three months ended March 31, 2019 and 2018 were $26,890 and $55,186, respectively.
COMPREHENSIVE INCOME (LOSS). Comprehensive
income (loss) includes the Company’s net income (loss) plus the unrealized currency translation gain (loss) for the period.
For the three months ended March 31, 2019 and 2018, the Company recorded a loss of $166,627 and $786,668, respectively, which were
made up of unrealized losses on currency translation.
Liquidity and Capital Resources
As of March 31, 2019, the Company
had a negative working capital of $(3,303,331), comprised of current assets of $5,589,909 and current liabilities of $8,893,240.
This represents an increase of $1,519,638 in the working capital (deficit) maintained by the Company of $(1,783,693) as of December
31, 2018, due primarily to the mark to market adjustment for our derivative liabilities.
Net cash (used) by operations for
the three months ended March 31, 2019 was $(925,534) compared with cash provided by operations of $482,775 for the three months
ended March 31, 2018.
Net cash used in investing activities
for the three months ended March 31, 2019 and 2018 was $0 and $0, respectively.
Net cash used in financing activities
for the three months ended March 31, 2019 and 2018 was $169,675 and $154,565, respectively.
Non-controlling Interest
Under the terms of the Earn In Agreement
(September 1, 2006 to March 15, 2011), Goldgroup Mining Inc. and its wholly owned subsidiary Goldgroup Resources, Inc. (Goldgroup),
through 2010, had contributed capital to DynaMéxico in order to acquire 25% of the outstanding shares (a shareholder interest)
of DynaResource de México, S.A. de C.V. (DynaMéxico). In March 2011, Goldgroup had contributed a total of $18M USD
capital to DynaMéxico in order to acquire a total of 50% of the outstanding shares (a shareholder interest) of DynaMéxico.
From March 2011 through May 2013, Goldgroup owned 50% of the outstanding shares of DynaMéxico, and since May 2013 to current
date Goldgroup owns 20% of the outstanding shares of DynaMéxico. The applicable portion of the earnings or loss attributable
to Goldgroup is offset in this section. In the three months ended March 31, 2019 and 2018 the loss attributable to Goldgroup was
$26,890 and $55,186.
Off-Balance Sheet Arrangements
As of March 31, 2019, the Company
did not have any off-balance sheet arrangements (as that phrase is defined by SEC rules applicable to this report) which have or
are reasonably likely to have a material adverse effect on our financial condition, results of operations or liquidity.
Plan of Operation
The Plan of operation for the next twelve
months includes DynaMineras continuing the improvement and expansion of the test mining and pilot milling operations at SJG. The
Company funds its general and administrative expenses in the US. The Company’s operating subsidiaries, DynaMineras and DynaOperaciones,
receive monthly fees for management of SJG activities and personnel. These amounts are eliminated in consolidation. The Company
believes that cash on hand, and including cash flow generated from its current operations, is adequate to fund its ongoing general
and administrative expenses through 2019. The Company plans to seek additional debt funding during the next 12 months depending
on results of its pilot operations, market conditions, and other factors.
Capital Expenditures
The Company’s primary activities
relate to the exploitation of the SJG property through its 100% owned operating subsidiary, DynaMineras. DynaMineras is conducting
activities at SJG under the terms of the Exploitation Amendment Agreement (the “EAA”, or, “operating agreement”)
with DynaMéxico.
Drilling Programs
In the period September 2006 through
December 31, 2011, funding from Goldgroup provided for DynaMéxico’s completing approximately 68,741 meters drilling
at San Jose de Gracia, resulting in a defined NI 43-101 Mineral Resource Estimate as described in the 2012 DynaMéxico-CAM
SJG Mineral Resource Estimate. The Company expects DynaMineras to plan continued and subsequent drilling programs at San Pablo,
Tres Amigos, La Ceceña, Palos Chinos, La Union, La Purisima, and La Prieta / Rosario / Rudolpho. The Company expects further
drilling programs to confirm extensions to mineralization in all directions and down dip from the main target areas.
Mineralization at San José de Gracia
The Company was informed by DynaMéxico
that it had outlined significant mineralization from drilling activity at San Pablo, Tres Amigos, La Union, and La Purisima areas
of SJG as described in the recent NI 43-101 2012 DynaMéxico-CAM SJG Mineral Resource Estimate. Further drilling is expected
to outline additional mineralization at these 4 major target areas at SJG, while additional mineralization is also expected to
be defined at La Prieta and the area Northeast of Tres Amigos. Other areas at SJG indicate clear potential to develop additional
mineralization.
No Known Reserves
The SJG property is without known reserves.
Under U.S. standards, mineralization may not be classified as a “reserve” unless a determination has been made that
the mineralization could be economically and legally produced or extracted at the time the reserve determination is made.
Exploitation Amendment Agreement (“EAA”)
On May 15, 2013, DynaMineras entered
into an Exploitation Amendment Agreement (“EAA”) with DynaMéxico. The EAA grants to DynaMineras the right to
finance, explore, develop and exploit the SJG Property, in exchange for: (A) Reimbursement of all costs associated with financing,
maintenance, exploration, development and exploitation of the SJG Property, which costs are to be charged and billed by DynaMineras
to DynaMéxico; and, (B) After Item (A) above, the receipt by DynaMineras of 75% of gross receipts received by DynaMéxico
from the sale of all minerals produced from SJG, to the point that DynaMineras has received 200% of its advanced funds; and, (C)
after items (A) and (B) above; the receipt by DynaMineras of 50% of all gross receipts received by DynaMéxico from the sale
of all minerals produced from SJG, and throughout the term of the EAA; and, (D) in addition to Items (A), (B), and (C) above, DynaMineras
shall receive a 2.5% NSR (“Net Smelter Royalty”) on all minerals sold from SJG over the term of the EAA. The total
Advances made by DynaMineras to DynaMéxico as of December 31, 2014 is $4,025,000. The EAA is the third and latest Amendment
to the original Contract Mining Services and Mineral Production Agreement (the “Operating Agreement”), which was previously
entered into by DynaMineras with DynaMéxico in April 2005, wherein DynaMineras was named the Exclusive Operating Entity
at SJG. The Operating Agreement was previously amended in September 2006 (the “First Amendment”), and amended again
at July 15, 2011 (the “Second Amendment”). The Term of the Second Amendment is 20 years, and the EAA (Third Amendment)
provides for the continuation of the 20 Year Term from the date of the Second Amendment (July 15, 2011).
Exclusive Operating Entity at San
Jose de Gracia
Under agreement with DynaMéxico,
Mineras de DynaResource S.A. de C.V. (“DynaMineras”) has been named the exclusive operating entity at the San Jose
de Gracia Project. DynaResource owns 100% of DynaMineras.
DynaMéxico General Powers of
Attorney
The Chairman-CEO of DynaUSA also serves as the President of
DynaMéxico and as the President of DynaMineras. The President of DynaMéxico holds broad powers of attorney granted
by the shareholders of DynaMéxico which gives the current President significant and broad authority within DynaMéxico.
Rehabilitation and Start-up of Pilot Mill Facility at San
Jose de Gracia
Under the terms of the Exploitation Amendment
Agreement (“EAA”), as described above, DynaMineras has rehabilitated the pilot mill facility at SJG. The SJG pilot
mill facility (a gravimetric-flotation circuit) is now processing bulk samples mined from selected target areas of SJG. Operations
at SJG are managed by DynaMineras, and are projected to be similar to those conducted by DynaMéxico during 2003-2006.
Capital Advances to Subsidiaries
DynaResource de México (“DynaMéxico”)
In May 2013, the Company acquired additional
shares in the outstanding equity in DynaMéxico in exchange for the retirement of accounts receivable of $2,393,803, which
amount was due from DynaMéxico at December 31, 2012. As a result, as of May 17, 2013, the Company owns 80% of the outstanding
equity of DynaMéxico.
At December 31, 2014, the Company issued 1,333,333
shares of its common stock to DynaMineras in exchange for $4,000,000 receivable it held from DynaMéxico.
As of March 31, 2019, and December 31, 2018
DynaMineras owed the Company $5,830,443 and $6,392,705, respectively.
As of March 31, 2019, and December 31, 2018 DynaMéxico owed
the Company $4,000,000 and $4,000,000, respectively.
As of March 31, 2019, and December 31, 2018
DynaOperaciones owed the Company $225,000 and $225,000, respectively.
As of March 31, 2019, and December 31, 2018
DynaMéxico owed DynaMineras $2,373,500 and $2,373,500, respectively.
As of March 31, 2019, and December 31, 2018
DynaOperaciones owed DynaMineras $7,134,808 and $7,134,808, respectively.
Beginning on December 31, 2012, the Company
and DynaMineras agreed with DynaMéxico to accrue interest on the total amount receivable until repaid or otherwise retired.
The interest rate to be accrued is agreed to be simple annual interest at the rate quoted by the Bank of México.
Future Advances to DynaMineras
and DynaMéxico from the Company
The Company expects to make additional
advances to DynaMineras and DynaMéxico. Future advances from DynaMineras to DynaMéxico will be made under the terms
of the Exploitation Amendment Agreement. Other advances are agreed to be accrued in the same manner as previous receivables, until
or unless otherwise agreed between DynaMéxico and the Company.
In 2014, Goldgroup advanced $111,500 to DynaMéxico
and in 2013 Goldgroup advanced $120,000 USD to DynaMéxico. This total $231,500 is being carried by DynaMéxico as
a Due to Non-Controlling Interest.
Note Receivable and Investments in Affiliate
DynaResource Nevada, Inc., a Nevada Corporation
(“DynaNevada”), with one operating subsidiary in México, DynaNevada de México, S.A. de C.V. (“DynaNevada
de México”) have common officers, directors and shareholders. The total amount loaned by the Company to DynaNevada
at December 31, 2010 was $805,760. The terms of the Note Receivable provided for a “Convertible Loan,” repayable at
5% interest over a 3-year period, and convertible at the Company’s option into Common Stock of DynaNevada at $0.25 / Share. On
December 31, 2010, the Company converted its receivable from DynaNevada into 3,223,040 Shares of DynaNevada; and as a result,
the Company owns 19.92% of the outstanding share capital of DynaNevada. DynaNevada is a related entity, and through its subsidiary
in México (DynaNevada de México), (“DynaNevada de México”), has entered into an Option agreement
with Grupo México (“IMMSA”) in México, for the exploration and development of approximately 3,000 hectares
in the State of San Luis Potosi (“the Santa Gertrudis Property”). In March 2010, DynaNevada de México completed
the Option with IMMSA so that it now owns 100% of Santa Gertrudis. In June 2010, DynaNevada de México acquired an additional
6,000 Hectares in the State of Sinaloa (“the San Juan Property”). The Company has loaned additional funds to DynaNevada
since 2010 for maintenance of concessions and other nominal required fees and expenses. The Company had $0 receivable from DynaResource
Nevada, Inc. at March 31, 2019 and December 31, 2018 respectively. The Company has investment balance in DynaResource Nevada,
Inc. of $70,000 and $70,000 as of March 31, 2019 and December 31, 2018, respectively.
Minority Interest Holder in DynaMéxico
Attempts to Interfere with Activities at San Jose de Gracia (2016)
Goldgroup Mining Inc., Vancouver, BC. (“GGA.TO”
– “Goldgroup Mining”), a Minority Interest Holder in DynaMéxico through a Mexican subsidiary Goldgroup
Resources Inc., issued a press release on June 27, 2016 claiming to announce a closing of mining operations at the SJG Project,
which was misleading, deceptive, and proved to be false. Goldgroup Mining issued the June 27 press release without independently
confirming the facts – and admitted its failure to confirm the facts in the release. DynaMéxico corrected the misleading
press release issued by Goldgroup Mining as described below:
1. DynaMéxico herein states
the facts:
(a) Following an unscheduled inspection
of the mining operations at the SJG Project on June 26, 2016 by a Sinaloa State governmental agency, an order of temporary work
stoppage was quickly overturned by Sinaloa State court order.
(b) The Sinaloa State Court ruled
that the unscheduled inspection and the temporary suspension of mining operations at the SJG Project, were improper. The Sinaloa
State Court further ordered the immediate removal of the temporary suspension.
(c) Following the Sinaloa State
Court Order, all mining operations at SJG promptly resumed normal activities.
2. DynaMéxico herein states
further facts:
(a) Following a second unscheduled
inspection of the mining and milling operations at the SJG Project on August 18, 2016 by a Sinaloa State governmental agency, an
order of temporary work stoppage was quickly overturned by a second Sinaloa State court order.
(b) The Sinaloa State Court ruled
that the unscheduled inspection and the temporary suspension of mining and milling operations at the SJG Project, were again improper.
Once again, the Sinaloa State Court further ordered the immediate removal of the temporary suspension.
(c) Following the second Order issued
by the Sinaloa State Court, all mining and milling operations at SJG once again promptly resumed normal activities.
3. The award of damages in excess of $48 million
USD against Goldgroup Resources Inc. (“Goldgroup Resources”, a wholly owned subsidiary of Goldgroup Mining Inc.), by
virtue of a sentence issued on October 5, 2015 by the Thirty Sixth Civil Court of the Superior Court of Justice of the Federal
District of México, remains as ordered by the court.
4. On October 5, 2016, the Thirty-Sixth Civil
Court of the Superior Court of Justice of the Federal District of Mexico (Tribunal Superior de Justicia del Distrito Federal) approved
a Lien (referred to by the court as an “Embargo”), in favor of DynaMéxico, upon Stock Certificates in the name
of Goldgroup Resources Inc. (“Goldgroup”). The Stock Certificates subject to the Lien (“Embargo”) constitute
Shares of DynaMéxico (“the Goldgroup DynaMéxico Shares”).
(a) Goldgroup Mining Inc., the parent
company (“Goldgroup Mining”), has not disclosed the $48 million award of damages, Nor the Lien against the Shares,
nor has Goldgroup Mining disclosed the unsuccessful efforts of its subsidiary to challenge the $ 48 million damages award, in its
Annual Information Form -- the equivalent of its annual report to shareholders.
(b) An unrelated lawsuit, in which
the amount in controversy was only $3 million, was disclosed by Goldgroup Mining Inc.
(c) Goldgroup Resources currently
holds a minority interest in the outstanding share capital of DynaMéxico. Goldgroup Resources has challenged this level
of ownership through the legal system, but this challenge has also been unsuccessful. The ownership of Goldgroup Resources in the
capital of DynaMéxico remains at 20%.
(d) Goldgroup Mining, the parent
company, has not disclosed the unsuccessful efforts of Goldgroup Resources to challenge this ownership level in DynaMéxico,
in its Annual Information Form.
(e) Since 2005, the exclusive operator
of the SJG Project, under contract with (and an affiliate of) DynaMéxico, is Mineras de DynaResource S.A. de C.V. (“DynaMineras”).
This operating control of the SJG Project has continued uninterrupted since 2005, before Goldgroup Resource contributed any capital
investment to DynaMéxico.
(f) Goldgroup Mining, the parent
company, has not disclosed that DynaMineras has operating control of the SJG Project, in its Annual Information Form.
(g) Since 2000, the President of
DynaMéxico holds broad powers of attorney granted by the shareholders of DynaMéxico. The powers of attorney give
the President broad authority to act for DynaMéxico. The powers of attorney existed before Goldgroup Resources contributed
any capital investment to DynaMéxico.
(h) Goldgroup Mining, the parent
company, has not disclosed the existence of the powers of attorney held by the President of DynaMéxico, in its Annual Information
Form.
DynaMéxico’s further clarifying
statements regarding the SJG Project:
(a) In recent years, Goldgroup Mining
and Goldgroup Resources (“Goldgroup”) have continuously misrepresented ownership interest and shareholder position
related to DynaMéxico and the SJG Project;
(b) DynaMéxico, since May
2000, owns 100% of the mining concessions and related interest comprising the SJG Project;
(c) At no time has Goldgroup owned
any interest in the SJG Project; rather its only ownership interests have been earned under agreement as a common shares equity
interest (shareholder’s interest) of DynaMéxico;
(d) DynaResource, Inc., Irving,
Texas (OTCQB: DYNR - “DynaUSA”) currently owns 80% of the outstanding share Capital of DynaMéxico; Goldgroup
currently owns 20% of the outstanding share capital of DynaMéxico;
(e) At no time during its involvement
as a common shares equity interest holder (shareholder) of DynaMéxico, has Goldgroup been an operator at the SJG Project;
(f) There is no joint venture agreement
with Goldgroup involving the SJG Project;
(g) Since
the earning of its shareholder’s interest in DynaMéxico (March 2011), Goldgroup has continuously refused to contribute
funds to the ongoing maintenance, advance, and further development of the SJG Project;
(h) Consistently
and continuously since March 2011, Goldgroup has sought to, and threatened to stop, delay, or otherwise impair and negatively impact
the financing, maintenance, advance and further development of the SJG Project;
The Company believes that no material adverse
change will occur as a result of the actions taken, and the Company further believes that there is little to no potential for the
assessment of a material monetary judgment against the Company for legal actions it has filed in México. For purposes of
confidentiality, the Company does not provide more specific disclosure in this Form 10-Q.