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.:
|
|
80%
Owned by DynaResource, Inc.;
|
|
|
|
|
100%
owner of the San Jose de Garcia Property;
|
|
|
|
|
|
|
|
Mineras de DynaResource, S. A. de C.V.:
|
|
|
|
|
|
|
100%
Owned by DynaResource, Inc.;
|
|
|
|
|
Exclusive
Operator of the San Jose de Gracia Project;
|
|
|
|
|
Entered
into Exploitation Agreement (“EAA”) with
|
|
|
|
|
DynaMéxico
(See EAA below);
|
|
|
|
|
Entered
into a 20-year Surface Rights Agreement
|
|
|
|
|
with
the Santa Maria Ejido (See Surface Rights Agreement
below);
|
|
|
|
|
|
|
|
DynaResource Operaciones de
|
|
100%
Owned by DynaResource, Inc.;
|
|
|
San Jose de Gracia, S.A. de C.V.:
|
|
Personnel
Management Company at San Jose de Gracia;
|
|
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. $85,000 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
|
|
|
|
2008
|
$
1,011
|
$
713
|
$
872
|
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
|
$
1,077
|
$
1,251
|
2017
|
$
1,346
|
$
1,151
|
$
1,257
|
2018 (through
August 6, 2018)
|
$
1,355
|
$
1,210
|
$
1,303
|
Source:
Kitco, Reuters and the London Bullion Market
Association
On
August 6, 2018, the afternoon fixing gold price on the London
Bullion Market was $1,210 per ounce and the spot market gold price
on the New York Commodity Exchange was $1,208 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
(2015)
In July
2015, the Company commenced a capital investment program designed
to increase tonnage and output 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.
Capital Investment (2015
)
The
capital investment program consisted of a net total of $3,565,000
USD and is 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 expensed;
●
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
($272,000); Value added taxes paid, and refundable;
●
Land
Use and Rental ($83,000);
Year 2017 Improvements and Expansion
During 2017 the Company initiated and completed the following
capital projects at SJG to improve and expand test mining and pilot
milling operations:
●
Medical facility (SJG Clinic):
$107,500;
●
Expanding camp, office, and infrastructures:
$145,500;
●
Expanding tailings pond, installing liners:
$265,000;
●
Improving, setting new foundation, and re-installing the Denver
Mill:
$257,500;
●
Installing Mill #3:
$258,000;
●
Machinery &
Equipment:
$200,000;
●
Transportation:
$40,000;
Total:
$1,273,500;
Year to Date Capital Investment 2018:
During
the first six months of 2018 the Company has incurred $587,000
consisting of:
●
Improvements to the
medical facility $15,000
●
Completion of Mill
#3 $424,000
●
Mine Infrastructure
$18,000
●
Purchase of
Machinery and Equipment $130,000
Summary of Test Mining and Pilot Mill Operations (2016 and
2017)
DynaMineras
reports the following estimated summary of its test mining and
pilot milling operations during 2016 and 2017:
Year
|
Total
Tonnes
Mined
&
Processed
|
Reported
Mill
Feed
Grade
(g/t Au)
|
|
Gross
Gold
Concentrates
Produced
(Au
oz.)
|
Net
Gold
Concentrates
Sold (Au
oz.)
|
2016
|
33,172
|
12.70
|
79.0
%
|
10,836
|
8,668
|
2017
|
35,170
|
12.95
|
85.0
%
|
12,636
|
10,740
|
Test
pilot operations in 2017 yielded 35,170 tonnes mined and processed
from underground mining activity and pilot mill operations; and the
production of approximately 12,636 gross Oz Au (and net of dry
weights, buyer’s price discount and refining and treatment
costs, approximately 10,740 Oz. Au) contained in gold-silver
concentrates, and the receipt of $10,850,091 in revenues from the
sale of gold-silver concentrates.
Test
pilot operations in 2016 yielded 33,172 tonnes mined and processed
from underground mining activity and pilot mill operations; and the
production of approximately 10,836 gross Oz Au (and net of
buyer’s price discount and refining costs approximately 8,668
Oz Au) contained in gold-silver concentrates, and the receipt of
$9,496,105 in revenues from the sale of gold-silver
concentrates.
Summary of Test Mining and Pilot Mill Operations for the six months
ended June 30, 2018 and 2018:
|
Total
Tonnes
Mined
&
Processed
|
Reported
Mill
Feed
Grade
(g/t Au)
|
|
Gross
Gold
Concentrates
Produced
(Au
oz.)
|
Net
Gold
Concentrates
Sold (Au
oz.)
|
|
|
|
|
|
|
Six
Months Ended June 30, 2018
|
22,931
|
9.70
|
83.0
%
|
6,159
|
5,821
|
Six
Months Ended June 30, 2017
|
15,035
|
11.75
|
78.5
%
|
6,265
|
5,021
|
Test
pilot operations in Q1 2018 yielded 11,025 tonnes mined and
processed from underground mining activity and pilot mill
operations; and the production of approximately 2,525 gross Oz Au
(and net of dry weights, buyer’s price discount and refining
and treatment costs, approximately 2,372 Oz. Au) contained in
gold-silver concentrates, and the receipt of $2,517,766 in revenues
from the sale of gold-silver concentrates.
Test
pilot operations in Q2 2018 yielded 11,906 tonnes mined and
processed from underground mining activity and pilot mill
operations; and the production of approximately 3,634 gross Oz Au
(and net of dry weights, buyer’s price discount and refining
and treatment costs, approximately 3,449 Oz. Au) contained in
gold-silver concentrates, and the receipt of $3,828,450 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: Na
2
S (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 $6,346,216 and $4,559,314 for the six months
ended June 30, 2018 and June 30, 2017 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 and Six Months Ended June 30, 2018 and
2017
In the
six months ended June 30, 2018 and 2017, 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 and
second quarters of 2018 and 2017. During the six months ended June
30, 2018, the test mining and pilot milling operations have yielded
the underground mining and mill processing of approx. 22,931 tonnes
of mineralized material, the production of approximately 6,159
gross oz. Au (and net of weight and value adjustment) approximately
5,821 oz. Au) contained in gold-silver concentrates. DynaMineras
realized the receipt of $6,346,216 in revenues from the delivery
and sale of gold-silver concentrates in the first six months of,
2018.
REVENUE.
Revenues for the quarter ended June 30, 2018 and 2017 were
$3,828,450 and $3,217,802 respectively. Revenues for the six months
ended June 30, 2018 and 2017 were $6,346,216 and $4,559,314,
respectively. The increase was due to the expanded mining
operations in the second half of 2017 and the opening of the San
Pablo East Mine for production in the second quarter of 2018.
Revenue increase 52% in the second quarter of 2018 over the first
quarter due to the full time operations of the second mill and the
opening of additional areas to mining in June. Management expects a
similar increase in the third quarter from increase productivity
for all three months.
PRODUCTION
COSTS RELATED TO SALES. Production costs related to sales for the
quarters ended June 30, 2018 and 2017 were $181,480 and $738,435
respectively. Production cost related to sales for the six months
ended June 30, 2018 and 2017 were $508,327 and $894,294,
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. The decrease
was due to non-recurring cost in the second quarter of
2017.
MINE
PRODUCTION COSTS. Mine production costs for the quarter ended June
30, 2018 and 2017 were $724,959 and $292,651 respectively. Mine
production costs for the six months ended June 30, 2018 and 2017
were $1,179,820 and $417,583, respectively. These costs are
directly related to the extraction of mine tonnage for processing.
The increase is due to the expansion of the mining operations and
reflected in the increase in revenue above.
MINE
EXPLORATION COSTS: Mine exploration costs for the quarters ended
June 30, 2018 and 2017 were $1,194,884 and $799,332 respectively.
Mine exploration costs for the six months ended June 30, 2018 and
2017 were $2,022,183 and $1,140,562, respectively. These are the
cost of extracting waste material to reach the materials to be
extracted for processing This is also reflective of the increase
activity.
MINE
EXPANSION COSTS: Mine expansion costs for quarters ended June 30,
2018 and 2017 were $302,731 and $0, respectively. Mine expansion
cost for the six months ended June 30, 2018 and 2017 were $462,631
and $0, respectively. These were the cost associated with preparing
the
San
Pablo East Mine
for production. The Company completed the
mine expansion project and begin actively mining the
San Pablo East
Mine
in the second quarter.
TRANSPORTATION.
Transportation costs for the quarters ended June 30, 2018 and 2017
were $196,919 and $115,295, respectively. Transportation costs for
the six months ended June 30, 2018 and 2017 were $284,587 and
$246,242. These are the costs of transporting the product to the
customer for treatment and sale. They increased due to the increase
in production.
CAMP,
WAREHOUSE AND SUPPORT FACILITIES. Camp, warehouse and support
facility cost for the quarters ended June 30, 2018 and 2017 were
$695,487 and $285,398, respectively. Camp, warehouse, and support
facilities for the six months ended June 30, 2018 and 2017 were
$1,361,896 and $517,354, respectively. These are the support cost
of the mining facilities including housing, food, security and
warehouse operations. This increase is reflective support required
for the doubling of the Company’s workforce to support
increase mining activity.
PROPERTY
HOLDING COSTS. Property holding costs for the quarters ended June
30, 2018 and 2017 were $785,777 and $139,467, respectively.
Property holding costs for the six months ended June 30, 2018 and
2017 were and $938,164 and 263,070, respectively. These costs are
concessions taxes, leases on land and other direct costs of
maintaining the property. The increase is due to increase in
concession taxes on the Francisco Arturo property.
GENERAL AND
ADMINISTRATIVE EXPENSES. General and administrative expenses for
the quarters ended June 30. 2018 and 2017 were $545,912 and
$650,821, respectively. General and administrative expenses for the
six months ended June 30, 2018 and 2017 were $1,140,355 and
$1,189,337. The above expenses exclude depreciation and
amortization amounts of $65,109 and $75,667 for the quarters ended
June 30, 2018 and 2017, respectively and $129,921 and $92,467 for
the six months ended June 30, 2018 and 2017,
respectively.
NET
OPERATING GAIN (LOSS). For the second quarter of 2018 and 2017 the
Company had a net operating gain (loss) of $(864,608) and $120,736,
respectively. Year to date net operating gain (loss) for 2018 and
2017 were $(1,681,668) and $(201,595), respectively. The increase
was primarily due to the increase expenses of ramping up operations
as detailed above.
OTHER
INCOME (EXPENSE). Other income (expenses) for the quarters ended
June 30, 2018 and 2017 was $(1,177,687) and $(419,777),
respectively. Other income (expense) for the six months ended June
30, 2018 and 2017 was $1,556,138 and $2,337,613, respectively Other
income for the six months ended June 30, 2017 included are interest
expense of $(61,670), other income of $397, change in derivative
liability of $1,703,437, and currency transaction gain of $695,449.
Included in this category for the same period in 2018 are interest
expense of $(118,126), other expense of $315,944, change in
derivative liability of $2,096,440 and currency transaction gain
(loss) of $(106,232). Other income for the quarter ended June 30,
2017 included currency transactions gains of 256,669, interest
expense of $(32,057), change in derivative liability of $(644,641)
and other expenses of $252. Other income for the quarter ended June
30, 2018 included currency transaction losses of $(912,746),
interest expense of $(62,575), change in derivative liability of
$113,958 and other expenses of $(316,324).
NON-CONTROLLING
INTEREST. The non-controlling interest portion of the net loss for
the three months ended June 30, 2018 and 2017 were $219,293 and
$348,323, respectively. The non-controlling portion of the net loss
year to date for 2018 and 2017 were $276,938 and $202,435,
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
June 30, 2018 and 2017, the Company recorded a gain of $1,064,962
and $603,836, respectively. For the six months ended June 30, 2018
and 2017 the Company recorded a gain (loss) of $276,464 and
$(257,872).
Liquidity and Capital Resources
As of
June 30, 2018, the Company had a negative working capital of
$(945,917), comprised of current assets of $5,014,034 and current
liabilities of $5,959,951. This represents a decrease of $878,937
from the working capital (deficit) maintained by the Company of
$(1,824,854) as of December 31, 2017, due primarily to the mark to
market adjustment for our derivative liabilities.
Net
cash provided by (used in) operations for the six months ended June
30, 2018 was $(675,418) compared with $1,814,964 for the six months
ended June 30, 2017. The change was due to funding the Company
increase operating loss.
Net
cash (used in) investing activities for the six months ended June
30, 2018 and 2017 was $587,534 and $301,667, respectively. These
funds were primarily used to expand the Company’s milling
operations through constructions of the Hardings Mill.
Net
cash (used in) financing activities for the six months ended June
30, 2018 and 2017 was $209,431 and $116,940, respectively. The
increase was due to the payoff of one convertible
note.
The
combination of these factors led to a decrease of $1,199,032 in the
Company’s cash reserve during the first six months.
Management anticipates a reversal of this trend in the second half
of the year from increased revenues as a result of the
Company’s expanded milling operations and mining
operations.
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 $18 M 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 six
months ended June 30, 2018 and 2017 the income gain (loss)
attributable portion to Goldgroup was $(276,938), and $(202,435),
respectively .
Off-Balance Sheet Arrangements
As of
June 30, 2018, 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 2018. 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
June 30, 2018, and December 31, 2017 DynaMineras owed the Company
$6,364,918 and $6,346,500, respectively.
As of
June 30, 2018, and December 31, 2017 DynaMéxico owed the
Company $4,000,000 and $4,000,000, respectively.
As of
June 30, 2018, and December 31, 2017 DynaOperaciones owed the
Company $225,000 and $225,000, respectively.
As of
June 30, 2018 and December 31, 2017 DynaMéxico owed
DynaMineras $2,273,500 and $2,539,639, respectively.
As of
June 30, 2018, and December 31, 2017 DynaOperaciones owed
DynaMineras $7,134,800 and $6,077,325, 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 a receivable
from DynaResource Nevada, Inc. of $0 and $0 at December 31, 2017
and 2016 respectively. The Company has investment balance in
DynaResource Nevada, Inc. of $70,000 and $70,000 as of June 30,
2018 and December 31, 2017, 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.