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 oper
ator 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 oper
ator
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 Gracia 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 20-year Surface Rights Agreement with the Santa Maria Ejido (See Surface Rights Agreement below);
|
DynaResource Operaciones de San Jose
de Gracia, S.A. de C.V.:
100% Owned by DynaResource, Inc.
|
·
|
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 higher 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
|
|
Suspension of Production Activities (2006)
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 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).
The total Advances made by DynaMineras
to DynaMéxico under the EAA, as of March 31, 2016, is $6,000,000. In Addition, DynaOperaciones has incurred payroll and
related expenditures in the amount of $2,276,029, which amount has been loaned to DynaOperaciones by DynaMineras, and which amount
has not been charged to DynaMéxico under the terms of the EAA.
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.
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 (2014)
Operational Permits for the rehabilitation
of the San Pablo Mine and for the refurbishment of the Pilot Mill Facility including the installation of the Tailings Pond area
adjacent to the pilot mill facility were obtained in fall, 2013, leading to the rehabilitation of the San Pablo Mine and the refurbishing
of the Pilot Mill Facility in 2014. Pilot Production Operations, including test underground mining activity commenced in October
2014, with approximately 1,676 Oz. Gold being delivered for sale during the startup testing phase.
Period
|
Total Tons
Mined & Processed
(Gravity Only)
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
|
Gross Gold
Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
2014
|
5,156
|
12.45
|
~45%
|
929
|
830
|
|
|
|
|
|
|
Period
|
Total Tons
Mined and Processed
(Gravity + Flotation)
|
Reported Mill Feed Grade
(g/t Au)
|
Reported Recovery
|
Gross Gold Concentrates Produced
(Au oz.)
|
Net Gold Concentrates Sold
(Au oz.)
|
2014
|
3,694
|
7.86
|
~80%
|
747
|
608
|
|
|
|
|
|
|
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 pilot mill 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. As a result of the capital investment program, DynaMineras
projected test mining and pilot milling volumes to approach 100 tons/day of mineralized material, in the first quarter, 2016.
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)
;
Summary of Test Mining and Pilot Mill
Operations
DynaMineras reports the following summary
of its test mining and pilot milling operations during 2015:
Period
|
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
|
8.3
|
78%
|
1,495
|
1,308
|
Test Underground Mining and Pilot
Mill Operations (First Quarter 2016)
At March 31, 2016, the DynaMineras reports
the following summary of its test mining and pilot milling operations conducted in the first quarter, 2016:
Period
|
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.)
|
January, 2016
February, 2016
March, 2016
First Quarter, 2016
|
2,521
2,985
3,085
8,591
|
11.3
16.6
11.45
|
80 %
76.5 %
78 %
|
740
1,225
900
2,865
|
2,311
|
DynaMineras expects to continue its test underground mining
activity and pilot milling operations in 2016; and projects the increased output of 150 tons/day from the mine and mill in the
second quarter, 2016.
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 $2,008,179 and $144,337 for the
three months ended March 31, 2016 and 2015.
Capital Requirements
The mining industry in general requires
significant capital in order to take a property from the exploration, to development to production. These costs remain a significant
barrier to entry for the average company but once in production, there is a ready market for the final products, In the case of
SJG, the final product would be mainly gold, the price of which is determined by global markets, so there is not a dependence on
a customer base.
Gold
Gold Uses.
Gold generally is used for fabrication or investment. Fabricated gold has a variety of end uses, including jewelry, electronics,
dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors buy gold bullion, official coins
and jewelry.
Gold Supply.
A
combination of current mine production, recycling and draw-down of existing gold stocks held by governments, financial institutions,
industrial organizations and private individuals make up the annual gold supply. Based on public information available for the
years 2008 through 2015, on average, current mine production has accounted for approximately 64% of the annual gold supply.
Gold Price.
The
following table presents the annual high, low and average daily afternoon fixing prices for gold over the past fifteen years on
the London Bullion Market ($/ounce):
Year
|
|
High
|
|
|
Low
|
|
|
Average
|
|
2002
|
|
$
|
349
|
|
|
$
|
278
|
|
|
$
|
310
|
|
2003
|
|
$
|
416
|
|
|
$
|
320
|
|
|
$
|
363
|
|
2004
|
|
$
|
454
|
|
|
$
|
375
|
|
|
$
|
410
|
|
2005
|
|
$
|
536
|
|
|
$
|
411
|
|
|
$
|
444
|
|
2006
|
|
$
|
725
|
|
|
$
|
525
|
|
|
$
|
604
|
|
2007
|
|
$
|
841
|
|
|
$
|
608
|
|
|
$
|
695
|
|
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 (through May 13, 2016)
|
|
$
|
1,294
|
|
|
$
|
1,077
|
|
|
$
|
1,204
|
|
Source: Kitco, Reuters and the London Bullion Market Association
On May 11, 2016, the afternoon fixing gold prices were: (a)
on the London Bullion Market - $1,277 per ounce; and, (b) on the New York Commodity Exchange - $1,276 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.
Results for the Three Months Ended March 31, 2016 and 2015
In the three months ended March
31, 2015, the Company was focused on planning and preparing for the injection of capital pursuant to the capital investment program,
and obtaining financing in order to improve its test mining and milling operations.
In the three months ended March
31, 2016, the Company, through its wholly owned subsidiary DynaMineras, established full test mining and pilot mill operations
at San Jose de Gracia.
DynaMineras conducted limited test
mining and milling operations in the first quarter of 2015. During the three months ended March 31, 2016, the test mining and pilot
milling operations have yielded the underground mining and mill processing of approx. 8,591 tonnes of mineralized material, the
production of approximately 2,865 gross oz. Au (and net of weight and value adjustment) approximately 2,311 oz. Au) contained in
gold-silver concentrates. DynaMineras realized the receipt of $2,008,179 in revenues from the delivery and sale of gold-silver
concentrates in the first quarter, 2016.
REVENUE. Revenues for the three months
ended March 31, 2016 and 2015 were $2,008,179 and $146,337, respectively. The Company established full test mining and pilot milling
operations in January 2016.
PRODUCTION COSTS RELATED TO SALES. Production
costs related to sales for the three months ended March 31, 2016 and 2015 were $301,995 and $25,000, 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 OPERATING COSTS. Mine operating
costs for the three months ended March 31, 2016 and 2015 were $663,408 and $55,000, respectively. These costs are directly related
to the extraction and transportation of mine tonnage.
PRE-PILOT-PRODUCTION EXPENSES. Pre Pilot-Production
Expenses for the three months ended March 31, 2016 and 2015 were $0 and $484,155 respectively. The decrease in expense in 2016
was due to the establishing of full test mining and pilot milling operations in the current quarter and therefore the Company was
no longer in a pre-pilot operation phase.
PROPERTY HOLDING COSTS. Property holding
costs for the three months ended March 31, 2016 and 2015 were $133,084 and $119,612, respectively. These costs are concessions
taxes, leases on land and other direct costs of maintaining the property.
OPERATING EXPENSES. Operating expenses
for the three months ended March 31, 2016 and 2015 were $1,567,686 and $1,524,289, respectively. In 2015, this included $486,135
in expenses related to issuance of share based compensation. The above expenses include depreciation and amortization amounts of
$47,359 and $11,710 for the three months ended March 31, 2016 and 2015, respectively.
OTHER INCOME (EXPENSE). Other income,
exclusive of currency transaction gain or (loss) for the three months ended March 31, 2016 and 2015 was $274,449 and $(573,409),
respectively. Derivatives mark-to-market adjustments are the primary components of income $204,279 in this category, whereas no
mark-to-market adjustments were in effect in the quarter ended March 31, 2015. Currency transaction gain or (loss) was $99,867
and $(462,829) for the three months ended March 31, 2016 and 2015, respectively. The reason for these fluctuations is the change
in valuation of the Mexican Peso.
NON-CONTROLLING INTEREST. The non-controlling
interest portion of the net loss for the three months ended March 31, 2016 and 2015 was $(27,781) and $(63,190), 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, 2016 and 2015, the Company recorded a (loss) of $(4,496) and $(734,755), respectively, which
were made up of unrealized losses on currency translation.
Liquidity and Capital Resources
As of March 31, 2016, the Company
had a negative working capital of $(4,306,397), comprised of current assets of $3,338,243 and current liabilities of $7,644,640.
This represents an increase of $703,720 from the working capital (deficit) maintained by the Company of $(5,010,117) as of December
31, 2015, due primarily to the improvement in production in the first quarter at the San Pablo mine at San Jose de Gracia.
Net cash provided by operations
for the three months ended March 31, 2016 was $127,257 compared with $(1,243,709) for the three months ended March 31, 2015. This
was due to the Company’s establishing consistent test mining and pilot milling activities at San Jose de Gracia.
Net cash (used) in investing activities
for the three months ended March 31, 2016 and 2015 was $(17,899) and $(53,620), respectively.
Net cash provided by financing activities
for the three months ended March 31, 2016 and 2015 was $0 and $414,249, respectively. The primary components for the previous year
are for issuance of common shares for cash of $367,749. Proceeds from financing were utilized to refurbish the pilot mill facility
and to rehabilitate the San Pablo mine, and to prepare to process bulk mined samples through the mill facility.
Noncontrolling 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. For the three months ended March 31, 2016 and 2015, the portion of the net loss attributable
to Goldgroup was $(27,781) and $(63,190), respectively.
Off-Balance
Sheet Arrangements
As of March 31, 2016, we 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 the Company, through its wholly owned subsidiary DynaMineras, continuing its test mining and pilot milling
operations at SJG, and increasing the volume of material processed and the amount of gold concentrates produced. The Company funds
its general and administrative expenses from revenues produced from test operations at SJG. 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 current cash on hand and revenues from pilot operations is adequate to fund its ongoing
general and administrative expenses through 2016. The Company may seek additional financing for increased operations in the event
the Board of Directors determines it is in the best interest of the Company.
Capital Expenditures
The Company’s primary activities
relate to the test mining and pilot mill operations at 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. The Company utilized financing proceeds to advance funds to DynaMineras
in order that DynaMineras could: (a) finalize its underground mining plan; (b) make improvements to the pilot mill facility; (c)
acquire mining and transportation equipment; (d) engage a contract miner; and, (e) add integral management and personnel; among
other things. As a result, the Company realized the commencement of contract mining at San Pablo in the fourth quarter 2015, and
a full re-start of pilot mill operations at January 1, 2016.
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.
Capital Advances to Subsidiaries
DynaResource de México S.A.
de C.V. (“DynaMéxico”)
Equity Ownership of 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, the Company currently owns 80% of the outstanding
equity of DynaMéxico.
Amounts Owed to DynaUSA and
DynaMineras
As of March 31, 2016, DynaUSA had
advanced $8,393,394 USD to DynaMineras and DynaMineras had advanced $6,000,000 USD to DynaMéxico. In addition, at March
31, 2016, DynaOperaciones has incurred payroll and related expenditures in the amount of $ 2,276,029 USD, which amounts were loaned
to DynaOperaciones by DynaMineras, and which amount has yet to be charged to DynaMéxico under the terms of the EAA.
On September 5, 2014, DynaUSA issued
1,333,333 shares of its common stock to DynaMineras in exchange for the $4,000,000 receivable from DynaMéxico.
As a result, the balances owed
to DynaUSA and DynaMineras by DynaMéxico as of March 31, 2016 are as following;
|
·
|
DynaMéxico owes $2,000,000 USD to DynaMineras;
|
|
·
|
DynaMéxico will be charged an additional $2,276,029 (at March
31, 2016); which amount will be owed to DynaMineras by DynaMéxico;
|
|
·
|
DynaMéxico owes $4,000,000 USD to DynaUSA; and,
|
As of 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.
DynaResource Operaciones (“DynaOperaciones”)
The Company loaned DynaOperaciones $225,000
in 2012, which amount remains payable to the Company as of March 31, 2016.
Mineras de DynaResource (“DynaMineras”)
At March, 31, 2016, DynaMineras owes
$8,393,394 to DynaUSA, as described above.
Elimination upon Consolidation
All receivables and payables among all
subsidiary companies have been eliminated upon consolidation.
Future Advances to DynaMineras and
DynaMéxico from DynaUSA
DynaUSA 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 DynaUSA Company.
Advances from Non-Controlling Interest
Holder to DynaMéxico
In 2014, the Non-Controlling interest
holder advanced $111,500 to DynaMéxico and in 2013 advanced $120,000 USD to DynaMéxico. This total $231,500 is being
carried by DynaMéxico at March 31, 2016 as amount Due to Non-Controlling Interest.
Note Receivable – 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 currently has
a receivable from DynaResource Nevada, Inc. of $159,576 and an investment balance of $70,000 as of March 31, 2016.