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 September 30, 2019 is $2,125,000. The EAA is the third and
latest Amendment to the original Contract Mining Services and Mineral Production Agreement (the “Operating Agreement”),
which was previously entered into by DynaMineras with DynaMéxico in April 2005, wherein DynaMineras was named the Exclusive
Operating Entity at SJG. The Operating Agreement was previously amended in September 2006 (the “First Amendment”),
and amended again at July 15, 2011 (the “Second Amendment”). The Term of the Second Amendment is 20 years, and the
EAA (Third Amendment) provides for the continuation of the 20 Year Term from the date of the Second Amendment (July 15, 2011).
Surface
Rights Agreement
On
January 6, 2014 DynaMineras entered into a 20-year surface rights agreement with the Santa
Maria Ejido Community surrounding the San Jose de Gracia Property (the “20 Year SRA”). The 20 Year SRA covers an area
of 4,399 hectares surrounding the main mineral resource areas of SJG, and provides for annual lease payments by DynaMineras of
$1,359,443 Pesos (approx. $72,000 USD), commencing in 2014. The 20 year SRA provides DynaMineras with surface access to
the core resource areas of SJG, and allows for all permitted mining, pilot production and exploration activities from the owners
of the surface rights (Santa Maria Ejido community).
Additionally,
DynaMineras expects to construct a Medical Facility and a Community Center within the SJG community in year 2015. DynaMineras
reports that land and building for which the medical facility and community center will be constructed have been approved for
re-zoning by the local community; and plans are being drawn for constructing the facilities.
Structure
of Company / Operations
Activities
in México are conducted by Mineras de DynaResource S.A. de C.V. (“DynaMineras”); with the management of personnel
being contracted by DynaMineras through to the personnel management subsidiary, DynaResource Operaciones, S.A. de C.V. (“DynaOperaciones”).
Management of DynaResource, Inc. and consultants continue to manage the operating companies in México; while the Chairman/CEO
of DynaUSA is the President of each of the operating companies in México. Fees for Management and administration are charged
by DynaMineras and DynaOperaciones, which are eliminated in consolidation.
Activities
under Exploitation Amendment Agreement
In
2013, DynaMineras, in accordance with the terms of the Exploitation Amendment Agreement, commenced the rehabilitation of the San
Pablo Mine and the refurbishment of the pilot production facility at SJG. DynaMéxico received permits as discussed above
for the rehabilitation and operation of the pilot mill facility and the exploitation and mining of the San Pablo area of SJG.
The basis for the mining activity and the operation of the pilot mill facility are the NI 43-101 Mineral Resource Estimate, the
Technical Report, the block models prepared as a result of the recent drilling activity, and the recent production history of
2003-2006.
Competitive
Advantage
The
Company, through its subsidiaries, has been conducting business in México since March 2000. During this period the Company
believes it has structured its subsidiaries properly and strategically, and during which time the Company has retained key personnel
and developed key relationships and support. The Company believes its experience and accomplishments and relationships in México
give it a competitive advantage, even though many competitors may be larger and have more capital resources.
DynaMéxico
retains 100% of the rights to concessions over the area of the San José de Gracia property and it currently sees no competition
for mining on the lands covered by those concessions. The sale of gold and any bi-products would be subject to global market prices,
which prices fluctuate daily. DynaMéxico was successful in selling gold concentrates produced from SJG in prior years,
and the Company expects a competitive market for produced concentrates and/or other mineral products in the future. Actual prices
received by DynaMineras in the sale of concentrates or other products produced from San Jose de Gracia would depend upon these
global market prices, less deductions.
Capital
Requirements
The
mining industry in general requires significant capital in order to take a property from the exploration, to development to production.
These costs remain a significant barrier to entry for the average company but once in production, there is a ready market for
the final products, In the case of SJG, the final product would be mainly gold, the price of which is determined by global markets,
so there is not a dependence on a customer base.
Gold
Gold
Uses. Gold generally is used for fabrication or investment. Fabricated gold has a variety of end uses,
including jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions and official coins. Gold investors
buy gold bullion, official coins and jewelry.
Gold
Supply. A combination of current mine production, recycling and draw-down of existing gold stocks held
by governments, financial institutions, industrial organizations and private individuals make up the annual gold supply. Based
on public information available for the years 2008 through 2014, on average, current mine production has accounted for approximately
64% of the annual gold supply.
Gold
Price. The following table presents the annual high, low and average daily afternoon fixing prices
for gold over the past ten years on the London Bullion Market ($/ounce):
Year
|
High
|
Low
|
Average
|
2009
|
$1,213
|
$810
|
$972
|
2010
|
$1,421
|
$1,058
|
$1,225
|
2011
|
$1,895
|
$1,319
|
$1,572
|
2012
|
$1,792
|
$1,540
|
$1,669
|
2013
|
$1,694
|
$1,192
|
$1,411
|
2014
|
$1,380
|
$1,140
|
$1,265
|
2015
|
$1,303
|
$1,057
|
$1,175
|
2016
|
$1,366
|
$1,151
|
$1,251
|
2017
|
$1,379
|
$1,101
|
$1,236
|
2018
|
$1,355
|
$1,178
|
$1,288
|
2019 (through November 5, 2019)
|
$1,540
|
$1,269
|
$1,380
|
Source:
Kitco, Reuters and the London Bullion Market Association
On
September 30, 2019, the afternoon fixing gold price on the London Bullion Market was $1,489 per ounce and the spot market gold
price on the New York Commodity Exchange was $1,489 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)
Capital
Investment Program (2015 and 2016)
In
July 2015, the Company commenced a capital investment program designed to increase tonnage from the test mining operations and,
to increase volume and output through the pilot mill facility. Through DynaMineras, the Company was engaged in the implementation
of this capital investment program from July through December 2015. And, in 2016, the Company was carrying out operations utilizing
the improvements and increased outputs from test mining and pilot milling activities. The capital investment program consisted
of a net total of $3,565,000 USD as generally described below:
|
Contract
Mining;
|
|
$713,000;
including $250,000 Deposit (advance for services);
And
$513,000 in direct mining costs, explosives, and payments to contractor;
|
|
Mine
related Costs;
|
|
$290,000;
including mine plan development, permits, assays, consulting, mine supplies, and equipment items;
|
|
Mill and Camp;
|
|
$613,000; Improvements to the Mill and
Camp, including pre-operation expenses;
|
|
Personnel Costs;
|
|
$673,000; including payroll and consulting
expenses;
|
|
Equipment;
|
|
$636,000
long term equipment purchases including transportation, mine loading and hauling, generators, compressors and pumps;
|
|
Overhead;
|
|
$285,000; including
legal expenses, consulting, and administration;
|
|
IVA Taxes;
|
|
$272,000; Value
added taxes paid, and refundable;
|
|
Land Use and
Rental;
|
|
$83,000;
|
|
Total:
|
|
$3,565,000
|
Project
Improvements, Expansion and Increased Output (2017, 2018 AND 2019)
The
Company continues its business plan of operations at San Jose de Gracia, which is to improve, increase and expand test mining
and pilot milling operations and generally, to increase production output. Since 2015 startup of the test mining and milling activities,
the Company has increased daily output from an initial 75 tons per day, to a current 200 tons per day, and during fiscal year
2019 the Company expects to achieve production output of 250 tons per day. (Note the Summary of Test Mining and Pilot Mill Operations
for 2015, 2016, 2017, and 2018 below).
Since
January 2017, the Company has expended over $10 million USD in non-operating costs, generally classified as project improvements
and expansion costs which have been expensed in the company’s financial statements. These funds have been provided primarily
from cash flows from operations. An itemized list of these non-operating costs is described below:
|
Mill Expansion;
|
|
$1,787,000
|
|
|
Tailings Pond Expansion
|
|
265,000
|
|
|
Machinery and Equipment
|
|
731,000
|
|
|
Mining Camp Expansion
|
|
146,000
|
|
|
Medical Facility
|
|
123,000
|
|
|
Mine Development - San Pablo
|
|
3,131,000
|
|
|
Mine Expansion - San Pablo East
|
950,000
|
|
|
Mine Expansion – Tres Amigoes
|
|
502,000
|
|
|
SJG Mining Concessions
|
|
1,375,000
|
|
|
Surface Rights and Permitting
|
|
238,000
|
|
|
Debt Retirement
|
|
125,000
|
|
|
Legal Fees
|
|
1,116,000
|
|
|
Total
|
|
$10,489,000
|
|
The
Company is currently reporting all costs of mine operations, improvements, and expansion as expenses in accordance with United
States General Accepted Accounting Principal (GAAP) requirements. The results of expensing all costs is that the Company has accumulated
a net loss carry forward from Mexico operations of $28 million USD which amount is available to offset future taxable earnings.
Summary
of Test Mining and Pilot Mill Operations for 2015, 2016, 2017 and 2018:
Year
|
Total
Tonnes
Mined
& Processed
|
Reported
Mill Feed Grade
(g/t Au)
|
Reported
Recovery
%
|
Gross
Gold Concentrates Produced
(Au
oz.)
|
Net
Gold Concentrates Sold
(Au
oz.)
|
2015
|
7,180
|
8.30
|
78.0%
|
1,495
|
1,308
|
2016
|
33,172
|
12.70
|
79.7
%
|
10,836
|
8,668
|
2017
|
35,170
|
12.95
|
85.00
%
|
12,636
|
10,740
|
2018
|
52,038
|
9.82
|
86.11%
|
14,147
|
13,418
|
DynaMineras
expects to continue to increase its test underground mining activity and pilot milling operations in 2019; and projects the increased
output to 250 tons/day from the mine(s) and mill during 2019.
Test
pilot operations in 2018 yielded 52,038 tonnes mined and processed from underground mining activity and pilot mill operations;
and the production of approximately 14,147 gross Oz Au (and net of dry weights, buyer’s price discount and refining and
treatment costs, approximately 13,418 Oz. Au) contained in gold-silver concentrates, and the receipt of $14,059,697 in revenues
from the sale of gold-silver concentrates.
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.
Summary
of Test Mining and Pilot Mill Operations for the nine months ended September 30, 2019 and 2018:
|
Total
Tonnes
Mined
&
Processed
|
Reported
Mill
Feed
Grade
(g/t Au)
|
Reported
Recovery
%
|
Gross
Gold
Concentrates
Produced
(Au
oz.)
|
Net
Gold
Concentrates
Sold
(Au oz.)
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
49,701
|
6.19
|
86.9%
|
8,585
|
8,027
|
Nine Months Ended
September 30, 2018
|
36,255
|
10.43
|
86.5%
|
10,517
|
9,667
|
|
|
|
|
|
|
Test
pilot operations in Q1 2019 yielded 17,599 tonnes mined and processed from underground mining activity and pilot mill operations;
and the production of approximately 2,517 gross Oz Au (and net of dry weights, buyer’s price discount and refining and treatment
costs, approximately 2,366 Oz. Au) contained in gold-silver concentrates, and the receipt of $2,329,563 in revenues from the sale
of gold-silver concentrates.
Test
pilot operations in Q2 2019 yielded 15,538 tonnes mined and processed from underground mining activity and pilot mill operations;
and the production of approximately 3,378 gross Oz Au (and net of dry weights, buyer’s price discount and refining and treatment
costs, approximately 3,039 Oz. Au) contained in gold-silver concentrates, and the receipt of $3,412,973 in revenues from the sale
of gold-silver concentrates.
Test
pilot operations in Q3 2019 yielded 16,564 tonnes mined and processed from underground mining activity and pilot mill operations;
and the production of approximately 3,113 gross Oz Au (and net of dry weights, buyer’s price discount and refining and treatment
costs, approximately 2,622 Oz. Au) contained in gold-silver concentrates, and the receipt of $3,417,521 in revenues from the sale
of gold-silver concentrates.
Additional
Test Mining and Mill Operations Disclosure
The
flow sheet for obtaining and processing mineralized material is described below:
Contract
Mining: Mineralize material is mined from San Pablo mine by the contract miner, and according to the formal mine plan developed
by the Company.
Mining
Patio: Freshly mined mineralized material is transported by the contract miner outside the San Pablo Mine to the mine patio;
Pilot
Mill Facility – General Description and Flow Sheet;
Mill
Patio: Mineralized material is transported by Company dump trucks and articulated dump truck to the mill patio.
Crushing
Circuit: Freshly mined mineralized material is loaded from the mill patio into the crushing circuit, comprised of a jaw crusher
and cone crusher; and 1/2” crushed material is fed by conveyor belt to the fine mineralized material bin. The mineralized
material is then sent by conveyor belt to the primary ball mill, which is a Hardinge conical mill.
Hardinge
Mill: The mineralized material is then ground to -100 mesh particle size; and then fed to a holding tank;
Holding
Tank: The mineralized material is pumped from the holding tank to the cyclone;
Cyclone:
The course material plus (-100 Mesh) is fed to the Ball Mill #2, the Denver Mill; and fine material less (-100 Mesh) is fed
to another holding tank.
Fine
Screening System (Sweco Screen): The fine mineralized material is fed from the holding tank to the Sweco Screen; the fine
mineralized material less (-200 Mesh) is fed to the spirals; the oversized material is fed to Ball Mill# 2.
Denver
Mill: All mineralized material reground in the Denver Mill, is then fed to the holding tank prior to the Cyclone.
Spiral
Gravity Concentration: Approximately 25% of the mineralized material is fed from the spirals to the Wifley table. Approximately
75% of the mineralized material is fed from the spiral concentration to the flotation conditioning tank.
Wifley
Shaking Table: The concentrate from the spirals feed the Wifley shaking table, producing a high-grade gravity concentrate.
The high-grade gravity concentrate is bagged and shipped for sale. (There are no chemicals present in the gravity concentrate.)
It is estimated that the gravity concentrate produced is approx. 40% of the total recovered gold; and estimated that a 300-400
g/t Au would be the final gravity concentrate grade.
Flotation
Conditioning Tank: The tailings from spirals and from the Wifley table are fed to the flotation conditioning tank. A low calculation
of chemicals is added, with metered feeder, directly to the flotation feed tank. Sodium sulfide, a granular solid, is added also
to the agitated flotation feed tank.
Flotation
Chemicals: The following chemicals are added to the flotation feed tank: Na2S (Sodium Sulfide), 400 g/mt (solid); Aero 343
Xanthate Collector 40-80 g/mt (liquid); Cytec 7249 conditioner 50 g/mt (liquid); Cytec 4037 Conditioner 20–40 g/mt (liquid);
and Aerofroth 70 or 73 Frother 30 g/mt (liquid).
Rougher
Flotation: The Rougher flotation consists of a bank of 8 flotation cells (or Hybrid float cell), which is fed by the conditioning
tank. The rougher concentrate recovered from the rougher float cells or the first hybrid cell is bagged for shipment and sale.
A very low percentage of chemicals remains in the rougher concentrate.
Scavenger
and Cleaner Concentrate: The tailings of the rougher concentrate could be fed to the scavenger and cleaner float cells (or,
a second hybrid cell). The cleaner concentrate would then be bagged and shipped for sale. A very low percentage of chemicals remains
in the cleaner concentrate.
Circuit
Tailings: The tailings from the flotation area are fed to the tailings impoundment area. Less than 10% of chemicals added
at the conditioning tank remain in the tailings slurry. Chemicals do not appear in the water of the tailings; as confirmed by
analysis.
Power:
A 45 KW efficient diesel generator will supply power to the camp, mill lights and to the laboratory. Two 50 KW back-up diesel
generators (Selmec, Kamag) are also available for camp use.
The
mill primary generator is a 310 KW Cat Diesel and there is a 455 KW Cat Diesel mill back-up generator.
Diesel
fuel is stored in a 10,000-liter storage tank that feeds the two large generators by gravity flow to a common 500-liter head tank.
The fuel storage tank is contained within a secondary cement impoundment with controlled and oil-trapped drainage.
Electrical:
The Company is in process of connecting electrical power sufficient to supply electrical power for the camp and mill.
Competitive
Advantage
The
Company, through its subsidiaries, has been conducting business in México since March 2000. During this period the Company
believes it has structured its subsidiaries properly and strategically, and during which time the Company has retained key personnel
and developed key relationships and support. The Company believes its experience and accomplishments and relationships in México
give it a competitive advantage, even though many competitors may be larger and have more capital resources.
DynaMéxico
retains 100% of the rights to concessions over the area of the San José de Gracia property and it currently sees no competition
for mining on the lands covered by those concessions. The sale of gold and any bi-products would be subject to global market prices;
which prices fluctuate daily. DynaMéxico was successful in selling gold concentrates produced from SJG in prior years,
and the Company expects a competitive market for produced concentrates and/or other mineral products in the future. Actual prices
received by DynaMineras in the sale of concentrates or other products produced from San Jose de Gracia would depend upon these
global market prices, less deductions.
The
Company’s operating subsidiaries, DynaMineras and DynaOperaciones, receive monthly fees for management of the SJG activities
and personnel. These fee amounts are eliminated in consolidation. Other than those intercompany fees, the Company reported revenue
of $9,160,657 and $10,146,585 for the nine months ended September 30, 2019 and September 30, 2018 respectively.
Capital
Requirements
The
mining industry in general requires significant capital in order to take a property from the exploration, to development to production.
These costs remain a significant barrier to entry for the average company but once in production, there is a ready market for
the final products, In the case of SJG, the final product would be mainly gold, the price of which is determined by global markets,
so there is not a dependence on a customer base.
Condition
of Physical Assets and Insurance
Our
business is capital intensive and requires ongoing capital investment for the replacement, modernization or expansion of equipment
and facilities. We and our subsidiaries maintain insurance policies against property loss. Such insurance, however, contains exclusions
and limitations on coverage, particularly with respect to environmental liability and political risk. There can be no assurance
that claims would be paid under such insurance policies in connection with a particular event.
Environmental
Matters
Our
activities are largely outside the United States and subject to governmental regulations for the protection of the environment.
We conduct our operations so as to protect public health and the environment and believe our operations are in compliance with
applicable laws and regulations in all material respects. DynaMéxico is involved with maintaining tailings ponds and test
mining and pilot production activities (through DynaMineras) with the oversight of SEMARNAT, the federal environmental agency
of México.
Results
for the Three and Nine Months Ended September 30, 2019 and 2018
In
the nine months ended September 30, 2019 and 2018, the Company, through its wholly owned subsidiary DynaMineras, continued full
test mining and pilot mill operations at San Jose de Gracia.
DynaMineras
conducted test mining and milling operations in the three quarters of 2019 and 2018. During the nine months ended September 30,
2019, the test mining and pilot milling operations have yielded the underground mining and mill processing of approx. 49,701 tonnes
of mineralized material, the production of approximately 8,027 gross oz. Au (and net of weight and value adjustment) approximately
oz. Au) contained in gold-silver concentrates. DynaMineras realized the receipt of $9,160,057 in revenues from the delivery and
sale of gold-silver concentrates in the first nine months of 2019.
REVENUE.
Revenues for the three months ended September 30, 2019 and 2018 were $3,417,521 and $3,800,369, respectively. Revenues for the
nine months ended September 30, 2019 and 2018 were $9,160,057 and $10,146,585, respectively. The decrease was due to a lower yield
per ton from the current years mining. The g/t yield dropped from 10.43 g/t to 6.19 g/t.
PRODUCTION
COSTS RELATED TO SALES. Production costs related to sales for the three months ended September 30, 2019 and 2018 were $472,053
and $457,589 respectively. Production costs related to sales for the nine months ended September 30, 2019 and 2018 were $1,328,507
and $1,237,241, respectively. The increase was largely due to the company’s increase in processing capacity related to the
refurbishing and opening of the second mill.
MINE
PRODUCTION COSTS. Mine production costs for the three months ended September 30, 2019 and 2018 were $1,306,831 and $698,431 respectively.
Mine productions costs for the nine months ended September 30, 2019 and 2018 were $3,156,476 and $1,989,637, respectively. These
costs are directly related to the extraction of mine tonnage for processing. The increase is due to the increase tonnage mined
and the drop in the g/t yield.
MINE
EXPLORATION COSTS: Mine Explorations costs for the three months ended September 30, 2019 and 2018 were $193,397 and $1,443,693
respectively. Mine exploration cost for the nine months ended September 30, 2019 and 2018 were $1,710,612 and 3,083,165, respectively.
These are the cost of extracting waste material to reach the materials to be extracted for processing.
MINE
EXPANSION COSTS: Mine expansion costs are the cost incurred in opening new areas to mining including the construction of mine
infrastructure and expansion of min support facilities. Mine expansion costs for the three months ended September 30, 2019 and
2018 were $166,820 and $185,150, respectively. Mine expansion costs for the nine months ended September 30, 2019 and 2018 were
$765,024 and $1,235,315, respectively. The 2018 cost were the cost associated with preparing the San Jose de Gracia East Mine
for production. The Company began actively mining the San Jose de Gracia East mine in the second quarter of 2018. The 2019
cost is largely associated with opening of the Tres Amigos mine. The Company expects to begin active mining of the Tres Amigos
mine in the fourth quarter of 2019.
TRANSPORTATION.
Transportation costs for the three months ended September 30, 2019 and 2018 were $196,533 and $160,972, respectively. Transportation
costs for the nine months ended September 30, 2019 and 2018 were $634,688 and $445,559, respectively. These are the costs of transporting
the product to the customer for treatment and sale. The increase in transportation cost is due to the increase tonnage transported.
Because of the decrease in g/t yield more tonnage has been necessary to produce each ounces of gold.
CAMP,
WAREHOUSE AND SUPPORT FACILITIES. Camp, warehouse and support facility cost for the three months ended September 30, 2019 and
2018 were $647,146 and $740,228 respectively. Camp, warehouse and support facility costs for the nine months ended September 30,
2019 and 2018 were $1,968,587 and $2,102,124, respectively. These are the support cost of the mining facilities including housing,
food, security and warehouse operations.
PROPERTY
HOLDING COSTS. Property holding costs for the three months ended September 30, 2019 and 2018 were $292,956 and $108,629 respectively.
Property holding costs for the nine months ended September 30, 2019 and 2018 were $399,185 and $1,046,993, respectively. These
costs are concessions taxes, leases on land and other direct costs of maintaining the property. The decrease in a result of final
settlement of prior year concession taxes on the Francisco Arturo property and the reduction of the total concession area.
GENERAL
AND ADMINISTRATIVE EXPENSES. General and administrative expenses for the three months ended September 30, 2019 and 2018 were
$546,919 and $516,315 respectively. General and administrative expenses for the nine months ended September 30, 2019 and 2018
were $1,590,196 and $1,656,670, respectively. The above expenses exclude depreciation and amortization amounts of $812 and $3,274
for the three months ended September 30, 2019 and 2018, respectively and $2,442 and $5,892 for the nine months ended September
30, 2019 and 2018, respectively.
OTHER
INCOME (EXPENSE). Other income (expense) for the three months ended September 30, 2019 and 2018 was $(425,355) and $425,293, respectively.
Included in this category in 2019 is interest expense of $(208,721), other income of $163, change in derivative liability of $185,029
and currency transaction loss of $(401,826). Included in this category in 2018 is interest expense of $(144,000), other expense
of $(12,077), change in derivative liability of $370,638, a gain on sale of assets of $24,870 and currency transaction gain of
$185,862.
Other
income for the nine ended September 30, 2019 and 2018 was $261,625 and $1,981,431, respectively. Included in this category in
2019 is interest expense of $(462,133), other income of $770, change in derivative liability of $831,114 and currency transaction
loss of $(108,126). Included in this category in 2018 is interest expense of $(262,126), other expenses of $(328,021), change
in derivative liability of $2,467,078, a gain on sale of assets of $24,870 and currency transaction gain of $79,630.
NON-CONTROLLING
INTEREST. The non-controlling interest portion of the net loss for the three months ended September 30, 2019 and 2018 were $133,974
and $(18,982), respectively. The non-controlling interest portion of the net loss for the nine months ended September 30, 2019
and 2018 were $164,824 and $256,712, 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 September 30, 2019 and 2018, the Company recorded a gain (loss) of $405,791
and $(387,290), respectively, which were made up of unrealized losses on currency translation. For the nine months ended September
30, 2019 and 2018, the Company recorded a gain (loss) of $105,526 and $(110,826), respectively.
Liquidity
and Capital Resources
As
of September 30, 2019, the Company had a negative working capital of $(4,298,168), comprised of current assets of $4,968,468 and
current liabilities of $9,266,636. This represents a decrease of $2,514,475 in the working capital (deficit) maintained by the
Company of $(1,783,693) as of December 31, 2018, due primarily to decrease in cash from funding the Company’s operating
loss.
Net
cash used by operations for the nine months ended September 30, 2019 was $1,170,621 compared with cash used by operations of $1,178,619
for the nine months ended September 30, 2019.
Net
cash used in investing activities for the nine months ended September 30, 2019 and 2018 was $0 and $0, respectively.
Net
cash used in financing activities for the nine months ended September 30, 2019 and 2018 was $132,658 and $369,504 respectively.
These amounts were used for debt service.
Non-controlling
Interest
Under
the terms of the Earn In Agreement (September 1, 2006 to March 15, 2011), Goldgroup Mining Inc. and its wholly owned subsidiary
Goldgroup Resources, Inc. (Goldgroup), through 2010, had contributed capital to DynaMéxico in order to acquire 25% of the
outstanding shares (a shareholder interest) of DynaResource de México, S.A. de C.V. (DynaMéxico). In March 2011,
Goldgroup had contributed a total of $18M USD capital to DynaMéxico in order to acquire a total of 50% of the outstanding
shares (a shareholder interest) of DynaMéxico. From March 2011 through May 2013, Goldgroup owned 50% of the outstanding
shares of DynaMéxico, and since May 2013 to current date Goldgroup owns 20% of the outstanding shares of DynaMéxico.
The applicable portion of the earnings or loss attributable to Goldgroup is offset in this section. In the nine months ended September
30, 2019 and 2018 the loss attributable to Goldgroup was $164,824 and $256,712.
Off-Balance
Sheet Arrangements
As
of September 30, 2019, the Company did not have any off-balance sheet arrangements (as that phrase is defined by SEC rules applicable
to this report) which have or are reasonably likely to have a material adverse effect on our financial condition, results of operations
or liquidity.
Plan
of Operation
The
Plan of operation for the next twelve months includes DynaMineras continuing the improvement and expansion of the test mining
and pilot milling operations at SJG. The Company funds its general and administrative expenses in the US. The Company’s
operating subsidiaries, DynaMineras and DynaOperaciones, receive monthly fees for management of SJG activities and personnel.
These amounts are eliminated in consolidation. The Company believes that cash on hand, and including cash flow generated from
its current operations, is adequate to fund its ongoing general and administrative expenses through 2019. The Company plans to
seek additional debt funding during the next 12 months depending on results of its pilot operations, market conditions, and other
factors.
Capital
Expenditures
The
Company’s primary activities relate to the exploitation of the SJG property through its 100% owned operating subsidiary,
DynaMineras. DynaMineras is conducting activities at SJG under the terms of the Exploitation Amendment Agreement (the “EAA”,
or, “operating agreement”) with DynaMéxico.
Drilling
Programs
In
the period September 2006 through December 31, 2011, funding from Goldgroup provided for DynaMéxico’s completing
approximately 68,741 meters drilling at San Jose de Gracia, resulting in a defined NI 43-101 Mineral Resource Estimate as described
in the 2012 DynaMéxico-CAM SJG Mineral Resource Estimate. The Company expects DynaMineras to plan continued and subsequent
drilling programs at San Pablo, Tres Amigos, La Ceceña, Palos Chinos, La Union, La Purisima, and La Prieta / Rosario /
Rudolpho. The Company expects further drilling programs to confirm extensions to mineralization in all directions and down dip
from the main target areas.
Mineralization
at San José de Gracia
The
Company was informed by DynaMéxico that it had outlined significant mineralization from drilling activity at San Pablo,
Tres Amigos, La Union, and La Purisima areas of SJG as described in the recent NI 43-101 2012 DynaMéxico-CAM SJG Mineral
Resource Estimate. Further drilling is expected to outline additional mineralization at these 4 major target areas at SJG, while
additional mineralization is also expected to be defined at La Prieta and the area Northeast of Tres Amigos. Other areas at SJG
indicate clear potential to develop additional mineralization.
No
Known Reserves
The
SJG property is without known reserves. Under U.S. standards, mineralization may not be classified as a “reserve”
unless a determination has been made that the mineralization could be economically and legally produced or extracted at the time
the reserve determination is made.
Exploitation
Amendment Agreement (“EAA”)
On
May 15, 2013, DynaMineras entered into an Exploitation Amendment Agreement (“EAA”) with DynaMéxico. The EAA
grants to DynaMineras the right to finance, explore, develop and exploit the SJG Property, in exchange for: (A) Reimbursement
of all costs associated with financing, maintenance, exploration, development and exploitation of the SJG Property, which costs
are to be charged and billed by DynaMineras to DynaMéxico; and, (B) After Item (A) above, the receipt by DynaMineras of
75% of gross receipts received by DynaMéxico from the sale of all minerals produced from SJG, to the point that DynaMineras
has received 200% of its advanced funds; and, (C) after items (A) and (B) above; the receipt by DynaMineras of 50% of all gross
receipts received by DynaMéxico from the sale of all minerals produced from SJG, and throughout the term of the EAA; and,
(D) in addition to Items (A), (B), and (C) above, DynaMineras shall receive a 2.5% NSR (“Net Smelter Royalty”) on
all minerals sold from SJG over the term of the EAA. The total Advances made by DynaMineras to DynaMéxico as of December
31, 2014 is $4,025,000. The EAA is the third and latest Amendment to the original Contract Mining Services and Mineral Production
Agreement (the “Operating Agreement”), which was previously entered into by DynaMineras with DynaMéxico in
April 2005, wherein DynaMineras was named the Exclusive Operating Entity at SJG. The Operating Agreement was previously amended
in September 2006 (the “First Amendment”), and amended again at July 15, 2011 (the “Second Amendment”).
The Term of the Second Amendment is 20 years, and the EAA (Third Amendment) provides for the continuation of the 20 Year Term
from the date of the Second Amendment (July 15, 2011).
Exclusive
Operating Entity at San Jose de Gracia
Under
agreement with DynaMéxico, Mineras de DynaResource S.A. de C.V. (“DynaMineras”) has been named the exclusive
operating entity at the San Jose de Gracia Project. DynaResource owns 100% of DynaMineras.
DynaMéxico
General Powers of Attorney
The
Chairman-CEO of DynaUSA also serves as the President of DynaMéxico and as the President of DynaMineras. The President of
DynaMéxico holds broad powers of attorney granted by the shareholders of DynaMéxico which gives the current President
significant and broad authority within DynaMéxico.
Rehabilitation
and Start-up of Pilot Mill Facility at San Jose de Gracia
Under
the terms of the Exploitation Amendment Agreement (“EAA”), as described above, DynaMineras has rehabilitated the pilot
mill facility at SJG. The SJG pilot mill facility (a gravimetric-flotation circuit) is now processing bulk samples mined from
selected target areas of SJG. Operations at SJG are managed by DynaMineras, and are projected to be similar to those conducted
by DynaMéxico during 2003-2006.
Capital
Advances to Subsidiaries
DynaResource
de México (“DynaMéxico”)
In
May 2013, the Company acquired additional shares in the outstanding equity in DynaMéxico in exchange for the retirement
of accounts receivable of $2,393,803, which amount was due from DynaMéxico at December 31, 2012. As a result, as of May
17, 2013, the Company owns 80% of the outstanding equity of DynaMéxico.
At
December 31, 2014, the Company issued 1,333,333 shares of its common stock to DynaMineras in exchange for $4,000,000 receivable
it held from DynaMéxico.
As
of September 30, 2019, and December 31, 2018 DynaMineras owed the Company $5,210,456 and $6,392,705, respectively.
As
of September 30, 2019, and December 31, 2018 DynaMéxico owed the Company $4,000,000 and $4,000,000, respectively.
As
of September 30, 2019, and December 31, 2018 DynaOperaciones owed the Company $225,000 and $225,000, respectively.
As
of September 30, 2019, and December 31, 2018 DynaMéxico owed DynaMineras $2,373,500 and $2,373,500, respectively.
As
of September 30, 2019, and December 31, 2018 DynaOperaciones owed DynaMineras $7,134,800 and $7,134,800, respectively.
Beginning
on December 31, 2012, the Company and DynaMineras agreed with DynaMéxico to accrue interest on the total amount receivable
until repaid or otherwise retired. The interest rate to be accrued is agreed to be simple annual interest at the rate quoted by
the Bank of México.
Future
Advances to DynaMineras and DynaMéxico from the Company
The
Company expects to make additional advances to DynaMineras and DynaMéxico. Future advances from DynaMineras to DynaMéxico
will be made under the terms of the Exploitation Amendment Agreement. Other advances are agreed to be accrued in the same manner
as previous receivables, until or unless otherwise agreed between DynaMéxico and the Company.
In
2014, Goldgroup advanced $111,500 to DynaMéxico and in 2013 Goldgroup advanced $120,000 USD to DynaMéxico. This
total $231,500 is being carried by DynaMéxico as a Due to Non-Controlling Interest.
Note
Receivable and Investments in Affiliate
DynaResource
Nevada, Inc., a Nevada Corporation (“DynaNevada”), with one operating subsidiary in México, DynaNevada de México,
S.A. de C.V. (“DynaNevada de México”) have common officers, directors and shareholders. The total amount loaned
by the Company to DynaNevada at December 31, 2010 was $805,760. The terms of the Note Receivable provided for a “Convertible
Loan,” repayable at 5% interest over a 3-year period, and convertible at the Company’s option into Common Stock of
DynaNevada at $0.25 / Share. On December 31, 2010, the Company converted its receivable from DynaNevada into 3,223,040
Shares of DynaNevada; and as a result, the Company owns 19.92% of the outstanding share capital of DynaNevada. DynaNevada is a
related entity, and through its subsidiary in México (DynaNevada de México), (“DynaNevada de México”),
has entered into an Option agreement with Grupo México (“IMMSA”) in México, for the exploration and
development of approximately 3,000 hectares in the State of San Luis Potosi (“the Santa Gertrudis Property”). In March
2010, DynaNevada de México completed the Option with IMMSA so that it now owns 100% of Santa Gertrudis. In June 2010, DynaNevada
de México acquired an additional 6,000 Hectares in the State of Sinaloa (“the San Juan Property”). The Company
has loaned additional funds to DynaNevada since 2010 for maintenance of concessions and other nominal required fees and expenses.
The Company had $0 receivable from DynaResource Nevada, Inc. at September 30, 2019 and December 31, 2018 respectively. The Company
has investment balance in DynaResource Nevada, Inc. of $70,000 and $70,000 as of September 30, 2019 and December 31, 2018, respectively.
Minority
Interest Holder in DynaMéxico Attempts to Interfere with Activities at San Jose de Gracia (2016)
Goldgroup
Mining Inc., Vancouver, BC. (“GGA.TO” – “Goldgroup Mining”), a Minority Interest Holder in DynaMéxico
through a Mexican subsidiary Goldgroup Resources Inc., issued a press release on June 27, 2016 claiming to announce a closing
of mining operations at the SJG Project, which was misleading, deceptive, and proved to be false. Goldgroup Mining issued the
June 27 press release without independently confirming the facts – and admitted its failure to confirm the facts in the
release. DynaMéxico corrected the misleading press release issued by Goldgroup Mining as described below:
1.
DynaMéxico herein states the facts:
(a)
Following an unscheduled inspection of the mining operations at the SJG Project on June 26, 2016 by a Sinaloa State governmental
agency, an order of temporary work stoppage was quickly overturned by Sinaloa State court order.
(b)
The Sinaloa State Court ruled that the unscheduled inspection and the temporary suspension of mining operations at the SJG Project,
were improper. The Sinaloa State Court further ordered the immediate removal of the temporary suspension.
(c)
Following the Sinaloa State Court Order, all mining operations at SJG promptly resumed normal activities.
2.
DynaMéxico herein states further facts:
(a)
Following a second unscheduled inspection of the mining and milling operations at the SJG Project on August 18, 2016 by a Sinaloa
State governmental agency, an order of temporary work stoppage was quickly overturned by a second Sinaloa State court order.
(b)
The Sinaloa State Court ruled that the unscheduled inspection and the temporary suspension of mining and milling operations at
the SJG Project, were again improper. Once again, the Sinaloa State Court further ordered the immediate removal of the temporary
suspension.
(c)
Following the second Order issued by the Sinaloa State Court, all mining and milling operations at SJG once again promptly resumed
normal activities.
3.
The award of damages in excess of $48 million USD against Goldgroup Resources Inc. (“Goldgroup Resources”, a wholly
owned subsidiary of Goldgroup Mining Inc.), by virtue of a sentence issued on October 5, 2015 by the Thirty Sixth Civil Court
of the Superior Court of Justice of the Federal District of México, remains as ordered by the court.
4.
On October 5, 2016, the Thirty-Sixth Civil Court of the Superior Court of Justice of the Federal District of Mexico (Tribunal
Superior de Justicia del Distrito Federal) approved a Lien (referred to by the court as an “Embargo”), in favor of
DynaMéxico, upon Stock Certificates in the name of Goldgroup Resources Inc. (“Goldgroup”). The Stock Certificates
subject to the Lien (“Embargo”) constitute Shares of DynaMéxico (“the Goldgroup DynaMéxico Shares”).
(a)
Goldgroup Mining Inc., the parent company (“Goldgroup Mining”), has not disclosed the $48 million award of damages,
Nor the Lien against the Shares, nor has Goldgroup Mining disclosed the unsuccessful efforts of its subsidiary to challenge the
$ 48 million damages award, in its Annual Information Form -- the equivalent of its annual report to shareholders.
(b)
An unrelated lawsuit, in which the amount in controversy was only $3 million, was disclosed by Goldgroup Mining Inc.
(c)
Goldgroup Resources currently holds a minority interest in the outstanding share capital of DynaMéxico. Goldgroup Resources
has challenged this level of ownership through the legal system, but this challenge has also been unsuccessful. The ownership
of Goldgroup Resources in the capital of DynaMéxico remains at 20%.
(d)
Goldgroup Mining, the parent company, has not disclosed the unsuccessful efforts of Goldgroup Resources to challenge this ownership
level in DynaMéxico, in its Annual Information Form.
(e)
Since 2005, the exclusive operator of the SJG Project, under contract with (and an affiliate of) DynaMéxico, is Mineras
de DynaResource S.A. de C.V. (“DynaMineras”). This operating control of the SJG Project has continued uninterrupted
since 2005, before Goldgroup Resource contributed any capital investment to DynaMéxico.
(f)
Goldgroup Mining, the parent company, has not disclosed that DynaMineras has operating control of the SJG Project, in its Annual
Information Form.
(g)
Since 2000, the President of DynaMéxico holds broad powers of attorney granted by the shareholders of DynaMéxico.
The powers of attorney give the President broad authority to act for DynaMéxico. The powers of attorney existed before
Goldgroup Resources contributed any capital investment to DynaMéxico.
(h)
Goldgroup Mining, the parent company, has not disclosed the existence of the powers of attorney held by the President of DynaMéxico,
in its Annual Information Form.
DynaMéxico’s
further clarifying statements regarding the SJG Project:
(a)
In recent years, Goldgroup Mining and Goldgroup Resources (“Goldgroup”) have continuously misrepresented ownership
interest and shareholder position related to DynaMéxico and the SJG Project;
(b)
DynaMéxico, since May 2000, owns 100% of the mining concessions and related interest comprising the SJG Project;
(c)
At no time has Goldgroup owned any interest in the SJG Project; rather its only ownership interests have been earned under agreement
as a common shares equity interest (shareholder’s interest) of DynaMéxico;
(d)
DynaResource, Inc., Irving, Texas (OTCQB: DYNR - “DynaUSA”) currently owns 80% of the outstanding share Capital of
DynaMéxico; Goldgroup currently owns 20% of the outstanding share capital of DynaMéxico;
(e)
At no time during its involvement as a common shares equity interest holder (shareholder) of DynaMéxico, has Goldgroup
been an operator at the SJG Project;
(f)
There is no joint venture agreement with Goldgroup involving the SJG Project;
(g) Since
the earning of its shareholder’s interest in DynaMéxico (March 2011), Goldgroup has continuously refused to contribute
funds to the ongoing maintenance, advance, and further development of the SJG Project;
(h) Consistently
and continuously since March 2011, Goldgroup has sought to, and threatened to stop, delay, or otherwise impair and negatively
impact the financing, maintenance, advance and further development of the SJG Project;
The
Company believes that no material adverse change will occur as a result of the actions taken, and the Company further believes
that there is little to no potential for the assessment of a material monetary judgment against the Company for legal actions
it has filed in México. For purposes of confidentiality, the Company does not provide more specific disclosure in this
Form 10-Q.