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PAN AMERICAN GOLDFIELDS LTD - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

January 21, 2014

Cautionary Statement Regarding Forward-Looking Statements Certain statements contained in this Form 10-Q, including statements in the following discussion which are not statements of historical fact, constitute "forward-looking statements". These statements, which may be identified by words such as "plans", "intends", "anticipates", "hopes", "seeks", "will", "believes", "estimates", "should", "expects" and similar expressions include our expectations and objectives regarding our present and future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in such forward-looking statements. Numerous factors and future events could cause us to change such plans and objectives or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits. Such risks and uncertainties include those set forth under this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q and in our Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC"). These forward-looking statements represent beliefs and assumptions only as of the date of this report. We undertake no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results. We advise you to carefully review the reports and documents we file from time to time with the SEC , particularly our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. As used in this management's discussion and analysis, the terms "Pan American", the "Company", "we", "us", and "our" mean Pan American Goldfields Ltd. Overview We are an exploration stage company focused on mineral exploration activities in Mexico through our wholly owned Mexican subsidiary, Sunburst Mining de Mexico, S.A. de C.V. , ("Sunburst"). We are currently engaged in the exploration and development of one gold and silver project, named the Cieneguita Project , which is made up of several mining concessions. The Cieneguita Project is located in the Sierra Madre region of the State of Chihuahua , Mexico. To help support our exploration activities, in February 2009 we entered into a joint venture agreement with Minera Rio Tinto, S.A. de C.V. ("MRT"), a mining operator in Chihuahua, Mexico (the "Joint Venture Agreement"). Under the Joint Venture Agreement, we authorized MRT to commence a small scale milling operation at our Cieneguita Project (the "pilot project" or "pilot operation"). MRT commenced the pilot operation in March 2010 after the construction of systems and initial plant facilities for crushing and gravity and flotation circuits were complete and adequate water supplies established. Operations have since been expanded from one to two 12-hour shifts per day with a processing rate up to 750 tonnes per day. The terms of the Joint Venture Agreement (as amended) with MRT are discussed in detail below. Our financial condition has improved substantially since late 2009. At the time, the Company's working capital deficiency was approximately $4.7 million and the Company received no revenues from its operations. Because of lack of capital, the Company faced having its interests in the Cieneguita Project reduced from 40% to 25%. Since then, the Company's position has improved dramatically. The Company now receives 35% of net cash flow from pilot operations at the Cieneguita Project , which were 100% financed by MRT under the Joint Venture Agreement, and it retains at all times an 80% ownership interest in the Cieneguita Project . In addition, the Company has substantially reduced the nearly $5 million in debt it had incurred as of 2009, and has achieved positive working capital. In September 2011 , because MRT experienced delays in achieving a steady state of production at the pilot project and was unable to complete a feasibility study for the Cieneguita Project within the prescribed time by the initial terms of the Joint Venture Agreement, we were able to renegotiate the terms of the Joint Venture Agreement to increase the Company's cash flow from the pilot project and its percentage ownership of the overall Cieneguita Project . We assumed the responsibility to complete a preliminary economic assessment for the Cieneguita Project , and the parties agreed to fund the future feasibility study for the Cieneguita Project on a pro-rata basis according to their respective ownership percentages. In September 2012 , the Company negotiated a second amendment to the Joint Venture Agreement with MRT, as discussed in more detail below. In the second amendment to the Joint Venture Agreement, we were further able to increase cash flow to the Company from the pilot project at the Cieneguita Project , on a retroactive basis to March 2012 . The second amendment to the Joint Venture Agreement also increased our ownership interests in the Cieneguita Project , as well as removed the depth limitations for the pilot project, giving MRT more incentive to implement project efficiencies and increase the production rate of the pilot project. Now, due to the second amendment of the Joint Venture Agreement, we are not wholly dependent on the equity markets for funding the Company's development, a strategy that has turned out to be prescient given the current market conditions. 21 -------------------------------------------------------------------------------- As a result of our efforts and strategy, the Company has received revenues from MRT on a regular monthly basis to support the Company's activities since late 2011. Recent Developments Change in Management Effective July 3, 2013 , Mr. Emilio Alvarez was appointed to serve as Chief Executive Officer of the Company. Effective September 20, 2013 , Mr. Daniel Crandall was appointed to serve as the Chief Financial Officer of the Company. Change in Board of Directors As previously disclosed in its Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2013 , pursuant to an Order Setting Meeting Date and Quorum Rule, which the Delaware Court of Chancery entered on March 1, 2013 (the "Order"), the Company held its annual meeting of stockholders on June 17, 2013 (the "Annual Meeting"). On March 19, 2013 , Emilio Alvarez , a stockholder associated with Vortex Capital Ltd. ("Vortex"), subsequently submitted a Stockholder Notice (the "Notice") of his intention to nominate five individuals (the "Vortex Nominees") at the Annual Meeting. Mr. Alvarez and Vortex solicited proxies on behalf of the Vortex Nominees in advance of the Annual Meeting. At the Annual Meeting, the Company questioned the Notice's compliance with one of the Company's Bylaw requirements for stockholder nominations and took the position at the meeting that the Notice did not comply with such Bylaw requirement and that the Vortex Nominees were excluded from consideration at the Annual Meeting. Vortex disputed the Company's position and took the position that Mr. Alvarez submitted a valid Notice and asserted the nomination of the Vortex Nominees was valid and sufficient. Following the Annual Meeting, the Company and Vortex entered into discussions to resolve the dispute and avoid litigation and, as a result, entered into a settlement agreement (the "Settlement Agreement"), which was to become effective following formal approval by the Board of Directors. Among other things, the Settlement Agreement provided that the following persons, all of whom are Vortex Nominees, would serve as directors and hold office for the terms designated, (i) Laurent Deydier to hold office until the 2014 Annual Meeting, (ii) Balbir Bindra and William R. Majcher to hold office until the 2015 Annual Meeting, and (iii) Emilio Alvarez and Bruno Le Barber to hold office until the 2016 Annual Meeting. In addition, pursuant to the terms of the Settlement Agreement, Ricardo Ernesto Marcos Touche has been appointed to hold office until the 2014 Annual Meeting. Accordingly, there is one vacancy in the class of directors holding office until the 2015 Annual Meeting. The Settlement Agreement additionally provides for mutual releases by the Company, Vortex, the Vortex Nominees and the departing members of the Board. Additionally, pursuant to the terms of the Settlement Agreement, Messrs. Neil Maedel , Hernan Celorrio , George Young , Randy Buchamer and Gary Parkison agreed that they were no longer members of the Board of Directors of the Company (the "Board") and each of Messrs. Maedel, Celorrio, Young, Buchamer and Parkison entered into an option and warrant exchange and share issuance agreement (the "Share Issuance Agreements"), pursuant to which they exchanged warrants issued in connection with Board service for shares of the Company's common stock. Pursuant to each of their respective Share Issuance Agreements, Mr. Maedel exchanged warrants to purchase 6,000,000 shares of the Company's common stock for the issuance of 2,100,000 shares of the Company's common stock and Messrs. Celorrio, Young, Buchamer and Parkison each exchanged a warrant to purchase 1,000,000 shares of common stock for the issuance of 350,000 shares of the Company's common stock. The shares issued in exchange for the warrants, were issued pursuant to Section 3(a)(9) and Section 4(2) of the Securities Act of 1933, as amended. Mr. Maedel also entered into a consulting agreement with the Company for a consulting fee of $5,000 per month for a term ending December 31, 2013 , to provide transition services as requested by the Company. Project Developments Joint Venture Agreement In September 2011 , because MRT experienced delays in achieving a steady state of production at the pilot project and was unable to complete a feasibility study for the Cieneguita Project within the prescribed time by the initial terms of the Joint Venture Agreement, we were able to renegotiate the terms of the Joint Venture Agreement to increase the Company's cash flow from the pilot project and its percentage ownership of the overall Cieneguita Project . We assumed responsibility to complete a preliminary economic assessment for the Cieneguita Project , and the parties agreed to fund the future feasibility study for the Cieneguita Project on a pro-rata basis according to their respective ownership percentages. In September 2012 , we entered into the second amendment of the Joint Venture Agreement with MRT. The parties agreed to the following provisions pursuant to the second amendment of the Joint Venture Agreement: Our share of net cash flow from the pilot project operated by MRT on the Cieneguita Project increased from 20% to 29% beginning retroactive to March 1, 2012 through December 31, 2012 . Beginning January 1, 2013 through December 31, 2013 (extended to December 31, 2014 ), our share of net cash flow from the project increases to 35%. After December 31, 2014 , we receive 80% of the net cash flow. At all times, the Company retains its 80% ownership interest in the entire Cieneguita project. 22 -------------------------------------------------------------------------------- Additional fees previously payable by MRT for minerals processed below the first 15 meters have been eliminated. MRT, which is the exclusive operator, must provide us financial information related to the calculation of net cash flow within 30 days of the end of each month and will pay a minimum US $150,000 to us within the first 10 days of each month as a good faith advance against the previous month's net cash flow. The balance of monies owed (if any) to us for the previous quarter is to be paid within 45 days from the end of each fiscal quarter. MRT must provide us with quarterly reports summarizing exploration, development and operations and all related technical results from activities on the Cieneguita Project . All of the books and records and the operations of MRT are subject to audit by us. MRT must, at its cost, provide, a quarterly audit within thirty (30) days of the end of each fiscal quarter regarding compliance with environmental laws and steps required to effect remediation or other required actions (if any) to maintain and/or bring the project operations into compliance with all applicable environmental laws. The audit is to be performed by an independent expert environmental consulting firm selected by us and MRT. MRT is solely responsible for any costs of effecting any remediation recommended by the audit. The date of the pilot production was extended from December 31, 2012 to December 31, 2013 . MRT may terminate the project by providing us with ninety (90) days advanced written notice, and we may terminate the project upon an uncured breach of the Joint Venture Agreement by MRT. At all times, we retain our 80% ownership interest in the entire Cieneguita Project . The map below shows the location of the Cieneguita Project in the Sierra Madre Sierra region of the State of Chihuahua , Mexico. 23 -------------------------------------------------------------------------------- [[Image Removed]] Other Projects In February 2011 , we had entered into an agreement with CompaÑia Minera Alto Rio Salado S.A. , a private Argentine entity, for the acquisition of the 15,000 hectares Cerro Delta Project in northwest La Rioja Province , Argentina . Under the terms of the agreement, we were required to pay $150,000 upon signing the agreement, $200,000 on the first anniversary, $500,000 on the second anniversary, $750,000 on the third anniversary, $1.2 million on the fourth anniversary, and $2.2 million on the fifth anniversary of the signing, with a final option payment of $5 million to purchase a 100% interest in the Cerro Delta Project payable on the sixth anniversary of the signing. However, due to poor results from a field reconnaissance program, a worsening business environment in the country and the approach of an option payment in the amount of $500,000 , we elected to terminate the project in January 2013 in order to focus our resources on the development of the Cieneguita project. Additionally, we sold our Encino Gordo Project in Mexico in May 2012 for a total consideration of $300,000 . In July 2011 , we entered into an agreement with M3 Engineering and Technology Corporation ("M3 Engineering") for the execution and completion of a NI 43-101 compliant PEA for the Cieneguita Project . In June 2013 , we finalized and released the PEA which can be found on our website, www.panamgoldfields.com , with additional information summarized under the " Recent News " section, June 12, 2013 and March 13, 2013 . We believe the data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project . The PEA confirms that the Cieneguita project represents an exceptional opportunity to develop a highly economic, relatively low-cost mine in the prolific Sierra Madre gold and silver belt in Mexico . 24 -------------------------------------------------------------------------------- Financings In connection with the Second Amended Agreement, MRT purchased 2,000,000 shares of our common stock at a price of $0.12 per share for net proceeds of $240,000 pursuant to the our private placement Subscription Agreement. We issued the shares to MRT in reliance on exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. On July 13, 2012 we entered into a $2.1 million private placement offering. In the offering, we issued 17,500,000 shares of our common stock at a subscription price of $0.12 per share. Of the aggregate purchase price, $1,050,000 was paid in cash and $1,050,000 was paid through the transfer of real property in Argentina valued at $1,050,000 . The shares were acquired by an accredited investor (as defined under Rule 501(a) of Regulation D promulgated under the Securities Act). The Company intends to liquidate the real property it acquired as soon as practical and has so far sold one unit for total proceeds of $330,000 . We have used the net proceeds we received from the offering for working capital and general corporate purposes, including supporting the PEA for the Cieneguita Project . Revenue and Production Pursuant to the amended Joint Venture Agreement, the parties agreed to restructure cash flows payments and ownership of the Cieneguita Project as follows: Holder Ownership Net Cash Flow Net Cash Flow Net Cash Flow Percentage Interest Interest Interest (After (March 1, 2012 (January 1, 2013 December 31, until until 2013) (1) December 31, December 31, 2012) 2013) (1) MRT 20% 65% 65% 20% Marje Minerals 0% 6% 0% 0% Pan American 80% 29% 35% 80% (1) Effective December 23, 2013 , the Company and MRT signed an extension to this agreement extending it under the same terms to December 31, 2014 . For the nine months ended November 30, 2013 , the joint venture with MRT generated net cash flows to the Company of $1,506,000 . We expect that certain capital improvements, including an improved water collection system and the construction of a small water reservoir adjacent to the Cieneguita mill, along with the addition of a conditioner, a disc filter, additional flotation cell capacity and a conventional thickener, should result in increased production to approximately 800 tons per day from the current rate of 715 tons per day rate at the end of fiscal 2013. Gross revenue derived from the pilot project pursuant to the Joint Venture Agreement for the nine months ended November 30, 2013 was $12,166,000 compared to $13,413,000 for the nine months ended November 30, 2012 . Net of operating costs, the Company's net cash flow from pilot project, was $1,506,000 for the nine months ended November 30, 2013 compared to $2,021,000 in the nine months ended November 30, 2012 , a decrease of 25%. The decrease was primarily due to a decrease in the price of gold. This was offset due to the efforts of the Company in renegotiating the Joint Venture Agreement with MRT and obtaining the improved business terms discussed above. Financing Needs The term of the pilot project ends in December 31, 2013 (extended to December 31, 2014 ). We may extend the term of the Joint Venture Agreement with the goal of reducing our future equity financing needs to support our future development of the Cieneguita Project . After the term of the pilot project ends, the Company will earn 80% and MRT will earn 20% of the net cash flow interest earned from the extraction and processing of mineralized material from the Cieneguita Project , if any, whether by extension of the pilot operation thereafter operated by the Company, or from the development of a much larger, commercial operation. The final results of the PEA can be found on SEDAR at www.sedar.com . We believe the data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project . For the fiscal year ending February 28, 2014 , our current operating budget is based on receiving a minimum of $1,200,000 from the pilot project. We believe we will receive more than $1,200,000 from the operations of the pilot project, but we have prepared a conservative operating budget to allow for unexpected operating issues at the pilot project. In the event we do not receive the projected amount from our pilot project, we will have to raise additional capital through the sale of securities or other methods of financings to meet our projected working capital requirements. We will also need capital to pay our outstanding accounts payable or to pursue a feasibility study for the Cieneguita Project . We will also need to raise additional capital to prepare a feasibility study and put the Cieneguita Project into production, or, alternatively, pursue the possibility of selling the property. In the event that we should find a mineable reserve at the Cieneguita Project , it is management's intention to contract the mining and milling of any mineralized reserves out to third parties. We do not have any known reserves at this time at the Cieneguita Project . 25 -------------------------------------------------------------------------------- Exploration Projects - Current Status Our exploration activities in 2012 focused on the Cieneguita Project . A small reconnaissance drill program was completed in the Piedras Blancas area, approximately 500 meters south of the Cieneguita deposit. The best intercept was hole SM-06 with 39 meters averaging approximately 0.84 g/t Au eq. The next phase of drilling is to focus on the Cieneguita deposit and will consist of infill drilling and defining the southeastern boundaries of the Cieneguita deposit. In December 2011 , we hired Dr. Fedor Zhimulev , MSc., PhD Honors as our chief geologist. He was a former senior researcher at the Sobolev Institute of Geology and Mineralogy and has extensive experience conducting fieldwork. From 2009 to 2011, he was appointed as leader of the Sobolev Institute's Junior Scientists Community , and last year was awarded the Academican Sobolev prize for junior scientists from the Siberian Branch of the Academy of Sciences . Dr. Zhimulev will work with Alexander Becker PhD, who retains actual management of our exploration programs. We have conducted a series of exploration programs at Cieneguita since March 2007 . The drilling exploration program commenced in December 2007 with one drill rig and a second rig was added in July 2008 . The drilling was completed in December 2008 . The figure below shows the location of the 103 diamond drill holes on the Cieneguita Project : [[Image Removed]] The figure below shows the main mineralization zones our drilling work identified at the Cieneguita Project . Areas in red on the figure represent zones exhibiting mineralization areas where grades are>1.5 g/t Au. 26 -------------------------------------------------------------------------------- [[Image Removed]] Cieneguita Preliminary Economic Assessment (PEA) We commenced work on the Cieneguita PEA compliant with Canadian National Instrument 43-101 in October 2011 . We retained M3 Engineering, Tucson, Arizona , based on the firm's extensive recent and relevant experience with mining projects in Mexico . In June 2013 and as amended in November 2013 , we finalized and released the PEA which can be found on SEDAR at www.sedar.com . We believe the data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project . The PEA confirms that the Cieneguita project represents an exceptional opportunity to develop a highly economic, relatively low-cost mine in the prolific Sierra Madre gold and silver belt in Mexico . A summary of the key findings of the PEA include: The PEA considers an open pit mining operation using an operator owned mining fleet which feeds mineralized material to an adjacent flotation plant and cyanide leach facility with dry stack tailings disposal. A processing rate of 15,000 tonnes per day ("tpd") provides for an 11 year mine life while processing a total of 56.7 million tonnes of material from an open pit with a low overall stripping ratio of 1.2 to 1. Forecast life of mine ("LOM") production is 509,000 ounces gold and 55.5 million ounces silver, or 1.50 million ounces of gold equivalent. The average annual LOM production is forecast to be 46,300 ounces of gold and 5.05 million ounces of silver, or 136,500 ounces of gold equivalent. Average annual production in the first three years of operation is forecast to be 64,000 ounces gold and 6.84 million ounces silver, or 186,200 ounces gold equivalent, or about 36% percent higher than the average LOM annual production, through mining of a shallow, higher-grade core of the deposit in the early years of the operation. Estimated cash operating costs are estimated to average $518 per ounce gold equivalent for the first three years of operation and $701 for the life of the mine, with LOM average annual pre-tax net operating income of $97.1 million and $1.07 billion LOM, using base case metal prices. Initial start-up capital costs including working capital and owner's costs are estimated to be $484 million , including a 25% contingency ( $81.6 million ). Sustaining LOM capital costs are estimated at $20.5 million . Using base case metal prices the PEA indicates the Cieneguita project has a pre-tax Internal Rate of Return ("IRR") of 22.4%, a payback of 3.0 years and a Net Present Value at an 8% discount rate ("NPV8") of $248 million . The project is leveraged to higher metal prices with the pre-tax IRR rising to 32.6%, and the NPV8 increasing to $462 million using recent metals prices of $1,600 per ounce gold and $30 per ounce silver, while the payback decreases to 2.4 years. 27 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Three and nine months ended November 30, 2013 compared to the three and nine months ended November 30, 2012 . In this discussion of the Company's results of operations and financial condition, amounts, other than per-share amounts, have been rounded to the nearest thousand dollars. Revenues The pilot project generated approximately $4,258,000 in revenues allocable to us for the nine months ended November 30, 2013 as compared to approximately $3,890,000 for the nine months ended November 30, 2012 , an increase of 9%. MRT sold concentrate from the pilot project and pursuant to the terms of the Joint Venture Agreement, we receive a portion of the net cash flows. Gross Margin Our gross margin was approximately $2,055,000 for the nine months ended November 30, 2013 as compared to approximately $2,630,000 for the nine months ended November 30, 2012 , a decrease of 22%. The decrease was primarily attributed to lower net cash received from the pilot project. General and Administrative Expenses The following table shows general and administrative expenses by operating segment during the nine months ended November 30, 2013 : Mexico Corporate Sub total Cieneguita Total Operations Selling expenses $ - $ - $ - $ 135,650 $ 135,650 Camp costs - - - 178,178 178,178 Strip mining - - - - - Depreciation 5,660 - 5,660 - 5,660 Consulting fees - 59,488 59,488 - 59,488 Directors' fee - 41,665 41,665 - 41,665 Investor relations - 138,311 138,311 - 138,311 Public company costs - 48,456 48,456 - 48,456 Management fees - 100,300 100,300 - 100,300 Office and miscellaneous 110,350 234,672 345,022 235,632 580,654 Advertising and promotion - 86,389 86,389 - 86,389 Accounting and legal fees 11,161 937,672 948,833 - 948,833 Rent & utilities 13,336 9,500 22,836 - 22,836 Auto expense 2,266 - 2,266 - 2,266 Travel and promotion 2,247 89,485 91,732 - 91,732 Stock-based compensation - 143,860 143,860 - 143,860 Total general and administration expenses $ 145,020 $ 1,889,798 $ 2,034,818 $ 549,460 $ 2,584,278 Our general and administrative expenses for the nine months ended November 30, 2013 for all segments were $2,034,818 not including expenses incurred by MRT but proportionately allocated to us under the Joint Venture Agreement. These expenses, as set forth in the table above under "Cieneguita operations", included selling expenses, camp costs, and office and miscellaneous expenses, all of which were directly attributable to the pilot project operations being conducted at our Cieneguita Project , and amounted to $549,460 . These expenses are deducted by MRT prior to our receipt of the net cash flows from the pilot project. Thus, our net cash flow of $1,506,000 we received from the operations of the pilot project for the nine months ended November 30, 2013 is equal to our gross margin of $2,055,000 , less the general and administrative expenses for the operations of the pilot project of $549,000 , less certain royalty payments. In the three and nine months ended November 30, 2013 , our general and administrative expenses were $1,029,000 and $2,584,000 compared to $697,000 and $2,377,000 for the three and nine months ended November 30, 2012 , an increase of 48% and 9%. The increase was primarily due to a general decrease in corporate costs partially offset by a higher legal fee relating to annual general meeting matters and higher administrative costs in Cieneguita operations. Management fees decreased to $14,000 and $100,000 in the three and nine months ended November 30, 2013 compared to $16,000 and $255,000 in the three and nine months ended November 30, 2012 . Office and administration fees increased to $208,000 and $581,000 in the three and nine months ended November 30, 2013 compared to $152,000 and $445,000 in the three and nine months ended November 30, 2012 . Stock-based compensation decreased to $49,000 and $144,000 in the three and nine months ended November 30, 2013 compared to $192,000 and $540,000 in the comparative periods. During fiscal 2014, we don't expect to incur any further general and administrative expenses for other mining properties, as we focus our efforts on developing the Cieneguita Project . 28 -------------------------------------------------------------------------------- Mineral and Exploration Costs Mineral exploration expenses were approximately $62,000 and $567,000 in the three months and nine months ended November 30, 2013 compared to approximately $317,000 and $1,326,000 for the three and nine months ended November 30, 2012 , a decrease of 80% and 57%, respectively. The decrease was due to absence of expenses relating to the Cerro Delta Project in the current period. In the nine months ended November 30, 2013 , we incurred $270,000 in mineral property costs as payments for our Mexican properties. At November 30, 2013 , we tested the carrying amounts of all our Mexican properties for recoverability. Based on our tests, we concluded that the sum of undiscounted cash flows expected to result from the use and eventual disposition of all such properties was $nil as the properties have no known reserves. If we are able to raise additional funds to continue with our business plan, we anticipate that exploration expenditures will increase in fiscal 2014 as a result of anticipated exploration activities on our Mexican mineral properties. Operating Loss Our operating loss increased to $652,000 for three months ended November 30, 2013 compared to $559,000 for three months ended November 30, 2012 . The operating loss decreased to $1,366,000 for the nine months ended November 30, 2013 compared to $1,473,000 for the nine months ended November 30, 2012 . The increase in the three months is primarily due to increased legal costs. The decrease in the nine month is primarily attributable to lower mineral exploration expenses offset by lower net cash received from the pilot project and higher legal fees. Interest Expense Our interest expense was consistent at $nil and $8,000 for three and nine months ended November 30, 2013 compared to $2,000 and $9,000 for three and nine months ended November 30, 2012 . The interest expense pertains to loans payable and other charges. Other Income Other income was consistent at $109,000 and $428,000 for three and nine months ended November 30, 2013 compared to $150,000 and $419,000 for three and nine months ended November 30, 2012 , an increase of 27% and 2%. Net Loss Our net loss increased to $502,000 for the three months ended November 30, 2013 compared to $237,000 for the three months ended November 30, 2012 and decreased to $956,000 for the nine months ended November 30, 2013 compared to $1,070,000 for the nine months ended November 30, 2012 . The increase in the three and decrease in the nine month loss is primarily attributable to lower mineral exploration expenses offset by lower net cash received from the pilot project and higher legal costs. The non-cash component of stock-based compensation costs was $49,000 and $144,000 in the three and nine months ended November 30, 2013 compared to $192,000 and $540,000 for three and nine months ended November 30, 2012 . We anticipate that we will continue to incur net losses until such time that we can develop reserves and achieve significant revenues from sale of minerals recovered from our Cieneguita Project in a commercial operation, if ever. There is no assurance that we will commence significant commercial operations at our Cieneguita Project or achieve significant commercial revenues. LIQUIDITY AND CAPITAL RESOURCES We are in the exploration stage, and have incurred significant operating losses since inception. The total deficit accumulated during since our inception in 2006 is $52,918,000 . Cash and Working Capital As of November 30, 2013 , we had total current assets of $1,354,000 and total current liabilities of $1,825,000 . This includes $109,000 we have accrued for contingent liabilities in Argentina and a further $220,000 which is the debt remaining from the Company's operations in 2007 and 2008. During the first nine months of fiscal 2014, we were in the final phase of completing the PEA and continued to incur corporate administrative expenses to support our operations. Our accounts payable, accrued liabilities and current loans payable increased from $988,000 as at February 28, 2013 to $1,825,000 in the first nine months of fiscal 2014. A percentage of the payables are being carried forward from the Company's operations prior to 2009. The Company intends to further reduce its outstanding accounts payable by continuing to pursue negotiated settlements. For the fiscal year ending February 28, 2014 , our current operating budget is based on receiving a minimum of $1,200,000 from the Cieneguita pilot project. We believe we will receive more than $1,200,000 from the operations of the pilot project, but we have prepared a conservative operating budget to allow for unexpected operating issues at the pilot project. 29 -------------------------------------------------------------------------------- We may need to raise additional working capital through the sale of equity or debt to pay our outstanding accounts payable or to pursue a feasibility study for the Cieneguita Project . Other than our Joint Venture Agreement with MRT, we do not have any other sources to raise additional capital for us at this time and no assurance may be given that we will be able to find sources to raise additional capital. If we are unable to obtain additional financing when sought, we will be required to curtail or delay our business plan. Cash Used in Operating Activities Cash used in operating activities amounted to $349,000 for the nine months ended November 30, 2013 compared to $905,000 used for operating activities in the nine months ended November 30, 2012 . The cash was used for general and administrative costs and for the exploration programs on the properties. Investing Activities Cash provided by investing activities amounted to $nil for the nine months ended November 30, 2013 compared to cash of $49,000 for the nine months ended November 30, 2012 provided from sale of equipment. Financing Activities Cash provided by financing activities amounted to $229,000 for the nine months ended November 30, 2013 compared to $1,021,000 for the nine months ended November 30, 2012 . Cash provided by financing activities was used to fund our operating and development activities. We anticipate continuing to rely on equity sales of our common stock or issuance of debt in order to continue to fund our future development of our Cieneguita Project . Issuances of additional shares will be dilutive to our existing stockholders. Going Concern Our financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/ or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern. We have a history of operating losses and will need to raise additional capital to fund our planned operations. As at November 30, 2013 , we had a working capital deficiency of $471,000 ( February 28, 2013 - working capital of $44,000 ) and an accumulated deficit during the exploration stage of $52,918,000 ( February 28, 2013 - $51,963,000 ). These conditions raise substantial doubt about our ability to continue as a going concern. There is no assurance that our operations will be profitable. We have conducted private placements of convertible debt and common stock, which have generated funds to support our operations and development efforts. Our plans for future development of our Cieneguita Project depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.


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