BACANORA MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED JUNE 30, 2012

Transcription

1 DATE OCTOBER 30, BACANORA MINERALS LTD. The following Management s Discussion and Analysis ("MD&A") should be read in conjunction with Bacanora Minerals Ltd. ("Bacanora" or the "Company") audited consolidated financial statements for the year ended, together with the accompanying notes. The following discussion and analysis provides information that management believes is relevant to the assessment and understanding of the Company s results of operations and financial position. In the opinion of management, all adjustments consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company's financial position, results of operations and funds flow, have been included. Additional information relating to Bacanora is available on SEDAR at THE COMPANY The Company is a public mining company engaged in exploration for mineral deposits in Mexico. The Company is in the exploration stage with respect to all of its properties. On July 20, 2009, the Company entered into a binding letter of agreement dated July 17, 2009 regarding the acquisition of Mineramex Limited ( Mineramex ), a British Virgin Islands company whose sole assets consist of 99.9% of the issued and outstanding shares of Minera Sonora Borax, S.A. de C.V. ("MSB") and 60% of the issued and outstanding shares of Minerales Industriales Tubutama, S.A. de C.V. ("MIT"). MSB and MIT are two Mexican corporations that are holding certain exploration and development stage borate and other mining claims in the Magdalena and Tubutama regions in the northern Sonora State of Mexico. On April 9, 2010, The Company completed its qualifying transaction by a way of reverse takeover of Mineramex. The Company was listed on the Exchange as a Tier 2 issuer and the trading of the Company s shares under the revised symbol, "BCN" commenced on April 20, The following diagram illustrates the Company s corporate legal structure. Bacanora Minerals Ltd. (Canada) 100% Mineramex Limited (BVI) Minera Sonora Borax, S.A. de C.V. (Mexico) 99.9% 60% Minerales Industriales Tubutama S.A. de C.V.(Mexico) MINERAL PROPERTIES As a result of the reverse takeover of Mineramex, the Company indirectly holds the assets of MIT and MSB, including borate mining claims in the Magdalena and Tubutama regions in the northern Sonora State of Mexico. In addition, the Company holds certain lithium claims in the 1

2 Sonora State, which it acquired in August The specific descriptions of such claims are as follows: Tubutama Borate Originally referred to as the Carlos Project, Tubutama Borate project consists of six mining concessions with a total area of 1,661 hectares. The concessions are located 15 kilometres from the town of Tubutama, and they are 100% owned by MIT. Magdalena Borate Originally referred to as San Francisco and El Represo projects, the Magdalena Borate project consists of seven concessions, with a total area of 15,508 hectares. The concessions are located 15 kilometres from the city of Magdalena and the city of Santa Ana, and are 100% owned by MSB The borate properties (Tubutama and Magdalena) are subject to a 3% gross overriding royalty payable to a director of the Company, and a 3% gross overriding royalty payable to the original concessioners on sales of products produced from these properties. Sonora Lithium The Company, through its subsidiary MSB, acquired all rights, title and interests in certain lithium claims from a related party. As consideration for the assets, the Company issued 600,000 common shares at a price of $0.25 per share. In addition, the Company paid cash payments of US$40,000 to reimburse the vendors for acquisition and preliminary assessment costs. The property consists of four exploration licenses, covering approximately 4,050 hectares in the Sonora State of Mexico. The Lithium property is subject to a 3% gross overriding royalty payable to a director of the Company on sales of products produced from this property. At, the lithium concession titles were held in trust by the vendors and are currently being transferred to MSB. The Company expects that the titles will be received by MSB in due course. Any changes in management s estimate of this asset will be recognized in the period of determination and the change in estimate may be significant. EXPLORATION ACTIVITIES The Company is in the exploration stage with respect to all of its properties, and has not commenced generating any cash flows from said properties. Borate Properties At the Tubutama project, the Company has drilled a total of 1,882 metres in 8 NQ-core drillholes and 1,478 lineal metres of trenches have been conducted in the northern portion of the project area, with an estimated resource of 2.5 Mt of colemanite, with 7% of B 2 O 3, and although these values are considered modest for a high grade operation, the Company has decided to maintain the properties in order to perform metallurgical tests on the low-grade ore, and for possible use of the ore at the Company s full scale plant. 2

3 At the Magdalena project, the Company has completed two rounds of drilling on its borate properties. In May of 2010, the Company drilled 3,483 metres in 25 holes at the Magdalena and Represo basins, with approximately 1,033 core samples taken. Three main borate zones have been located on the Magdalena project area: El Cajon, Bellota and Pozo Nuevo. Of the main borate zones, the El Cajon deposit is most advanced, with a total of 28 holes drilled, identifying 3 separate colemanite horizons (Unit A, B, and C). According to the NI report filed by the Company in June of 2011, the El Cajon deposit contains an inferred resource of 7.3 million tonnes averaging 9.3% B 2 O 3 in Unit A, and indicated resources totaling 11.1 million tonnes averaging 9.9% B 2 O 3 in Units B and C. In September of 2011, the Company completed an in-fill drilling program of 8,663 metres in 57 holes on the El Cajon deposit, 2,616 samples were taken as part of the in-fill drilling. During the second quarter of, the Company announced that it had successfully achieved marketable grades of colemanite concentrate after extensive laboratory testing of borates samples from its El Cajon deposit. Bench scale testing has yielded product with grades upwards of 40% B 2 O 3, which is considered as the industry benchmark grade for commercial production of colemanite concentrate. Based on this testing, the Company has refined its pilot plant flow sheet, and is currently in the process of procuring components for and constructing the pilot plant. The Company expects to have the pilot plant completed in December, and to achieve possible production of colemanite concentrates in the first quarter of The Company is contemplating testing production of boric acid at its pilot plant as well. The Company is also proceeding with full scale mine plan and pit design. Mining permit applications have been finalized and all applicable documents are ready for filing with the Secretary of Environment for the State of Sonora. The Company is also in the process of conducting bulk sampling, detailed metallurgical testing and Preliminary Economic Assessment ( PEA ) in order to update the El Cajon deposit from resource to reserve category under its NI report. Lithium Property The Company initiated exploration on the lithium property during the second quarter of 2010, when it conducted its first drilling campaign on the La Ventana concession within the Sonora Lithium project. The drilling provided an initial test of a 400 by 200 metre section of the southernmost portion of a 3,000 by 300 metre target area. The four hole, metre, diamond drill program was designed to test a Tertiary age volcano-sedimentary sequence. All of the drillholes intersected lithium-bearing clays (hectorite) including zones with lithium enrichment. Other elements such as Cesium, Boron, Potassium, Magnesium, etc. are considered highly anomalous as well. The second round of drilling at La Ventana was completed in December of The Company drilled a total of 1,465 metres in 8 holes. The two rounds of drilling on the La Ventana concession located two lithium-bearing clay units that average 41 and 22 metres in thickness. Based on the NI Technical Report prepared by the Company, the inferred resource for both upper and lower clay units is estimated to be 43,324,000, tonnes bearing an average grade of 3,005 Li ppm at 1.6% Lithium Carbonate Equivalent ( LCE ) for a total of 712,000 tonnes of LCE. 3

4 Investors are cautioned that the resource estimate does not mean or imply that an economic lithium deposit exists at the La Ventana concession. Further testing will need to be undertaken to confirm economic feasibility. Along with the drilling on La Ventana, exploration activities such as mapping and systematic sampling continue on other concessions (El Sauz, Buenavista and San Gabriel). Currently, the Company is carrying out metallurgical tests on the samples before planning the next stage of the drilling programme. The Company capitalizes all exploration costs subsequent to obtaining the right to explore related to the projects in Mexico to exploration and evaluation assets. Below is a summary of expenditures made for the year ended and Tubutama Borate Magdalena Borate Sonora Lithium Total Balance, July 1, 2010 $ 1,144,443 $ 324,467 $ - $ 1,468,910 Additions: Concession tax $ - $ 127,412 $ 4,972 $132,384 Acquisition - 3, , ,357 Exploration - 206,428 31, ,434 Drilling - 434,721 70, ,933 Analysis and assays - 11,754 4,484 16,238 Technical services - 100, ,222 Travel - 50,826 8,013 58,839 Office and miscellaneous (59,646) 64,621 48,383 53,358 Total additions $ (59,646) $ 999,961 $ 333,450 $ 1,273,765 Balance, 2011 $ 1,084,797 $ 1,324,428 $ 333,450 $ 2,742,675 Additions: Concession tax $ 10,891 $ 207,063 $ 4,371 $ 222,325 Acquisition - - 1,267 1,267 Exploration 30, ,043 2, ,845 Drilling 12, , , ,173 Analysis and assays 1, ,538 24, ,982 Technical services 4,741 45,442 10,038 60,221 Travel ,411 3,810 68,191 Office and miscellaneous 6, ,114 69, ,344 Total additions $ 68,507 $ 1,559,479 $ 313,362 $ 1,941,348 Balance, $ 1,153,304 $ 2,883,907 $ 646,812 $ 4,684,023 OUTLOOK The Company continues to focus on the development of its borate and lithium deposits in Sonora, Mexico. To support the continued evaluation of the projects in a technically disciplined and measured manner, a number of activities are underway or planned for the remainder of and 2013: 4

5 Further analysis of assay results and metallurgical test work. Upgrade the NI Report and start preliminary economic analysis. Finalize construction of the pilot plant and installation of all components. Achieving pilot plant operations. Refine a process to produce boric acid economically. Develop mine plan. Further market analysis and evaluation of end user requests for product. In addition to the work being completed on the borate deposits, work continues to be undertaken to advance the Company s lithium deposits including: Continued analysis of assay results. Solubility tests of the lithium clays from La Ventana project. Geological mapping and sampling on other lithium properties. Preliminary Economic Assessment at the Sonora Lithium project. The Company expects that cash raised in the last equity financing will fully fund the contemplated programs and general operations. LIQUIDITY AND CAPITAL MANAGEMENT Working Capital The Company is not in commercial production on any of its resource properties and accordingly, it does not generate cash from operations. The Company finances its activities by raising capital through equity issues. As at, the Company had a working capital surplus of $3,885,784 (2011 $6,340,655). The current working capital is dedicated towards the completion of the Mexican exploration program started in May. At, the Company does not have any bank debt and does not plan on securing any long-term debt. The Company intends on meeting its financial commitments through further equity financings. Capital structure The Company's objectives in managing capital are to safeguard its ability to operate as a going concern while pursuing opportunities for growth through identifying and evaluating potential acquisitions or businesses. The Company defines capital as the Company's shareholders equity excluding contributed surplus and non-controlling interest, of $8,028,304 at ( $8,793,719, July 1, $3,001,471), and the Company s working capital of $3,885,784 ( $6,340,655, and July 1, $1,348,100). The Company sets the amount of capital in proportion to risk and corporate growth objectives. The Company manages capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company is not subject to any externally imposed capital requirements other than as described in Note 1 to the Company s annual consolidated financial statements. The Company does not expect to enter into any debt financing at this time. The Board of Directors does not establish a quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Company will be meeting its objective of managing capital 5

6 through its detailed review and preparation of both short-term and long-term cash flow analysis and monthly review of financial results. Equity instruments On May 18, 2011, the Company completed a private placement financing, pursuant to which it has issued an aggregate of 14,113,760 units of the Company at a price of $0.50 per unit for aggregate gross proceeds of $7,056,880. Each unit consists of one common share and onehalf of one common share purchase warrant, with each whole warrant being exercisable into one common share at a price of $0.80 for a period of 30 months. The Company has paid compensation consisting of approximately $510,174 in legal and commission fees and the issuance of 705,688 compensation warrants to eligible parties. Each compensation warrant is exercisable into one common share at a price of $0.80 for a period of 24 months. The Company did not complete any financings during the year ended. The following tables summarize the outstanding securities issued by the Company as at June 30, and as of the date of this MD&A. October 30, Common shares 51,432,145 51,432,145 Stock options 2,900,000 2,900,000 Warrants 7,762,568 7,762,568 Total equity instruments outstanding 62,094,713 61,094,713 The following table summarizes the outstanding options as at. Date of Grant Number Outstanding at Exercise Price Weighted Average Remaining Contractual Life (Years) Date of Expiry Number Exercisable at May 1, ,000 $ May 1, ,000 December 8, ,050, Dec. 8, ,050,000 March 25, , Mar. 25, ,000 June 19, , Jun. 19, ,000 July 19, , July19, ,000 September 1, , Sept. 1, 100,000 2,900,000 2,900,000 SELECTED ANNUAL INFORMATION The Company is in the early stages of exploration, and does not have any mining operations and has not earned any revenue, except for interest income. While the information set out in the tables below is mandated by National Instrument , it is management s view that the 6

7 variations in financial results that occur from year to year and quarter to quarter are not particularly helpful in analyzing the Company s performance. It is in the nature of the business of junior exploration companies that unless they sell a mineral interest for a sum greater than the costs incurred in acquiring such interest, they have no significant net sales or total revenue. Because the majority of their expenditures consist of exploration costs that are capitalized, exploration companies annual and quarterly losses usually result from costs that are of a general and administrative nature. Significant variances in the Company s reported loss from year to year and quarter to quarter most commonly arise from several factors that are difficult to anticipate in advance or to predict from past results. These factors include: (i) decisions to write off deferred exploration costs when management concludes there has been an impairment in the carrying value of a mineral property, or the property is abandoned, (ii) the vesting of incentive stock options, which results in the recording of amounts for stock based compensation expense that can be quite large in relation to other general and administrative expenses incurred in any given period, and (iii) fluctuations in foreign exchange rates. For the year ended, the Company recorded a loss of $ 994,463( $ 1,015,962). During, the Company recorded $272,439 in stock based compensation expense and $311,737 in The Company general and administrative expenses for were $ 585,125 (2011 $546,545). For the year ended For the year ended 2011 For the year ended 2010 ($, except shares amounts) Interest income (expense) 27,177 4,689 2,350 Total expenses 974, ,734 76,746 Comprehensive loss 838,646 1,171,123 25,316 Comprehensive loss per share basic and diluted Funds provided (used) in operations (571,085) (943,167) (44,611) Total assets 9,022,692 9,511,551 3,124,809 Total liabilities 434, , ,166 Exploration and evaluation costs 1,941,348 1,123, ,670 General and administrative costs 585, ,545 74,958 During the year ended, the Company s general and administrative expenses increased by approximately $39,000. 7

8 General and administrative expenses for the years ended and 2011 were as follows: For the year ended, 2011 Management fees $ 145,338 $ 112,650 Legal and accounting fees 236, ,740 Engineering fees - 47,540 Investor relations 149,009 88,465 Office expenses 36,698 81,337 Miscellaneous 17,571 7,813 Total $ 585,125 $ 546,545 SUMMARY OF QUARTERLY RESULTS The Company is in the early stages of exploration, and does not have any producing operations and has not earned any revenue. During the quarter ended, the Company realized a comprehensive income of $236,264, incurred $595,158 on exploration activities, and $262,266 on general and administrative expenses. Comprehensive Three month period ended Comprehensive income/(loss) ($) earnings/(loss) per basic and diluted share ($) 236,264 (0.00) March 31, (160,297) (0.00) December 31, 2011 (408,427) (0.01) September 30, 2011 (506,186) (0.01) 2011 (1,058,974) (0.03) March 31, 2011 (67,282) (0.00) December 31, 2010 (137,817) 0.00 September 30, SEGMENTED INFORMATION The Company currently operates in one operating segment, the exploration and development of mineral properties in Mexico. Management of the Company makes decisions about allocating resources based on the one operating segment. A geographic summary of profit and loss and identifiable assets by country is as follows: Mexico Canada Consolidated Property and equipment $ 210,533 $ 47,014 $ - $ - $ 210,533 $ 47,014 Exploration and evaluation assets $ 4,684,023 $ 2,742,675 $ - $ - $ 4,684,023 $ 2,742,675 8

9 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT This note presents information about the Company s exposure to credit, liquidity and market risks arising from its use of financial instruments and the Company s objectives, policies and processes for measuring and managing such risks. i) Credit risk Credit risk arises from the potential that a counter party will fail to perform its obligations. Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts and related party receivables. The Company believes that the amount due from related party is collectible, however as the amount has not been collected subsequent to year end its recoverability is uncertain. Any changes in management s estimate of the recoverability of the amount due will be recognized in the period of determination and any adjustment may be significant. The carrying amount of accounts and related party receivables represents the maximum credit exposure. The Company s cash is held in major Canadian and Mexican banks, and as such the Company is exposed to the risks of those financial institutions. The Company has no sales, therefore the Company is only exposed to the risks associated with changes in foreign exchange rates. The Board of Directors monitors the exposure to credit risk on an ongoing basis and does not consider such risk significant at this time. The Company considers all of its accounts receivables fully collectible. ii) Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses. The carrying value of accounts payable and accrued liabilities and due to related parties approximates fair value due to their relatively short period to maturity. iii) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the value of the Company s financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing long-term returns. The Company conducts exploration projects in Mexico. As a result, a portion of the Company s expenditures, accounts receivables, accounts payables and accrued liabilities are denominated in US dollars and Mexican pesos and are therefore subject to fluctuation in exchange rates. As at, a 1% change in the exchange rate between the Canadian dollar, Mexican peso and US dollar would have an approximate $13,000 ( $54,000) change to the Company s total comprehensive loss. iv) Fair values The carrying value approximates the fair value of the financial instruments due to the short term nature of the instruments. 9

10 RELATED PARTY TRANSACTIONS BACANORA MINERALS LTD. The Company s related parties include directors and officers and companies which have directors in common. Transactions made with related parties are made in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. During the year ended, management fees in the amount of $332,550 ( $280,166) were incurred by directors and officers of the Company. Of this amount $83,534 ( $119,541) was capitalized to exploration and evaluation assets, $NIL ( $33,571) was recorded as share issue costs, and $249,016 ( $127,054) was expenses as general and administrative costs. Of the total amount paid as management fees and expenses, $69,179 (2011 $21,153) remains in accounts payable and accrued liabilities. A company with common directors and shareholders made payment on behalf of the Company with respect of an office sublease and other general and administrative expenses in the amount of $45,046 ( $100,318). The advances are non-interest bearing, unsecured with no specific terms of repayment. The Company was repaid advances of $100,203 (2010 made advances of $107,599) to a company with common directors and officers. The advances are non-interest bearing, unsecured with no specific terms of repayment. A Company with common management incurred $246,699 ( $101,710) charged to exploration and evaluation assets during the year. An amount of $28,795 ( $15,774) remains in accounts payable and accrued liabilities. a) Key management personnel compensation Key management of the Company are directors and officers of the Company and their remuneration includes the following: For the year ended, 2011 Short-term benefits (i) $ 332,550 $ 280,166 Share based compensation 272, ,737 Total remuneration $ 604,989 $ 591,903 (i) Short-term benefits include consulting fees. COMMITMENTS AND CONTINGENCIES During 2009, the Company entered into an office space lease agreement for a term of three years, commencing April 1, 2010 and expiring March 31, The Company also has commitments for lease payments for field office and camp with no specific expiry dates. The total annual financial commitment resulting from these agreements is $40,860. The properties in Mexico are subject to spending requirements in order to maintain title of the concessions. The capital spending requirement for 2013 is $312,083. The properties are also subject to semi-annual payments to the Mexican government for holding fees. 10

11 SUBSEQUENT EVENTS BACANORA MINERALS LTD. Subsequent to, a further 1,102,507 shares were released from escrow. The number of shares remaining in escrow is 3,953,209. On September 28,, the Company announced that a total of 150,000 stock options to purchase common shares of the Company have been granted to consultants. The options are immediately exercisable at a price of $0.25 and expire on September 28, On August 10,, the Company entered into purchase orders for the construction of its building in Mexico totalling $313,583 USD. On October 25,, the Company received an approval to extend the term of the 7,056,880 outstanding share purchase warrants from eighteen months to thirty months from the date of issuance. The foregoing warrants were to expire on November 18,, the new expiry date is November 18, TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ( IFRS ) In February 2008, the CICA Accounting Standards Board ( AcSB ) announced that 2011 is the changeover date for publicly accountable profit-oriented enterprises to use IFRS, replacing Canadian GAAP for interim and annual financial statements relating to fiscal years beginning on or after January 1, Enterprises are required to provide IFRS comparative information for the previous fiscal year. Accordingly, the Company has prepared its audited annual financial statements for the year ending in accordance with IFRS (including the prior period comparatives). The conversion to IFRS did not result in any significant changes to processes or data management within the Company except that, additional schedules and data collection points are required to meet the new disclosure requirements under IFRS. The conversion to IFRS did result in changes in accounting policies of the Company, which are described in more detail in note 3 to the audited annual financial statements for the year ended. A description of the impact of first-time adoption of IFRS can be reviewed in Note 17 to the audited annual financial statements of the Company for the year ended. ADVISORY REGARDING FORWARD LOOKING STATEMENTS This discussion includes certain statements that may be deemed "forward-looking statements". All statements in this discussion other than statements of historical facts, that address future acquisitions and events or developments that the Company expects are forward-looking statements. Although the Company believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements include market prices, continued availability of capital and financing and general economic, market or business conditions. Investors are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Except as required by applicable securities laws, the Corporation does not undertake any obligation to publicly update or revise any forward looking statements. 11