BACANORA MINERALS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS AS AT AND FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011

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1 DATE FEBRUARY 28, The following Management s Discussion and Analysis ("MD&A") should be read in conjunction with Bacanora Minerals Ltd. ("Bacanora" or the "Company") unaudited condensed consolidated interim financial statements as at and for the three months ended December 31, and the audited consolidated financial statements for the year ended June 30,, 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. All financial information in this MD&A is stated in Canadian dollars, the Company s reporting currency. Additional information relating to Bacanora is available on SEDAR at THE COMPANY The Company is a development stage public 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 announced that it had 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 a reverse takeover of Mineramex. The Company was listed on the TSXV 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 corporate legal relationships after the qualifying transaction. 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 northern Sonora State of Mexico. In addition, the Company holds certain lithium claims in the Sonora State, which it acquired in August The specific descriptions of such claims are as follows: 1

2 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 kilometers 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 kilometers from the city of Magdalena and the city of Santa Ana, and are 100% owned by MSB Sonora Lithium The Company through its subsidiary MSB acquired all rights, title and interests in certain lithium claims from related parties. As consideration for the assets, the Company issued 600,000 common shares at an ascribed price of $0.25 per share. In addition, the Company maid 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. As at December 31,, 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. RESULTS OF OPERATIONS AND EXPLORATION ACTIVITIES The Company is in the exploration stage with respect to all of its properties, and has not commenced generating cash flows from said properties. Borates During the second quarter, the bulk of the Company s management time focused on advancing the metallurgical testing and assay results of the Cajon Borates Deposit as well as preliminary pilot plant design. The Hermosillo region has been experiencing delays in testing due to a large backlog of samples. In response the Company has employed the services of 3 separate laboratories. Assays were received from Chemex Lab and 144 samples from the last two batches reported over 10,000 ppm B. Upon receipt of the last results the Company intends to advance the new reserve estimate as well as 3D block modeling and pit design. In order to expedite the receipt of the assays the Company has started to perform in-house B2O3 assays for the metallurgical tests. Lithium During the second quarter, the Company met its objective of proving the lateral continuity of the hectorite-polylithionite clay mineralization on the Ventana Lithium deposit. Bacanora intends to generate a NI compliant Lithium Carbonate Equivalent (LCE) resource on Ventana in This campaign consisted of a total 1,465 meters of 8 NQ-Core drill holes and confirmed the deposit to be approximately 3,000 x 300 metres to a depth of 200 meters. The deposit is open on strike at both ends and contains two mineralized zones of 30 and 40 meter sections respectively for a composite 2

3 thickness of 70 meters. Core logging and sampling activities were also undertaken with samples from the drilling shipped to the lab to be assayed. The company also completed mapping and sampling at its 100% owned El Sauz property. A continuous 120+ meter thick volcano-sedimentary section was exposed in a semi mountainous area that covers 1,200 X 400 meters in several outcrops. This section is composed of altered tuffs, white and green clays and silica layers similar in mineralization to Bacanora s Ventana lithium deposit. The section is gently dipping to the NE in the northern outcrops and to the SE in the southern portion and has a minimum stripping ratio since the clay section is exposed on the surface. A total of 125 samples were collected with a general average of 1,000 ppm Li (with samples up to 7,220 ppm) and K average of 0.5% (min 0.26%, max 3.07%). There were 36 samples that contained cesium with over 500 ppm and one sample with over 10,000 ppm Boron (3.22% B2O3). Additional results of these activities will be announced by Bacanora in subsequent news releases in accordance with applicable disclosure rules and timing provisions. The Company capitalizes all exploration costs related to the projects in Mexico to mineral properties. Below is a summary of expenditures made for the year ended June 30, and for the period ended December 31,. Tubutama Borate Magdalena Borate Sonora Lithium Total Balance, June 30, 2010 $ 1,091,231 $ 292,316 $ - $ 1,383,547 Additions: Concession tax $ 6,606 $ 143,080 $ 5,111 $ 154,797 Acquisition , ,380 Exploration - 235,220 31, ,090 Drilling - 461,445 29, ,445 Analysis and assays - 12,430 4,609 17,039 Field transportation 1,875 10,204 4,226 16,305 Technical services - 100, ,690 Travel 48 51,700 8,236 59,984 Amortization 728 8,337 4,629 13,694 Office and miscellaneous 21,471 68,757 45, ,329 Total additions $ 30,728 $ 1,091,863 $ 299,162 $ 1,421,753 Balance, June 30, $ 1,121,959 $1,384,179 $ 299,162 $ 2,805,300 Additions: Concession tax $ 3,562 $ 64,433 $ 1,600 $ 69,595 Acquisition Exploration - 139, ,150 Drilling - 227,564 79, ,564 Analysis and assays - 50,237 3,773 54,010 Field transportation - 6,456 6,115 12,571 Technical services - 19,483 3,938 23,421 Travel - 27,863 2,855 30,718 Amortization - 6,929 3,881 10,810 Office and miscellaneous - 60,034 39,443 99,477 Total additions $ 3,562 $ 602,149 $ 140,605 $ 746,316 Balance, December 31, $ 1,125,521 $ 1,986,328 $ 439,767 $ 3,551,616 3

4 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 2012 including: Borates Receipt of assay results Reserve calculation Preliminary pit design Finalize pilot plant design Procurement of pilot plant components Construction of pilot plant Lithium Resource calculation for Ventana 2012 drill program for Ventana Advance sampling and mapping and planning on other lithium deposits The company expects that its cash position will fully fund the contemplated programs and general operations for the fiscal year. 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 December 31,, the Company had a working capital surplus of $5,033,588 (2010 $711,485). The current working capital is dedicated towards the completion of the Mexican exploration program. 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, of $8,010,841 at December 31, ( $3,001,542), and the Company s working capital of $5,033,588 ( $711,485). 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 through its detailed review and preparation of both short-term and long-term cash flow analysis and monthly review of financial results. 4

5 Equity instruments On May 18,, 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 one-half 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 18 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. All of the securities issued pursuant to the private placement are subject to a 4- month hold period in accordance with applicable securities laws and regulatory policies. The following tables summarize the outstanding securities issued by the Company as at December 31, and as of the date of this MD&A. February 28, 2012 December 31, 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 62,094,713 The following table summarizes the outstanding options as at December 31,. Number Outstanding at Weighted Average Remaining Contractual Life (Years) Number Exercisable at Exercise Date of Grant Price Date of Expiry May 1, ,000 $ May 1, ,000 December 8, ,050, Dec. 8, ,050,000 March 25, 100, Mar. 25, ,000 June 19, 350, Jun. 19, ,000 July 19, 900, July 19, ,000 September 1, 100, July 19, ,000 2,900,000 2,850,000 SELECTED ANNUAL INFORMATION ($, except shares amounts) For the year ended June 30, For the year ended June 30, 2010 For the year ended June 30, 2009 Interest income (expense) 4,689 2,350 (2,096) Total expenses 860,338 76,746 64,635 Comprehensive loss 1,053,245 25,316 42,466 Comprehensive loss per share basic and diluted Funds provided (used) in operations (795,179) (44,611) (49,848) 5

6 Total assets 9,574,176 3,039, ,501 Total liabilities 383, ,166 1,346,987 Exploration costs 1,271, , ,847 General and administrative costs 546,545 74,958 64,635 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 December 31,, the Company incurred $181,555 in general and administrative expenses. The Company spent $189,080 on exploration activities in the second quarter, and $746,316 during the first half of the fiscal year. Comprehensive Three month period ended Comprehensive earnings/(loss) ($) earnings/(loss) per basic and diluted share ($) December 31, (408,427) (0.01) September 30, (506,186) (0.01) June 30, (848,179) (0.03) March 31, (67,282) (0.00) December 31, 2010 (137,817) 0.00 September 30, June 30, , March 31, 2010 (73,165) (0.01) The quarterly results shown above prior to the reverse takeover of Mineramex on April 9, 2010 are that of Mineramex only. Consolidated quarterly results are only for the quarters after the June 30, 2010 quarter end. SEGMENTED INFORMATION The Company currently operates in one operating segment, the exploration and development of mineral properties in Mexico. Management of the Company makes decisions about allocating resources based on the one operating segment. A geographic summary of profit and loss and identifiable assets by country is as follows: ($) Mexico Canada Consolidated Interest income $ 156 $ 2,191 $ 22,146 $ 386 $ 22,302 $ 2,577 Net income (loss) (393,349) 31,213 (508,394) (215,103) (901,743) (183,890) Property and equipment 84,863 53, ,863 53,768 Mineral property 3,551,616 2,041, ,243 3,551,616 2,328,223 6

7 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. (a) Credit risk Credit risk arises from the potential that a counterparty will fail to fulfill its obligations. Financial instruments that potentially subject the Company to concentrations of credit risk consist of accounts receivable. The carrying amount of accounts receivable 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 receivables fully collectible. (b) 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 approximates its fair value due to their relatively short period to maturity. All of the Company s accounts payable and accrued liabilities of $50,096 are due within 90 days or less. (c) 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 Company s operations, net earnings or the value of 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 s cash is held in a major Canadian and Mexican chartered bank, all of the Company s transactions are in Canadian dollars, and the Company has no sales, therefore the Company is not exposed to any of the market risks. (d) Sensitivity analysis Based on management s knowledge and experience of the financial markets, the Company believes that movements in interest rates that are reasonably possible over the next twelve months will not have a significant impact on the Company. 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. A 1% change in the exchange rate between the Canadian dollar, Mexican peso and US dollar would have an approximate $54,000 change to the Company s net loss (e) Fair values 7

8 The fair value of the Company s financial instruments as at December 31, and 2010 is summarized as follows: December 31, June 30, July 1, 2010 Financial assets Held for trading Cash $ 4,781,766 $ 6,411,975 $ 1,491,942 Loans and receivables Accounts receivable 301, ,288 85,324 Related party receivable - 107,599 - Financial liabilities Other liabilities Accounts payable and accrued liabilities 50, , ,166 Due to related parties - 100,318 - RELATED PARTY TRANSACTIONS a) Related party expenses 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. In addition to transactions mentioned elsewhere in these notes, the Company incurred the following related party transactions during the six month period ended December 31,. Management fees and expenses of $79,408 ( $36,700) were incurred by directors and officers of the Company. Of this amount, $23,415 (2010 Nil) was capitalized to mineral properties, and $52,583 was expensed as general and administration costs. Of the total amount incurred as management fees and expenses, $3,410 ( $NIL) remains in accounts payable and accrued liabilities. b) Key management personnel compensation Key management of the Group are directors and officers of the Company and their remuneration includes the following: Period ended December 31, Period ended December 31, 2010 Management fees $ 32,750 $ 41,420 Consulting fees 73,210 22,570 Share based compensation 272,439 52,289 8

9 COMMITMENTS AND CONTINGENCIES The Company has office space lease agreements as well as field office and camp with associated annual financial commitments of approximately $70,000. TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS On January 1,, the Canadian Accounting Standards Board replaced Canadian GAAP with IFRS for publicly accountable enterprises, with a transition date of January 1, Accordingly, the Company has prepared its unaudited condensed consolidated interim financial statements for the three month period ending December 31, in accordance with IFRS (including the prior period comparatives). As previously disclosed in the Company's MD&A for the year ended June 30,, the Company implemented its conversion from Canadian GAAP to IFRS through a convergence plan. No significant issues were noted following the implementation with regard to the Company's reporting process for the three months ended December 31,. Currently, the Company is maintaining its data and processes in an IFRS compliant manner which will be monitored and evaluated throughout 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 project to IFRS did result in changes in accounting policies of the Company, which are described in more detail in note 3 to the unaudited condensed consolidated interim financial statements for period ended December 31,. The IASB continues to amend and add to current IFRS standards and interpretations with several projects underway. Accordingly, the accounting policies adopted by the Company for the Company's first IFRS annual consolidated financial statements for the year ending June 30, 2012 may differ from the significant accounting policies used in the preparation of the Company's unaudited condensed consolidated interim financial statements for the three month period ended December 31,. As of the date of this MD&A, the Company does not expect any of the IFRS standard developments to have a significant impact on the June 30, 2012 financial statements. A description of the impact of first-time adoption of IFRS can be reviewed in Note 17 to the unaudited condensed consolidated interim financial statements of the Company for the three month period ended December 31,. 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. 9