-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GBJDOTR+pR+Ps+NPc0/BUas946uGnHASNOsLJHw7CacjMUladqusla/y2NyLN0z1 jT5R2eYL1aMgzjHkRB1mTQ== 0001010549-00-000214.txt : 20000418 0001010549-00-000214.hdr.sgml : 20000418 ACCESSION NUMBER: 0001010549-00-000214 CONFORMED SUBMISSION TYPE: 10SB12G PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 20000417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNA RESOURCE INC CENTRAL INDEX KEY: 0001111741 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 941589426 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10SB12G SEC ACT: SEC FILE NUMBER: 000-30371 FILM NUMBER: 602820 BUSINESS ADDRESS: STREET 1: 5215 NORTH OCONNOR RD STREET 2: STE 200 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 9728689066 MAIL ADDRESS: STREET 1: 5215 NORTH OCONNOR RD STREET 2: STE 200 CITY: IRVING STATE: TX ZIP: 75039 10SB12G 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-SB GENERAL FORM FOR REGISTRATION OF SECURITIES (SMALL BUSINESS ISSUERS) ------------------------------------ Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 ------------------------------------ DYNARESOURCE, INC. F/K/A: West Coast Mines, Inc. (Name of the Small Business Issuer in its charter) Delaware 94-1589426 - -------------------------------------------------------------------------------- (State of incorporation) (Employer Identification No.) 5215 N. O'Connor Blvd., Suite 200, Irving, Texas 75039 - -------------------------------------------------------------------------------- (Address of principal offices) (Zip Code) Issuer's contacts: Phone: (800)510-2283; (972)868-9066; Fax: (972)868-9067; - -------------------------------------------------------------------------------- E-Mail: dynares@anational.com; Web Site: dynaresource.com Securities to be registered pursuant to Section 12(b) of the Act: None ---- Securities to be registered pursuant to Section 12(g) of the Act: Common Stock; $ .01 Par Value ----------------------------- (Title of Class) Name of Each Exchange On Which Securities to be Registered: Nasdaq; Over the Counter ------------------------ Bulletin Board ("OTCBB") ------------------------ DATE OF FILING: MARCH 31, 2000 ------------------------------ FORM 10-SB DYNARESOURCE, INC. Table of Contents PAGE Forward Looking Statements ....................................... 3 Incorporation of Documents ....................................... 3 Currency and Metric Equivalents ....................................... 3 Glossary of Terms ....................................... 3 PART I. ............................................................. 6 Item 1. Description of Business .................. 6 Business Development / History .................. 6 Business of Issuer / Overview .................. 7 Business of Issuer / Properties .................. 8 Pansy Lee Property .................. 8 San Jose de Gracia Property .................. 8 Business Development / Factors .................. 10 Item 2. Management's Discussion and Analysis .................. 14 Operating Results .................. 16 Financing and Investing .................. 17 Item 3. Properties. .................. 18 Pansy Lee Property .................. 18 San Jose de Gracia Property .................. 19 Item 4. Security Ownership; Beneficial Owners and Management ... 27 Item 5. Directors and Officers .................. 29 Consultants .................. 30 Item 6. Executive Compensation .................. 31 Item 7. Certain Relationships and Related Transactions .......... 31 Stock Issued to Related Parties. Compensation Paid to Officers.32 Item 8. Description of Securities .................. 32 Part II. ............................................................. 33 Item 1. Market Price of Common Stock .................. 33 Item 2. Legal Proceedings .................. 33 Item 3. Changes in and Disagreements with Accountants ........... 33 Item 4. Recent Sales of Unregistered Securities .................. 33 Item 5. Indemnification of Directors and Officers .................. 34 Part F/S. Item 1. Company Audited Financial Statement, December 31, 1998 ... 34 Exhibit "3.1" Item 2. Company Audited Financial Statement, December 31, 1999 ... 34 Exhibit "3.2" Signatures ....................................................... 34 Part III. Exhibits. ............................................... TAB 1 Index to Exhibits ............. 35/Tab 1 Sub-Tab 1: Articles of Incorporation, By-Laws, Amendments ... 1.1 - 1.8 Sub-Tab 2: Property and Related ............................ 2.1 - 2.6 Sub-Tab 3: Financial Statements ............................ 3.1 - 3.4 2 PRELIMINARY: - ------------ Forward Looking Statements: - --------------------------- Many statements made by the Company in this Form 10 - SB contain forward-looking language and information related to the Company. In general, the Company identifies these forward-looking statements and information through use of terminology such as "shall", "will", "may", "expect", "intend", "project", "estimate", "believe", or other similar phrases. The Company bases these such statements and information on its opinions and assumptions, based upon current conditions and information currently available to the Company. Because these statements reflect the Company's views regarding current and future events, these statements involve uncertainties and risks. Realized future performance could differ materially and significantly from these forward-looking statements. Readers should exercise caution in placing any undue reliance upon any such forward-looking statements. Incorporation of Financial Statements and Exhibits: - --------------------------------------------------- Incorporated into and forming an integral part of this Form 10 S-B are the audited financial statements for the Company for the years ended December 31, 1998 and December 31, 1999, together with the auditor's report and Notes thereon. These financial statements are incorporated herein as Part F/S, Items 1 and 2; and attached hereto is Exhibits "3.1." and "3.2.". All financial information for the Company contained in this Form 10 S-B is prepared in accordance with accounting principles generally accepted in the United States. Also incorporated into and forming an integral part of this Form 10 S-B are the audited and unaudited financial statements for the Company's partner at the San Jose de Gracia Property, Golden Hemlock Explorations, Ltd., Vancouver, B.C. Canada, ("Hemlock") for the years ended February, 1999, together with the auditor's report and notes thereon; and the 9 month unaudited statement ending November, 1999. The Financial Statements for Hemlock are attached hereto as Exhibits "3.3" and "3.4". All financial information for Hemlock is prepared in accordance with accounting principles generally accepted in Canada. Also incorporated into and forming an integral part of this Form 10 S-B are the Exhibits attached hereto as Exhibits 1.1. - 1. 8., and Exhibits 2. 1. - 2. 6. Currency and Metric Equivalents: - -------------------------------- All dollar amounts are expressed in United States dollars unless otherwise indicated. The Company's accounts are maintained in US. Dollars. Business activities of the Company, carried out through a 26.7 % Company owned subsidiary in Mazatlan, Sinaloa, Mexico, Minera Finesterre S.A. de C.V. ("Minera"), are conducted primarily with the Mexican Peso and occasionally in U.S. Dollars. Hemlock maintains accounts in Canadian Dollars. Any reference herein to expenditures made by Hemlock are noted in Canadian Dollars. During the years referenced herein, the Canadian Dollar equivalent has averaged approximately 67 % exchange to the U.S. Dollar. The following factors for converting Imperial measurements into metric equivalents are provided:
To convert from Imperial To metric Multiply by --------------------------------------------------------------- Acres Hectares 0.405 Feet Metres 0.305 Miles Kilometres 1.609 Tons (2000 pounds) Tonnes 0.907 Ounces (troy)/ton Grams/tonne 34.286
Glossary of Terms: 3 Amended and Restated Loan Agreement (the "ARLAG") (Superseded by the Mine Operating Agreement.) That specific agreement between the Company and Golden Hemlock Explorations, Ltd. ("Hemlock"), and Minera Finesterre S.A. de C.V. ("Minera"), dated December 20, 1996; whereby the Company retained its 24.9 % Net Profits Interest in the San Jose de Gracia Property, Sinaloa, Mexico. The ARLAG was superseded by the Mine Operating Agreement ("MOAG") in August, 1998 (See Exhibit "2.2"). ================================================================================ Golden Hemlock Explorations, Ltd. "Hemlock" That specific junior resource company, Vancouver, B.C., Canada which is party to the Mine Operating Agreement (the "MOAG") between the Company, Hemlock, and Minera Finesterre; and which at the date of this filing retains 73.3 % Interest in Minera Finesterre S.A. de C.V. ("Minera"), See Glossary below. ================================================================================ Hazen Metallurgy Report The specific metallurgical report of process development on the Tres Amigos and related ores at the San Jose de Gracia Property; conducted by Hazen Research, Inc., Golden, Colorado, in 1999, on behalf of the Company. (See Exhibit "2.3.") ================================================================================ Indicated Resources: As defined under the proposed classification in the International Reserves Definition Initiative, reported in the Bulletin of the Canadian Institute of Mining and Metallurgy, Vol. 90, No. 1017, Feb. 1998, pp. 44-45, as follows: "that part of a Mineral Resource which has been explored, sampled and tested through appropriate exploration techniques; at locations such as outcrops, trenches, pits, workings and drill holes, which are too widely spaced or inappropriately spaced to confirm geological and grade/quality continuity; but which are spaced closely enough to be able to assume geological and grade/quality continuity, and from which collection of reliable data allows tonnage/volume, densities, shape, physical characteristics, quality and mineral content to be estimated with a reasonable but not high level of confidence". And as referred to by Pamicon at the Tres Amigos area of the San Jose de Gracia Property. See Part I - Item 3; "San Jose Property"; See "Pamicon Report" - Exhibit "2.5". ================================================================================ Inferred Resources: As defined under the proposed classification in the International Reserves Definition Initiative, reported in the Bulletin of the Canadian Institute of Mining and Metallurgy, Vol. 90, No. 1017, Feb. 1998, pp. 44-45, as follows: "that part of a mineral resource, inferred from geological evidence and assumed but not verified continuity; where information gathered through appropriate exploration techniques, from locations such as outcrops, trenches, pits, workings and drill holes, is limited or of uncertain quality and reliability; but on the basis of which tonnage/volume, quality and mineral content can be estimated with a low level of confidence". And as referred to by Pamicon at the Tres Amigos area of the San Jose de Gracia Property. (See Part I, Item 3 - "San Jose Property"; See "Pamicon Report" - Exhibit "2.5.") ================================================================================ Mine Operating Agreement: ("MOAG") That specific agreement dated August, 1998, which superseded the "ARLAG", between the Company and Golden Hemlock Explorations, Ltd. ("Hemlock") and Minera Finesterre S.A. de C.V. ("Minera"), wherein the Company acquired a 25% interest in Minera, and wherein the Company retained the 24.9% N.P.I. (See Exhibit "2.2.") ================================================================================ 4 Minera Finisterre S.A. de C.V. ("MINERA") Minera Finisterre S.A. de C.V., the Company's 26.7 % owned subsidiary, incorporated under the laws of Mexico, which holds title to the San Jose de Gracia Property; and in which the Company would retain 43.75 % of, upon the completion of the DynaResource Options described in the Mine Operating Agreement (the "MOAG"). ================================================================================ Pamicon Report: The specific report issued in September, 1999 by Pamicon Developments, Ltd., Vancouver, British Columbia, Mr. Chuck Ikona, P. Eng.; wherein the San Jose de Gracia Property is reviewed, Indicated and Inferred Resources are estimated, and future activities and budgets at the San Jose de Gracia Property are recommended. (See Part I, Item 3. - "San Jose Property"; See Exhibit "2.5."). ================================================================================ Pansy Lee Lease / Purchase Agreement: The specific lease agreement of January, 1998, entered into by the Company and Newcrest Resources, Inc., Australia, whereby the Company leased its Pansy Lee Property, Winnemucca, Nevada (See Part I, Item 3. - "Pansy Lee Property"; See Exhibit "2.1.") ================================================================================ Phase II Exploration Activity Report The specific activity report describing exploration activities at the San Jose Property, scheduled to be commenced in late February by the Company. (See Exhibit "2.6.") ================================================================================ San Jose Production Pro Forma The specific Production "Projection" of precious metals at the San Jose Property by Mr. Wayne Henderson, Lockwood Greene Engineers, Dallas, Texas. (See Exhibit "2.4."). ================================================================================ San Jose de Gracia Property: The mineral concessions and exploration rights in Northern Sinaloa State, Mexico, comprising a total of 4,160 hectares more or less, held in the name of Minera Finisterre. (See Part I, Item 3. - "San Jose de Gracia".) ================================================================================ Interest in Minera Finesterre That certain specific Interest which represents ownership in the San Jose Property, which amount of interest retained by the Company is 26.7 % at December 31, 1999; and, which Interest could accumulate to 43.75 % at year end December 31, 2001, through the expenditure by the Company of $ 2,000,000. Cnd. By December 31, 2001. ================================================================================ 24.9% N.P.I.: The Net Profits Interest in the San Jose de Gracia Property retained by DynaResource, defined under the Mine Operating Agreement as a pre-tax, carried interest, entitling DynaResource to receive 24.9% of all Available Cash Flow; including all consideration without limitation, whether cash, stock, or any other interests, generated from any and all activities which are derived from, or in any way related to the Property; including without limitation, exploration of the Property, any mining activities, the sale of any minerals extracted from the Property, the sale or licensing of any rights to derive minerals or income from the Property, the sale of any rights in the concessions, and the sale, transfer, or assignment of any rights or interests whatsoever to directly or indirectly develop, operate, control or produce the Property", over the life of the Property. The Net Profits Interest was spun off as a dividend to existing shareholders by DynaResource in 1998. The Net Profits Interest is more fully defined and described in the MOAG. (See Exhibit "2.2.") 5 PART I: - ------- Item 1. Description of Business - ------------------------------- Business Development/History: - ----------------------------- The Company was incorporated in the State of California on September 28, 1937, under the name West Coast Mines, Inc., to generally engage in all types of mining, with the right to do everything in connection with the extraction of any and all kinds of minerals, including: exploration, development, leasing, purchasing, producing, refining, smelting, joint venturing, investing, and anything else in any way connected to the mining industry; and, to act as fully as any corporation be allowed by state and federal law. In October, 1937, the Company acquired approximately 560 acres of mining claims in Humboldt County, Nevada, (the "Pansy Lee Property") which claims surrounded a hard rock mining prospect. (See Part I, Item 3. - "Pansy Lee".) In connection with the acquisition and development of the Pansy Lee Property, the Company sought and obtained the approval for the sale of the Company's securities from the Commissioner of the State of California. The Company produced precious metals from this Pansy Lee Property until 1942, when the mine was closed by Executive Order. From 1942 to 1994, the Company was primarily involved in negotiations involving the leasing or sale of the Pansy Lee Property to outside parties. Through September, 1994, the Company had 89,573 shares of common stock outstanding. In October 1994, the Company issued 97,927 shares in exchange for approximately 960 Acres of mining claims in Arizona. A majority of new Board of Directors were installed at this exchange. In December 1994, the Company entered into a Plan and Agreement of Merger with Resolute Mining Corp., a Nevada corporation, which was approved by the shareholders on February 16, 1995, and became effective February 28, 1995. In conjunction with this Agreement of Merger, Company filed an amendment to its Articles of Incorporation to increase the authorized number of common stock from 750,000 to 50,000,000 shares and changed the par value from $1.00 to $0.01 per share. Under this Plan and Agreement of Merger, 1,312,500 shares of the Company's securities were issued in exchange for the 5,250,000 outstanding shares of Resolute Mining Corp. Resolute Mining Corp. was subsequently dissolved There were then issued and outstanding 1,500,000 common shares of the Company, 87.5% of which were owned by former shareholders of Resolute Mining Corp. In 1995, the Company acquired a 1.65 % Net Profits Interest in the San Jose de Gracia Property in Sinaloa State, Mexico (the "San Jose de Gracia Property) through the capital contribution of $ 33,000. to the holders of the rights to the San Jose Property. Within the terms of the acquisition of Net Profits Interest, the Company also reserved the Option to acquire an additional 23.25 % Net Profits Interest in the same property. In 1996, the Company completed its option at the San Jose Property, and acquired 23.25 % additional Net Profits Interest in the San Jose through the Capital Contribution of $ 15,250., and through the Issuance of 451,750 Shares in exchange for an additional $ 451,750. of Net Profits Interest. Through the terms of the acquisition of this Net Profits Interest, the Company retained the option to elect a $ 500,000. Note Receivable, plus certain accelerated payback provisions on the Note, in exchange for surrender of the Net Profits Interest. Through year end December 31, 1996 there were 2,671,396 shares of common stock outstanding. On January 31, 1997 the Company declared a one-for-four reverse consolidation of its common stock. In connection with the stock consolidation, the Company reduced its common shares outstanding from 10,685,586 to 2,671,396. The number of authorized shares remained at 50,000,000. Any reference to the Company's shares, including common shares outstanding have been adjusted to reflect the one-for-four consolidation. In 1998, the Company acquired 25 % of the outstanding stock of Minera Finesterre S.A. de C.V., a private Mexican Corporation and the owner of 100 % of the rights and interest to the San Jose Property, subject to the 24.9 % Net Profits Interest. $ 733,277. of this acquisition was recorded as Investment. Pursuant to this acquisition, the Company forgave future consideration including a $ 500,000. Note and related interest, plus accelerated payback provisions on cash flows, and elected to retain the Net Profits Interest. Subsequently, the Company spun off as a dividend its 24.9 % Net Profits Interest. The spin off was recorded at book value of $ 500,000. On November 1, 1998, the Company merged with DynaResource, Inc., a newly formed Delaware corporation. This merger resulted in changing the Company's name to DynaResource, Inc. and changing the state of incorporation 6 from California to Delaware and reducing the Company's authorized common stock from 50,000,000 to 12,500,000 shares. This business combination was accounted for as a purchase. (See "Plan and Agreement of Merger", attached hereto as Exhibit "1.6.".) In 1999, the Company expended $ 96,270. in exploration costs at the San Jose Property, which earned the Company an additional 1.7 % Interest in Minera Finesterre. At year end 1999, the Company owned a total of 26.7 % of Minera Finesterre. All shares of the Company rank equally as to voting, and there are no special preferences, conversion or redemption rights attached to any of the shares. The address of the head office of the Company is 5215 N. O'Connor Blvd., Suite 200, Irving, Texas 75039, Telephone (972) 868-9066. Subsidiaries - ------------ The Company owns 26.7 % Interest in Minera Finisterre S.A. de C.V. ("Minera"), which Incorporated March 20, 1980 in Mexico. Minera holds title to mineral concessions comprising, "the San Jose de Gracia Property", in Sinaloa State, Mexico. Should the Company complete the option described in the Mine Operating Agreement ("MOAG" - attached hereto as Exhibit "2.2"), through the expenditures of $ 2,000,000. Cnd. By December 31, 2001, the Company would then own 43.75 % of Minera. Business of Issuer/Overview: - ---------------------------- The Company is a junior resource company engaged primarily in exploration of mineral properties. The Company owns an interest in the San Jose de Gracia mining concessions in Sinaloa State, Mexico, through its 26.7 % ownership of Minera Finesterre, which holds title to the San Jose concessions (the "San Jose Property"), (See Part I, Item 3. - "San Jose de Gracia"); and the Company owns 560 acres of patented mining property in Humboldt County, Nevada, near Winnemucca (the "Pansy Lee Property"), (See Part I, Item 3. - "Pansy Lee Property"). The Pansy Lee Property recorded production of Gold, Silver, Copper and Lead in the late 1930's to 1942 when the Mine was closed by Executive Order during World War I. Since that time no production has been recorded. The Pansy Lee Property has drawn the interest from large exploration and production companies, including Newmont Mining which leased the Pansy Lee Property in the late 1980's. Most recently the Pansy Lee Property was leased to Newcrest Resources, Australia in 1998. Although the Winnemucca area in Nevada is well known for exploration for Gold and Silver and other precious metals, including most recently the Placer Dome Company which currently is conducting a large exploration and development project approximately 60 miles east of the Pansy Lee, there can be no certainty that the Company will be able to negotiate profitable terms for the Pansy Lee. The Company continues to solicit interest in the Pansy Lee Property, while it concentrates its own resources on the San Jose de Gracia Property. In the future, the Company could determine to focus more of its own resources at the Pansy Lee Property, should conditions warrant at that time. Since 1995, the Company has concentrated its own efforts on the San Jose de Gracia Property, Northern Sinaloa State, Mexico. The San Jose Property has recorded production of Gold of over 1,000,000 Ounces in the early 1900's. The Company's technical personnel, and consultants to the Company have described the potential for significant Gold resources at the San Jose (See Pamicon Report - Exhibit "2.5."; See Production Pro Forma - Exhibit "2.4."; See Phase II Exploration Activities - Exhibit "2.6.") Although there can be no certainty that significant gold reserves or other precious metals will be confirmed at the San Jose Property, the Company believes the likelihood of proving significant gold reserves is high. As a result, the Company continues to focus its efforts toward the exploration and development of the San Jose Property. The Company believes that upon the completion of its planned and budgeted Phase II exploration activities at the San Jose de Gracia, (See Phase II Exploration Activity Report - - Exhibit "2.6.") it will be in position to continue to selectively explore and develop the San Jose de Gracia property, through its own efforts, through joint venture arrangements, or otherwise. In addition to its commitment at the San Jose de Gracia, the Company is actively seeking other mineral projects, which have the potential for near-term profitable production, and long term reserves potential. Acquiring and developing any such future properties will depend upon on specific property opportunities, market conditions and other factors, some of which factors are beyond the control of the Company. 7 Business of Issuer / Properties: - -------------------------------- The Company's primary material property is the San Jose de Gracia property in Sinaloa State, Mexico. Through its 26.7 % owned subsidiary Minera Finisterre, the Company is engaged in exploration activities in Sinaloa State, Mexico. The Company's second property is the Pansy Lee Property in Humboldt County, near Winnemucca, Nevada. Pansy Lee Property: - ------------------- In October, 1937, the Company acquired approximately 560 acres of mining claims in Humboldt County, Nevada, (the "Pansy Lee Property") which claims surrounded a hard rock mining prospect. (See Part I, Item 3. - "Pansy Lee".) The Company explored and developed this Pansy Lee, including the driving of a 900 foot Mine Shaft for production. The Company reported production of 8,000 Oz. Gold, 700,000 Oz. Silver, 110,00 Lbs. Copper, and 2,000,000 Lbs. Lead. at the Pansy Lee Property. In 1942 the Pansy Lee was shut down by Executive Order in World War I, and reported little production after that time. >From 1944 to 1988, the Company involved itself with the leasing of the Pansy Lee to various parties, including Newmont Mining in 1988. No significant mining activities were reported from these leasing activities. From 1989 to 1994 no significant property activities were reported. In 1998, the Company leased the Pansy Lee to Newcrest Resources, Inc., Australia, in a 5 year Lease - Purchase Agreement (the "Pansy Lee Lease Purchase Agreement"). (See Exhibit "2.1.") Newcrest performed sampling, mapping, and drilling activities at the Property, and reported significantly positive results. However, Newcrest made a corporate decision to cease all US. Activities in 1999; and as a result, terminated its lease with the Company. No activity is being conducted at the Pansy Lee Property at this time. The Company will pursue offers for lease or purchase at the Pansy Lee, while it focuses its efforts at the San Jose de Gracia Property. San Jose de Gracia Property: - ---------------------------- The claims which comprise the San Jose de Gracia project, consist of four contiguous groups of mineral claims: San Jose de Gracia I; San Jose de Gracia II; Santa Rosa; and, Finisterre; the sum total of which comprise 4,160 hectares, more or less. In 1995, the Company acquired a 1.65 % Net Profits Interest in the San Jose de Gracia Property in Sinaloa State, Mexico (the "San Jose de Gracia Property) through the Capital contribution of $ 33,000. to Minera Finesterre S.A. de C.V. ("Minera"), the holders of the rights and claims to the San Jose Property. Within the terms of the acquisition of Net Profits Interest, the Company also reserved the option to acquire an additional 23.25 % Net Profits Interest in the same property. In 1996, the Company completed its Option at the San Jose Property, and acquired additional Net Profits Interest in the San Jose through the Capital Contribution of $ 15,250., and through the Issuance of 451,750 Shares in exchange for an additional $ 451,750. of Net Profits Interest. Through the terms of the acquisition of this Net Profits Interest, the Company retained the option to elect a $ 500,000. note receivable, plus certain accelerated payback provisions on the note, in exchange for surrender of the Net Profits Interest. The election of this option, at the sole determination of the Company, could occur at the completion of the accelerated payback provisions. In 1996, Company partners at the San Jose Property, Golden Hemlock Explorations. Ltd. ("Hemlock") on a net basis, recorded acquisition costs of $ 1,630,300. Canadian Dollars ("Cnd.") related to Minera Finisterre, and deferred exploration costs of $ 396,221. Cnd. related to the San Jose de Gracia Property. During 1996, the Company retained its 24.9 % Net Profits Interest at the San Jose Property, without incurring costs attributed thereto. In 1997, Hemlock incurred property acquisition expenditures of $ 709,703. Cnd. and deferred exploration expenditures of $ 2,288,324. Cnd. (total $ 2,998,207. Cnd.), on the San Jose de Gracia project. Again, the Company retained its 24.9 % Net Profits Interest without incurring costs attributed thereto. In 1998, Hemlock incurred property acquisition expenditures of $ 92,842. and deferred exploration expenditures of $ 208,596. (total $ 301,438.), at the San Jose de Gracia project. The principal items of expenditure were property maintenance, geological reports and salaries. 8 In 1998, The Company incurred deferred exploration expenditures of $ 35,000., and property acquisition expenditures of $ 85,000. (total of $ 120,000.) in providing capital assistance to Hemlock. These expenditures by the Company strategically positioned the Company to make certain legal claims against Hemlock and Minera. In 1998, legal proceedings commenced by the Company, against Hemlock and Minera in connection with the San Jose de Gracia project, were settled pursuant to the terms of an agreement, the "Mine Operating Agreement" (the "MOAG" - See Exhibit "2.2."). As part of the settlement, Hemlock was credited with $ 4,500,000. Cnd. total expenditures at the San Jose Property, and the Company was credited with $ 1,500,000. Cnd. total expenditures at the San Jose Property. Among the Company's credited $ 1,500,000. were items of forgiveness related to a $ 500,000. note receivable and related accelerated payback provisions. Pursuant to the terms of the MOAG, a 25% equity interest in Minera Finisterre was transferred by Hemlock to the Company. The Company retained the 24.9% N.P.I. without incurring any costs attributable thereto; which Net Profits Interest was subsequently spun off to as a dividend to existing shareholders. Within the provisions of the MOAG, the Company obtained the option to earn an additional 18.75 % Interest in Minera (total of 43.75 % interest in Minera), through the expenditure of $ 2,000,000. Cnd. At the San Jose project through December 2001. Additional provisions of the MOAG, provided that Hemlock maintain the maintenance and administration of Minera, and the maintenance of the San Jose Property. In 1999, Hemlock recorded $ 125,000. Cnd. in costs associated with acquisition, and $ 212,250. Cnd. in deferred exploration costs (total of $ 337,250. Cnd.) at the San Jose de Gracia project. In 1999, the Company incurred $ 96,270. in deferred exploration costs at the San Jose Property, related to compilation of data into a mining software program, additional sampling and mapping, and the completion of a metallurgical processing program on the Tres Amigos ores located at the San Jose property (Hazen Report - See Exhibit "2.3.") . These expenditures earned the Company an additional 1.7 % Interest in Minera. At year end 1999, the Company owned a total of 26.7 % of Minera. The San Jose de Gracia properties are also subject to a 3% net smelter return royalty ("NSR"), on which the Company has an option to repurchase 2% of the NSR for US. $3,000,000 until April 23, 2001. Dollar Amounts Expended/Interest Acquired Hemlock, expended a total of $ 2,557,845. Cnd. in acquisition costs in 1996 through 1999. The Company expended a total of $ 500,000, in costs associated with the acquisition of the 24.9 % Net Profits Interest through 1998. The Company expended $ 85,000. in 1998 on behalf of Hemlock, towards acquisition costs associated with the San Jose Property. The Company and Hemlock have expended the following amounts on exploration and development costs (including drilling) at the San Jose de Gracia project for the past four years: Hemlock: Cnd. DynaResource: USD. 1996 $ 396,221. Nil 1997 $ 2,228,324. Nil 1998 $ 208,596. $ 120,000. 1999 $ 212,250. $ 96,270. -------------- ----------
Total Through 1999 $ 3,045,391. Cnd. $ 216,270. USD. In February, 2000 the Company commenced a "Phase II Exploration Activity" at the San Jose Property. This activity includes sampling, mapping, trenching, and drilling activities. Full description of this exploration activity is contained within the "Phase II Exploration Activity Report" attached hereto as Exhibit "2.6". Activities at the San Jose Property have attracted the preliminary interest of major mining companies. The Company believes that upon the completion of its planned and budgeted Phase II exploration activities at the San Jose de Gracia, it will be in position to continue to selectively explore and develop the San Jose de Gracia property, through its own efforts, through joint venture arrangements, or otherwise. The following sets forth in sequential order the interests earned by the Company, and the costs expended at the San Jose Property: 9
Capital Costs: San Jose Interest: Terms: 1995 $ 33,000. 1.65 % Net Profits Interest Cash Paid 1996 $ 15,250. Cash Paid $ 451,750. 23.25 % Net Profits Interest 451,750 Common Shares ----------- Total $ 500,000. (Total 24.9 % NPI.); or elect: 1. $ 500,000. Note Receivable. 2. $ 1,050,000. Accelerated Payback Provisions 1997 Nil retained 24.9 % NPI. 1998 $ 120,000. $ 85,000. acquisition Costs $ 35,000. exploration Costs $ 30,000. Satisfaction of Interest receivable $ 500,000. ($ 500,000.) Satisfaction of note receivable $ 350,000. ($ 1,050,000.) Satisfaction of accelerated payback (Discounted) ----------- Total: $1,000,000. Acquired 25 % Minera Option to acquire 18.75 % Minera ($ 2,000,000. Cnd. expenditures at 12/31/01) retained 24.9 % NPI. 1998 ($ 500,000.) Spin Off 24.9 % NPI. Dividend to existing Shareholders 1999 $ 96,270. acquire 1.7 % Minera Option to acquire 17.08% Minera (Total held 26.7 %) ($ 1,855,000. Cnd. at 12/31/01)
At December 31, 1999 the Company retained ownership of 26.7 % of Minera, with the remaining option to acquire 17.08 % of Minera through the expenditure of $ 1,855,000. Cnd. At December 31, 2001. Business Development/Factors: - ----------------------------- Body of Commercial Ore/Limited Resources: - ----------------------------------------- The properties owned by the Company, and properties in which the Company retains an interest, contain limited bodies of commercial ore. The exploration programs undertaken and proposed constitute, in the most part, an exploratory search for ore. There is no assurance that the Company will be successful in its continued exploration and development activities. Exploration and Development: The business of exploring for minerals and mining involves a high degree of risk. Few properties that are explored are ultimately developed into producing mines. Major expenses may be required to establish ore reserves, to develop metallurgical processes and to construct mining and processing facilities at a particular site. It is impossible to ensure that the current exploration programs planned by the Company will result in a profitable commercial mining operation. Unusual or unexpected formations, faulting, fires, power outages, labour disruptions, flooding, explosions, cave-ins, land slides and the inability to obtain suitable or adequate machinery, equipment or labour are other risks involved in the operation of mines and the conduct of exploration programs. The Company has limited experience in the development and operation of mines and in the construction of facilities required to bring mines into production. The Company has relied and may continue to rely upon consultants for operating expertise. The economics of developing mineral properties are affected by many factors including the cost of operations, variations of the grade of ore mined and fluctuations in the price of minerals produced. Depending on the price of minerals produced, the Company may determine that it is impractical to commence or continue commercial production. Although precautions to minimize risk will be taken, processing operations are subject to hazards such as equipment failure or failure of retaining dams around tailings disposal areas, which may result in environmental pollution and consequent liability. 10 Mineral Deposits and Production Costs - ------------------------------------- Mineral deposits and production costs are affected by such factors as environmental permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. In addition, the grade of any ore ultimately mined may differ from that indicated by drilling results. Production can be affected by such factors as permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. Short term factors relating to ore reserves, such as the need for orderly development of ore bodies or the processing of new or different grades, may also have an adverse effect on mining operations and on the results of operations. There can be no assurance that any gold, copper or other minerals recovered in small scale laboratory tests will be duplicated in large scale tests under on-site conditions or in production scale heap leaching. Mining Operations - ----------------- The business of mining is subject to a variety of risks such as cave-ins and other accidents, flooding, environmental hazards, the discharge of toxic chemicals and other hazards. Such occurrences may delay production, increase production costs or result in liability. The Company currently does not carry on any operations and as a result does not currently maintain liability insurance against such liabilities. The Company intends to obtain insurance if it commences operations; the nature of these risks is such that liabilities might exceed policy limits, the liabilities and hazards might not be insurable, or the Company might elect not to insure itself against such liabilities due to high premium costs or other reasons. In such case, the Company could incur significant costs that could have a materially adverse effect upon its financial condition. Title Matters - ------------- While the Company has investigated title to all mineral claims, and, to the best of its knowledge, title to all properties is in good standing, this should not be construed as a guarantee of title. The properties may be affected by undetected defects in title, such as the reduction in size of the mineral claims and other third party claims affecting the Company's priority rights, at the discretion of the Public Registry of Mining in Mexico. The Company's interests in mineral tenures are comprised of exclusive rights to concessions acquired through contracts with vendors of individual concessions. The Company has received governmental permit to conduct operations in exploration and limited mining activities. Maintenance of such rights is subject to ongoing compliance with the terms of such permits, and subject to the regulations and rules of the Public Registry of Mining. Conflicts of Interest - --------------------- Directors of the Company are or may become directors of other reporting companies, or, have significant shareholdings in other mineral resource companies; and, to the extent that such other companies may participate in ventures in which the Company may participate, the directors of the Company may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. The Company and its directors attempt to minimize such conflicts. In the event that such a conflict of interest arises at a meeting of the directors of the Company, a director who has such a conflict will abstain from voting for or against the approval of such a participation or such terms. In appropriate cases the Company will establish a special committee of independent directors to review a matter in which several directors, or management, may have a conflict. In accordance with the laws of Canada, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company. In determining whether or not the Company will participate in a particular program and the interest therein to be acquired by it, the directors will primarily consider the potential benefits to the Company, the degree of risk to which the Company may be exposed and its financial position at that time. Other than as indicated, the Company has no other procedures or mechanisms to deal with conflicts of interest. Currency Fluctuations - --------------------- The Company maintains its accounts in US. Dollars. Golden Hemlock Explorations, Ltd. ("Hemlock") maintains it accounts in Canadian dollars. Company exploration expenses, and expenses incurred through Minera, may be incurred in US. Dollars, or in Mexican Pesos. As such, the Company is subject to exchange rate fluctuations and foreign currency fluctuations. Future operations by the Company may be subject to foreign currency fluctuations and exchange rate fluctuations, and such fluctuations may materially affect the Company's financial position and results. The Company has not in the past engaged in hedging activities. 11 Additional Funding Requirements - ------------------------------- The Company's current operations do not provide any cash flow. In the past, the Company has relied on sales of equity securities to meet its cash requirements. The development of the Company's properties may depend upon the Company's ability to obtain financing through the joint venturing of projects, private placement financing, public financing or other means. There is no assurance that the Company will be successful in obtaining the required financing. Competition - ----------- Significant and increasing competition exists for the limited number of mineral opportunities available in Mexico. As a result of this competition, some of which is with large established mining companies with substantial capabilities and greater financial and technical resources than the Company, the Company may be unable to acquire additional attractive mining properties on terms it considers acceptable. Metals Prices - ------------- The mining industry in general is intensely competitive and there is no assurance that, even if commercial quantities of mineral resource are discovered, a profitable market will exist for the sale of same. Factors beyond the control of the Company may affect the marketability of any minerals discovered. The Company is extremely sensitive to fluctuations in the price of gold. The price of various metals recently has experienced significant price movements over short periods of time; and, is affected by numerous factors beyond the control of the Company; including, international economic and political trends, expectations of inflation, currency exchange fluctuations, interest rates, global or regional consumption patterns, speculative activities and increased production due to improved mining and production methods. The supply of and demand for metals are affected by various factors, including political events, economic conditions and production costs in major producing regions including the Commonwealth of Independent States. There can be no assurance that the price of any mineral deposit will be such that the Company's properties can be mined at a profit. Foreign Countries and Regulatory Requirements - --------------------------------------------- The Company's principal property, the San Jose de Gracia project, is located in Mexico and mineral exploration and mining activities may be affected in varying degrees by political and financial instability, inflation, and haphazard changes in government regulations relating to the mining industry. Any changes in regulations or shifts in political or financial conditions are beyond the control of the Company and may adversely affect its business. Operations may be affected in varying degrees by government regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, environmental legislation and mine safety. Mexico's status as a country may make it more difficult for the Company to obtain any required exploration, development and production financing for its properties due to the increased investment risk. However, it is possible that a deterioration in economic conditions or other factors could result in a change in government policies. In addition, social unrest in Mexico could have a material adverse effect on the Company's activities. The Company's main interests are in Mexico where the presence of contagious diseases may affect the Company's ability to carry on operations and obtain personnel. Environmental and other Regulatory Requirements - ----------------------------------------------- The current or future operations of the Company, including exploration and development activities and commencement of production on its properties; require permits from various foreign, federal, state and local governmental authorities. Such operations are and will be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs, and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. Additional permits and studies, which may include environmental impact studies conducted before permits can be obtained, are necessary prior to operation of properties in which the Company has interests. There can be no assurance that the Company will be able to obtain or maintain all necessary 12 permits that may be required to commence construction, development or operation of mining facilities at these properties, on terms which enable operations to be conducted at economically justifiable costs. The Company's potential mining and processing operations and exploration activities are subject to various laws and regulations governing land use, the protection of the environment, prospecting, development, production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, mine safety and other matters. Such operations and exploration activities are also subject to substantial regulation under these laws by governmental agencies and may require that the Company obtain permits from various governmental agencies. The Company believes it is in substantial compliance with all material laws and regulations which currently apply to its activities. There can be no assurance, however, that all permits which the Company may require for construction of mining facilities and for the conduct of mining operations will be obtainable on reasonable terms; or that such laws and regulations would not have an adverse effect on any mining project which the Company might undertake. Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions there under, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations and, in particular, environmental laws. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof; could have a material adverse impact on the Company and cause increases in capital expenditures or production costs, or reduction in levels of production at producing properties, or require abandonment or delays in development of new mining properties. To the best of the Company's knowledge, the Company is operating in compliance with all applicable environmental regulations. Price Fluctuations: Share Price Volatility - ------------------------------------------- In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly those considered development stage companies, have experienced wide fluctuations in price, which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continual fluctuations in price will not occur. Limited Operating History: Losses - ---------------------------------- The Company to date has limited experience in mining or processing of metals. The Company has experienced, on a consolidated basis, losses in most years of its operations. All activities have been of an exploration and development nature. There can be no assurance that the Company will generate profits in the future. Dividends - --------- Investors cannot expect to receive a dividend on the Company's common shares in the foreseeable future. Capital obtained by the Company, either through the sale of equity or from generated revenue, is intended by the Company to finance further development of the Company's properties. Capital and Other Requirements - ------------------------------ The Company currently has no commercial operations. It must obtain financing from the sale of equity to maintain its property interests and to pay general and administrative expenses for the foreseeable future, until such time as commercial mineral production may arise from its existing or future projects. At year end 1999, the Company has necessary capital to complete the Phase II Exploration activities at the San Jose Property, and will have working capital reserve through June 30, 2001. Minera is responsible for annual tax requirements on the concessions comprising the San Jose district in the total amount of $ 26,700. Hemlock remains obligated for the payment of these taxes in year 2000. Minera may also become obligated 13 to complete the acquisition of 2 mineral concessions within the San Jose de Gracia district, upon the delivery of proper legal documentation by the vendors. The total amount of these acquisitions is approximately US $ 70,000., plus applicable IVA Tax. Hemlock remains obligated for the payments on these two concessions. Employees - --------- The Company has no employees. Management services are provided Dynacap Group Ltd., a Texas Limited Liability Company, an affiliate company. An officer and director of the Company is also a Manager of Dynacap. Minera has three part-time administration employees and employs on a full-time basis seven other individuals for security and maintenance at the San Jose de Gracia property. Minera obligations remain the responsibility of Hemlock. Reports to Securities Holders: - ------------------------------ The Company delivers annual reports, including selected financial data, to shareholders. Copies of Audited Financial Statements are available on request at the offices of the Company. Audited financial statements for years end December 31, 1998, and December 31, 1999, together with notes thereto, are available at the Company's web site: http://www.dynaresource.com. At the Company's receipt of a "No Comment Letter" from the Securities and Exchange Commission (the "SEC"), in regard to the form and substance of this Form 10 S-B filing by the Company, the Company shall prepare and file those quarterly statements, commonly known as Form "10 - Q", and those annual statements, commonly known as Form "10 - K", as required by the SEC. As at the date of the filing of this Form 10 S-B, the Company has not filed any such Form 10-Q or 10-K. The public may read and copy any materials the Company may file with the SEC, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company anticipates being an electronic filer of required reports. The SEC maintains an internet site that contains reports, proxy, information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is: (http://www.sec.gov). Selected information and reports filed by the Company, if filed electronically, should be available at the SEC web site. Some of this information, or condensed reports or filings may be available at the Company's web site at: http://www.dynaresource.com Item 2. Management's Discussion and Analysis of Operation: - -------------------------------------------------------------- The goal of the Company is to maximize shareholder value through the discovery and delineation of mineral resources, reserves, and potential reserves. Currently, the Company owns no producing properties and consequently, has no current operating income or cash flow. Operations are funded primarily by equity subscriptions. The level of the Company's activities is subject to fluctuation from year to year, depending on, among other matters, the readiness of the Company's mineral projects to absorb exploration spending and the availability of financing to apply to exploration activity. The availability of financing, in turn, is subject to wide fluctuations, depending upon the trend of equity markets; the trend of the equity markets related to junior resource exploration company securities; commodity prices; sentiment of investors; sentiment of institutional investors; and, recent results from and general outlook for the exploration programs proposed to be carried out on the Company's projects. The inter-relation of these factors is complex and difficult to project. In 1995, the Company acquired a 1.65 % Net Profits Interest in the San Jose de Gracia Property in Sinaloa State, Mexico through the capital contribution of $ 33,000. to the owners of the property, Minera Finesterre S.A. de C.V. ("Minera"). The Company also reserved the option to acquire an additional 23.25 % Net Profits Interest in the same property. In 1996, the Company acquired additional Net Profits Interest in the San Jose Property through the capital contribution of $ 15,250., and through the issuance of 451,750 Shares in exchange for an additional $ 451,750. of Net Profits Interest. This $ 451,750., had been advanced to the San Jose Project by Dynacap / Mexico Resource Group, Ltd., a Nevada Limited Liability Company; and had been utilized 14 for the acquisition and installation of certain flotation production equipment. At December 31, 1996, the Company retained a 24.9 % Net Profits Interest at the San Jose Property. Through the terms of the acquisition of this Net Profits Interest, the Company retained the option to elect to receive a $ 500,000. note receivable, plus certain accelerated payback provisions on the note, in exchange for surrender of the Net Profits Interest. This election, at the sole determination of the Company, could take place at the completion of the accelerated payback provisions. In 1996, the Company partners at the San Jose Property, Golden Hemlock Explorations. Ltd. ("Hemlock") on a net basis, recorded acquisition costs of $ 1,630,300. Canadian Dollars ("Cnd.") related to Minera, and deferred exploration costs of $ 396,221. Cnd. related to the San Jose de Gracia Property. In 1996, the Company brought legal claims against Hemlock and Minera, and against certain named principles of Minera, in effort to protect its Net Profits Interest. The claims were settled by all parties by the entering into of the Amended and Restated Loan Agreement at December 20, 1996 (the "ARLAG"), which was superseded by the Mine Operating Agreement (the "MOAG") in August 1998. (See Exhibit "2. 2."). As a result of the litigation in 1996, and the resulting entering into of the ARLAG, the Company retained its 24.9 % Net Profits Interest at the San Jose Property, without incurring any costs associated thereto. In 1997, Hemlock incurred property acquisition expenditures of $ 709,703. Cnd. and deferred exploration expenditures of $ 2,288,324. Cnd. (total $ 2,998,207. Cnd.), on the San Jose de Gracia project. Again, the Company retained its 24.9 % Net Profits Interest without incurring any costs associated thereto. In 1998 Hemlock incurred property acquisition costs of $ 92,842. Cnd., and deferred exploration costs of $ 208,596. Cnd. (total of $ 301,438. Cnd.) on the San Jose de Gracia project. In 1998, the Company brought additional claims and litigation against Hemlock and Minera, related to issues involving the ARLAG, and the Company claimed among other things, the non-compliance therewith. This additional litigation and claims were settled in August, 1998 through the entering into of the Mine Operating Agreement (the "MOAG"), whereby the Company acquired 25 % of the outstanding stock of Minera, the owner of 100 % of the rights to the San Jose Property, subject to the Net Profits Interest. In regard to the acquisition of this 25 % interest in Minera, $ 733,277. was recorded by the Company as an investment. Pursuant to this acquisition, the Company forgave future consideration including the $ 500,000. note and related interest, plus accelerated payback provisions on cash flows, and elected to retain the Net Profits Interest. Subsequently, the Company spun off to existing shareholders as a dividend its 24.9 % Net Profits Interest. Pursuant to the MOAG, the Company acquired the option to earn up to an additional 18.75 % Interest in Minera, through the expenditure of $ 2,000,000. Cnd. in exploration and development costs on the property by December 31, 2001. (See MOAG, attached as Exhibit "2.2".) The Company and its partners believe they made significant progress in exploration activities conducted at the San Jose de Gracia property in 1997 - 1999 (See Part I, Item 3. - "San Jose Property"; See Pamicon Report attached as Exhibit "2.5."). However, exploration programs were curtailed in December 1997, due to Hemlock's exhaustion of funds available for exploration, and in the Company's views, due to lack of managerial authority over Minera, and activities at the San Jose Property. Hemlock's activities were confined to care and maintenance items of Minera and the San Jose, the preparation of an independent engineering report (the "Pamicon Report"), compilation of data, and negotiations with the Company. In 1999, Hemlock recorded $ 125,000. Cnd. in costs associated with acquisition, and $ 212,250. in deferred exploration costs (total of $ 337,250. Cnd.) at the San Jose de Gracia project. In 1999, the Company incurred $ 96,270. in deferred exploration Costs at the San Jose Property, related to compilation of data into a mining software program, additional sampling and mapping, and the completion of a metallurgical processing program on the Tres Amigos ores (Hazen Report - See Exhibit "2.3.") . These expenditures earned the Company an additional 1.7 % Interest in Minera. At year end 1999, the Company owned a total of 26.7 % of Minera. In fall 2000, the Company organized and compiled a Phase II exploration report, detailing exploration and development activities planned at the San Jose Property in spring, 2000. Included in this report was a compilation of many years of data from the San Jose into a mapping software program. This mapping software enables the company to present a professional perspective of the estimated current resources in place at the San Jose Property, and the potential for additional estimated resources. The presentation of this data has recently 15
drawn the attention and interest of major mining companies, as indicated by the scheduled visit by one major company to the San Jose Property in April, 2000. Although there can be no certainty that the Company will be successful in its exploration and development efforts at the San Jose Property, the Company believes that upon the completion of its planned and budgeted Phase II exploration activities at the San Jose de Gracia, (See Exhibit "2.6.") it will be in position to continue to selectively explore and develop the San Jose de Gracia property, through its own efforts, through joint venture arrangements, or otherwise. The Company plans to focus its efforts on the exploration and development of the San Jose Property, with the goal of confirming significant gold resources. Additionally the Company will continue to solicit interest for its Pansy Lee Property. Operating Results Deferred exploration and development expenditures incurred by the Company in 1997 - 1998 at the San Jose de Gracia property were $ 120,000., the Company recorded these expenditures as Investment. Hemlock expended a total of $ 2,300,000. Cnd. In deferred exploration and development expenditures in 1997, and $ 208,000. Cnd. in 1998. Deferred exploration and development expenditures incurred in 1999 by the Company at the San Jose de Gracia property were $ 96,270., these expenditures were recorded as Investment. Hemlock, expended a total of $ 212,000. Cnd. In deferred exploration and development expenditures in 1999. The expenditures at the San Jose Property in 1997 - 1999 have provided the foundation for continued exploration and development programs at the Property (See Pamicon Report - Exhibit "2.5"). Hemlock, expended a total of $ 2,557,845. Cnd. in acquisition costs in 1996 through 1999. The Company expended a total of $ 500,000. in costs associated with the acquisition of the Net Profits Interest. Additionally, the Company expended $ 27,015. in 1996 and 1997, and $ 30,170. in 1998 in legal costs associated with the actions brought by the company against Hemlock and Minera. These costs are recorded as accounts receivable, together with accrued interest. In 1998 and 1999 the Company advanced funds to Hemlock in the total amount of $ 42,800. These costs are recorded as accounts receivable, together with accrued interest. The Company and Hemlock have expended the following amounts on costs associated with the San Jose de Gracia Project in the past 4 years: Hemlock / Cnd.: DynaResource / USD.: --------------- -------------------- Acquisition Exploration Acquisition Exploration Legal /Advances ----------- ----------- ----------- ----------- --------------- 1996 $ 1,630,300 $ 396,221 $ 500,000 Nil 1997 $ 709,703 $ 2,228,324 Nil Nil $ 27,015. 1998 $ 92,842 $ 208,596 $ 85,000 $ 35,000 $ 30,170. 1999 $ 125,000 $ 212,250 Nil $ 96,270 $ 42,800. ----------- ----------- --------- --------- ---------
Total '96-'00 $ 2,557,845 $ 3,045,391 $ 585,000 $ 131,270 $ 99,850 The following sets forth in sequential order the interests earned by the Company, and the costs expended at the San Jose Property: Capital Costs: San Jose Interest: Terms: -------------- ------------------ ------ 1995 $ 33,000. 1.65 % Net Profits Interest Cash Paid 1996 $ 15,250. Cash Paid $ 451,750. 23.25 % Net Profits Interest 451,750 Common Shares ---------- Total $ 500,000. (Total 24.9 % NPI.); or elect: 1. $ 500,000. Note Receivable. 2. $1,050,000. Accelerated Payback Provisions 16 1997 Nil retained 24.9 % NPI. 1998 $ 120,000. $ 85,000. acquisition Costs $ 35,000. exploration Costs $ 30,000. Satisfaction of Interest receivable $ 500,000. ($ 500,000.) Satisfaction of note receivable $ 350,000. ($ 1,050,000.) Satisfaction of accelerated payback (Discounted) ----------- Total: $1,000,000. Acquired 25 % Minera Option to acquire 18.75% Minera ($ 2,000,000. Cnd. expenditures at 12/31/01) retained 24.9 % NPI. 1998 ($ 500,000.) Spin Off 24.9 % NPI. Dividend to existing Shareholders 1999 $ 96,270. acquire 1.7 % Minera Option to acquire 17.08% Minera (Total held 26.7 %) ($ 1,855,000. Cnd. at 12/31/01) At December 31, 1999 the Company retained ownership of 26.7 % of Minera, with the remaining option to acquire 17.08 % of Minera through the expenditure of $ 1,855,000. Cnd. At December 31, 2001. Financing and Investing Activities - ---------------------------------- In 1996, the Company raised $ 358,865. through the sale of promissory notes which subscribers subsequently converted into 176,433 common shares of the company. The Company raised an additional $ 70,573. through the exercise of options issued with the conversion of the notes above; at the exercise of such options the Company issued an additional 176,433 common shares. In 1997, the Company raised $ 160,000. through the sale of promissory notes which subsequently converted into 40,000 common shares. The Company raised an additional $ 259,500. through the exercise of options at $ 1.00 / share (which options were issued at the time of acquisition of $ 451,750. of Net Profits Interest); in conjunction with the exercise, the company issued 259,500 common shares. The Company raised a further $ 121,500. through the exercise of 81,000 options at $ 1.50 (which options were issued in conjunction with the acquisition of the $ 451,750. of Net Profits Interest); in conjunction with the exercise, the company issued 81,000 common shares. In 1998 and 1999 the company raised $ 733,000. through the sale of 483,000 common shares. In 1998, the company also received $ 50,000. In lease income from the Pansy Lee Property. During the period 1996 - December 31, 1999 the Company expended a total of $ 500,000. in acquisition costs associated with the Net Profits Interest; $ 85,000. in other acquisition costs related to the San Jose de Gracia Property; $ 131,270. in costs associated with exploration and development at the San Jose de Gracia; and $ 57,185. in legal costs; and, $ 42,800. in advances made to Hemlock. During the prior 4 year period, the company has raised the following amounts in cash, and has issued common shares in conjunction therewith as shown: Amount Raised: Common Shares Issued: -------------- --------------------- 1996: $ 358,865. 176,433 $ 70,573. 176,433 1997: $ 160,000. 40,000 $ 259,500. 259,500 $ 121,500. 81,000 1998: $ 131,000. Issued in 1999 1999: $ 602,000. 483,000 ------------- ------- Total '96 - '00 $ 1,703,438. 1,216,366
17 Liquidity and Capital Resources - ------------------------------- The Company finances its mineral property acquisition and exploration costs, and related administration costs, through the issue of equity. The Company's ability to generate adequate amounts of cash is dependent on its ability to attract equity investment. The Company intends to conduct exploration programs on the San Jose de Gracia property totaling a minimum of $ 250,000. (See Phase II Exploration Activity Report - Exhibit "2.6.") The Company expects that, upon completion of the Phase II Exploration Program, it will have a positive working capital position of $ 150,000. 1999 sampling and mapping programs conducted at the San Jose de Gracia property have prepared the property for the diamond drilling program recommended by the Pamicon Report (Exhibit "2.5." ); and as described in the Phase II Exploration Activity Report (Exhibit "2.6"), which activity is scheduled for February 25, 2000. Capital and Other Requirements - ------------------------------ The Company currently has no commercial operations. It must obtain financing from the equities market to maintain its property interests and to pay general and administrative expenses for the foreseeable future, until such time as commercial mineral production may arise from its existing or future projects. Upon completion of the Phase II Exploration Activity as described in The Phase II Activity Report (attached hereto as Exhibit "2.6.") the Company will have necessary working capital through June 30, 2001. Minera is responsible for annual tax requirements on the concessions comprising the San Jose district in the total amount of $ 26,700. Hemlock retains the liability and obligation for the payment of these taxes. Minera may also become obligated to complete the acquisition of 2 mineral concessions within the San Jose de Gracia district, upon the delivery of proper legal documentation by the vendors. The total amount of these acquisitions is approximately US. $ 70,000., plus applicable IVA Tax. Hemlock retains the liability and obligation for payment of these acquisitions by Minera. Employees - --------- The Company has no employees. Management services are provided by Dynacap Group Ltd, a Texas Limited Liability Company. An officer and director of the Company is a Manager of Dynacap Group Ltd. Minera Finisterre has three part-time administration employees and employs on a full-time basis seven other individuals for security and maintenance at the San Jose de Gracia property. Hemlock retains the obligation and responsibility for costs associated with the maintenance of Minera. Activities: - ----------- Company activities during 1998 and 1999 focused on acquiring additional interest in Minera, the holders of 100 % Interest, subject to the 24.9 % Net Profits Interest, of the San Jose de Gracia Property. The Company also expended resources in compiling data from the San Jose and organizing next stage development activities, including the retaining of exploration advisors, First Point Minerals Corp., Vancouver, B.C. Canada. In February, 2000 the Company commenced its next stage of activity at the San Jose Property, as advised by First Point Minerals. (See "Phase II Exploration Activity", attached as Exhibit "B.6". Item 3. Properties: - ---------------------- The Company presently maintains its executive offices at 5215 N. O'Connor Blvd., Suite 200, Irving, Texas 75039, at a rate of $ 1,250.00 per month, plus utilized services. The Company renewed its lease for 1 year, commencing April, 2000. Pansy Lee Mine, Winnemucca, Nevada: - ---------------------------------- In October, 1937, the Company acquired approximately 560 acres of mining claims in Humboldt County, Nevada, which claims surrounded a hard rock mining prospect. For the next several years, the Company engaged in exploring this property, including the drilling of a 900 Foot mine shaft and the installation of a flotation mill circuit for potential production. Although the Company 18 reports the following Production from the Pansy Lee Mine in the early 1940's: 8,000 Oz. Gold, 700,000 Oz. Silver, 110,000 Lbs. Copper, and 2,000,000 Lbs. Lead; the mine was shut down by Executive Order in World War I, with little production reported thereafter. From 1944 through 1988, the Company involved itself with the leasing of its Pansy Lee Property, to various mining entities, including Newmont Mining (1986-1988). The Company reported no production or profits from such leasing activities. The Company had no significant mining activity outside of the property leases during this period, while it negotiated potential mergers with other mining entities. From 1989 to 1994, the Company had no significant activity. In 1998, the Company entered into a 5 Year Lease / Purchase Agreement with Newcrest Resources, Inc., Australia on the Pansy Lee Property. (See Exhibit "2.1") Terms of the Lease were as follows: 1. 1st Year (1/23/98): $ 50,000. 2. 2nd Year (1/23/99): $ 100,000. 3. 3rd Year (1/23/00): $ 150,000. 4. 4th Year (1/23/01): $ 250,000. 5. 5th Year (1/23/02): $ 250,000. A Purchase Price of $ 2,000,000. was to be due at the end of the Lease at January 23, 2003. The Company retained a 2.5 % Gross Smelter Royalty on any and all production. The Company received the first year's Lease Payment from Newcrest in January, 1998. However, Newcrest terminated the Lease in 1999, and ceased all U.S. operations. During the time of Lease, Newcrest performed the following work on the property: o sampling and grid mapping o IP/resistivity and ground magnetic surveys o three 1,500 foot reverse circulation holes drilled. The Company has not performed any recent work of its own on this property, as it focuses its resources on the San Jose de Gracia Property, Sinaloa State, Mexico. San Jose de Gracia Property: - ---------------------------- The claims referred to as the San Jose de Gracia claims contain approximately 4,160 hectares of mining concessions. Prior to the Mexican Revolution in 1910, over 1,000,000 ounces of gold were produced from these concessions. There has been approximately $ 1,800,000. expended in acquisition costs, and $ 2,300,000. expended in exploration costs during the period 1996 to December 31, 1999. This exploration work has provided the confirmation of vein deposits at the San Jose Property. (See Pamicon Report - Exhibit "2.5."). The claims which comprise the San Jose de Gracia Project, consist of four contiguous groups of mineral claims; San Jose de Gracia I; San Jose de Gracia II; Santa Rosa, and Finisterre. The San Jose de Gracia I claims were acquired by Minera Finesterre S.A. de C.V. ("Minera") effective May 15, 1997, from parties at arm's length to the Company, under agreement dated May 15, 1995 in consideration for cash payments totaling $ 690,000. The San Jose de Gracia II claims were acquired over a two year period, pursuant to an agreement dated May 14, 1994, from parties at arm's length to Minera, in consideration for cash payments totaling $ 200,000., and assumption of a $ 450,000. term loan. As at February 28, 1999, all the required cash payments had been made by Minera and the term loan retired. Minera obtained an option to purchase interests totaling 100% in the Santa Rosa claim, from parties at arm's length to Minera and the Company, pursuant to three separate agreements dated May 15, 1996. The option was exercisable by making payments totaling $ 250,000. in two equal annual installments due May 15, 1997 and May 15, 1998, subject to Minera's receipt of certain legal documentation from the vendors. The initial installment of $ 125,000. was made by Minera on the first payment date and since that time additional payments on account of the remaining purchase price and taxes have been made to various vendors by Minera as legal documentation has been produced. Minera estimates the remaining acquisition costs relating to the San Jose claim to be $ 70,000., including applicable value added tax. The balance of the acquisition costs will become payable upon the vendors tendering the required documentation. 19 The Finisterre claims were staked by, or on behalf of Minera. Consideration consisted solely of related filing fees. The Company completed metallurgy work in 1999 to confirm the ability to extract gold and other minerals from ores contained at the San Jose Property. The results of this work confirmed that 87 % - 95 % recoveries of Gold and other Minerals are possible, using a basic gravity flotation circuit. (See Hazen Metallurgy Report - "Process Development on Tres Amigos Ores"; attached as Exhibit "2.3.") Title to the claims are held in the name of Minera Finisterre S.A. de C.V., ("Minera") a Mexican Corporation, in which the Company currently holds a 26.7 % of the outstanding common stock and interest related thereto. The remainder of the Interest in Minera is held by Golden Hemlock Explorations, Ltd. ("Hemlock"). The following information is extracted from a report (the "Pamicon Report") dated September, 1999, by Pamicon Developments Ltd., Vancouver, British Columbia, Mr. Charles K. Ikona, P. Eng, a copy of which has been attached to this Form as Exhibit "2.5.". Location, Access and Topography - ------------------------------- The San Jose de Gracia Mining District is located in the northeast portion of the State of Sinaloa some 156 kilometers northeast of the city of Culiacan. Access is by a mountainous road 78 kilometers from the municipal seat of Sinaloa de Leyva, or by air, to a gravel air strip on the property, suitable for small to medium sized aircraft. The village of San Jose de Gracia is located in the project area and offers a labor source as well as limited support facilities. Geographical co-ordinates of the project are 26'09'N latitude and 107'53'W longitude. Topography on the property is characterized by ravines and low mountain ranges, with moderate to steep slopes. Elevations range between 400 and 700 meters A.S.L. Extensive unpaved roads and tracks offer four-wheel drive access to much of the project area. Climate is semi-tropical with a dry season extending from mid November to the end of June and a rainy season from July to mid November. Summers are hot with temperatures to 40(degree)C and winters mild. Vegetation consists of mesquites, thorny bushes and shrubs. Some deciduous trees grow in the ravines with abundant underbrush growth during the rainy season. Limited surface water in flooded old workings is available for drilling in several areas of the property. Process water is available from wells in the main river valley near the village but may also be available from possible aquifers elsewhere on the property. Concessions - ----------- The following concessions, with the exception of the Santa Rosa Claim previously described, are 100 % owned by Minera Finisterre: CLAIM NAME TITLE OR FILE NUMBER HECTARES ---------- -------------------- -------- San Jose 190244 27.0000 El Real 190736 2332.0000 Tres Amigos 2 192290 54.4672 Lost Tres Amigos 172216 23.0000 San Sebastian 184463 40.0000 La Nueva Esperanza 209870; formerly 162840 40.0000 Guadalupe 189470; formerly 16335 77.0000 Nuevo Rosario 184999 32.8781 Mina Grande 163578 6.6588 Ampliacion de Santa Rosa 163592 25.0000 Santo Tomas 187348; formerly 178649 312.0000 San Nicolas 163913 55.5490 La Libertad 172433 97.0000 La Union 176214 4.1098 Ampliacion de San Nicolas 183815 17.4234 El Real 2 201128 393.8510 Piedras de Lumbre Uno 201946 40.2753 Piedras de Lumbre 2 201947 34.8484
20 Piedras de Lumbre 3 203467 4.3098 Finisterre Fraccion A 203285 18.7856 Finisterre Fraccion B 203286 173.4966 San Miguel 183504 7.0000 Santa Rosa 170557 31.4887 San Andreas 192288 385.0990
Total "4,160 hectares more or less" History - ------- Gold was originally discovered on the property in 1828 near the small settlement of El Rosario in the north central portion of the area. Work was restricted to the areas of Mina Grande and Mina San Pablo during this period. Further work in the 1870's, led to additional production from other original mines in the area. In 1893 the first ore body in the Purisma Creek area was discovered. From 1892 - 1895 these ore bodies are reported to have produced some 470,000 ounces of gold at an average grade of 3.48 oz Au/ton. In 1895 the La Prieta area was discovered which resulted in additional production. The mines produced until 1910 when the Mexican Revolution halted mining activities. Total Production during the period 1828 until 1910 is estimated at 1,000,000 oz. The mines were returned to private control in 1918 with resulting sporadic production until present. This production appears to have been hampered by lack of financial and technical resources. Material mined during this later period was salvaged from old operations, with no organized attempt to define new reserves. By 1977 the present underlying vendors to Minera Finisterre succeeded in acquiring control of most of the district, and installed a 70 ton per day flotation concentrator. Preliminary modem geological surveys of the area were started in the 1990's by Asarco and Penoles, the Mexican state mining company. Minera Finisterre subsequently acquired the property and continued some exploration work, although most of its financial resources were expended in erecting a 200 ton per day concentrator on the property. Golden Hemlock Explorations, Ltd., Vancouver, B.C. ("Hemlock") obtained an option to acquire control of Minera Finisterre and commenced work on the property in 1997. This development work, performed for Hemlock by Perforaciones Quest de Mexico (PQM), consisted primarily of core drilling, along with trenching and mapping. In 1998 Pamicon examined the results of PQM's work, in order to calculate possible mineral reserves developed by the drilling, and to review the general status of the property. Results of this examination were presented in a Pamicon report of September 1998. Subsequently, during the first half of 1999, the Company and its agents arranged to collect samples for metallurgical testing. Thereafter, In July - August 1999, a short survey, sampling, and mapping program, under the direction of T.C. Scott and M. Mitchell, P.Eng. (Pamicon), was conducted to address some problems with the PQM data noted in the 1998 review. Geology - ------- Geologic characteristics of the San Jose de Gracia Property, including: A. Regional Tectonics; B. Structural Trends; C. Magmatic Intrusion Trends; and, D. Mineralization Trends; are described in detail in the Pamicon report. Review of 1997 Field Work - ------------------------- The Pamicon review of the 1997 field activities focuses primarily on the results of the diamond drilling, and the reported trenching conducted by PQM. Eight areas of the property were tested with 64 drill holes, which produced an accumulated length of approximately 6500 meters of NQ core. In addition, the Gossan Cap and the La Purisima were reported to be extensively trenched. Tres Amigos Structure - --------------------- The 1997 drill program at Tres Amigos comprised 26 holes drilled at various azimuths because of terrain constraints. While the near orthogonal drill pattern was not ideal for assessing the Tres Amigos vein structure, extrapolation of data between the idealized Mine Grid Sections, East (330) and 21 North (060), provided enough continuity to indicate its tenor and trend. Many narrow, seemingly spurious hanging wall intercepts were attributed to intermittent north striking, steeply dipping veins of the Orange Tree grouping. It is not possible from drill logs to identify these structures with any certainty, nor, to separate their possible contribution to the grade of the mineralized blocks depicted. The recently conducted re-survey of drill holes (August, '99), has increased the confidence level in the spatial relationship between the various mineralized intercepts encountered in the Tres Amigos brecciated vein system. Several auriferous veins, occurring approximately 35 meters into the hanging wall of the Tres Amigo vein, were previously interpreted as spurious. On sections east of Section 5078E, these now appear to define a second mineralized structure (the Quarta Amigo), of similar orientation and character as the Tres Amigos. The significance of this mineralized breccia vein, possibly en echelon, lies not only in its ore potential, but also in that it may define a zone of dilation between the two structures. The mineralized, hanging wall splays of the Tres Amigos, comprising brecciated quartz-sulfide filled gashes and mineralized wall rock breccias, would be typical of such an environment. Similarly, the hanging wall splays of the Quarta Amigo may signal the presence of additional en echelon structures and dilation zones occurring to the northeast. Conformation and delineation of these zones could greatly increase the systems mineral potential. In preparation of the resource estimate for the Tres Amigos area, the following observations and their possible inferences were also apparent: o Based primarily on the distribution of gold, anastomosing or sheeted mineralized zones are depicted as striking approximately 060 with a northerly dip which may vary from 20 to 60(degree). o The mineralized zones appear to crosscut all sedimentary, volcanic and intrusive lithologies. o Significant silver, copper, zinc and lead values were encountered in the drill holes but a definitive correlation between gold and individual elements is not apparent. o Several drill holes encountered the sedimentary lithologies which make up the pre-Tertiary basement rock for the region . The dramatic difference in the depth of the sediment interface in adjacent drill holes, as seen in Sections 5037E, 5078E, 5035N and 5080N is in sharp contrast to the regularity of the Tres Amigos structure. This suggests that considerable faulting occurred prior to the development of the main mineralized structures. o Pamicon also noted that the auriferous, massive-sulfide vein intersected within the sediments at the bottom of hole SJG 047 is the only significant mineralization encountered below the Tres Amigos vein to date. Although of undefined orientation, adjacent drill holes to the west tend to eliminate all but an easterly dipping structure, that may or may not be directly related to the development of the overlying dilatation zone. With a grade of Au 7.5 g/t, Ag 15.5 g/t, Cu 0.09%, Zn 3.18%, and Pb 0.27% over 7 meters, including 1.5 meters at Au 23.1 g/t, Ag 42.5 g/t, Cu 0.24%, Zn 8.0% and Pb 0.83%, this structure possibly represents a feeder channel for the mineralizing fluids that permeated into the Tres Amigos system. Delineation of this structure is a priority, as it offers the potential for encountering mineralization in an environment similar to that of La Prieta; and, it also offers the potential for manto style mineralization, developed within calcareous members of the basement sediments. La Cecena Workings - ------------------ The La Cecena workings are located 200 meters SW from the Tres Amigos workings and drifts northerly into the footwall of a mineralized structure which, based on similarities in orientation and mineral tenor, is interpreted to be an extension of the Tres Amigos mineralization. Drill hole 97-50, collared approximately 70 meters to the west of the La Cecena workings, was oriented at 063(degree) at a -80(degree)dip. The intention of drilling this diamond drill hole was to test the La Cecena structure, which strikes 049' and displays a variable northerly dip of 45(degree) to 65(degree). The following comments are based on a review of the drill logs and assays of drill core for this hole. o Andesite tuffs breccias and porphyries dominate the lithologies encountered in this 155.5 meter diamond drill hole. Sedimentary, felsic and andesitic clasts were noted in a 2 meter breccia zone at 73 meters. The rhyolitic sequence was not encountered, however a 4 meter quartz-feldspar porphyry dyke (?) Was intercepted at 113.5 meters. 22 o A zone of significant mineralization was encountered between 69 and 80 meters that may reflect a continuation of mineralization encountered in the workings. Encouraging assay results of 5.2 g/t Au - 16.6 g/t Ag and 8.8 g/t Au - 10.8 g/t Ag were returned from 2 samples on both the hanging wall and foot wall of the zone respectively. Sulfide mineralization associated with the zone include sphalerite, galena and minor pyrite. Significant copper values of 0.22% reported with the HW sample and 0.78% Pb with the FW sample. Anomalous precious and base metal values were returned from the intervening samples. o Faulting and brecciation persisted throughout the section drilled, with prominent graphite on minor slips. o The dominant alteration is chlorite, with epidote becoming more pronounced at depth, along with fractures filled with talc/gypsum. o Recent surveying and sampling suggests a probable correlation between Tres Amigos and La Cecena; which upon confirmation would yield a mineralized structure in excess of 450 meters. Rudolphos Workings - ------------------ Drill holes 97-48 and 97-49 were collared 270 meters SE of the Tres Amigos portal adjacent to the Rudolphos workings and tested a mineralized structure that lies sub-parallel to the Tres Amigos structure. Hole 97-48, an inclined hole, penetrated 100 meters of the Lower Volcanic Sequence that consisted of andesitic tuffs with diorite porphyry clasts, polymictic conglomerate, rhyolitic tuffs and andesite porphyry. The hole terminated in 20 meters of basement sediments. Hole 97-49, a vertical hole from the same setup, penetrated similar lithologies comprising 128 meters of the Lower Volcanic sequence before terminating in 17 meters of basement sediments. A shallow northerly apparent dip is indicated for the volcanic/sediment interface. o Hole 97-48 encountered 40 meters of highly anomalous zinc mineralization between 36 and 76 meters which included several 1-2 meter intervals grading between 1% and 4.8% Zn. Anomalous Au values up to 2.5 g/t were encountered between 64 and 69 meters. o Mineralization in 97-48 is of special significance as it is hosted by heavily quartz veined and brecciated rhyolitic tuff, with total sulfides of up to 10%. o The presents of silicified sedimentary clasts within the quartz veining is strongly suggestive of a hydromagmatic breccia. Similar breccias have been reported in the Tres Amigos and La Cecena drilling. o Hole 97-49 encountered several segments of similar mineralization with elevated gold values in which andesitic rocks were the primary host. o These drill holes indicate that significant mineralization occurs not only in the andesitic stratigraphy but also within rhyolitic, volcanic rocks, with structural complexities being the main controls on the location of mineralization. o Interpretation of results suggest the presence of at least two sub-parallel mineralized structures with a moderate NW dip. Neither, however, appear to correlate with the targeted Rudolpho surface workings which is in their foot wall. o Even though initial gold values are low, the drilling has indicated Rudolphos to represent a strong system of mineralization, worthy of additional drill testing. o The spatial relationship of the Tres Amigos and Rudolphos systems suggests they are not contiguous and represent separate but similar centers of mineralizing events. Gossan Cap Area - --------------- In the vicinity of the Gossan Cap area, which lies to the southeast of the San Pablo and Mina Grande underground workings, 12 diamond drill holes were completed. Drilling targeted an auriferous zone identified as a result of 23 surface rock chip sampling conducted during a property inspection by Teck Resources Inc. in 1996. The drill collars have as yet to be surveyed. Field mapping and diamond drilling indicates the bedrock of the Gossan Cap area to be dominated by basement sediments, in contrast to the anticipated Tertiary volcanics. There are, however, several aspects of the drill results that warrant comment. The following observations are based on drill log descriptions: o Except for the intrusion of a few mafic and felsic dykes, the rock cored was comprised of siltstone, mudstone, graphitic black shales and calcareous members of the Paleozoic basement for the property. No volcanic rocks comparable to those found overlying the basement rocks at surface appear to have been encountered in the drill holes. o Intense fracturing and brecciation is evident throughout the core. o Fe and Mn oxides are prominent to a depth of approximately 35 meters, below which sulfides, primarily pyrite, are dominant. o Drill holes 97-15, 17 and 26 were drilled to depths of 55.77m, 54.86m and 66.45m respectively. All other holes were less than 46 meters in depth. o Although elevated gold values (100-200 ppb) were encountered in most holes, few samples returned values >500 ppb Au. o Trace levels of silver and base metals increase markedly in the sulfide zones at the bottom of the holes. o Core recoveries are generally poor in all holes and likely influenced drill core assay results. o Gold values attributed to surface sampling are not reflected in drill core assays. o Elevated zinc values associated with a quartz veined, tectonic breccia in Hole 97-15, between 10.6 and 14.8 meters, suggests that an extension to the mineralized structure at Pozo Mina Grande, may have been intersected. Inferred from these observations are the following: o Surface weathering probably extends to a depth of approximately 35 meters. o Either the sediments originally contained only elevated gold values, or, gold was lost as the result of poor recovery and /or surface leaching. o Gold values from surface samples may be residually derived from erosion of auriferous volcanic cover. o Mineralized structures within sediments may be sub-vertical, thus negating their effective detection by vertical drill holes. The drilling in the Gossan Cap area has neither confirmed that surface mineralization continues to depth, nor has it satisfactorily explained the results obtained from previous surface sampling. However, drilling confirms that elevated precious and base metal values do occur in structurally prepared areas within the basement sediments. It will be important to incorporate the data from the Gossan Cap area into the geological data base for the property, to attempt to explain the high values from surface trench samples. La Union Area - ------------- A total 716.87 meters of diamond drilling in 8 holes tested the down dip continuity to the fissure veins exposed in the underground workings at La Union. The diamond drill holes encountered a Lower Volcanic Sequence dominated by felsic and mafic porphyries, heterolithic breccias and the basement sediments. Phyllic and argillic alteration is extensive within these well fractured rocks especially where brecciated quartz-chlorite-sulfide veins were encountered. Significant assay results of 12.92 g/t. Au over .5 meter intersection, and 8.99 24 g/t Au over 1 meter, were encountered. The results are encouraging and the area requires further evaluation. La Purisima Area - ---------------- The lower reaches of the Arroyo Purisima, between the La Cruz and El Salto workings and the area around Trench 5 were tested with 1,043 meters of diamond drilling in 14 holes. Bedrock includes a variety of well altered, andesitic to felsic porphyries, tuffs and breccias that are laced with silicified zones, stockworks and quartz breccias. Hematitic and argillic alteration is extensive. Pyrite at 1 to 3% is pervasive. The core recovery from these 14 holes is extremely poor, and ranged between 40 and 60%. This sheds doubt on the accurateness of the drill assay results, and may account for the surprisingly few core samples with Au > 0.2 g/t from an area where trench sampling commonly returned Au values of 1 to 3 g/t. Contrary to earlier reports, assays show that elevated gold values occur in conjunction with anomalous concentrations of base metals in hematitic and silicic structures, as in hole 97-55 at 24.4m: 5.2 g/t Au, 28 g/t Ag, 0.6% Cu, 1.8% Zn, 0.35% Pb over 3 meters, and at 114 meters: 2.1 g/t Au, 2.9 g/t Ag, 0.08% Pb over 2 meters. Hole 97-56A (location unknown) similarly reports approximately 1.0 g/t Au with 0.05 Pb over its entire length of 12.2 meters. Trench 5, within the La Purisima area, is an area of extensive mechanical excavation. While sample numbers and significant results are shown, there is no documentation of sample types and lengths, or of the rock types collected during sampling. It is obvious that there are several areas that returned very encouraging results. Unfortunately, without substantial geological data, it is not possible to evaluate the significance of the results at this time, other than to say that the area should be re-sampled and mapped. Palos Chinos Area - ----------------- Drill hole 97-63 (-60/057), was collared on the roadside approximately 100 meters west of the Palos Chinos-Tajo Verde workings. These workings explore at least two parallel structures oriented at 340/45SW at an elevation of 495 meters (CRM 1981). This elevation appears to equate to 561 meters on the PQM maps with a surveyed drill collar elevation of 565 meters. A target depth of 80 meters was anticipated. The drill hole intercepted a wide zone of hematicized breccia and quartz stockworks, which contain up to 5% pyrite and noticeable chalco-pyrite between 46.4 meters and 87.1 meters. The arithmetic average for 29.6 meters starting at 52.7 m is 2.65 g/t Au, which includes sections grading 9.25 g/t Au over 0.73 meters and 8.45 g/t Au over 2.7 meters. This wide mineralized structure may possibly be interpreted as extending the Palos Chinos mineralization an additional 80 meters down dip. The 1999 fieldwork at SJG included a survey traverse from the Palos Chinos portal to drill hole SJG 063 and the Tajo Verde portal. This will provide spatial control for follow up drilling. Dead Zone Area - -------------- The Dead Zone was tested with Drill Hole 97-64. A soft, medium gray, andesitic porphyry, characterized by 5 to 10% disseminated, fine grained, black hematite and streaks of red hematite, was encountered throughout the hole. This rock was cut by numerous 0.3 to 2.0 cm. gypsum veinlets. The core recovery was extremely poor (<25%) to a depth of 123 meters; thereafter it improved markedly (> 95%). As there were no corresponding changes in lithology, etc., the marked change in core recovery at 123 meters may reflect the depth of surface weathering. Assay results for both core and sludge samples are generally low. The highest value returned for all metals tested was 41 ppm zinc. No change in tenor is evident below 123 meters. Unfortunately, references to any specific alteration facies were omitted from the diamond drill logs. However, the presence of gypsum combined with extremely low metal value possibly suggests an environment of leaching by acid sulfate, hydrothermal waters. Reserves - -------- The following information is condensed from the Pamicon Report. Full tables and grid sections are included in the Report. Pamicon deduced that the data contained within its report indicates extensive potential of the San Jose de Gracia as generally represented by: o A large property area, geologically favorable for the deposition of significant concentrations of gold. 25 o Historical production estimated to be in excess of 1,000,000 oz. of gold from some 67 known historical workings. o Recent work by the Company demonstrating potential reserves on several areas of the project. The Pamicon Report notes that while a large portion of the property requires additional geological and geo-technical review prior to determining its potential; several areas, including the Tres Amigos - La Cecena, Rudolphos, Palos Chinos, and possibly the La Union and La Purisima areas, have sufficient results to justify additional immediate work. Of the above mentioned areas, only the Tres Amigos - La Cecena area has received sufficient work to allow preliminary estimate of possible tonnage and grades to be made. Where exposed on surface, the Tres Amigos structure has been developed by three short adits over a vertical extent of some 25 meters and by several shallow trenches. The lower adit (Level#1) is the longest at 83 meters. In this area it appears as a structurally controlled vein type deposit, within competent rhyolites. General altitude appears to be 060(degree) dipping 50-60(degree) to the north. Width varies between 2 to 4 meters averaging approximately 3 meters. The vein is highly silicified, and contains extensive massive sulfides, primarily pyrite, but including some base metals (Copper, Zinc and Lead). The most important economic constituent is gold, together with lesser silver. In 1997 Minera completed 26 diamond drill holes in the Tres Amigos area. Results from these Drill holes, along with sampling of the adits were employed for preliminary resource calculations. To date the Tres Amigos area has been drilled over a strike length of 160 meters to a depth of 250 meters. The La Cecena area has been included with the Tres Amigos as it is quite possible that the La Cecena structure as indicated by old workings and drill holes 97-53 represents an extension of the Tres Amigos structure to the south-west. Should this be the case, a strike length of 450 meters, open to the south / west might be postulated for the combined area. Classification of Resources - --------------------------- Mineralization in the Tres Amigos area is classified as "Indicated Mineral Resources", and "Inferred Mineral Resources", in accordance with the proposed classification under the International Reserves Definition Initiative reported in the Bulletin of the Canadian Institute of Mining and Metallurgy, Vol. 90, No. 1017, Feb. 1998, pp. 44-45. It is anticipated that additional work will allow portions of these to be moved into a "Measured Mineral Resource" class and possibly into "Proven / Probable Mineral Reserve" upon satisfactory final resolution of metallurgy and economics. Detailed reserve results on a section basis, are presented in Appendix C of the Pamicon Report. (See Exhibit "2.5.") Interpretation - -------------- New cross sections were plotted for the Tres Amigos area, employing the re-survey of the area conducted during August, 1999. These show the main Tres Amigos zone to have a relatively consistent strike and dip ( 056(degree) @-60 (degree)N) over the area drilled. In addition, several of the new sections (5078, 5097, 5114E) appear to indicate the presence of a second zone (tentatively named the Quarta Amigo) sub parallel to the Tres Amigos and some 35 meters in the Hanging wall. Both of these zones appear to be structurally controlled. Opposing movement on such a set of sub-parallel structures can cause dilation or wrench type secondary structures between them. The presence of these may be indicated by a number of intersections which previously were interpreted as a significant flattening of the main Tres Amigos zone at depth. In addition section 5078 appears to show the presence of these dilation structures in the hanging wall of the Quarto Amigo zone. This may indicate the presence of a third, previously unsuspected zone in this direction. Should this new interpretation of the controlling structural features prove correct, the implications for increasing the tonnage potential for the area are significant. Cutting of Grades and Results - ----------------------------- Assays from underground sampling and drilling demonstrate an extensive range in gold grades. Additional information is required to develop a statistically meaningful method of cutting assays. Cutting of grades at this time therefore is somewhat arbitrary. Table 2 (Pamicon) shows the tonnage and grade calculated on sections for various portions of the deposit and the uncut weighted average grade of 9.4 gm/t gold. Inspection of results show three tonnage blocks with gold grades substantially above the uncut average (zone T section 5078, zone C section 5078 and zone C section 5114). On a preliminary basis cutting the grade of these to the uncut average shows a cut weighted average grade of 7.4 gm/t gold. No cutting of silver and copper results appear warranted. 26 The Indicated Resource of the Tres Amigos area is therefore 161,696 Tonnes with an uncut average grade of 9.4 gm/t Gold, 15.15 gm/t Silver and 0.44% copper or a cut average grade of 7.4 gm/t Gold, 15.15 gm/t Silver and 0.44% Copper. Inferred Mineral Resource - ------------------------- On sections 4988E, 5037E and 5046E, significant portions of the main Tres Amigos structure require fill in drilling as the distance between drill intersections and/or underground sampling is greater than the described parameters used for calculation of Indicated Resources. An Inferred Resource of some 125,000 T can be postulated in this area. Grade is indeterminate but may approach the Indicated Mineral Resource averages. Metallurgy - ---------- In the spring of 1999, personnel under the direction of Mr. Wayne C. Henderson, P.E. of Lockwood Greene Engineers, Dallas, Texas, visited the property with the purpose of obtaining samples for metallurgical testing. Six samples were collected and forwarded to Hazen Research in Golden, Colorado for test work, under the direction of Mr. Henderson. (Metallurgical report attached as Exhibit "2.3.") The objectives of the work conducted by Hazen were to: a. Categorize the samples mineralogically, and chemically; b. Evaluate gravity separation, for the recovery of relatively coarse gold and silver; c. Evaluate flotation processing, as a method to recover gold, silver, and copper; d. Develop preliminary Process Design Criteria; and, e. Describe any obvious metallurgical complications. Hazen summarized the results of their work as follows. "When the results from the highly oxidized sample and results at course grinds were ignored, gold recovery varied between 87 and 95%, silver recovery varied between 67 and 94%, and copper recovery varied between 81 and 97% into a combined (calculated,) gravity cleaner concentrate and rougher flotation concentrate. For the sulfide samples, when target conditions (primarily grind size) were attained, the rougher flotation conditions were visually excellent, and there were no indications of interference from clays or other components that can interfere with results. No attempts were made to recover oxidized minerals." Of the samples processed at Hazen, three were Tres Amigos, with the others from elsewhere on the project. As only resource calculations were made on the Tres Amigos the following comments from Pamicon are made for these samples only. Pamicon, September, 1999: "Most of the test work was directed to the high grade adit sample (Sample 1). Results on this sample both in terms of recovery and concentrate grade (in gold) were excellent. However, while the Tres Amigos will undoubtedly produce some material of this grade and mineralogical tenor, run of Mine feed, considering overall resource and dilution will most likely be of much lower grade. Although yet to be completed, the possibility of producing an acceptable grade of concentrate from Run of Mine, Tres Amigos material, should be considered good". Phase II Exploration Activity Report: - -------------------------------------- The Company commenced Phase II exploration activities at the San Jose de Gracia Property on February 25, 2000. The Company's planned activities during this phase of work is outlined in the "Phase II Exploration Activity Report") attached hereto as Exhibit "2.6.". Item 4. Security Ownership of Certain Beneficial Owners and Management - -------------------------------------------------------------------------- The following table sets forth the amount and nature of beneficial ownership of each of the executive officers and directors of the Company and each person known to be a beneficial owner of more than five percent of the issued and outstanding shares of the Company as of December 31, 1999. The following table sets forth the information based on 3,739,907 common shares issued and outstanding as of December 31, 1999: 27 Beneficial Owner Common Shares Percent Ownership ---------------- ------------- ----------------- Great Sands Mining Group Trust 433,000 11.58 % (Darryl Butler, Beneficial Owner) K.D. Diepholz 240,926 6.44 % Douglas Metcalf 50,000 1.34 % Vantage Ltd. Trust 50,000 1.34 % (Douglas Metcalf, Beneficial Owner) Wayne C. Henderson 50,000 1.34 % Melvin E. Tidwell 48,312 1.29 % Brad J. Saulter 64,675 1.73 % Dynacap Group Ltd. 115,124 3.08 % ------- ------- All Officers, Directors And Beneficial owners as a Group (6 Persons) 1,052,037 28.13 % Consultants: Matrix Group Beneficial Owner - Charles Smith 125,000 3.34 % Curtis Sales 25,000 .67 % ------- ------- All Officers, Directors, and Beneficial Owners as a Group, Including consultants: 1,202,537 32.15 % o The Company has issued shares of its common stock for services in the past 5 years to Dynacap Group Ltd. a Texas Limited Liability Company, a private consulting firm. Mr. Charles E. Smith, consultant to the Company, and Mr. K.D. Diepholz, Chairman and CEO of the Company are the managers of Dynacap Group Ltd. Mr. Smith and Mr. Diepholz disclaim all but 5 % ownership of Dynacap Group Ltd. o Viking Gold Ltd., L.P., a Texas Limited Liability Partnership, is the holder of 42,476 common shares of the Company. These shares were received through the exchange of certain laboratory equipment for shares, and through direct purchase of common shares and through direct exercise of options of the Company. Dynacap Group Ltd. is the manager of Viking Gold Ltd. o There exist 733,000 Options of the Company, which were issued to Great Sands Mining Group Trust and Vantage Ltd. Trust, the purchasers of 483,000 common shares in 1998 and 1999, for $ 733,000. cash. These 733,000 Options are exercisable at a price of $ 2.50 for a period of two years terminating November 2001. o There exist 40,000 "A" Warrants at $ 8.00, and 40,000 "B" Warrants at $ 12.00; such warrants being issued with the conversion of promissory notes of the Company into common shares in 1996. The "A" and "B" Warrants are exercisable within 90 days of the Company's common stock trading on any exchange for the average closing bid price over 5 days of $ 12.00., and $ 16.00, respectively. None of the foregoing have any right to acquire additional shares of the Company. There is no existing arrangement which may result in a change in control of the Company. 28 Item 5. Directors and Executive Officers of Registrant: - ----------------------------------------------------------- The following table lists the names and ages of the executive officers, directors and key consultants of the Company. The directors will continue to serve until the next annual shareholders meeting, scheduled for May, 2000, or until their successors are elected and qualified. All officers serve at the discretion of the Board of Directors. Name Age Position Held Since ---------------------------------------------------------------------- K.D. Diepholz 40 Chairman May 1997 1140 Hidden Ridge Chief Executive Officer May 1997 Irving, Texas 75038 Director 1995 Douglas Metcalf 36 Secretary May 1997 46 Lakeshore Drive North Director May 1995 Westford, Ma. 01886 Wayne C. Henderson 60 Director May 1995 5502 Lafayette Lane Vice-President / Frisco, Texas 75035 Mineral Properties May 1997 Melvin E. Tidwell 55 Director May 1994 4804 Picadilly Place Tyler, Texas 75703 Brad J. Saulter 39 Vice President - May 1998 922 Signal Ridge Investor Relations Rockwall, Texas 75087 K.D. Diepholz - Graduated Lake Land College, Southern Illinois University; Communications and Business Emphasis; Regional Director - Fidelity Union Insurance and Investment, Dallas, Texas (1980 -1983); President - KWD Properties Corporation, Mattoon, Illinois (1983 - 1989); a privately-held Oil & Gas Exploration and Development Company involved in all phases of The Oil & Gas Business, and Various Types of Partnerships; Vice President - American Investment Retirement Corporation, Phoenix, Arizona (1990 - 1991), Involved in Program Structuring for Pension Accounts; Vice President - Ideal Securities, Inc., Dallas, Texas (1992); Program Structuring and Marketing Management; President - DP Phoenix, a Real Estate Investment Company, Phoenix, Arizona (1991 - -1992); Investment Program Structuring, Real Estate Acquisitions, General Management; Director: Farm Partners, Inc., Dallas, Texas (1992 - Present); General Management of this General Partner to Precious Metals Limited Partnership; DP Group Ltd., Dallas, Texas (1993 - Present); President of this independent Marketing firm; Dynacap Group Ltd., Dallas, Texas (1992 - Present); President of this Consulting and Management firm, directing the management of certain Limited Liability Investment Companies; DynaResource, Inc. (f/k/a: West Coast Mines, Inc.), a Junior Public Mining Company, Dallas, Texas (1994 - Present); Chairman, Chief Executive Officer, Treasurer, and Director of this junior resource exploration and development Company. Special Skills in the areas of Business Development, Project Planning, Corporate Financing, Acquisition Analysis, Investment Program Interpretation and Structuring. Douglas E. Metcalf - Graduated Cornell University, B.S. degree 1986; Executive Vice President - OHMS International, an International Import / Export Consulting Company (1987 - 1991); President - Quantum Ventures Corporation, a holding company involved in the development of new business enterprises (1992 - Present); Secretary and Director - DynaResource, Inc. (f/k/a: West Coast Mines, Inc.), a junior resource exploration and development Company, 1995 - Present. Mr. Metcalf has worked extensively with junior mining companies over the past 10 years; with direct involvement in the areas of: recruiting technical personnel; acquisition of milling and refining equipment; financing; and, acquisition. Wayne C. Henderson - Research Engineer - Bethlehem Steel Corporation, Homer Research Laboratories - Bethlehem, Pa.; development of new steel making processes; Ph.D. Candidate - Lehigh University, Department of Chemical Engineering, Bethlehem, Pa., developed mathematical modeling procedures which used real-time data to develop dynamic process models for simulation control; awarded a National Science Foundation Fellowship; Senior Research Engineer - Inland Steel Company, East Chicago, Indiana; developed process simulation models 29 and process control strategies for a number of steel making processes and operations; developed forecasting control models for blast furnace, basic oxygen furnace, continuous casting, and hot and cold rolling mills; responsible for testing and design confirmation of then novel fluid-bed kiln design for producing high-reactivity metallurgical lime, resulting in a number of process and equipment patents; Project Leader - Kennecott Copper Corporation, Lexington, Massachusetts; led development and operation of 5 TPD Pilot Plant for the "Cuprion" hydrometallurgical process for extraction and recovery of metals from deep sea manganese nodules; Staff Process Engineer - Mobile Oil Corporation, Denver, Colorado; responsible for conventional heap leach and leach uranium process plant design, process engineering, and metallurgical development; Chief Process Engineer, Project Manager, Process Engineering Supervisor - Kennecott Minerals Company, Salt Lake City, Utah; Vice President Operations - Calmet Corporation, Colorado Springs, Colorado; responsible for day to day operations of custom toll processing plant (15 TPD) for recovery of gold and silver from high grade gold and silver ore concentrates using unique pressure cyanidation technology; Metallurgical Manager - Tonkin Springs Gold Mining Company, Elko, Nevada; responsible for bio-oxidation refractory gold process development; designed, constructed, and operated bio-oxidation testing facilities; Project Manager / Process Manager / Lead Process Engineer - Brown & Root, Inc., Houston, Texas, 1989 to 1996; provided project consulting for Atec Inc., U.S. Energy, Sutter Gold Venture, Atlas Goldbar, Inland Gold and Silver, Newmont Mining Corp., Homestake Mining, Santa Fe Mining, Equity Au, Inc., Dynacap Group Ltd.; Senior Project Engineer - Lockwood Greene Engineers, Inc., Dallas Texas; 1996 - Current; Vice-President of Mineral Properties and Director- DynaResource, Inc. (f/k/a: West Coast Mines, Inc.), a junior resource exploration and development company, Dallas, Texas, 1996 -Present; provide overall technical analysis of precious metals properties. Melvin E. Tidwell, P.E. - Professional Engineer, registered in California in 1977; Control Systems Engineer; Instrument Engineer on over 80 Projects Worldwide; Instrument Startup Engineer on over 50 Projects Worldwide; Affiliated / Associated with following Companies over the past 25 years: Weyerhaeuser Company, Howe-Baker Engineers, LaGloria Oil & Gas Co., IWATANI Electronics (Japan), EQM (Mexico), Kyodo Oxygen Co., Ltd. (Japan), Chin Yang Fine Chemical Co. (South Korea), Hankuk Glass Mfg. Co. (South Korea), Hunt Oil Co., Liquid Carbonics Co., Celanese Mexicana (Mexico), Grain Power Tucumcari Ltd., Jetco Chemical Inc., Claiborne Gasoline Co., Conoco, Chevron, Metano Gas (now Exxon), Union Oil, Texaco Angola, Petrofac, Alfurat (Syrian Oil Co.), Arco, Chevron / Placer Cego, Tidwell & Associates; with Engineering / Management Experience in the following Project Areas: Startup & Engineering - $ 160 Million Linerboard Paper Mill; Chief Instrument Engineer - chemical division; DEA Gas Treating & Sulfur Recovery Plant; One Part / million H2 Plant; Startup Hydrogen Plants; H2 / CO Cosorb Plant; Startup H2 / CO synthesis Gas Plant & Cold Box; Startup Ethanol Plant; Specialities Chemicals Expansion - Foxboro 200 instruments; Startup & Calibration 75,000 BPD Crude Distillation Facility; Instrument Engineer - 1st Oxygen Enrichment Cope Unit; Instrument Engineer, Startup & checkout - 30 TPD Selectox SRU; Instrument Engineer - Offshore Oil & Gas Production Facility; Lead Instrument Engineer - 60,000 BPD Oil Production Facility; Instrument Checkout, Calibration, and Inspection prior to startup - Selectox Sulfur Units (Honeywell TDC 3000 DCS) (Foxboro 760 Electronics Controllers); Startup Amine Plant and Sulfur Plant, and System Engineering (Foxboro and Westinghouse PLC); Instrument Engineer, Field Startup and Checkout - - CCR, HDS, MTBE, Hydrogen and Cryogenic Plants. Founder, President - Tidwell & Associates, an private engineering consulting Firm (1993 to Present); Director - DynaResource, Inc. (f/k/a: West Coast Mines, Inc.), - a Junior resource exploration and development Company, Dallas, (1994 to Present). Brad J. Saulter - Attended University of Texas, Austin, Texas; Marketing Department of Metagram, Inc., a Dallas National Marketing Company; Regional Manager for Lugar, Lynch, & Associates, A Dallas Financial Services Company, Involved in Sales & Marketing of Various Investment Products; Independent Marketing Consultant; Series 22 & 63 Securities License; Vice President / Marketing - Dynacap Group Ltd. (1992 - Present); Director: Farm Partners, Inc. (1992 - Present), Vice President - Investor Relations - DynaResource, Inc., a junior resource exploration and development company, Dallas, Texas (1995 to Present). Consultants - ----------- Charles Smith. Mr. Smith graduated from Boston University, Boston, Massachusetts in 1979 and since that time has been a Certified Public Accountant involved in all phases of business including the audit of companies and tax matters. He is a consultant to various companies. Mr. Smith's business affiliations the past five years follow: Chairman - Dynacap Group, Ltd. - a consulting and management firm - - 1992 to the present. Sole proprietor as a Certified Public Accountant - 1983 to the present. Sole officer and Director - MC Cambridge, Inc. - a financial consulting firm - 1997 to present. Sole officer and director - Asset Servicing Corporation - a leasing company - 1998 to present. 30 Curtis Sales - Equity AU, Inc. - Mena, Arkansas (1992 - 1994); Lab Director, Assistant to Mr. Natvar Patel; West Coast Mines, Inc. -Lake Havasu, Arizona (1994 - Present); Director of Lab Operations for DynaResource, Inc. (f/k/a: West Coast Mines, Inc.), a junior resource exploration and development company; Involved in all laboratory phases of analysis and extraction of precious metals. To the knowledge of the Company, no present or former director, executive officer, or person nominated to become a director or executive of the Company, or consultants to the Company has ever: 1.) Filed a bankruptcy petition by or against any business of which such person was a general partner or executive officer whether at the time of the bankruptcy or with two years prior to that time; 2.) Had any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); 3.) Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and 4.) Been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed suspended or vacated. Item 6. Executive Compensation - ---------------------------------- The Company currently is not paying, and has not during the past three years, except for the period January 1, 1997 to December 31, 1997 as described under Item 7. below, paid any cash compensation to officers, directors or executives. It does not have any pension, profit-sharing, stock bonus, or other benefit plans. Such plans may be adopted in the future at the discretion of the Board of Directors. Item 7. Certain Relationships and Related Transactions - ---------------------------------------------------------- 1n 1996 the Company issued shares of its common stock for the acquisition of the 24.9 % Net Profits Interest in the San Jose de Gracia property, Sinaloa, Mexico. These shares were issued to Dynacap / Mexico Resource Group LLC., a private Nevada Company. The Manager of the Dynacap / Mexico Resource Group was Dynacap Group Ltd., a Texas Limited Liability Company. At the time of this share issuance, the Manager of Dynacap Group Ltd. was also a director of DynaResource. The Company has paid management consulting fees to Dynacap Group, Ltd., a Texas Limited Liability Company, Dallas, Texas. The Chairman and Chief Executive Officer of the Company is the Manager of Dynacap Group Ltd. During 1996 and through May, 1997 the Company rented office space from Dynacap Group Ltd. Total amount paid for rent was recorded at $ 16,880. The Company is the current owner of 26.7 % interest in Minera Finesterre S.A. de C.V., ("Minera") a Mexican corporation, the holder of 100 % rights and claims to the San Jose Property. Golden Hemlock Explorations, Ltd., Vancouver, B.C. Canada, ("Hemlock"), is the current owner of 73.3 % of Minera. The Company advanced $ 42,800. cash on behalf of Hemlock in 1998 - 1999. These advanced amounts are recorded as accounts receivable. The Company expended $ 27,015. in 1996 and $ 30,170. in 1998 in legal expenses, in connection with litigation brought by the Company against Hemlock and Minera. In the resolution agreements to these litigations, the Company was awarded reimbursement of these total legal costs, ( $ 57,185.), plus related interest. The Company recorded these amounts as accounts receivable. The Company is not currently aware of any other material relationships or related transactions between the Company and any officers, directors or holders of more than five percent of any class of outstanding securities of the issuer. 31 Stock issued to related parties. Compensation paid to Officers and Directors. - ----------------------------------------------------------------------------- The Company has issued shares of its common stock for services to Dynacap Group Ltd., a Texas Limited Liability Company, a private consulting firm. Mr. Charles E. Smith, consultant to the Company, and Mr. K.D. Diepholz - Chairman and CEO of the Company, are the Managers of Dynacap Group. . Mr. Smith and Mr. Diepholz disclaim all but 5 % ownership of Dynacap Group Ltd. The Company has issued shares for services, and cash compensation as follows, to related parties or officers during the period 1997 - December 31, 1999: o In 1997, the Company issued 118,727 shares of its common stock for services rendered to Dynacap Group Ltd., recorded at $ 29,682. o In 1997, the Company issued 7,500 shares of its common stock for services rendered to Wayne C. Henderson, a director of the Company, recorded at $ 1,875. o In 1997, the Company paid $ 122,260. cash for services rendered to Dynacap Group Ltd. o In 1997, the Company paid $ 21,399. cash to K.D. Diepholz, Chairman, CEO, and Treasurer of the Company for services rendered; and $ 18,675. to Brad J. Saulter, Vice-President of the Company for services rendered. o In 1998, the Company issued 34,714 shares of its common stock for services rendered to Dynacap Group Ltd., recorded at $ 8,679. o In 1998, the Company paid $ 117,350. cash for services rendered to Dynacap Group Ltd. o In 1999, the Company issued 73,000 shares of its common stock for services rendered to Dynacap Group Ltd., recorded at $18,250. o In 1999, the Company paid $ 172,303. cash for services rendered to Dynacap Group Ltd. o In 1999, the Company paid $ 1,225. cash to Brad J. Saulter Vice-president of the Company, for services rendered. Item 8. Description of Registrant's Securities to be Registered - ------------------------------------------------------------------- Common Stock: The Company is authorized to issue 12,500,000 shares of common stock, par value of $0.01, of which 3,739,907 shares are issued and outstanding as of December 31, 1999. Holders of Common Stock are entitled to dividends when, as and if declared by the Board of Directors out of funds available therefore, subject to any priority as to dividends for Preferred Stock that may be outstanding. Holders of Common Stock are entitled to cast one vote for each share held at all stockholder meetings for all purposes, including the election of directors. The holders of more than 50% of the Common Stock issued and outstanding and entitled to vote, present in person or by proxy, constitute a quorum at all meetings of stockholders. The vote of the holders of a majority of Common Stock present at such a meeting will decide any question brought before such meeting, except for certain actions such as amendments to the Company's Certificate of Incorporation, mergers or dissolutions which require the vote of the holders of a majority of the outstanding Common Stock. Upon liquidation or dissolution, the holder of each outstanding share of Common Stock will be entitled to share equally in the assets of the Company legally available for distribution to such stockholder after payment of all liabilities and after distributions to preferred stockholders legally entitled to such distributions. Holders of Common Stock do not have any preemptive, subscription or redemption rights. They are entitled to cumulative voting rights under the Delaware Corporations Code. Under cumulative voting, minority shareholders may have the right to vote one or more members onto the Company's Board of Directors. All outstanding shares of Common Stock are fully paid and non-assessable. The holders of the Common Stock do not have any registration rights with respect to the stock. Transfer Agent and Registrar - ---------------------------- The Company's Transfer Agent is: Signature Transfer, Inc., 14675 Midway Road, Suite 221, Addison, Texas 75001, (972) 788-4193. 32 PART II: Item 1. Market Price of and Dividends on the Registrant's Common Equity and Related Matters. - -------------------------------------------------------------------------------- The Company is organized under the laws of Delaware, and its common stock is traded on the Nasdaq Over The Counter Bulletin Board Exchange ("OTCBB") under the symbol "WCMI". On June 27, 1996 the Company's shares were approved for trading on the Over the Counter Market. The following table sets forth, for the periods indicated, the high and low bid quotations (as reported by Nasdaq). The bid quotations set forth reflect inter-dealer prices, without retail mark-up or mark-down and without commissions; and may not reflect actual transactions. No dividends on the Company's common stock have been declared or paid since the Company's inception and no dividends are anticipated in the future. The Company's retained earnings in the foreseeable future are expected to be reinvested by the Company into the expansion of its Property development programs. The Company had 474 registered shareholders at December 31, 1999. Calendar Quarter Ending High Low ------------------------------------------------------ March 31, 1998 5.00 0.25 June 30, 1998 5.00 0.25 September 30, 1998 5.00 0.25 December 31, 1998 5.00 0.25 March 31, 1999 5.00 0.25 June 30, 1999 5.00 0.25 September 30, 1999 5.00 0.25 December 31, 1999 5.00 0.25 Item 2. Legal Proceedings - ----------------------------- In 1996 the Company was a plaintiff in legal proceedings brought against Golden Hemlock Explorations, Ltd. , Vancouver, B.C. Canada ("Hemlock"), Minera Finesterre S.A. de C.V., a Mexican Corporation, ("Minera"); and other named defendants. The Company's complaints were settled at December 20, 1996, through the entering into of the Amended and Restated Loan Agreement (the "ARLAG"). The ARLAG set forth the Company's right to retain the Net Profits Interest, and the Company retained certain loan repayment provisions and accelerated payback provisions related to the Net Profits Interest. The ARLAG was superseded by the Mine Operating Agreement ("MOAG"), (See Exhibit "2.2") in August 1998. Pursuant to the terms of the MOAG, Company Legal Fees in the amount of $ 27,015. related to these legal proceedings were obligated to be paid by Hemlock. The legal fees were recorded as accounts receivable. In 1998 the Company was the plaintiff in legal proceedings brought against Hemlock, Minera, and other named defendants. The Company's complaints were settled at August, 1998, with the Company acquiring a 25 % Interest in Minera Finesterre S.A. de C.V., the owners of 100 % Interest of the San Jose de Gracia Property, subject to the Net profits Interest; and, through the entering into of the Mine Operating Agreement (the "MOAG"), attached hereto as Exhibit "2.2." The MOAG sets forth the Company's Option to earn additional interest in Minera and the San Jose Property by expending $ 2,000,000. Cnd. in exploration and development costs on the San Jose Property through December, 2001. At the time of this filing, the company is involved in no legal proceedings, and does not anticipate any immediate legal proceedings. Item 3. Changes in and Disagreements with Accountants. - ------------------------------------------------------- The Company has not had any disagreements with its accountants regarding accounting and financial disclosure. Since 1996, The Company has engaged Mark L. Cleland, independent Certified Public Accountant, to conduct the audits of the company. Item 4. Recent Sales of Unregistered Securities. o In 1997, the Company issued 259,500 shares of common stock for exercise of 259,500 Options at $ 1.00. o In 1997, the Company issued 81,000 shares of common stock for the exercise of 81,000 Options at $ 1.50. 33 o In 1997, the Company issued 40,394 shares of common stock for the conversion of $ 160,000. of promissory notes, and related interest. o In 1997, the Company issued 126,227 shares of common stock for services recorded at $ 31,557.In 1998, the Company issued 34,714 shares of common stock for services recorded at $ 8,679. o In 1999, the Company issued 483,000 common shares and 733,000 options exercisable at $ 2.50 for a period of two years terminating at November, 2001 for $ 733,000. Cash. o In 1999, the Company issued 73,000 shares of common stock for services recorded at $18,250. The Company was the Seller / Issuer of the above securities, and no underwriters were used. No underwriting discounts, commissions or selling commissions were paid in connection with any of the prior sales of the company securities. All company securities issued were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933 (the "Act"); in that the transactions did not involve a public offering, and in that all purchasers or recipients were sophisticated investors who represented their intention to acquire the Company's securities for investment purposes only and not with the intent to re-sell or distribute. Item 5. Indemnification of Directors and Officers - -------------------------------------------------- Under the laws of Delaware and the Company's Articles of Incorporation, the Company's directors will have no personal liability to the Company or its stockholders for monetary damages incurred as the result of the breach or alleged breach by a director of his duty of care. This provision does not apply to the directors (i) breach of their duty of loyalty, (ii) acts or omissions not in good faith or involving intentional violations of law, (iii) illegal payment of dividends, stock repurchases, or stock redemption, and (iv) approval of any transaction from which a director derives an improper personal benefit. Directors may be responsible to the Company's shareholders for damages suffered by the Company or its shareholders as a result of a breach of their fiduciary duty. In so far as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted for directors, officers or person controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission each indemnification is against public policy as expressed in the Act and is therefore unenforceable. PART F/S. FINANCIAL STATEMENTS. - --------------------------------------- Incorporated into and forming an integral part of this Form 10 S-B are the audited financial statements for the Company for the years ended December 31, 1998 and December 31, 1999, together with the auditor's report and Notes thereon. These financial statements are incorporated herein as Exhibits "3.1." and "3.2." All financial information for the Company contained in this Form 10 S-B is prepared in accordance with accounting principles generally accepted in the United States. Item 1. Company Year End December 31, 1998. - -------------------------------------------- (Attached as Part III, Section 3, Exhibit "3.1.") Item 2. Company Year End December 31, 1999. - -------------------------------------------- (Attached as Part III, Section 3, Exhibit "3.2.") SIGNATURES - ---------- Pursuant to the requirements of Section 12(g) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, on March 31, 2000. DYNA RESOURCE, INC. By: /S/ K.D. Diepholz ------------------------------- Mr. K.D. Diepholz; Chairman / CEO On Behalf of the Board of Directors 34 PART III. EXHIBITS. The following documents are attached as Exhibits to this Form 10 S-B, and filed as an integral part of this Form 10 : TAB 1: - ------ EXHIBIT 1.1. Articles of Incorporation; West Coast Mines, Inc. EXHIBIT 1.2. By - Laws EXHIBIT 1.3. Articles of Amendment 1940 EXHIBIT 1.4. Articles of Amendment 1943 EXHIBIT 1.5. Articles of Amendment 1996 EXHIBIT 1.6. Certificate of Merger 1998; Agreement of Merger into DynaResource, Inc. EXHIBIT 1.7. Articles of Incorporation; DynaResource, Inc. EXHIBIT 1.8. Amendment of Articles 1998 TAB 2: - ------ EXHIBIT 2.1. Pansy Lee Property Lease / Purchase Agreement EXHIBIT 2.2. Mine Operating Agreement ("MOAG") EXHIBIT 2.3. Hazen Process Development Report / Tres Amigos Ores ("Hazen Metallurgical Report") EXHIBIT 2.4. San Jose de Gracia Production Proforma EXHIBIT 2.5. Pamicon Report EXHIBIT 2.6. Phase II Exploration Activity Report TAB 3: - ------ EXHIBIT 3.1. December 31, 1998 Year End Audited Financial Statement for the Company EXHIBIT 3.2. December 31, 1999 Year End Audited Financial Statement for the Company EXHIBIT 3.3. February 28, 1999 Audited Financial Statement for Golden Hemlock Explorations, Ltd. EXHIBIT 3.4. November 30, 1999 Unaudited Financial Statement for Golden Hemlock Explorations, Ltd. SIGNATURES Pursuant to the requirements of Section 12(g) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 31, 2000. DYNARESOURCE, INC. By: /S/ K.D. Diepholz ------------------- Mr. K.D. Diepholz; Chairman / CEO On behalf of the Board of Directors 35 EX-1.1 2 ARTICLES OF INCORPORATION EXHIBIT "1.1 WEST COAST MINES, INC. "ARTICLES OF INCORPORATION" Department of State Corporation Number 173041 FILED in the office of the Secretary of State OF THE STATE OF CALIFORNIA Sep 28 1937 FRANK C. JORDAN SECRETARY OF STATE By /S/ DEPUTY SECRETARY OF STATE ARTICLES OF INCORPORATION OF WEST COAST MINES, INC. KNOW ALL MEN BY THESE PRESENTS: That we, the undersigned, a majority of whom are citizens and residents of the State of California, have this day voluntarily associated ourselves together for the purpose of forming a corporation under the laws of the State of California. AND WE HEREBY CERTIFY: FIRST: That the name of said Corporation shall be "WEST COAST MINES, INC." SECOND: That the purposes for which it is formed are: 1. To investigate, explore, develop, purchase, lease, option, locate, or otherwise acquire, own, exchange, sell, or otherwise dispose of, pledge, mortgage, hypothecate and deal in mines, mining claims, mineral lands, coal lands, timber lands, real property, water, water rights, and to work, explore, operate and develop the same, and to extract any and all minerals, or other products therefrom, and deal in the products and by-products thereof. 2. To purchase, lease, or otherwise acquire, erect, own, operate or sell quartz and other mills of any and every kind, smelting and ore reduction works, and saw mills. 3. To search for, prospect, examine, refine, smelt, product, crush, concentrate, manipulate, and treat gold, silver, lead, and other minerals of every class and description. 4. To purchase, lease, or otherwise acquire, own, sell, handle, control, sell of dispose of in any way, letters patent and inventions. 5. To manufacture, buy, sell, import, export, hire, and lease and generally deal in machinery, pumps, drills, implements, and conveniences suitable for use in connection with the mining business. 6. To purchase, lease, or otherwise acquire, own, sell, handle, control, sell or dispose of in any way, bonds and shares of its own capital stock and that of other companies, and to vote any stock owned by it the same as a natural person might do. 7. To issue bonds, notes, debentures and other evidences of indebtedness and secure the payment of the same by mortgage, pledge, deed of trust or otherwise as the circumstances may justify. 8. To buy, acquire, and obtain by grant, gift, lease or otherwise, and to own, possess, use, lease, exchange, sell or mortgage any and all improvements of whatever character or kind upon real estate, including houses, mills and buildings of all kinds, fences, walls, manufacturing works, machinery, dams, flumes, canals, ditches, and pipe lines for water and for other purposes incident to the conduct of the business of mining and milling, but not for public purposes, artificial structures and erections of all kinds, trees, vines, nursery stock and all kinds of plants. 9. To buy, acquire and obtain by grant, gift, lease, or otherwise, and to own, use, sell, lease, exchange, sell or mortgage any and all water, water rights, water properties, and any and all rights, titles, and interests in and to the water rights, water and water properties, and any and all sources of water supply, rights of way for water, water ditches, canals, pipe lines and other conduits incidental to the conduct of the business of mining or milling but not for public purposes. 10. To cultivate, improve and use in any and all ways lands and all and any kinds of real property, to plant, grow, raise, deal in and harvest any and all kinds of plants, vines, fruits, nuts, trees, vegetables, grasses and grains. 11. To buy, receive by gift, bequest, or otherwise, hold, sell, transfer, hypothecate and generally deal in personal property of every kind and nature. 12. To purchase, receive by grant, gift, or otherwise, to erect, construct, operate and maintain boarding and lodging houses and to collect and receive rents, tolls and pay for the same, and to conduct in a general boarding and lodging business. 13. To act as fully for any other corporation, firm or individual as any individual could do. 14. To do any and all things incident or necessary to the dong or performing of any of the aforesaid things, or the concluding of the aforesaid operations or kinds of business, or any other lawful business not inconsistent with the laws of the United States, or the State of California, and to have all rights in connection therewith as though a natural person. 15. To engage generally in all types of mining of every kind and nature with the right to do everything in connection with the extraction of any and all kinds of mineral, refining, and reducing the same to a merchantable property with all the rights of an individual in connection therewith. 16. To purchase, sell, lease, hypothecate, acquire, transfer bonds, stocks, securities of this and any other corporation individually or copartnership. 17. To buy, acquire, and obtain by grant, gift, lease, quitclaim, or otherwise, and to own, sue, sell, lease, exchange, sell or mortgage, real estate or any interest therein. 18. To buy, acquire and own, to sell, hypothecate, or to loan money on any securities issued by this corporation. The foregoing clauses shall be construed both as objects and powers, but no recitation, expression or declaration of specific or special powers or purposes herein enumerated shall be deemed to be exclusive; but it is hereby expressly declared that all other lawful powers not inconsistent therewith, are hereby included. THIRD: The county in this State where the principal office for the transaction of the business of the corporation is to be located is the County of Sacramento, State of California. FOURTH: The amount of the capital stock of the said corporation is Three Hundred Fifty Thousand Dollars ($350,000.000) divided into three hundred fifty thousand (350,000) shares of the par value of One Dollar ($1.00) per each share. FIFTH: The total number of shares actually subscribed is five (5), and names of the subscribers to the number of shares respectively, for which they have subscribed, and the amount to be paid by them for such shares is as follows, to-wit: Name No. of Shares Amount W.J. KAMENZIND 1 $1.00 GILBERT BALL 1 $1.00 WAYNE MILLER 1 $1.00 E.D. PALM 1 $1.00 WALTER LEITCH 1 $1.00 SIXTH: That the number of directors of this corporation shall be five (5), and that the directors and succeeding directors need not be shareholders of the corporation; and that the names of the directors who are appointed to serve and act as such for the first year and until their successors are elected and qualified, together with their residences, are as follows: Name Residence W.J. KAMENZIND 2716 - 6th Avenue, Sacramento, Cal. GILBERT BALL 2750 Riverside Blvd., Sacramento, Cal. WAYNE MILLER 2100 - 22nd Street, Sacramento, Cal. E.D. PALM Fair Oaks, California. WALTER LEITCH 3949 Folsom Boulevard, Sacramento, Cal. IN WITNESS WHEREOF, we have hereunto set our hands and seals this 27th day of September, 1937. /S/ W.J. Kamenzind /S/ E.D. Palm /S/ Wayne Miller /S/ Gilbert Ball /S/ Walter Leitch STATE OF CALIFORNIA ) ( ss COUNTY OF SACRAMENTO) On this 27th day of September, in the year one thousand nine hundred and thirty-seven, before me, LUDA N. GROSS, A Notary Public in and for the County of Sacramento, personally appeared W.J. KAMENZIND, GILBERT BALL, WAYNE MILLER, E.D. PALM, WALTER LEITCH, known to me to be the persons whose names are subscribed to the within instrument, and they duly acknowledged to me that they executed the same. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year in the certificate first above written. /S/ Luda N. Gross Notary Public in and for the County of Sacramento, State of California. My commission expires Nov. 8, 1938. EX-1.2 3 BY-LAWS EXHIBIT "1.2" DYNARESOURCE, INC. "BY - LAWS" BY-LAWS OF WEST COAST MINES, INC. A California Corporation ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal executive office of the corporation is hereby fixed and located at 1220 Perkins Way, Sacramento, California. The Board of Directors is hereby granted full power and authority to change said principal office from one location to another. Section 2. OTHER OFFICES. Branch or subordinate offices may at any time be established by the Board of Directors at any place or places where the corporation is qualified to do business. ARTICLE II SHAREHOLDERS' MEETING Section 1. PLACE OF MEETINGS. All meetings of the shareholders shall be held at the place designated by the President or a majority of Directors in the State of California, or at such other place as may be designated for that purpose from time to time by the Board of Directors. Section 2. ANNUAL MEETINGS. The annual meetings of the shareholders shall be held on the first Monday in October in each year at the hour of ten O'clock A.M. but if such day is a legal holiday then the meeting shall be held at toe same time on the next business day. At the annual meeting, the shareholders shall elect by plurality vote a Board of Directors, consider reports of the affairs of the corporation, and transact such other business as may properly be brought before the meeting. Section 3. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes whatsoever, may be called at any time by the president, or by the Board of Directors, or by any two or more members thereof, or by one or more shareholders holding not less than one-tenth (1-10) of the voting power of the corporation. Section 4. NOTICE OF MEETINGS. Notices of meetings, annual or special shall be given in writing to shareholders entitled to Vote by the secretary or assistant secretary, or if there be no such officer, or in case of his neglect or refusal, by any director or shareholder. Such notices shall be sent to the shareholders' address appearing on the hooks of the corporation or supplied by him to the corporation for toe purpose of notice, not less than ten (10) days before such meeting. Notice of any meeting of shareholders shall specify the place, the day and the hour of meeting, and in case of special meetings, as provided by the Corporations Code of California, the general nature of the business to be transacted. When a meeting is adjourned for forty-five (45) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Save, as aforesaid, it shall not be necessary to give any notice of the adjournment or of the business to be transacted at an adjourned meeting other than by announcement at the meeting at which such adjournment is taken. Section 5. CONSENT TO SHAREHOLDERS' MEETINGS. The transactions of any meeting of shareholders, however called and noticed, shall be valid as though had at a meeting duly held after regular call and notice, if a quorum be present Either in person or by proxy, and if, either before or after the meeting, each of the shareholders entitled to vote, not present in person or by proxy, sign a written waiver of notice or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waiver, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Any action which may be taken at a meeting of the shareholders, may be taken without a meeting if authorized by a writing signed by all of the holders of shares who would be entitled to vote at a meeting for such purposes, and filed with the secretary of the corporation. Section 6. QUORUM. The holders of a majority of the shares entitled to vote thereat, present in person, or represented by proxy shall constitute a quorum at all meetings of the shareholders, for the transaction of business except as otherwise provided by law, by the Articles of Incorporation, or by these By-laws. If, however, such majority shall not be present or represented at any meeting of the shareholders, the shareholders entitled to vote thereat, present in person, or by proxy, shall have power to adjourn the meeting from time to time, until the requisite amount of voting shares shall be present. At such adjourned meeting at which the requisite amount of voting shares shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. VOTING RIGHTS: CUMULATIVE VOTING. Only persons in whose names shares entitled to vote stand on the stock records of the corporation on the Jay of any meeting of shareholders, unless some other day be fixed by the Bach of Directors for the determination of shareholders of record, then on such other day, shall be entitled to vote at such meeting. Every shareholder entitled to vote shall be entitled to one vote for each or said shares and shall have the right to accumulate his votes as provided in Section 708, Corporations Code of California. Section 8. PROXIES. Every shareholder entitled to vote, or to execute consents, may do so, either in person or by written proxy, executed in accordance with the provisions of Section 705, of the Corporations Code of California and filed with the secretary of the corporation. ARTICLE III DIRECTORS: MANAGEMENT Section 1. POWERS. Subject to the limitation of the Articles of Incorporation, of the By-laws and of the laws of the State of California as to action to be authorized or approved by the shareholders , all corporate powers shall be exercised by or under authority of, and the business and affairs of this corporation shall be controlled by a Board of Directors. Section 2. NUMBER AND QUALIFICATION. The authorized number of directors of the corporation shall be until changed by an amendment of this Section 2, Article III of these By-laws, approved by the vote or written consent of shareholders entitled to exercise the majority of the voting power of the corporation; further subject to amendment of the Articles of Incorporation, if required. Section 3. ELECTION AND TENURE OF OFFICE. The directors shall be elected by ballot at the annual meet-inc of the shareholders, to serve for one year and until their successor are elected and have qualified. Their term of office shall begin immediately after election. Section 4. VACANCIES. Subject to the provisions of Section 305 of the Corporations Code, vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual meeting of shareholders or at a special meeting called for that purpose. The shareholders may at any time elect a director to fill any vacancy not filled b the directors, and may elect the additional directors at the meeting at which an amendment of the By-laws is voted authorizing an increase in the number of directors. A vacancy or vacancies shall be deemed to exist in case of the death, resignation or removal of any director, or if the shareholders shall increase the authorized number of directors, but shall fail at the meeting which such increase is authorized, or at an adjournment thereof, to elect the additional director so provided for, or in case the shareholders fail at any time to elect the full number of authorized directors. If the Board of Directors accepts the resignation of a director tendered to take effect at a future date, the Board, or the shareholders, shall have power to elect a successor to take office when the resignation shall become effective. No reduction of the number of directors shall have the effect of removing any director prior to the expiration or his term of office. Section 5. REMOVAL OF DIRECTORS The entire Board of Directors or any individual director may be removed from office as provided by Section 303 of the Corporations Code of the State of California. Section 6. PLACE OF MEETINGS. Meetings of the Board of Directors shall be held at any place within or without the State designated in the notice of the meeting, or if not designated in the notice, the place designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, meetings shall be held at the principal office of the corporation. Section 7. ORGANIZATION MEETINGS. The Board shall hold a regular meeting to be known as the "Organization Meeting". The organization meetings of the Board of Directors shall be held immediately following the adjournment of the annual meetings of the shareholders at the same place as the shareholders' meeting; and notice of said meeting shall not he required. Section 8. OTHER REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at the times and places specified in an annual schedule adopted by the Board. No notice need be given of the holding of such regular meetings. Section 9. SPECIAL MEETINGS -- NOTICES. Special meetings of the Board of Directors for any purpose or purposes shall be called at any time by the president or if he is absent or unable or refuses to act, by any vice-president or by any two (2) directors. Written notice of the time and place of special meetings shall be delivered personally to the directors or sent to each director by mail, or by telephone, charges prepaid, addressed to him at his address as it is shown upon the records of the corporation or as it appears in the telephone records, or if it is not so shown upon the records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally or telephoned as above pro-vided, it shall be so delivered or telephoned at least forty eight (48) hours prior to the time of the holding of the meeting. Such mailing, telephoning or delivery as above provided shall be due, legal and personal notice to such director. Section 10. WAIVER OF NOTICE. When all the directors are present at any directors' meeting, however called or noticed, and sign a written waiver thereto on the records of such meeting, or, if a majority of the directors are present, and if those not present sign in writing a waiver of notice of such meeting, whether prior to or after the holding of such meeting, which said waiver shall be filed with the secretary of the corporation, the transactions thereof are as valid as if had at a meeting regularly called and noticed. Section 11. ADJOURNMENT AND NOTICE. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time arid place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors ~~no were not pre-sent at the time of the adjournment. Section 12. QUORUM. A majority of the number of directors as fixed by the Articles or By-laws shall be necessary to constitute a quorum for the transaction of business, and the action of a majority of the directors present at any meeting at which there is a quorum. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 13. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors of the corporation under any provision of the General Corporation Law may be taken without a meeting, if all members of the Board shall individually or collectively consent in Writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. ARTICLE IV OFFICES Section 1. OFFICES. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, in the discretion of the Board of Directors, a chairman of the board, one or more vice-presidents, one or more assistant secretaries, one or more assistant chief financial officers, and such other officers as may be appointed in accordance with the provisions of Section 3. of this Article. Any number of offices may be held by the same person unless the Articles provide otherwise. Section 2. ELECTION. Except as otherwise provided by the articles or bylaws, officers shall be chosen by the board and serve at the pleasure of the board, subject to the rights, if any, of an officer under any contract of employment, until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-laws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the board, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation snail take effect at the date of the receipt of such notice or at any later time specified herein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. VACANCIES. A vacancy in any office because of the death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the by-laws for regular appointments to such office. Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the By-laws. If the corporation has no president, the chairman of the board is the general manager and chief executive officer of the corporation. Section 7. PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of Directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and in the absence of the chairman of the board, or if there be none, at all meetings of the Board of Directors. He shall be ex officio a member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the By-laws. Section 8. VICE-PRESIDENT. In the absence or disability of the president, the vice- presidents, in order of their rank as fixed by the Board of Directors, or if not ranked, the vice-presidents designated by the Board of Directors, shall perform all the duties of the president, and when so acting, shall have all the powers of, and be subject to all the restrictions upon the president. The vice-presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the By-laws. Section 9. SECRETARY The secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the names of the shareholders and their addresses; the number and classes of shares held by each; and the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors required by the By-laws or by the law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the By-laws. Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements , gains, losses, capital, surplus and shares. Any surplus, including earned surplus, paid-in-surplus and surplus arising from a reduction of stated capital, shall be classified according to source and shown in a separate account. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors; shall render to the president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition or the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the By-laws. ARTICLE V EXECUTIVE AND OTHER COMMITTEES The Board of Directors may appoint an executive committee, and such other committees as may be necessary from time to time, consisting of such number of its members and with such powers as it may designate, consistent with the Articles of Incorporation and By-laws and the General Corporation Laws of the State of California. Such committees shall hold office at the pleasure of the board. ARTICLE VI CORPORATE RECORDS AND REPORTS - INSPECTION Section 1. RECORDS The corporation shall maintain adequate and correct accounts, books and records of its business and properties. All of such books, records and accounts shall be kept at its principal place of business in the State of California, as fixed by the Board of Directors from time to time. Section 2. INSPECTION OF BOOKS AND RECORDS All books and records provided for in Section 1500 of the Corporations Code of California shall be open to inspection of the directors and shareholders from time to time and in the manner pro-vided in Sections 1601 and 1602. Section 3. CERTIFICATION AND INSPECTION OF BY-LAWS The original or a copy of these By-laws, as amended or otherwise altered to date, certified by the secretary, shall be open to inspection by the shareholders of the company, as provided in Section 213 of the Corporations Code of California. Section 4. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 5. CONTRACTS, ETC. -- HOW EXECUTED. The Board of Directors, except as in the By-laws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement, or to pledge its credit, or to render it liable for any purpose or to any amount. Section 6. ANNUAL REPORT. The annual report of shareholders referred to in Section 1501 of the California Corporations Code is expressly dispensed with, but the Board of Directors of the corporation may cause to be sent to the shareholders, not later than one hundred twenty (120) days after the close of the fiscal or calendar year, an annual report in such form as may be deemed appropriate by the Board of Directors. ARTICLE VII CERTIFICATES AND TRANSFER OF SHARES Section 1. CERTIFICATES FOR SHARES. Certificates for shares shall be of such form and device as the Board of Directors may designate and shall state the name of the record holder of the snares represented thereby; its number, a statement of the right, privileges, preferences and restrictions of each class of stock and a statement of the liens, restrictions, obligations or liability of holders as set forth in Section 418 of the Corporations Code. Statements of assessability and restrictions on transfer shall appear on the face of the certificate and SHALL BE CONSPICUOUS. Every certificate for shares must be signed by the president or a vice-president or a vice-president and the secretary or an assistant secretary or must be authenticated by facsimiles of the signatures of the president and secretary or by a facsimile of the signature of its president and the written signature of its secretary or an assistant secretary. Before it becomes effective, every certificate for shares authenticated by a facsimile of a signature must be countersigned by a transfer clerk or transfer agent and must be registered by an incorporated bank or trust company, either domestic or foreign, as registrar of transfers. Section 2. TRANSFER ON THE BOOKS. Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroy-ed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint one or more transfer agents or transfer clerks, and one or more registrars, which shall be an incorporated bank or trust company--either domestic or foreign, who shall be appointed at such times and places as the requirements of the corporation may necessitate and the Board of Directors may designate. ARTICLE VIII CORPORATE SEAL The corporation adopts a seal. The corporate seal shall be circular in form, and shall have inscribed thereon the name of the corporation, the date of its incorporation, and the word "California" ARTICLE IX AMENDMENTS TO BY-LAWS Section 1. BY SHAREHOLDERS. New By-laws may be adopted or these By-laws may be repealed or amended at their annual meeting, or at any other meeting of the shareholders called for that purpose, by a vote of shareholders en-titled to exercise a majority of the voting power of the corporation, or by the written assent of such shareholders. Section 2. POWERS OF DIRECTORS. Subject to the right of shareholders to adopt, amend or repeal By-laws, as provided in Section 1 of this Article IX, the Board of Directors may adopt, amend or repeal any of these By-laws; but a By-law or amendment thereof fixing or changing the authorized number of directors must be approved by the vote or written consent of shareholders entitled to exercise the majority of the voting power of the corporation. Section 3. RECORDS OF AMENDMENTS. Whenever an amendment or new By-law is adopted, it shall be copies in the book of By-laws with the original By-laws, in the appropriate place. If any By-laws or By-law is repealed, the fact of repeal with the date of the meeting at which the repeal was enacted or written assent was filed shall be stated in said book. KNOW ALL MEN BY THESE PRESENTS: That we, the undersigned, being all of the persons appointed to act as the first Board of Directors of hereby assent to the foregoing By-laws, and adopt the same as the By-laws of said corporation. IN WITNESS WHEREOF, we have hereunto set our hands this CERTIFICATE OF SECRETARY (Graphic Omitted) I, the undersigned, do hereby certify: (1) That I am the duly elected and acting Secretary of (2) That the foregoing By-laws comprising 12 pages, constitute the original By-laws of said corporation as duly adopted at the first meeting of the Board of Directors thereof duly held on IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said corporation. ---------------------------------------- WEST COAST MINES, INC. RESOLUTION OF THE BOARD OF DIRECTORS A Special Meeting of the Board of Directors of WEST COAST MINES. INC. was held on FEBRUARY 22ND, 1996 at the Company's Dallas Office at 5430 LBS Freeway, Suite 1600. Dallas, Texas 73240. Attending the meeting in person, or by Telephone Conference Call, were: Douglas E. Metcalf, Melvin E. Tidwell, and K. D. Diepholz, being a quorum of the Directors of the Company, each of whom waived notice of the meeting. The President, Mr. Metcalf called the meeting to order. The minutes of the prior meeting were read and unanimously approved. The President's report was given. The President then opened the floor to new business whereupon the following resolutions, after discussion, was properly moved, seconded and thereafter unanimously approved and adopted: RESOLVED, that the Corporation approve the original By Laws for the Company; specifically those By Laws set forth by the Company in 1937, and since re-typed and accepted by the Company in 1980; such By Laws to remain now in force until such time as they may be amended by the current Board of Directors; RESOLVED, That the Corporation approve all prior actions taken by the Board of Directors and the President. There being no further business before the meeting, on motion duly made, seconded and carried, the meeting was adjourned. DATED THIS TWENTY - SECOND (22ND) DAY FEBRUARY, 1996. /S/ Douglas Metcalf /S/ Melvin E. Tidwell DOUGLAS METCALF, PRESIDENT, DIRECTOR MELVIN E. TIDWELL, DIRECTOR /S/ K.D. Diepholz KOY W. (K.D.) DIEPHOLZ, SECRETARY, DIRECTOR EX-1.3 4 ARTICLES OF AMENDMENT EXHIBIT "1.3" "ARTICLES OF AMENDMENT 1940" FILED in the office of the Secretary of State of the State of California MAY 2 1940 PAUL PEEK, Secretary of State By /S/ Deputy Secretary of State Capital stock chgd. fr. $350,000 to $750,000. CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF WEST COAST MINES, INC. KNOW ALL MEN BY THESE PRESENTS: That we, the undersigned, the president and secretary respectively of the WEST COAST MINES, INC., do hereby certify as follows: That a special meeting of the board of directors of said WEST COAST MINES, INC., was duly held on the 8th day of April, 1940, at the hour of 5 o'clock P.M., at the office and principal place of business of said corporation, to-wit, 215 Capital National Bank Building, Sacramento, California, at which said meeting a resolution was regularly proposed, voted upon and adopted by the unanimous vote of all of said directors, amending the articles of incorporation of said corporation; that the following is a full, true and correct copy of the resolution of said board of directors amending the articles on incorporation: "RESOLVED: That the articles of incorporation of WEST COAST MINES, INC., amended, by amending Article FOURTH so that it shall, as amended, read as follows, to-wit: "FOURTH: The amount of the capital stock of said corporation is Seven Hundred Fifty Thousand Dollars ($750,000.00), divided into seven hundred fifty thousand (750,000) shares of the par value of One Dollar ($1.00) per each share." That said resolution of the Board of Directors was approved on the 1st day of May, 1940, by the written consent of shareholders holding more that 60% of the voting power of said corporation, that is to say, holding 195,147 shares of stock of said corporation out of 324,892 shares entitled to vote at the time said consent was given; that the following is a full, true and correct copy of said consent of said shareholders to the amendment of the articles of incorporation: "We, the undersigned, shareholders of WEST COAST MINES, INC., holding more than 60% of the voting power of said corporation, that is to say, holding 195,147 shares of stock of said corporation out of 324,892 shares entitled to vote, hereby, and by these presents do, consent to, confirm and ratify the amendment of Article "FOURTH" of the Articles of Incorporation, made by the Board of directors of WEST COAST MINES, INC., at a special meeting held on the 8th day of April, 1940, at 5 o'clock P.M. by which amendment said Article shall read as follows: 'FOURTH: The amount of the capital stock of the said corporation is Seven Hundred Fifty Thousand Dollars ($750,000.00) divided into seven hundred fifty thousand (750,000) shares of the par value of One Dollar ($1.00) per each share.' DATED: May 1, 1940 William N. Enos, holding 2,250 shares Chas. A. Palm, holding 13,000 shares Clovis T. LaGrave, holding 3,000 shares J.W. Peacock, holding 2,650 shares E.D. Palm, holding 801 shares D. Schuyler Pulford, holding 6,000 shares W.E. Truesdale & M.A. Truesdale, holding 5,000 shares W.J. Kamenzind, holding 162,446 shares" IN WITNESS WHEREOF, we, the said president and said secretary, have hereunto set our hands this 2nd day of May, 1940. WEST COAST MINES, INC., By/S/W.J. Kamenzind, President And/S/Walter Leitch, Secretary STATE OF CALIFORNIA ) ( ss COUNTY OF SACRAMENTO) W.J. KAMENZIND and WALTER LEITCH, being by me duly sworn, depose and say: That they are the President and Secretary respectively of WEST COAST MINES, INC., that they have read the foregoing certificate and know the contents thereof and that the same is true of their own knowledge. /S/ W.J. Kamenzind - -------------------- /S/ Walter Leitch - -------------------- Subscribed and sworn to before me this 2nd day of May, 1940. /S/ Luda N. Gross - ----------------- Notary Public in and for the County of Sacramento, State of California. I, the undersigned, secretary of WEST COAST MINES, INC., do hereby certify that the following is a true and correct copy of a resolution of the board of directors, duly adopted the special meeting of the board of directors of said corporation, held on the 8th day of April, 1940, at the hour of 5 o'clock P.M. in the office of said company at 215 Capital National Bank Building, Sacramento, California; that the same has been duly recorded in the minutes of said corporation; said resolution is as follows, to-wit: RESOLVED: that the articles of incorporation of WEST COAST MINES, INC., be amended, by amending Article FOURTH so that it shall, as amended, read as follows, to-wit: "FOURTH: The amount of the capital tock of said corporation is Seven Hundred Fifty Thousand Dollars ($750,000.00), divided into seven hundred fifty thousand (750,000) shares of the par value of One Dollar ($1.00) per each share." IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of said corporation at Sacramento, in the State of California, this 8th day of April, 1940. /S/ Walter Leitch, Secretary - ---------------------------- EX-1.4 5 ARTICLES OF AMENDMENT 1943 EXHIBIT "1.4" "ARTICLES OF AMENDMENT 1943" FILED in the Office of the Secretary of State of the State of California Jun 3 1943 FRANK M. JORDAN, Secretary of State By /S/ Assistant Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF WEST COAST MINES, INC. The undersigned, GEO. A. BRIGGS and A. I. DIEPENBROCK, do hereby certify that they are, respectively, and have been at all times herein mentioned, the duly elected and acting president and secretary of WEST COAST MINES, INC., a California corporation, and further that: One: At a special meeting of the board of directors of said corporation duly held at its principal office for the transaction of business at Sacramento, California, at 7:30 o'clock P.M. on the 27th day of May, 1943, at which meeting there was at all times present and acting a quorum of the members of said board, the following resolutions were duly adopted: RESOLVED, by the Board of Directors of WEST COAST MINES, INC., that its articles of incorporation be amended by the addition thereto of Article Seventh, and that Article Seventh read as follows: "SEVENTH: The directors of this corporation are hereby granted power and authority to levy and collect from time to time, as in their discretion they my deem advisable, assessments upon all of the shares of stock of this corporation at any time issued and outstanding, and shall have and enjoy all of the rights and privileges with reference to such assessments as are fixed, provided and established by law in respect to corporations the directors of which have such power of assessment; provided, however, neither any assessment nor the levy thereof shall create any personal liability whatsoever of any shareholder of this corporation; and provided further that said power of assessment shall be limited in its aggregate to five cents ($0.05) per share." RESOLVED FURTHER, that the president or a vice president and the secretary or an assistant secretary of this corporation be and they hereby are authorized and directed to procure the adoption and approval of the foregoing amendment by the vote or written consent of shareholders of this corporation holding at least two-thirds of the voting power, and thereafter to sign and verify by their oaths and to file a certificate in the form and manner required by Section 362b of the California Civil Code, and in general to do any and all things necessary to effect said amendment in accordance with said Section 362b. Two: The number of shares of said corporation consenting to such amendment of its articles of incorporation is 454084, and the following is a copy of the form of written consent executed by the holders of said shares: CONSENT OF SHAREHOLDERS TO AMENDMENT OF ARTICLES OF INCORPORATION OF WEST COAST MINES, INC. We, the undersigned shareholders owing and having issued to us in our names at least two-thirds (2/3) of all of the outstanding shares of the West Coast Mines, Inc., do hereby consent to the hereinafter amendment to the articles of incorporation and request and direct that the Board of Directors of said corporation take such action as may be necessary in connection with the hereinafter set forth amendment, and that said articles of incorporation be amended by the addition thereto of Article Seventh, and that Article Seventh read as follows: "SEVENTH: The directors of this corporation are hereby granted power and authority to levy and collect from time to time, as in their discretion they may deem advisable, assessments upon all of the shares of stock of this corporation at any time issued and outstanding, and shall have and enjoy all of the rights and privileges with reference to such assessments as are fixed, provided and established by law in respect to corporations the directors of which have such power of assessment; provided, however, neither any assessment nor the levy thereof shall create any personal liability whatsoever of any shareholder of this corporation; and provided further that said power of assessment shall be limited in its aggregate to five cents ($0.05) per share." This consent may be given by signature on one or more counterparts hereof. IN WITNESS WHEREOF, we have hereunto set our hands and seals and set forth the number of shares held by each opposite our signatures: SIGNATURE NUMBER OF SHARES Three: The total number of shares of said corporation entitled to vote on or consent to the adoption of such amendment is 661400. IN WITNESS WHEREOF, the undersigned have executed this certificate of amendment this 29th day of May, 1943. /S/ Geo A. Briggs, President of West Coast Mines, Inc. - --------------------------------------------------------- /S/ A.I. Diepenbrock, Secretary of West Coast Mines, Inc. - --------------------------------------------------------- STATE OF CALIFORNIA ) ) ss. County of Sacramento) GEO. A. BRIGGS and A.I. DIEPENBROCK, being first duly sworn, each for himself deposes and says: That GEO. A. BRIGGS is, and was at all of the times mentioned in the foregoing Certificate of Amendment, the president of WEST COAST MINES, INC., The California corporation therein mentioned, and A.I. DIEPENBROCK is, and was at all of said times, the secretary of said corporation; and each has read said Certificate and that the statements therein made are true of his own knowledge, and that the signatures purporting to be the signatures of said president and secretary thereto are the genuine signatures of said president and secretary, respectively. /S/ Geo A. Briggs - ------------------ /S/ A.I. Diepenbrock - -------------------- Subscribed and sworn to before me this 29th day of May, 1943. /S/ Marion Fritz - ----------------- Notary Public in and for the County of Sacramento, State of California. EX-1.5 6 ARTICLES OF AMENDMENT 1996 EXHIBIT "1.5" "ARTICLES OF AMENDMENT 1996" ENDORSED FILED in the office of the Secretary of State of the State of California APR 24 1996 /S/ Bill Jones, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION The Undersigned certify that: 1. They are the President and Secretary, respectively, of: WEST COAST MINES, INC. DALLAS, TEXAS OFFICE III LINCOLN CENTRE 5430 LBJ FREEWAY / SUITE 1600 DALLAS, TEXAS 75240 (214) 369-4005 Fax: (214)369-2807 A California Corporation. 2. Article FOURTH of the Articles of Incorporation of this corporation is hereby amended to read as follows: "The amount of Common Stock the Corporation is authorized to issue is: 50,000,000." "The Par Value of such Common Stock is: $ .01" 3. The foregoing Amendment of Articles of Incorporation has been duly approved by the Board of Directors of West Coast Mines, Inc. 4. The foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of the Shareholders of West Coast Mines, Inc., in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the corporation as of FEBRUARY 16, 1995, was: 750,000. The number of shares voting in favor of the Amendment equaled or exceeded the vote required for approval. The percentage vote required for approval was more than 50 %. 5. We further declare under penalty of perjury under the Laws of the State of California that the matters set forth in this Certificate of Amendment are true and correct of our own knowledge. DATED THIS EIGHTEENTH DAY OF APRIL, 1996. /S/ Douglas E. Metcalf /S/ K.D. Diepholz ----------------------- ----------------- President Secretary A475162 State of California [graphic omitted] SECRETARY OF STATE CORPORATION DIVISION I, BILL JONES, Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this APR 25 1996 /S/ Bill Jones ----------------- Secretary of State [graphic omitted] The Great Seal of the State of California EX-1.6 7 CERTIFICATE OF MERGER EXHIBIT "1.6" DYNARESOURCE, INC. "CERTIFICATE OF MERGER" ENDORSED - FILED In the office of the Secretary of State of the State of California NOV 6 1998 AGREEMENT OF MERGER also referred to herein as "PLAN AND AGREEMENT OF MERGER" West Coast Mines. Inc. (a California corporation) Into DynaResource, Inc. (a Delaware corporation) THIS PLAN AND AGREEMENT OF MERGER (the "Agreement"), is dated as of January 15,1998, and is by and between DynaResource, Inc., a Delaware corporation (sometimes referred to herein as, the "Acquiring Corporation") and West Coast Mines, Inc., a California corporation (sometimes referred to herein as, the "Non-Acquiring Corporation"). Said corporations are hereinafter sometimes collectively referred to as the "Constituent Corporations". WITNESETH: WHEREAS. DynaResource, Inc. desires to acquire West Coast Mines, Inc. through merger of West Coast Mines, Inc. with and into DynaResource, Inc.; and, WHEREAS, DynaResource, Inc. desires to issue its Common Stock (the "Merger Stock") to the shareholders of West Coast Mines. Inc. in consideration of the merger of West Coast Mines, Inc. into DynaResource, Inc.; and, WHEREAS, the Boards of Directors of the Constituent Corporations deem it advisable for the general welfare and advantage of the Constituent Corporations and their respective shareholders that West Coast Mines, Inc. merge into DynaResource, Inc. and said corporation desires to so merge; NOW, THEREFORE, in consideration of the premises and of the mutual agreements herein contained, the parties hereby agree, in accordance with the applicable provisions of the laws of the States of California and Delaware; that West Coast Mines, Inc. shall be merged into DynaResource, Inc., which shall continue its corporate existence and be the corporation surviving the merger, and that the terms and conditions of the merger hereby agreed upon (hereafter called the "Merger) which the parties covenant to observe, keep, and perform, and the mode of carrying the same into effect, are and shall be as hereafter set forth: ARTICLE I EFFECTIVE DATE OF MERGER 1.1 Effective Date. Consummation of this Agreement shall be effected on the date on which this Agreement of Merger (~Plan and Agreement of Merger") is filed in the offices of the Secretary of State of the State of Delaware; and, upon satisfaction of the requirements of the applicable laws of the State of California prerequisite to such consummation. 1 ARTICLE 2 GOVERNING LAW, INSTRUMENTS, AND BODIES 2.1 Governing Law. The laws which are to govern the Acquiring Corporation are the laws of the State of Delaware. 2.2 Articles of Incorporation. The Articles of Incorporation of the Acquiring Corporation shall be the Articles of Incorporation of the Acquiring Corporation as the same shall be in effect at the effective time of the Merger. 2.3 Bylaws. The Bylaws of the Acquiring Corporation at the effective time of the Merger shall be the Bylaws of the Acquiring Corporation until the same shall be altered or amended in accordance with the provisions thereof. 2.4 Directors. The Directors of the Acquiring Corporation at the effective time of the Merger shall remain the directors of the Acquiring Corporation until their respective successors are duly elected and qualified, or their earlier death or resignation. 2.5 Officers. Subject to the authority of the Board of Directors as provided by law and the Bylaws of the Acquiring Corporation, the officers of The Acquiring Corporation at the effective time of the Merger shall remain the officers of the Acquiring Corporation. ARTICLE 3 CONVERSION OF SHARES 3.1 Conversion Plan. The mode of carrying into effect the Merger provided in this Agreement, and the manner and basis of converting the shares of West Coast Mines, Inc. into shares of DynaResource, Inc. are as follows: (a) The Acquiring Corporation's Common Stock. All of the shares of Common Stock, par value $.0001 per share, of the Acquiring Corporation issued and outstanding at the effective time of the Merger shall be tendered and canceled concurrent with giving effect to the Merger. (b) The Non-Aquiring Corporation's Common Stock. At the effective time of the Merger, each of the issued and outstanding shares of the $.O1 par value Common Stock of the Non-Acquiring Corporation (or fraction thereof) shall be converted into and become one (1) share (or the applicable fraction thereof) of the $.0001 par value Common Stock of the Acquiring Corporation, and each holder of outstanding shares of the Common Stock of the Non-Acquiring Corporation, upon surrender to the Acquiring Corporation of one or more stock certificates for Common Stock of the Non-Acquiring Corporation for cancellation, shall be entitled to receive one or more stock certificates for the full number of shares of the Common Stock of the Acquiring Corporation into which the Common Stock of the Non-Acquiring Corporation so surrendered shall have been converted as aforesaid. Each issued share of the Non-Acquiring Corporation's Common Stock, if any, held in its treasury at the effective time of the merger shall be canceled and shall not be converted. 3.2 Surrender of the Non-Acquiring Corporation Certificates. As soon as practicable after the Merger becomes effective, the stock certificates representing the Common Stock of the Non-Acquiring Corporation issued and 2 outstanding at the time the Merger becomes effective shall be surrendered for exchange to the Acquiring Corporation as above provided. Until so surrendered for exchange, each such stock certificate nominally representing Common Stock of the Non-Acquiring Corporation shall be deemed for all corporate purposes (except for the payment of dividends, which shall be subject to the exchange of stock certificates as above provided) to evidence the ownership of the number of shares of the Common Stock of the Acquiring Corporation which the holder thereof would be entitled to receive upon its surrender to the Acquiring Corporation. 3.3 Status of The Acquiring Corporation Shares. All shares of Common Stock of the Acquiring Corporation into which shares of Common Stock of the Non-Acquiring Corporation are converted as herein provided shall be fully paid and non-assessable and shall be issued in full satisfaction of all rights pertaining to such shares of common Stock of the Non-Acquiring Corporation. 3.4 Restriction on Transfer. The shares of the Acquiring Corporation are to be issued without being registered under the Securities Act of 1933, as amended (the "Act"), in reliance upon the exemption from registration afforded by Section 3(a)(9) of the Act. Notwithstanding, such shares shall be restricted to the extent that the shares surrender in exchange therefore were restricted and shall be affixed with the same legend(s), if any, as shall have been affixed upon the certificates surrendered in exchange therefore and, if so restricted, such shares may be sold or otherwise transferred only pursuant to a registration statement or in compliance with another exemption from registration. ARTICLE 4 EFFECT OF MERGER 4.1 The Non-Acquiring Corporation Ceases to Exist. At such time as the Merger shall become effective, the separate existence of The Non-Acquiring Corporation shall cease and The Non-Acquiring Corporation shall be merged into the Acquiring Corporation. 4.2 Acquiring Corporation Succeeds to Rights. etc.. At such time as the Merger becomes effective, the Acquiring Corporation shall succeed to, without other transfer, and shall possess and enjoy, all the rights, privileges, immunities, powers and franchises both of a public and a private nature, and be subject to all the restrictions, disabilities and duties of the Non-Acquiring Corporation, and all the rights, privileges, immunities, powers and franchises of the Non-Acquiring Corporation and all property, real, personal and mixed, and all debts due to either the Non-Acquiring Corporation or the Acquiring Corporation on whatever account, for stock subscriptions as well as for all other things in action or belonging to each of said corporations, shall be vested in the Acquiring Corporation; and all property, rights, privileges, immunities, powers and franchises, and all and every other interest previously held by the Non-Acquiring Corporation shall be thereafter as effectually the property of the Acquiring Corporation as they were of the Non-Acquiring Corporation and the title to any real estate vested by deed or otherwise in the Non-Acquiring Corporation shall not revert or be in any way impaired by reason of the Merger; provided, however, that all rights of creditors and all liens upon any property of the Non-Acquiring Corporation shall be preserved unimpaired, limited in lien to the property affected by such liens at the effective time of the Merger, and all debts, liabilities and duties of said corporations, respectively, shall thenceforth attach to the Acquiring Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by the Acquiring Corporation. 3 ARTICLE 5 ACCOUNTING MATTERS 5.1 Assets and Liabilities. The assets and liabilities of the Non-Acquiring Corporation as at the effective time of the Merger, shall be taken up on the books of the Acquiring Corporation at the amounts at which they shall have been carried at that time on the books of the Non-Acquiring Corporation. 5.2 Capital Surplus. The amount of Capital of the Acquiring Corporation after the Merger, shall be equal to the sum of the aggregate book value prior to the Merger as shown on the books of the Non-Acquiring Corporation; which shall be reflected as additional Paid-in Capital, and of the aggregate Par Value of the Common Stock that will remain issued upon the Merger. The surplus of the Acquiring Corporation after the Merger, including any surplus arising in the Merger, shall be available to be used for any legal purposes for which surplus may be used. ARTICLE 6 APPROVALS AND FILING 6.1 Approval. This Agreement shall be submitted to the Shareholders of each Constituent Corporation, as provided by Law and by each respective Articles of Incorporation, at meetings or otherwise; which shall be accomplished on or before February 1, 1998, or such later date as the Board of Directors of the Constituent Corporations shall mutually approve. After such adoption and approval, and subject to the conditions contained in this Agreement, A "Certificate of Approval", and A "Certificate of Merger", in substantially the form annexed and attached hereto as Exhibit A-1. and Exhibit A-2 respectively: shall be signed, verified, and delivered to the Secretary of the State of California and the Secretary of the State of Delaware, for filing as provided by the corporations laws of such states. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF THE NON-ACQUIRING CORPORATION The Non-Acquiring Corporation represents and warrants to the Acquiring Corporation as follows: 7.1 Organization. The Non-Acquiring Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The Non-Acquiring Corporation has the corporate power required to carry on its business; as it is now being conducted, and is qualified to do business in every jurisdiction in which the character and location of the assets owned by it, or the nature of the business transacted by it, require qualification. 7.2 Capitalization. The Non-Acquiring Corporation's capitalization consists of 50,000,000 authorized shares of $.0001 par value Common Stock. Each issued share is validly issued, fully paid, non- assessable and each outstanding share is entitled to one vote. There is no treasury stock held by the Non- Acquiring Corporation. 7.3 Subsidiaries. The Non-Acquiring Corporation has no subsidiary corporations. 4 7.4 Governmental Authorizations. The Non-Acquiring Corporation has all licenses, franchises, permits and other governmental authorizations required and which are valid and sufficient for all business presently carried on by The Non-Acquiring Corporation. ARTICLE 8 REPRESENTATIONS AND WARRANTIES The Acquiring Corporation The Acquiring Corporation represents and warrants to The Non-Acquiring Corporation as follows: 8.1 Organization. The Acquiring Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Acquiring Corporation has corporate power to carry on its business as it is now being conducted and is qualified to do business in every jurisdiction in which the character and location of the assets owned by it or the nature of the business transacted by it require qualification. 8.2 Capitalization. The Acquiring Corporations capitalization consists of 50,000,000 authorized shares of Common Stock, par value $.0001 per share, of which, as of the date hereof, 1,000 shares are issued and outstanding (which shares will be redeemed and canceled upon the effective date of the merger); and there are no treasury shares outstanding. Each such share when issued will be validly issued, fully paid, non-assessable and is entitled to one vote. There are no Common Stock purchase options outstanding as of the date hereof as to any of the Acquiring Corporation's Common Stock. ARTICLE 9 CONDUCT OF BUSINESS PENDING, THE MERGE 9.1 Conduct. From and after the date of this Agreement and prior to the effective time of the Merger, neither of the Constituent Corporations will, without the prior written consent of the other: (a) amend its Articles of Incorporation or Bylaws; (b) engage in any material activity or transaction or incur any material obligation (by contract or otherwise) except in the ordinary course of business; (c) issue rights or options to purchase or subscribe to any shares of its capital stock or subdivide or otherwise change any such shares; (d) issue or sell any shares of its capital stock or securities convertible into shares of its capital stock; or (e) declare or pay any dividends on or make any distributions whether of cash, stock or other property in respect of any shares of its capital stock. 9.2 Preservation. >From and after the date of this Agreement and prior to the effective time of the Merger, the Non-Acquiring Corporation will use its best efforts to preserve its business organizations intact; to keep available to the Acquiring Corporation the services of the Non-Acquiring Corporation's present officers and employees; and to preserve for the Acquiring Corporation the goodwill of the Non-Acquiring Corporation's suppliers, customers and others having business relations with it. 5 ARTICLE 10 ADDITIONAL AGREEMENTS The Acquiring Corporation and the Non-Acquiring Corporation further agree as follows: 10.1 Access and Information. The Acquiring Corporation and the Non-Acquiring Corporation hereby agree that each will give to the other and to the other's accountants, counsel and other representatives full access during normal business hours throughout the period prior to the Merger to all of its properties, books, contracts, commitments and records, and that each will furnish the other during such period with all such information concerning its affairs as such other party may reasonably request. In the event of the termination of this Agreement each party will deliver to the other all documents, work papers and other material obtained from the other relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, and will use its best efforts to have any information so obtained and not heretofore made public kept confidential. 10.2 Expenses. Upon a termination of this Agreement as provided below, each party will pay all costs and expenses of its performance of and compliance with all agreements and conditions contained herein on its part to be performed or complied with, including fees, expenses and disbursements of each party's accountants and counsel. 10.3 Further Assurances. If at any time the Acquiring Corporation shall consider or be advised that any further assignment or assurance in law or other action is necessary or desirable to vest, perfect, or confirm, of record or otherwise, in the Acquiring Corporation, the title to any property or rights of the Non-Acquiring Corporation acquired or to be acquired by or as a result of the Merger, the proper officers and directors of the Non-Acquiring Corporation, and the Acquiring Corporation, respectively, shall be and they hereby are severally and fully authorized to execute and deliver such proper deeds, assignments and assurances in law and take such other action as may be necessary or proper in the name of the Non-Acquiring Corporation or the Acquiring Corporation to vest, perfect or confirm title to such property or rights in the Acquiring Corporation and otherwise carry out the purposes of this Agreement. ARTICLE 11 CONDITIONS PRECEDENT: TERMINATION: GENERAL PROVISIONS 11.1 Conditions Precedent to the Obligations of The Acquiring Corporation and The Acquiring Corporation. The obligation of the Acquiring Corporation to effect the Merger and The Acquiring Corporation's obligation to issue stock on conversion of the stock of the Non-Acquiring Corporation shall be subject to the following conditions (which may be waived in writing by the Acquiring Corporation): (a) The representations and warranties of The Non-Acquiring Corporation herein contained shall be true as of and at the effective time of the Merger with the same effect as though made at such time; the Non-Acquiring Corporation shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by it prior to the effective time of the Merger; and the Non-Acquiring Corporation shall have delivered to the Acquiring Corporation a certificate, dated the effective date of the Merger and signed by its President and its Secretary, to both such effects. (b) No material change in the corporate status, business, operations or financial condition of the Non-Acquiring Corporation shall have occurred since the date hereof, (whether or not covered by insurance), other than changes in the ordinary course of business, none of which has been materially adverse in relation to the Non-Acquiring Corporation, taken as a whole, and no other event or condition of any character shall have occurred or arisen since that date which shall 6 have materially and adversely affected the corporate status, business, operations or financial condition of the Non-Acquiring Corporation taken as a whole. Operating costs shall not be considered as other than a change in the ordinary course of business. 11.2 Conditions Precedent to The Non-Acquiring Corporation's Obligations. The obligation of The Non-Acquiring Corporation to effect the Merger shall be subject to the following conditions (which may be waived in writing by The Non-Acquiring Corporation): (a) The representations and warranties of the Acquiring Corporation and the Acquiring Corporation herein contained shall be true as of and at the effective time of the Merger with the same effect as though made at such time; the Acquiring Corporation shall have performed all obligations and complied with all covenants required by this Agreement to be performed or complied with by it prior to the effective time of the Merger. (b) No material change in the corporate status, business, operations or financial condition of The Acquiring Corporation or The Acquiring Corporation shall have occurred since the date hereof (whether or not covered by insurance), other than changes in the ordinary course of business, none of which has been materially adverse in relation to the Acquiring Corporation taken as a whole, and no other event or condition of any character shall have occurred or arisen since that date which shall have materially and adversely affected the corporate status, business, operations or financial condition of the Acquiring Corporation, taken as a whole. 11.3 Termination and Abandonment Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and abandoned at any time before the effective time of the Merger, whether before or after adoption or approval of this Agreement by the shareholders of the Merging Corporations under any one or more of the following circumstances: (a) By the mutual consent of the Boards of Directors of the Constituent Corporations; (b) By either of the Constituent Corporations if any action or proceeding before any court or other governmental body or agency shall have been instituted or threatened to restrain or prohibit the Merger and such Constituent Corporation deems it inadvisable to proceed with the Merger; or (c) By either of the Constituent Corporations if the requisite approval of the shareholders of both Constituent Corporations shall not have been obtained on or before February 1, 1998, or if the Articles of Merger and Certificate of Merger shall not have been filed as provided in Article I hereof on or before February 15, 1998. 11.4 Amendments. Any of the terms or conditions of this Agreement may be modified or waived at any time before the effective time of the Merger by the party which is, or the shareholders of which are, entitled to the benefit thereof upon the authority of the Board of Directors of such party, provided that any such modification or waiver shall in the judgment of the party making it not affect substantially or materially and adversely the benefits to such party or its shareholders intended under this Agreement. [SIGNATURE PAGES FOLLOW] 7 IN WITNESS WHEREOF, this Agreement has been signed by a majority of the directors of each of the Constituent Corporations and each of the Constituent Corporations has caused its corporate seal to be hereunto affixed and attested by the signature of its Secretary, all as of the day and year first above written. A MAJORITY OF THE A MAJORITY OF THE DIRECTORS OF DIRECTORS OF DYNARESOURCE, INC.: WEST COAST MINES, INC.: /S/ K.D. Diepholz /S/ K.D. Diepholz - ---------------------------- --------------------------- Name: Koy W.(K.D.) Diepholz Name: Koy W.(K.D.) Diepholz Chairman / President Chairman / President /S/ Mel E Tidwell /S/ Mel E Tidwell - ---------------------------- --------------------------- Name: Mel E Tidwell Name: Mel E Tidwell /S/ Douglas Metcalf /S/ Douglas Metcalf - ---------------------------- --------------------------- Name: Douglas Metcalf Name: Douglas Metcalf Secretary Secretary /S/ Wayne C. Henderson /S/ Wayne C. Henderson - ---------------------------- --------------------------- Name: Wayne C. Henderson Name: Wayne C. Henderson EXHIBIT A-1 CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER The undersigned do hereby state and certify as follows: 1. They are the President and Secretary respectively of West Coast Mines, Inc., (the "Disappearing Corporation"); a California Corporation. 2. The Agreement of Merger to be executed by and between the Disappearing Corporation and DynaResource, Inc., a Delaware Corporation (the "Acquiring Corporation"), in the form attached hereto; was duly approved by the Board of Directors and Shareholders of West Coast Mines, Inc., the Disappearing Corporation, as of January 15, 1998. 3. Pursuant to Section 1201 of the California General Corporation Laws, no vote of the Shareholders of West Coast Mines, Inc. the Disappearing Corporation, is required; as the Shareholders of the Disappearing Corporation immediately prior to the Merger, will possess all (more than five-sixths) of the Voting Power of DynaResource, Inc., the Acquiring Corporation, immediately subsequent to the Merger. Each of the undersigned do hereby declare under the Penalty of Perjury under the Laws of the State of California, that he signed the foregoing Certificate in the Official Capacity set forth under his Signature below; and that the statements set forth in this Certificate are true of his own knowledge. Signed as of January 15, 1998. /S/ K.D. Diepholz - ----------------------- Koy (K.D.) Diepholz President /S/ Douglas Metcalf - ----------------------- Douglas Metcalf Secretary EXHIBIT A-2 CERTIFICATE OF MERGER The undersigned do hereby state and certify as follows: 1. The Constituent Corporations are: DynaResource, Inc., (the "Acquiring Corporation"); a Delaware Corporation; and West Coast Mines, Inc., (the "Disappearing Corporation"), a California Corporation. 2. An Agreement of Merger between the Acquiring Corporation and the Disappearing Corporation above, has been as of January 15, 1998, approved, executed, certified, and acknowledged; in accordance with Section 252 of the General Corporation Laws with the State of Delaware. 3. The Acquiring Corporation is the surviving Corporation and its name shall be DYNARESOURCE, INC. 4. No Amendments to the Certificate of Incorporation of the Acquiring Corporation are required by the Agreement of Merger, and subsequent to the Merger, the Certificate of Incorporation of the Acquiring Corporation shall be its Certificate of Incorporation. 5. The executed Agreement of Merger is on file at the principle place of business of the Acquiring Corporation, which is: The Towers at Williams Square, 5215 N. O'Connor Blvd., Suite 200, Irving, Texas 75039. 6. A copy of the executed Agreement of Merger will be furnished by the Acquiring Corporation on request and without cost, to any Shareholder of the Disappearing Corporation or to any Shareholder of the Acquiring Corporation. Each of the undersigned do hereby declare under the Penalty of Perjury under the Laws of the State of California, that he signed the foregoing Certificate in the Official Capacity set forth under his Signature below; and that the statements set forth in this Certificate are true of his own knowledge. Signed as of January 15, 1998. /S/ K.D. Diepholz - ------------------------------- Koy (K.D.) Diepholz, President /S/ Douglas Metcalf - ------------------------------- Douglas Metcalf, Secretary CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER The undersigned do hereby state and certify that: 1. They are the President and Secretary, respectively of DynaResource, Inc., a Delaware corporation (the "Acquiring Corporation" 2. The Agreement of Merger to be executed by and between the Acquiring Corporation and West Coast Mines, Inc. (the "Disappearing Corporation"), in the form attached hereto was duly approved by the Board of Directors and shareholders of the Disappearing Corporation, as of the date of this Certificate. 3. There is only one class of shares and the total number of outstanding shares is 1,000. 4. The terms of the merger agreement in the form attached were approved by the unanimous vote of all (100%) of the shares of the Acquiring Corporation. As of the date set forth below, in Dallas, Texas, each of the undersigned does hereby declare under the penalty of perjury under the laws of the State of California that he signed the foregoing certificate in the official capacity set forth beneath his signature, and that the statements set forth in said certificate are true of his own knowledge. SIGNED as of January 15, 1998 /S/ K.D. Diepholz - ------------------------------- Koy (K.D.) Diepholz, President /S/ Douglas Metcalf - ------------------------------- Douglas Metcalf, Secretary CERTIFICATE OF APPROVAL OF AGREEMENT OF MERGER The undersigned do hereby state and certify as follows: 1. They are the President and Secretary respectively of West Coast Mines, Inc., (the "Disappearing Corporation"); a California Corporation. 2. The Agreement of Merger to be executed by and between the Disappearing Corporation and DynaResource, Inc., a Delaware Corporation (the "Acquiring Corporation"), in the form attached hereto; was duly approved by the Board of Directors and Shareholders of West Coast Mines, Inc., the Disappearing Corporation, as of the date of this Certificate. 3. Pursuant to Section 1201 of the California General Corporation Laws, no vote of the Shareholders of West Coast Mines, Inc. the Disappearing Corporation, is required; as the Shareholders of the Disappearing Corporation immediately prior to the Merger, will possess all (more than five-sixths) of the Voting Power of DynaResource, Inc., the Acquiring Corporation, immediately subsequent to the Merger. Each of the undersigned do hereby declare under the Penalty of Perjury under the Laws of the State of California, that he signed the foregoing Certificate in the Official Capacity set forth under his Signature below; and that the statements set forth in this Certificate are true of his own knowledge. Signed as of January 15, 1998 /S/ K.D. Diepholz - --------------------- Koy (K.D.) Diepholz President /S/ Douglas Metcalf - --------------------- Douglas Metcalf Secretary Great Seal of the STATE OF CALIFORNIA (Graphic Omitted) SECRETARY OF STATE I, BILL JONES, Secretary of State of the State of California, hereby certify: That the attached transcript has been compared with the record on file in this office, of which it purports to be a copy, and that it is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this NOV 12 1998 /S/ Bill Jones ------------------ Bill Jones, Secretary of State State of Delaware Office of the Secretary of State PAGE 1 I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF MERGER, WHICH MERGES: "WEST COAST MINES, Inc. A CALIFORNIA CORPORATION, WITH AND INTO "DYNARESOURCE, INC." UNDER THE NAME OF "DYNARESOURCE, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE 0F DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE SECOND DAY OF NOVEMBER, A.D. 1998, AT 9 O'CLOCK A.M. A FILED COPY 0F THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER 0F DEEDS /S/ Edward J. Freel - ------------------------ Edward I. Freel, Secretary of State AUTHENTICATION. 9392765 DATE: 11-06-98 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED O9:00 AM 12/02/1998 981422213 - 2826546 CERTIFICATE OF MERGER The undersigned do hereby state and certify as follows: 1. The Constituent Corporations are: DynaResource, Inc. (the "Acquiring Corporation"); a Delaware Corporation; and West Coast Mines, Inc., (the "Disappearing Corporation"), a California Corporation. 2. An Agreement of Merger between the Acquiring Corporation and the Disappearing Corporation above, has been as of January 15, 1998, approved, adopted, excuted, certified, and acknowledged; in accordance with Section 252 of the General Corporation Laws of the State of Delaware. 3. The Acquiring Corporation is the surviving Corporation and its name shall be DYNARESOURCE, INC. 4. No Amendments to the Certificate of Incorporation of the Acquiring Corporation are required by the Agreement of Merger, and subsequent to the Merger, the Certificate of Incorporation of the Acquiring Corporation shall be its Certificate of Incorporation. 5. The executed Agreement of Merger is on file at the principle place of business of the Acquiring Corporation, which is: The Towers at Williams Square, 5215 N. O'Conner Blvd., Suite 200, Irving, Texas 75039. 6. A copy of the executed Agreement of Merger will be furnished by the Acquiring Corporation on request and without cost, to any Shareholder of the Disappearing Corporation or to any Shareholder of the Acquiring Corporation. 7. The Disappearing Corporation's Capitalization consists of 50,000,000 Authorized Shares of $.0001 Par Value Common Stock. Each of the undersigned do hereby declare under the Penalty of Perjury, that he signed the foregoing Certificate in the Official Capacity set forth under his Signature below; and that the statements set forth in this Certificate are true and accurate of his own knowledge. Signed as of February 3, 1998. DYNARESOURCE, INC. /S/ K.D. Diepholz ------------------ President EX-1.7 8 ARTICLES OF INCORPORATION EXHIBIT "1.7" DYNARESOURCE, INC. "ARTICLES OF INCORPORATION" State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF INCORPORATION OF "DYNARESOURCE, INC.", FILED IN THIS OFFICE ON THE EIGHTH DAY OF DECEMBER, A.D. 1997, AT 9 O'CLOCK A.M. GREAT SEAL OF THE STATE OF DELAWARE (Graphic Omitted) SEAL OF DELAWARE SECRETARY'S OFFICE (Graphic Omitted) /S/ Edward J. Freel - ---------------------------------- Edward J. Freel, Secretary of State AUTHENTICATION: 8795882 DATE: 12-08-97 CERTIFICATE OF INCORPORATION OF DYNARESOURCE, INC. The undersigned, a natural person of the age of eighteen years or more, acting as the Incorporator of a corporation under the Delaware Corporation Laws, hereby adopts the following Articles of incorporation for such corporation: ARTICLE I The name of the corporation Is Dynaresource, Inc. ARTICLE II The address of the corporation's initial registered office is 1013 Centre Road, Wilmington, Delaware, and the name of the corporation's Initial registered agent at such address is Corporation Service Company, in New Castle County. ARTICLE III The purpose or purposes for which the corporation is organized shall be and include the transaction of any or all lawful business for which coporations may be incorporated under the General Corporation Law of the State of Delaware. ARTICLE IV The corporation shall have authority to issue fifty million (50,000.000) shares of its common stock each having a par value of $.0001. Fully paid common shares of the corporation shall not be liable for further call or assessment. The authorized common shares of the corporation shall be Issued at the discretion of the Board of Directors of the corporation. Page 1 ARTICLE V The name and address of the incorporator of the corporation is James J. Panipinto, 10440 N. Central Expressway, Ste. 1440, Dallas, Texas 75231. The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation. ARTICLE VI The names and mailing addresses of the persons who are to serve as directors until the first annual meeting of stockholders or until (a) his successors have been elected and qualified, as provided In the Bylaws of the corporation, or (b) his earlier death or resignation is as follows: Name Mailing Address Douglas Metcalf 46 Lake Shore Drive North Westford, Massachusetts 01886 Koy W. (K.D.) Diepholz 5215 Williams Square Ste. 200 Irving, Texas 75039 Melvin E. Tidwell 4804 Pickadilly Place Tyler, Texas 75703 Wayne C. Henderson 5506 Lafayette Lane Frisco, Texas 75035 ARTICLE VII The period of the corporations duration is perpetual. ARTICLE VIII The right to accumulate votes in the Election of directors, and/or cumulative voting by any shareholder of the corporation, is hereby expressly denied. Page 2 ARTICLE IX The right to preemptive rights to acquire additional, unissued, or treasury shares of the corporation, or securities of the corporation convertible into or carrying a right to subscribe to or acquire additional shares of the corporation is hereby expressly denied. ARTICLE X All of the corporation's directors and officers and former directors and officers and all persons who may have served at the corporation's request as a director or officer of another corporation in which the corporation is a creditor or substantial shareholder, shall be indemnified against expenses actually and necessarily incurred by them in connection with the defense of any action, suit or proceeding, in which they, or any of them, are made parties, or a party by reason of being or having been directors or officers or a director or officer of the corporation, or of such other corporation, except in relation to matters as to which any such director or officer or former director or officer shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct. The foregoing right to indemnity shall include reimbursement of the amounts and expenses paid or incurred in settlement thereof or a plea of nolo contendere (or other plea of substantially the same import and effect) which, in the opinion of counsel for the corporation, appears to be in the interest of the corporation. Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled by law or under any bylaws, agreement, vote of stockholders or otherwise. ARTICLE XI No contract or other transaction between the corporation and any person, firm; association or corporation and no act of the corporation shall, in the absence of fraud, be invalidated or in any way affected by the fact that any of the directors of the corporation are pecuniarily or otherwise interested, directly or indirectly, in such contract, transaction or act, or are related to or interested in such person, firm, association or corporation as a director, shareholder, officer, employee, member or otherwise any director so interested or related who is present at any meeting of the Board of Directors or committee of directors at which action on any such contract, transaction or act is taken may be counted in determining the presence of a quorum at such meeting and may vote at such meeting with respect to such contract, transaction or act with like force and effect as if he or she were not so interested or related. No director so interested or related shall, because of such interest or relationship, be disqualified from holding his or her offiee or be liable to the corporation or to any shareholder or creditor thereof for any loss incurred by the corporation under or by reason of such contract, transaction or act, or be accountable for any gains or profits he may have realized therein. Page 3 THESE ARTICLES OF INCORPORATION OF DYNARESOURCE, INC. ARE HEREBY EXECUTED this December 5, 1997. /S/ James Panipinto - ------------------- James J. Panipinto Incorporator STATE OF TEXAS COUNTY OF DALLAS THIS INSTRUMENT WAS ACKNOWLEDGED before me J. PANIPINTO, on this December 5, 1997 /S/ M.L. Hilberth - ----------------- Notary Public, State of Texas (Notary Stamp) ================================================================================ ORGANIZATIONAL RESOLUTIONS OF THE BOARD OF DIRECTORS OF DYNARESOURCE, INC. The undersigned, being each of the duly and validly constituted directors listed in the Certificate of Incorporation of DynaResource, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), acting pursuant to authority granted by the Delaware General Corporation Act, hereby consents that, when the undersigned has executed this consent or an exact counterpart thereof, the resolutions hereinafter set forth shall be deemed to have been adopted to the same extent and with the same force and effect as if adopted at a formal meeting of the Board of Directors of the Corporation, duly called, noticed and held for the purpose of acting upon proposals to adopt such resolutions: Articles of Incorporation RESOLVED, that the duplicate original of the Certificate of Incorporation as filed with the Secretary of State of Delaware on December 7,1997, and the evidence of such filing be inserted in the minute book of this Corporation; and Minute Book; Bylaws; Stock Certificate; Corporate Seal RESOLVED, that the Bylaws submitted to the Board of Directors of this Corporation on this date are hereby adopted as and for the Bylaws of this Corporation, and that the Secretary of this Corporation is hereby instwcted to cause the same to be inserted in the minute book of the Corporation; the Secretary is further ordered to certify a copy of those Bylaws and maintain them in the principal office of the Corporation for the transaction of its business, open for inspection by the shareholders at all reasonable time during office hours; and Page 1 RESOLVED, FURTHER, that the Corporation shall maintain, as part of its corporate record, a minute book which shall include, but not limited to, a record of the Corporation's Articles of Incorporation and amendments thereto, its Bylaws and amendments thereto, minutes of all meetings of its directors, and minutes of all meetings of its shareholders; the time and place of such meetings, whether a meeting was regular or special, and if special, how the meeting was authorized, the notice given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and the proceedings at the meetings; and RESOLVED, FURTHER, that the form of stock certificates of the Corporation shall be in substantially the form as those previously issued by West Coast Mines, Inc., together with such changes as shall be reasonably required to reflect the name of the Corporation, its state of incorporation and the par value of the stock, all as shall be acceptable to the President of the Corporation with the advice of counsel; and RESOLVED, FURTHER, that the stock certificates shall be consecutively numbered beginning with Number 1; that the certificates shall be issued only when the signatures of the President and Secretary, or a facsimile thereof, and the corporate seal or a facsimile, are affixed thereto or impnnted thereon; that each certificate shall state on its face the name of the person to whom the shares representing the certificate are issued, the number and class of shares and the designation of the series, if any, that the certificate represents, the par value of each share represented by the certificate or the fact that the shares are without par value, that the corporation is organized under the laws of Texas; and that the certificates shall set forth in full or in summary form, or shall incorporate by reference, such statements as are required by the Articles of Incorporation or the Delaware General Corporation Laws. RESOLVED, FURTHER, that the seal affixed at this place is hereby adopted as the official seal of the Corporation; and Page 2 Election of Officers RESOLVED, that the following persons are hereby elected to be officers of the Corporation, to hold the office set opposite their respective names for a period of one year from the date hereof and for so long thereafter until their respective successors are chosen and qualified, or until their earlier death, resignation or removal: Chairman, President & CEO Koy W. (K. D.) Diepholz Vice President - Mineral Properties Wayne Henderson Vice President - Investor Relations Brad J. Saulter Secretary Douglas W. Metcalf Treasurer Koy W. (K. D.) Diepholz Issuance of Stock RESOLVED, that the offers of the following person(s) (hereinafter called the "Purchaser(s)") to purchase the number of shares of the authorized and unissued $0.0001 par value common capital stock of the Corporation set opposite the name(s) of such Purchaser(s), for the amount set opposite the name(s) of such Purchaser(s): PURCHASER NO. SHARES AMOUNT West Coast Mines 1000 $1.00 dollar per share is/are hereby accepted, such offer(s) being, in the judgment of the Board of Directors of the Corporation, fair and adequate consideration; RESOLVED, FURTHER, that the President and Secretary of the Corporation are hereby instructed, upon receipt of payment from the aforesaid Purchaser(s), to prepare, execute and deliver to such Purchaser(s) certificates for the number of shares of the Corporation's $0.01 par value common capital stock set forth opposite such Purchaser(s)' name(s) above; and Fiscal Year RESOLVED, that the fiscal year of the Corporation shall be the twelve month period ending December 31 of each calendar year; and Page 3 Bank Account RESOLVED, that the officers of the Corporation are hereby authorized to select such bank or banks, hereinafter collectively referred to as the "Bank," as depository of the funds of the Corporation and to establish and maintain, in the name of and on behalf of the Corporation, such demand deposit accounts with the Bank as may be necessary to conduct the business of the Corporation, subject to such terms and conditions that the officers may from time to time agree to with the Bank; that in connection with the establishment of such accounts, the officers may execute the Bank's regular corporate resolution forms which are incorporated by reference in and made a part of this resolution; and the Secretary is hereby directed to attach a copy of each executed corporate resolution form to these resolutions; and RESOLVED, FURTHER, that the Secretary of the Corporation is hereby authorized and directed to certify to the Bank that such resolutions have been duly adopted and are in conformity with the Articles of Incorporation and Bylaws of the Corporation, to verify to the Bank the names and specimen signatures of the present officers of the Corporation authorized to sign on such accounts, and if and when any new officer is elected or appointed, to verify the fact of that change and the name and specimen signature of each new officer duly authorized by the Board of Directors to sign on such accounts; and Corporate Office RESOLVED, that offices of the Corporation be established and maintained at Towers at Williams Square, 5215 N. O'Connor Blvd., Ste 200, Irving, TX 75039. Transaction of Business RESOLVED, that the officers of the Corporation are hereby directed to obtain, in the name of the Corporation, such licenses and tax permits as may be required for the conduct of the business of the Corporation by any federal, state, county or municipal governmental statute, ordinance or regulation, and to do all things necessary or convenient to qualify the Corporation to transact its business in compliance with the laws and regulations of any appropriate federal, state, or municipal governmental authority; and RESOLVED, that the Treasurer of the Corporation is hereby authorized to pay all charges and expenses incident to or arising out of the organization of the Corporation and to reimburse any person who has made any disbursement therefor; and RESOLVED, that the Corporation recognizes that James J. Panipinto has acted as incorporator of the Corporation solely for the purpose of incorporating the Corporation, and as an accommodation to the Corporation and that the Corporation, for such consideration and action, hereby agrees to indemnify and hold harmless James J. Panipinto from and against any and all claims and liabilities of any kind which may be brought against him by reason of his acting on behalf of the Corporation in such capacities; and such indemnification is provided for pursuant to the provisions of the Texas Business Corporation Act. DATED as of January 15, 1998. /S/ Douglas Metcalf /S/ Koy W. (K. D.) Diepholz /S/ Melvin E. Tidwell /S/ Wayne C. Henderson Page 5 EX-1.8 9 ARTICLES OF AMENDMENT EXHIBIT "1.8" DYNARESOURCE, INC. "ARTICLES OF AMENDMENT" State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "DYNARESOURCE, INC.", FILED IN THIS OFFICE ON THE THIRTENNTH DAY OF FEBRUARY, A.D. 1998, AT 9 O'CLOCK A.M. Great Seal of the State of Delaware [graphic omitted] /S/ Edward J. Freel, Secretary of State - --------------------------------------- AUTHENTICATION: 8928486 DATE: 02-19-98 FIRST AMENDMENT TO CERTIFICATE OF INCORPORATION OF DYNARESOURCE, INC. (PURSUANT TO SECTION 241) 1. Article IV of the Certificate of Incorporation of DynaResource, Inc., filed pursuant to the Delaware Corporation Laws on December 8, 1997. has been amended in its entirety, as follows: The corporation shall have authority to issue twelve million five hundred thousand (12,500,000) shares of its common stock each having a par value of $.O1. Fully paid common shares of the corporation shall not be liable for further call or assessment The authorized common shares of the corporation shall be issued at the discretion of the Board of Directors of the corporation. 2. DynaResource, Inc. has not received any payment for any of its stock. 3. The amendment to the Certificate of Incorporation was adopted by a majority of the Directors named in the Certificate of Incorporation. EXECUTED this 02-06-98 /S/ K.D. Diepholz ------------------ President STATE OF TEXAS ss. ss. COUNTY OF DALLAS ss. THIS INSTRUMENT WAS ACKNOWLEDGED before me by K.D. Diepholz, on this February 6, 1998, who being known to me stated that he was President of DynaResource, Inc., that this instrument was the act and said of said corporation, and that the facts set forth above are true. /S/ Janice E. Haley --------------------------------- Notary Public, State of Texas Comm. Exp. 05-16-99 Notary Stamp 1 EX-2.1 10 PANSY LEE LEASE AGREEMENT EXHIBIT "2.1" DYNARESOURCE, INC. "PANSY LEE LEASE AGREEMENT" MINERAL EXPLORATION LEASE WITH OPTION TO PURCHASE THIS AGREEMENT, is entered into this 23rd day of January 1998 by and between: West Coast Mines, Inc., a California corporation, Towers at Williams Square, 5215 N. O'Connor Road, Suite 200, Los Colinas/Irving, TX 75039 hereinafter called LESSOR (whether one or more); and NEWCREST RESOURCES, INC., a Colorado corporation, 1536 Cole Boulevard, Suite 140, Golden, Colorado 80401, hereinafter called NEWCREST: WITNESSETH: 1. That LESSOR, for and in consideration of the sum of $50,000.00 (the "Initial Payment") in hand paid, and of the covenants and agreements hereinafter contained, has this day granted, leased and let and by these presents does hereby grant, lease and let unto NEWCREST the exclusive right to explore for minerals, on the terms and conditions hereinafter set forth, in, upon and under the following described land situated in Humboldt County, Nevada, to wit: Township 36 North, Range 36 East MDB&M Section 1: Lots 1, 2, 3, 4, S1/2N1/2, Nl/2S1/2, Sl/2SW1/4 TAX PARCEL NO. 05-361-06 containing 555.40 acres, more or less, hereinafter called the "Subject Property". 2. This lease shall remain in force for a term of five (5) years from the date hereof, provided that NEWCREST shall make and tender to the LESSOR the following annual rental payments: a. On the first anniversary of this lease, the sum of $100,000.00 b. On the second anniversary of this lease, the sum of $150,000.00 c. On the third anniversary of this lease, the sum of $250,000.00 d. On the fourth anniversary of this lease, the sum of $250,000.00 Failure of NEWCREST to timely pay any rental payment when due shall, upon ten days prior notice from LESSOR and the failure thereafter of NEWCREST to make such payment within ten days after receipt of notice, terminate this lease. NEWCREST shall have no other liability for failure to make rental payment. Termination of this lease shall relieve NEWCREST of any obligations for payments of any nature becoming due after the date of termination. 3. NEWCREST shall have the exclusive right for itself and its employees and contractors to: (a) enter upon and have possession of the Subject Property, (b) carry out, at its expense, exploration (including road building), sampling, testing, development and any other studies on the Subject Property, (c) use any water to which LESSOR has rights or which is appropriated or otherwise acquired by NEWCREST for its operations on the Subject Property; and (d) remove from the Subject Property reasonable quantities of rock, ores, minerals and metals and transport the same for the purpose of sampling (including bulk sampling), testing and assaying, provided that NEWCREST shall not conduct commercial mining operations under the terms of this lease. NEWCREST shall comply with all applicable laws, rules and regulations, including applicable bonding requirements, and shall carry out its operations in a good and workmanlike manner in accordance with generally accepted exploration practices. NEWCREST shall maintain insurance with a reputable insurance carrier in the amounts customary in the mining industry for projects comparable to the operations hereunder. 4. NEWCREST, with the co-operation of LESSOR as required, shall be responsible for obtaining all appropriate permits or authorizations prior to commencement of work and shall be responsible for performing any required reclamation resulting from its work on the Subject Property. NEWCREST shall have no responsibility for reclamation of, or any form of environmental response or remediation with respect to, any disturbances or other conditions existing on the Subject Property as of the date hereof. NEWCREST on behalf of itself and all of its agents, representatives, employees, licensees, contractors, invitees, guests, vendors, related or affiliated companies, sublessees and/or assigns (collectively "NEWCREST) agrees to indemnify and save LESSOR harmless of and from any and all liability, damage, expense, cause of action, suits, claims or judgments resulting from: (a) injury to person or property which is proximately caused by NEWCREST'S possession of or work on the Subject Property including, without limitation, any act, failure to act, or negligence of NEWCREST; or (b) the placement of any hazardous materials or environmental wastes on the Subject Property by NEWCREST. NEWCREST, at its sole cost and expense, shall perform any reclamation which may be required by any governmental or quasi-governmental agency and indemnify LESSOR from any damage, loss or injury which may be incurred as a result of the presence of such substance on the Subject Property. 5. While this Lease remains in force and effect, NEWCREST shall within sixty (60) days of the last day of each of the first three quarters of each calendar year furnish LESSOR with a report which summarizes NEWCRESTS activities on the Subject Property during that quarter. No documents containing scientific or technical data shall be included with these reports. With the quarterly report furnished by NEWCREST within sixty (60) days after the last day of each calendar year (the fourth quarter report), NEWCREST shall furnish LESSOR one copy of each document in NEWCREST'S possession, exclusive of interpretative material or opinions, not previously furnished to LESSOR that contains scientific or technical data generated by NEWCRESTS exploration operations on the Subject Property during that calendar year. NEWCREST shall not be obligated to furnish data obtained on adjoining properties. LESSOR agrees to and hereby indemnifies and holds NEWCREST harmless from and against any and all losses, claims or liabilities which may be imposed upon or asserted against NEWCREST (by LESSOR or by any other party or entity) on account of or arising directly or indirectly from reliance on the content or accuracy of the reports or documents furnished to LESSOR by NEWCREST under this section. Each report and all accompanying information, data and documents and all information otherwise provided by NEWCREST to LESSOR under this Lease shall be treated as confidential by LESSOR and the contents thereof shall not be disclosed by LESSOR to any third party other than LESSORS legal advisors and technical consultants without NEWCRESTS prior written consent; provided, however, that such legal advisors and technical consultants shall agree in writing to keep such information confidential as provided herein. 6. LESSOR represents and warrants to NEWCREST that: a. LESSOR has not transferred or encumbered any interest whatsoever in the Property by any document which does not appear in the public real property records of Humboldt County, Nevada; b. Except for this Lease, LESSOR is not a party to any existing oral or written contract of any kind (recorded or unrecorded) which does or could have any impact whatsoever with regard to record, possessory, legal or equitable title to the Subject Property and/or the exploration of the Subject Property; c. There are no pending or threatened actions, suits, claims or proceedings with respect to the Subject Property; d. LESSOR owns one hundred percent (100%) of the entire and undivided record title to the Subject Property, free and clear of any defects, liens or encumbrances whatsoever. 7. NEWCREST represents and warrants to LESSOR and LESSOR represents and warrants to NEWCREST, that: a. That party has the capacity to enter into and perform this Lease and all transactions contemplated herein and that any required corporate and other actions necessary in order to authorize entry into and performance of this Lease have been properly taken; b. This Lease has been duly executed and delivered by that party and is valid and binding upon that party in accordance with its terms; c. The person or persons executing this Lease as or on behalf of that party is or are fully authorized to do so; and d. That party will not breach any other agreement or arrangement by entering into or performing this Lease. 8. OPTION TO PURCHASE. At any time while this lease is in effect, NEWCREST may, by notice to LESSOR, elect to purchase all of LESSOR'S right, title and interest in and to the Subject Property for a total purchase price of $2,000.000.00. The price shall be exclusive of and in addition to the Initial Payment and all of the rental payments provided for in Section 2 of this lease. Any rentals not paid at the time NEWCREST elects to purchase LESSOR'S interest shall be paid in full along with the purchase price. The purchase of the property shall be consummated no later than thirty days after the date of receipt by LESSOR of the notice from NEWCREST exercising the Purchase Option, at a time and place agreed upon by the parties. At the closing of the purchase of the Subject Property, NEWCREST shall deliver to LESSOR $2,000.000.00 plus the amount of any unpaid rentals in immediately available funds, and LESSOR shall deliver to NEWCREST a deed conveying to NEWCREST all of LESSOR'S right, title and interest in and to the Subject Property together with all rights-of-way, easements, improvements, structures, fixtures and all other property rights appurtenant to and/or owned or used by LESSOR in connection with the described real property, and any right, title and interest in and to any adjoining or adjacent roads or rights-of-way, all vacated roads and rights of way, all strips and gores of land adjoining the land, and all water and water rights appurtenant to the property unless otherwise specifically excluded; subject to and provided, however, that LESSOR shall retain and reserve for itself a 2-1/2% Gross Production Royalty, as defined in Exhibit A attached hereto, and paid in the manner described in Exhibit B attached hereto, on any minerals sold by Newcrest that were mined within the surface boundaries of the Subject Property extended downward vertically. As of the time of the closing, the Subject Property shall be free and clear of all liens and encumbrances. NEWCREST shall pay all closing costs. Upon the closing of the purchase of the Subject Property, this Lease shall automatically be terminated effective as of the date of the closing, provided, however, that all representations and warranties made by the LESSOR hereunder shall survive closing and delivery of the deed. 9. While this lease is in effect, LESSOR shall timely pay all taxes and assessments levied on the Subject Property by any state or local governmental authority, and shall pay when due all encumbrances, liens or other charges affecting or relating to the Subject Property. If LESSOR fails to make any of these payments when due, NEWCREST may, but shall not be obligated to, make them on behalf of LESSOR and, if paid by NEWCREST, NEWCREST shall receive a corresponding credit toward the purchase price at closing. 10. All notices, payments, consents, requests, demands, waivers or other communications required or permitted by the terms of this Lease shall be in writing, and each such communication shall be either personally delivered or placed in the United States certified mail, postage prepaid, return receipt requested. Each communication shall be either delivered or mailed to NEWCREST or to LESSOR (as appropriate) at their respective addresses for notice set forth in the initial paragraph of this Lease. 11. The rights and obligations of the parties hereto shall be fully assignable, provided, however, that the assigning party shall first obtain the prior written consent to the assignment by the other party, and provided further that the other party shall not unreasonably withhold such consent. Not withstanding the foregoing, NEWCREST may assign its rights hereunder only to an affiliate of NEWCREST or a financially and technically capable and responsible party. "Affiliate" means any person, partnership, joint venture, corporation or other form of enterprise which directly controls, is controlled by, or is under common control with NEWCREST. For purposes of the preceding sentence, "control" means possession, directly or indirectly through one or more intermediaries, of the power to direct or cause direction of management and policies through (i) the legal or beneficial ownership of voting securities or membership interests; (ii) the right to appoint managers, directors or corporate management; (iii) contract; (iv) operating agreement; (v) voting trust; or otherwise. It is the intention of the parties that a "financially and technically capable and responsible party' shall be a partnership, joint venture, corporation or other form of enterprise which is able to fund and perform the professional evaluation and development of the Subject Property. For example, and without limitation, a party of such significant corporate stature such as Newmont Gold Company, Homestake Mining Company, Placer Dome Inc., or Barrick Gold Corporation is an acceptable assignee. 12. The parties agree to execute and deliver such additional or further formal assurances or other written documents, in proper and recordable form, as may be reasonably necessary to carry out the intent, purposes and terms of this Lease including, without limitation, a memorandum of this Lease to be recorded in the official records of Humboldt County, Nevada. LESSOR shall not make this Lease of public record without NEWCREST'S prior written consent. If NEWCREST does not exercise the Option to Purchase, or upon termination of this Lease, NEWCREST shall deliver to LESSOR a quitclaim deed releasing the recorded memorandum. 13. This Lease shall inure to the benefit of, and be binding upon and enforceable by NEWCREST and LESSOR and their respective successors and assigns. IN WITNESS WHEREOF, the parties have executed this Lease effective as of the day and year first above written. NEWCREST: LESSOR: WEST COAST MINES, INC., a California corporation By: /S/ K.D. Diepolz ---------------------------- K. D. Diepholz, Chairman/CEO STATE OF COLORADO ) ) ss COUNTY OF JEFFERSON) The foregoing instrument was acknowledged before me on February 12 1998, by R.W. BARKER as President of Newcrest Resources, Inc., a Colorado corporation. Witness my hand and official seal. My Commission expires: 6/20/98. /S/ Nancy H. Sotak --------------------- Notary Public STATE OF TEXAS ) ) ss COUNTY OF DALLAS) The foregoing instrument was acknowledged before me on 2/3/1998 by K.D. Diepholz, Chairman/CEO of West Coast Mines, Inc., a California corporation. Witness my hand and official seal. My Commission expires: 4/13/2001 /S/ Cindy L. Booker -------------------- Notary Public EXHIBIT A: GROSS PRODUCTION ROYALTY DEFINITION The term "Gross Production Royalty" ("GPR") as used in the Lease shall mean the gross proceeds received by NEWCREST from the sale of minerals, or products derived from minerals, from the Property after deducting the following: (a) The cost of transporting mineral product from the concentrator to a smelter, refiner or other place of treatment, provided that the purpose of the transportation cost is to transport a concentrate containing recoverable gold to a smelter for treatment. No deduction for transportation shall be allowed with respect to the transfer or conveyance of gold dore. (b) All state and federal production taxes, severance taxes and sales, privilege and other taxes measured by production or the value of production. The GPR will be based upon the Sales Price of the specific metals and commodities as defined below: (a) Refined gold (gold meeting the specifications of the London Bullion Market Association) shall be deemed to have been sold during the month when it is produced, and the Sales Price thereof shall be deemed to be an amount calculated by multiplying the number of produced ounces by the average during the same month of the London Bullion Market Associates afternoon gold price fixings for one ounce of refined gold; (b) Refined silver (silver meeting the specifications established for the New York Silver Price published by Handy & Harman) shall be deemed to have been sold during the month when it is produced, and the Sales Price thereof shall be deemed to be an amount calculated by multiplying the number of produced ounces by the average during the same month of New York Silver spot price quotations published by Handy & Harman for one ounce of refined silver: (c) In the case of any minerals other than gold or silver, Sales Price means the amount calculated by multiplying the number of units of the refined metal or other mineral product produced during any month by the average of the daily spot prices during the same month as quoted by the London Metals Exchange for one unit of that refined metal or mineral product; and (d) Sales Price shall be determined as set forth in subparts (a), (b) and (C) above, irrespective of any actual arrangements for the sale or other disposition of minerals by NEWCREST, specifically including but not limited to forward sales, futures trading or commodities options trading, and any other price hedging, price protection or speculative arrangements involving the possible delivery of gold, silver or other minerals from the Subject Property. If, for any reason, published prices for minerals produced from the Subject Property are not available from the sources set forth above, the parties shall select such other published commodity exchange, producer, trade publication or other listing as will fairly reflect the spot price at which sales of such commodities are being effected at the time of sale by NEWCREST. EXHIBIT B: GROSS PRODUCTION ROYALTY PAYMENT PROCEDURES 1. Computation of Royalty. If and each time that minerals mined from the Subject Property are sold by NEWCREST, NEWCREST shall calculate the Gross Production Royalty ("GPR") realized by NEWCREST in connection with the sale. The GPR so calculated shall then by multiplied by the Applicable Percentage and NEWCREST shall pay LESSOR the resulting amount. LESSOR shall have no right whatsoever to take minerals or royalty "in kind". 2. Treatment and Sale. NEWCREST shall have the right (but not the obligation) to concentrate, mill, smelt, refine, upgrade or otherwise process or beneficiate minerals mined from the Subject Property, at locations on or off the Subject Property. NEWCREST shall not be liable for any values lost in processing under sound processing practices and procedures, and no royalty shall be payable to LESSOR with respect thereto. No earned mineral production royalty shall be payable to LESSOR for or with respect to reasonable quantities of minerals which are not sold by NEWCREST but are used by NEWCREST for assaying, treatment amen-ability, metallurgical or other analytical processes or procedures. 3. Commingling. NEWCREST shall have the right of mixing or commingling, at any location and either underground or at the surface, any minerals mined from the Subject Property with any ores, metals, minerals, or mineral products mined from other lands, provided that NEWCREST shall determine the weight or volume of, sample and analyze all such ores, metals, minerals and mineral products before the same are so mixed or commingled. Any such determination of weight or volume, sampling and analysis shall be made in accordance with sound and generally accepted sampling and analytic practices and procedures. The weight or volume and the analysis so derived shall be used as the basis of allocation of earned mineral production royalties payable to LESSOR hereunder in the event of a sale by NEWCREST of materials so mixed or commingled. 4. Statements and Payments. Each earned mineral production royalty payment due to LESSOR hereunder shall be made within thirty days after the end of the calendar quarter during which minerals are sold. Each such payment shall be accompanied by an itemized statement setting forth all facts and figures necessary in order to verify the accuracy of the amount of the payment. Each payment due to LESSOR hereunder shall be made by a single check. Such payments shall be made payable to WEST COAST MINES, INC. or to such other persons or entities as may be designated in writing by LESSOR as the payees for purposes of payments due to LESSOR under this Lease. Anything to the contrary in this Lease not with-standing, NEWCREST shall not be in default hereunder for failure to make any payment to LESSOR in timely fashion if LESSOR fails or refuses to give NEWCREST written notice designating the persons or entities to be the payees named on each and every check to be sent to LESSOR by NEWCREST hereunder, and NEWCREST shall have no duty with respect to the disbursement or application of any payments to LESSOR after such payments are made in accordance with this Paragraph 4. 5. Audit. LESSOR shall have a period of ninety days after the receipt by LESSOR of each statement provided for in Paragrpah 4 of this Exhibit B to give NEWCREST notice of any objection by LESSOR thereto. If LESSOR fails to object to a particular statement within ninety days after the receipt by LESSOR thereof, then, subject only to the provisions of Paragraph 6 ("Adjustments") of this Exhibit B the accuracy of such statement and the amount of any payment transmitted therewith shall be conclusive with respect to LESSOR. If LESSOR objects to the accuracy of a particular statement or the amount of the payment transmitted thereby within ninety days after the statement is received by LESSOR, a certified public accountant mutually acceptable to the parties and retained by LESSOR may promptly audit NEWCREST's relevant books and records at an office selected by NEWCREST and during NEWCREST's normal business hours. Any such audit shall be made at the sole expense of LESSOR if the audit determines that the payment in question was accurate to within three percent (3%). Any such audit shall be made at the sole expense of NEWCREST if the audit determines that the payment in question was inaccurate by more than three percent (3%). In any case, the payment in question shall be adjusted to reflect the results of the audit. 6. Adiustments. Any charges, costs or expenses or any adjustments thereto which are actually made and given to NEWCREST by a purchaser, shipper, processor or other creditor that were not taken into account in a statement to LESSOR which accompanied a preceding earned mineral production royalty payment shall be taken into account in determining the amount of the next earned mineral production royalty payment, but no such charges or adjustments shall otherwise affect the conclusiveness of preceding statements or payments. MEMORANDUM MINERAL EXPLORATION LEASE WITH OPTION TO PURCHASE THIS MEMORANDUM MINERAL EXPLORATION LEASE WITH OPTION TO PURCHASE is made and entered into effective as of January 23, 1998, BY AND AMONG WEST COAST MINES, INC., a California corporation, Towers at Williams Square, 5215 N. O'Connor Road, Suite 200, Los Colinas/Irving, TX 75039 (referred to below as "LESSOR") AND NEWCREST RESOURCES, INC., a Colorado corporation 1536 Cole Boulevard, Suite 140 Golden, Colorado 80401 Phone: 303-239-8796 Fax: 303-239-9180 (referred to below as "NEWCREST") 1. Definitions For all purposes of this Memorandum, the following terms shall have the definitions specified in this Section 1: (a) "Effective Date" means the date set forth in the initial paragraph of the Memorandum; (b) "Lease" means that certain Mineral Exploration Lease with Option to Purchase between LESSOR and NEWCREST dated as of the Effective Date for the Property for which this Memorandum is to give record notice. (c) "Property" means and includes the real property described in Exhibit A attached hereto and made a part hereof. (d) "Option to Purchase" means the option to purchase the Property granted to Newcrest in Section 4 of this Memorandum and in Section 7 of the Lease; 2. Grant and Term of Lease For and in consideration of the mutual covenants and conditions contained herein and in the Lease, the receipt and adequacy as consideration whereof is hereby acknowledged by LESSOR, LESSOR has leased and hereby leases the Property to NEWCREST on the terms and conditions contained in the Lease. Unless sooner terminated as hereinafter provided, the Lease shall remain in full force and effect for a term of five (5) years beginning on the Effective Date and expiring on the fifth anniversary of the Effective Date. 3. Exclusive Possession While the Lease is in force and effect, and subject to all of the terms and conditions thereof, NEWCREST shall have the exclusive right for itself and its employees and contractors to enter upon and have possession of the Property. 4. Purchase Option At any time while the Lease is in effect, NEWCREST may, by notice to LESSOR, elect to purchase all of LESSORS right, title and interest in and to the Property at the price set forth in the Lease. At the closing of the purchase of the Property, LESSOR shall deliver to NEWCREST a deed conveying to NEWCREST all of LESSOR'S right, title and interest in and to the Property free and clear of all liens and encumbrances, subject, however, to the reservations contained in the Lease. Upon the closing of the purchase of the Property, the Lease shall automatically be terminated effective as of the date of the closing. 5. Assignment/Binding Effect The respective rights and obligations of LESSOR and NEWCREST hereunder shall be freely assignable, subject, however, to the conditions contained in paragraph 11 of the Lease. The Lease shall inure to the benefit of, and be binding upon and enforceable by, NEWCREST and LESSOR and their respective successors and assigns. 6. Notice All notices, payments, consents, requests, demands, waivers or other communications required or permitted by the terms of the Lease shall be in writing, and each such communication shall be either personally delivered or placed in the United States certified mail, postage prepaid, return receipt requested. Each communication shall be either delivered or mailed to NEWCREST or to LESSOR (as appropriate) at their respective addresses for notice set forth in the initial paragraph of the Lease. 7. Additional Lease Terms Additional terms and conditions of the Lease are contained in the unrecorded Lease. Nothing contained herein enlarges or diminishes the respective rights and obligations of either NEWCREST or LESSOR under their more comprehensive Lease. Information concerning the Lease may be obtained from NEWCREST at the address for NEWCREST given above. IN WITNESS WHEREOF, the parties have executed this Memorandum and the Lease effective as of the day and year first above written. LESSOR: NEWCREST: WEST COAST MINES, INC., a California Corporation By: /S/ R.W. Barker By: /S/ K.D. Diepholz - ----------------------------- -------------------------------- Typed name: R. W. BARKER K.D. DIEPHOLZ, Chairman/CEO Title: President STATE OF COLORADO ) ) ss. COUNTY OF JEFFERSON) The foregoing instrument was acknowledged before me on February 12, 1998, R. W. BARKER as President of Newcrest Resources, Inc., a Colorado corporation. Witness my hand and official seal. My Commission expires: 6/20/98 /S/ Nancy H. Sotak ------------------- Notary Public STATE OF TEXAS ) ) ss. COUNTY OF Dallas) The foregoing instrument was acknowledged before me on 2/3/1998 by K. D. Diepholz, Chairman/CEO of West Coast Mines, Inc., a California corporation. Witness my hand and official seal. My Commission expires: 4/13/2001 /S/ Cindy L. Booker -------------------- Notary Public EXHIBIT A Attached to and made a part of Memorandum Mineral Exploration Lease with Option to Purchase dated January 23, 1998 The Property consists of the following described land situated in Humboldt County, Nevada, to wit: Township 36 North, Range 36 East MDB&M Section 1: Lots 1, 2, 3, 4, S1/2Nl/2, Nl/2S1/2, S1/2SWl/4 TAX PARCEL NO. 05-361-06 containing 555.40 acres, more or less. wcstrnenx. lse - -------------------------------------------------------------------------------- NEWCREST RESOURCES, INC. 1536 COLE BLVD., SUITE 140 PH. 303-239-8796 GOLDEN, CO 80401 CHECK 3453 DATE February 13,1998 PAY TO THE West Coast Mines, Inc. $50,000.00 ORDER OF Fifty thousand and no/100 ------------------------------ DOLLARS /S/ R.W. Barker - -------------------------------------------------------------------------------- DATE DESCRIPTION 2/13/98 Initial Payment Mineral Exploration Lease with Option to Purchase Dated 1/23/98 1693-022 AMOUNT $50,000.00 - -------------------------------------------------------------------------------- RECEIPT Received this 18th day of February, 1998, Newcrest Resources, Inc. Check No. 3453 for $50,000.00 as full payment of the Initial Payment for that certain Mineral Exploration Lease With Option to Purchase dated January 23, 1998 from WEST COAST MINES, INC. to Newcrest Resources, Inc., describing the following land situated in Humboldt County, Nevada. Township 36 North, Range 36 East M.D.B.&M. Section 1: Lots 1, 2, 3, 4, S1/2N1/2, N1/2S1/2, S1/2SW1/4 Containing 550.40 acres Assessor's Parcel No. 05-361-06 WEST COAST MINES, INC., a California corporation TIN: 94-1589426 By: /S/ K.D. Diepholz --------------------------- K.D. Diepholz, Chairman/CEO September 29, 1998 Mr. Koy Diepholz West Coast Mines, Inc. Towers at Williams Square 5215 N. O'Conner Rd., Suite 200 Irving, Texas 75039 Dear Mr. Diepholz: Accompanying this letter is a brief summary of our activities on West Coast's Pansy Lee mine property near Winnemucca, Nevada. A more comprehensive report will be forthcoming later in the year. If you have any questions please call either Bob Barker or me at our office in Golden, Colorado. Best regards, /S/ Bob McCusker ----------------- R. T. McCusker Principal Geologist Newcrest Resources, Inc. 1536 Cole Blvd., Suite 140. Golden, CO 80401 U.S.A. Phone: (303) 239-8796 Fax: (303) 239-9180 TO: Mr. Koy Diepholz/West Coast Mines, Inc. FROM: Newcrest Resources, Inc. DATE: September 29, 1998 SUBJECT: Pansy Lee Progress Report, Humboldt County, Nevada Since finalizing the mining lease with West Coast Mines in January of 1998. Newcrest has completed detailed geological mapping of Section 1, at a scale of 1:6,000 (1"=500'), conducted a grid soil and rock chip sampling program and undertaken ground magnetics and time domain IP/resistivity surveys over the entire project area. Reverse circulation drilling commenced on September 26 and the first of three to four holes is currently in progress. Analytical results for 639 soil samples have been received and plotted. Initial soil sampling was conducted on a 200 ft 200 ft grid. Locally, this grid was filled in at a 100 ft x 100 ft spacing. All soil samples were sieved to -10+80 mesh and analyzed for Au, Ag, trace and base metals using FA/AA and 32-element ICP. By far the strongest Au values in soil form a large (1.600 ft x 1,800 ft) coherent anomaly, as defined by the ~ 30 ppb Au, in an area centered 2,600 ft northwest of the Pansy Lee mine. Assay results were also received for 350 rock chip and mine dump samples. In general, Au values ranged from <5 ppb to over 12 oz Au/t. The higher Au values are closely associated with narrow zones of highly fractured and brecciated rock. Time domain and gradient array IP/resistivity, and ground magnetic surveys were completed over the project area in late July. Results from the IP survey indicate the presence of a large, broadly arcuate shaped chargeability anomaly extending from well north of Gee Hill, southward along the west and southwest flanks of GEE Hill. Newcrest expects to drill three to four, 1,500-ft-deep RC holes to test a number drill targets. These targets include a strong Au and coincident chargeability anomaly in the NW part of Section 1, the complex structural zone in the vicinity of the Pansy Lee mine, and an area near the summit of GEE Hill, where broadly developed hydrothermal alteration occurs. Assay results for the first hole are pending. EX-2.2 11 MINE OPERATING AGREEMENT EXHIBIT "2.2" DYNARESOURCE, INC. "MINE OPERATING AGREEMENT" "MOAG" MINE OPERATING AGREEMENT This Mine Operating Agreement (the "Operating Agreement") is made effective as of August 19, 1998, between West Coast Mines, Inc. ("West Coast") on the one hand and Minera Finisterre, S.A. de C.V. ("Minera" or "Finisterre") and Golden Hemlock Explorations, Ltd. ("Golden") (collectively "Finisterre/Golden") on the other hand. For and in consideration of the mutual covenants contained in this Operating Agreement, and the forbearance of certain actions, the sufficiency of which is expressly acknowledged and agreed to by the parties hereto, the parties enter into this Agreement on the terms and conditions set forth as follows: RECITALS WHEREAS, effective as of December 20, 1996, Dynacap/San Jose Resource Group, L.L.C. ("Dynacap"), West Coast and Finisterre/Golden (collectively the "Parties") entered into that certain Amended and Restated Loan Agreement (the "Amended Loan Agreement") setting forth the terms and conditions of the Parties' respective obligations relating to the Mine as that term is defined therein. Dynacap has transferred and assigned all its right, title and interest in and to the Amended Loan Agreement and in and to the Mine to West Coast. Golden has acquired one hundred percent (100%) of Minera and/or the rights in and to one hundred percent (100%) of Minera; Finisterre/Golden has conducted exploration activities at the Mine and otherwise undertook activities under the Amended Loan Agreement. Disagreements between the Parties have arisen with respect to the scope of, the interpretation of, and the performance under the Amended Loan Agreement; Following the execution of the Amended Loan Agreement, West Coast has contributed additional sums and consideration to the Mine in an amount not less than $150,000.00 U.S. Dollars. Disagreements have arisen between the Parties regarding the purpose and treatment of such payments; In order to resolve the current disputes between the Parties and to further progress the exploration, development and operation of the Mine, the Parties desire to amend and restate the Amended Loan Agreement. West Coast and Finisterre/Golden hereby further amend and restate the Amended Loan Agreement and intend that the terms of this Operating Agreement as set forth herein shall govern and control the obligations, responsibilities, duties and rights of the Parties from this day forward. ARTICLE 1 DEFINITIONS 1.01 For purposes of this Agreement, the following definitions shall be used: (a) Available Cash at any point in time means (i) Cash Flow, plus (ii) decreases in Cash Reserves (as defined in Section 1.01(e)), less (iii) Operating Expenses, and less (iv) increases in Cash Reserves. (b) Cash Flow for any period of time means any consideration without limitation, whether cash, stock, other interests or anything of value, derived from the Operation of the Mine. (c) Operating Expenses for any period of time means subject to the limitations expressed below, the costs, charges, expenses and disbursements which Finisterre/Golden (or West Coast, as the case may be) shall directly incur and pay in connection with development, maintenance, operation, management and production of the Mine, as approved by the Operating Committee (defined in Article 6 below) and determined in accordance with generally accepted accounting principles consistently applied. Any indebtedness, including principal and interest on any indebtedness for which Finisterre/Golden is liable and which was incurred to finance the Operation of the Mine will not be an Operating Expense, unless approved unanimously by the Operating Committee. In order for any payment to qualify as an Operating Expense, such payment must be approved by the Operating Committee through the operating budget as provided in Article 6.02 or through written consent of the Operating Committee. Operating Expenses do not include costs, charges, expenses or disbursements for exploration of the Mine unless any such funds disbursed and/or contributed for exploration are generated from production of the Mine and are approved unanimously by the Operating Committee and disbursed via the Trust Account. Operating Expenses do not include income taxes paid by Finisterre/Golden or West Coast and do not include interest or principal paid to West Coast. Operating Expenses do not include property payments. (d) Operation of the Mine means any and all activities which are derived from or in any way related to the Mine, including without limitation, exploration of the Mine, any mining activities, the sale of minerals extracted from the Mine, the sale or licensing of any rights to derive minerals or income from the Mine, the sale of any rights in the Concessions, and the sale, transfer, or assignment of any rights or interests whatsoever to directly or indirectly, develop, operate, control or produce the Mine. (e) Cash Reserves for any period of time means such amounts of cash (derived from production of the Mine) to be held in the Trust Account described in Article 4 as the Operating Committee deems necessary for contingent or unforeseen liabilities or for obligations of Finisterre/Golden arising out of or related to the business of the Operation of the Mine. The parties anticipate that additional funds will be infused by Finisterre/Golden or parties related to Finisterre/Golden to be deposited into the Capital or Exploration Accounts described in Article 4. Cash Reserves shall be established and approved by the Operating Committee for the proper expenditure of any such earmarked cash infusions into the Capital or Exploration Accounts. (f) The Mine means the various mineral claims and/or concessions located in Sinaloa, Mexico described on the attached Exhibit "A," together with any mineral claims, interest, rights or concessions acquired or optioned by Finisterre/Golden, its parent or subsidiary companies, successors, assigns, transferees and related or affiliated companies within a ten-mile radius (measured from the geographical center point) of the claims and/or concessions described on Exhibit "A" (the "Concessions") and including any replacement or successor claims or concessions, and all mining leases and other mining interests derived from any such claims. The definition of Mine is intended to be construed as broadly as possible such that all questions regarding rights, interests, concessions, claims or the like are to be resolved in favor of being included within the definition of Mine. Finisterre represents and covenants that Finisterre is the legal owner of the Mine and legal holder of the Concessions. Equity interest in the Mine is achieved through ownership of stock in Finisterre. Election of Net Profits Interest 1.02 Pursuant to Articles 2.04 and 2.05 of the Amended Loan Agreement, West Coast, at its sole discretion, hereby elects to maintain its 24.9% Net Profits Interest of Available Cash over the life of the Mine (hereinafter referred to as the "24.9% Net Profits Interest") as defined and granted in the Amended Loan Agreement. The 24.9% Net Profits Interest is a pre-tax, carried interest and is owned by West Coast for so long as the Mine is in existence and cannot be avoided, diluted, encumbered or hindered in any way without first obtaining West Coast's prior written consent thereto. The 24.9% Net Profits Interest shall entitle West Coast to 24.9% of all Available Cash generated from the Mine over the life of the Mine. West Coast's 24.9% Net Profits Interest set forth herein is owned and controlled exclusively by West Coast, unencumbered by any other interest, right, option, lien or agreement. Loan and Interest Debt Satisfaction 1.03 For good and valuable consideration, including that which is noted herein, West Coast hereby cancels, forgives, and forever waives any claims that it has or had to repayment of principal and interest under Articles 1 and 2 of the Amended Loan Agreement and the December 20, 1996 Promissory Note referenced therein. In exchange for the debt forgiveness, previous capital contributions and other good and valuable consideration, Finisterre/Golden grants to West Coast the 24.9% Net Profits Interest, the shares of stock in Finisterre noted in Article 2 below, the option described in Article 2.03, and other good and valuable consideration. West Coast hereby covenants that it will execute simultaneous with the execution of this Operating Agreement the Cancellation of Promissory Note attached hereto as Exhibit "B." Statements 1.04 On or before the tenth day following the end of each calendar month, the Operating Committee shall furnish to West Coast: (a) a statement detailing the Available Cash, and specifying the Cash Flow, decreases in Reserves, Operating Expenses, exploration expenses, and increases in Reserves for the preceding month; and (b) payments due under this Agreement for the preceding month. The Parties hereby covenant and agree to promptly provide and make available to the Operating Committee all information and data requested by the Secretary to the Operating Committee, so that the Operating Committee can provide the statements herein on a timely and informed basis. 24.9% Net Profits Interest Payments 1.05 The Operating Committee as defined below shall be responsible for determining all payments to be made to West Coast under this Article 1 for their 24.9% Net Profits Interest. Absent any contrary decisions by the unanimous vote of the Operating Committee, West Coast shall be entitled to payments for their 24.9% Net Profits Interest on the 15th day of each month following any Operation of the Mine. Right of First Refusal 1.06(a) West Coast hereby grants a right of first refusal to Golden for the purchase of the 24.9% Net Profits Interest and its Minera Finisterre stock should West Coast elect to sell, convey, or otherwise dispose of the 24.9% Net Profits Interest or its Minera Finisterre stock and hereby covenants and agrees that West Coast shall offer the 24.9% Net Profits Interest and its Minera Finisterre stock in writing for purchase by Golden prior to selling, conveying, or otherwise disposing of the 24.9% Net Profits Interest or its Minera Finisterre stock to any entity or person at or for the same consideration offered to such entity or person. Upon receipt of written notice from West Coast, Golden shall have ten (10) days to elect to exercise its right of first refusal and thereafter, twenty (20) days to close. Should Golden fail to elect to exercise its right of first refusal timely, or fail to close timely, Golden's right of first refusal expires. 1.06(b) Should Golden elect not to continue ownership of Minera or ownership, operation, development, exploration or production of the Mine, Golden hereby (1) grants a right of first refusal to West Coast for the purchase of its interest in Minera and/or the Mine and hereby covenants and agrees that Golden shall offer its interest in Minera and/or the Mine in writing for purchase by West Coast prior to selling, conveying, or otherwise disposing of such interest to any entity or person at or for the same consideration offered to such entity or person and (2) agrees to assign to West Coast immediately without delay or condition, its option agreement dated April 23, 1996 (defined as the "126 Agreement" in Article 2.07). Upon receipt of written notice from Golden, West Coast shall have sixty (60) days to elect to exercise its right of first refusal and thereafter, one hundred twenty (120) days to close. Should Golden fail to continue ownership of Minera or ownership, operation, development, exploration or production of the Mine, such failure shall not diminish, dilute or reduce Minera's obligations and responsibility to develop the Mine and perform under this Operating Agreement. 1.06(c) Upon the sale, transfer, conveyance, assignment or exchange of any of Finisterre's or Golden's interest, right, ownership, claim or control in the Concessions or the Mine, all consideration without limitation, including cash, stock or other interests of value, received for such sale, transfer, conveyance, assignment or exchange shall be immediately deposited into the Trust Account and disbursed in accordance with Article 4.01. 1.06(d) Any deviation of Article 1.06(c) above shall specifically require the unanimous written consent of the Operating Committee. Value Added Tax 1.07 Any liability for value added tax is the sole liability of Finisterre/Golden, and such tax shall not reduce any payments to West Coast under this Operating Agreement. Taxes, such as sales taxes, incurred on purchases of equipment in connection with the Operation of the Mine may be an Operating Expense, if such purchase has been approved by the Operating Committee. Withholding Tax 1.08 The parties understand that the payments under this Operating Agreement may be subject to a withholding tax pursuant to the Convention between United States and Mexico for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Income Taxes, which rate is subject to a reduction to ten percent (10%) upon certain conditions. For so long as the treaty is in effect, Finisterre/Golden and West Coast shall use their best efforts to comply with the conditions so as to qualify for ten percent (10%) withholding tax. ARTICLE 2 EQUITY INTEREST 2.0 1(a) Transfer of Minera Finisterre Shares. Finisterre/Golden agree to transfer to West Coast twenty-five percent (25%) of the one hundred percent (100%) of shares of stock presently issued and outstanding in Minera Finisterre, S.A. de C.V. Such number of shares shall be calculated by determining the total number of Minera Finisterre shares outstanding and multiplying such number by twenty-five percent (25%). Such shares shall be immediately transferred to West Coast upon execution of this Operating Agreement. Except as provided in Article 2.04 or as otherwise approved by the unanimous vote of the Operating Committee, West Coast's twenty-five percent (25%) ownership of Minera Finisterre shares, shall not be diluted or diminished in any way. 2.0 1(b) Private Placement of Golden Shares. Simultaneous with the final execution of this Operating Agreement, Golden shall submit private placement documents to West Coast for the private placement of 333,333 shares of Golden stock at fifteen cents ($. 15) (Cnd.) per share, together with Options for 333,333 shares of Golden stock, exercisable by West Coast within a two-year period, at fifteen cents ($.15) (Cnd.) during the first year, and at seventeen and one-half cents ($.175) (Cnd.) per share during the second year. Upon the full and final execution of this Operating Agreement, and upon West Coast's receipt of the private placement documents described in this Article 2.01(b) and upon West Coast's receipt of the Finisterre shares described in Article 2.01(a) above, West Coast shall tender the sum of $50,000.00 (Cnd.) to Golden. Golden's receipt of the $50,000.00 (Cnd.) is to be used by Golden to return the Company to regulatory compliance with the Vancouver Stock Exchange. Capital Contribution Calculation 2.02 For purposes of calculating the equity contributions made by the parties, the following estimated amounts are hereby agreed to be the capital contributions of the parties made to date: Golden $4,500,000.00 (Cnd.) 75% West Coast $l.500~000.00 (Cnd.) 25% ---------- ------------------------- Total $6,000,000.00 (Cnd.) 100% The $4,500,000.00 (Cnd.) assigned to Golden is comprised primarily of property and cash payments and the waiver of the obligations of Golden to contribute $250,000.00 (U.S.) to the Capital Account (see Article 2.06.). The $1,500,000.00 (Cnd.) assigned to West Coast is comprised primarily of cash payments and forgiveness of debt, accelerated payback and interest as noted herein. The contribution calculations contained within this paragraph shall serve as the basis for future rights for equity contributions provided for under this Operating Agreement. Thus, the parties' interests in Minera Finisterre will vary according to the party's actual contribution in accordance with the following formula: % = actual expenses of a party x 100 actual expenses of both parties West Coast Equity Infusions 2.03(a) S350.000.00 (Cnd.) Commitment. Notwithstanding the above, West Coast will contribute no less than $350,000.00 (Cnd.) on or before December 31, 1999, With respect to this $350,000.00 (Cnd.) contribution by West Coast, Golden shall have no right to contribute unless agreed to by West Coast. West Coast shall receive Minera Finisterre stock directly in proportion to the increase in its capital contribution divided by the total capital contributions made by Golden and West Coast. The calculations for equity interest shall be made based upon the total capital contributions by the parties of $6,000,000.00 (Cnd.), and shall be increased incrementally based upon the percentage of additional contribution. Therefore, West Coast will earn additional equity interest of four and thirteen one-hundredth's percent (4.13%) of the additional outstanding Minera Finisterre stock by contributing $350,000.00 (Cnd.), thereby increasing West Coast's total capital contribution to $1,850,000.00 (Cnd.), or twenty-nine and thirteen one-hundredth's percent (29.13%) of the total $6,350,000.00 (Cnd.) contributed by the Parties. Thus, at the conclusion of West Coast's $350,000.00 (Cnd.) contribution, West Coast will own twenty-nine and thirteen-hundredth's percent (29.13%) of the outstanding stock in Minera Finisterre. West Coast's failure to contribute the $350,000.00 (Cnd.) on or before December 31, 1999, shall result in the immediate forfeiture of the First and Second Options defined below. The Option forfeiture shall be Finisterre/Golden's sole remedy for West Coast's failure to contribute said $350,000.00 (Cnd.).. 2.03(b) West Coast's First Option. West Coast will have the exclusive option (the "First Option") to contribute up to a total of $650,000.00 (Cnd.) to acquire or earn additional equity interest (i.e., Minera Finisterre stock) in proportion to the contributions of the previous Article 2.02 and 2.03(a). The First Option shall expire December 31, 1999. With respect to any contribution(s) made by West Coast in connection with this First Option, Golden shall have no right to contribute unless agreed to by West Coast. West Coast shall receive Minera Finisterre stock directly in proportion to the increase in its capital contribution in proportion to the total capital contributions made by Golden and West Coast. The calculations for equity interest shall be made based upon the total capital contributions by the Parties of $6,350,000.00 (Cnd.), and shall be increased incrementally based upon the percentage of additional contribution. By way of example, West Coast may earn additional equity interest up to a maximum of six and fifty-seven hundredth's percent (6.5 7%) of the additional outstanding Minera Finisterre stock by contributing up to $650,000.00 (Cnd.), thereby increasing West Coast's total capital contribution to $2,500,000.00 (Cnd.) or thirty-five and seven-tenth's percent (35.7%) of the total $7,000,000.00 (Cnd.) contributed by the Parties. Under this example, West Coast will own thirty-five and seven-tenth's percent (35.7%) of the outstanding stock in Minera Finisterre. Golden acknowledges that West Coast is not obligated to contribute the entire $650,000.00 (Cnd.) and may contribute any amount(s), in West Coast's sole and absolute discretion, up to $650,000.00 (Cnd.) and earn equity interest in Minera Finisterre proportionately. 2.03(c) West Coast's Second Option. Assuming West Coast exercises any portion of the First Option set forth in Article 2.03(b) above, West Coast will have the exclusive option to contribute additional capital (without opportunity for Golden to match), in an amount up to and including $1,000,000.00 (Cnd.) prior to December 31, 2000 (the "Second Option"). Said additional contribution(s) by West Coast pursuant to this Second Option is to acquire or earn additional equity interest (i.e., Minera Finisterre stock) in proportion to the contributions of the previous Articles 2.02 and 2.03(a) and (b). West Coast shall receive Minera Finisterre stock directly in proportion to the increase in its capital contribution in proportion to the total capital contributions made by Golden and West Coast. The calculations for such equity interest shall be made just as in Article 2.03(a) and (b) above. By way of example, West Coast may earn additional equity interest up to a maximum of eight and five-hundredth's percent (8.05%) of the additional outstanding Minera Finisterre stock by exercising the Second Option and contributing up to an additional $1,000,000.00 (Cnd.), thereby increasing West Coast's total capital contribution to $3,500,000.00 (Cnd.), or forty-three and three-fourths percent (43.75%) of the total $8,000.000.00 (Cnd.) contributed by the Parties. Under this example, West Coast will own forty-three and three-fourths percent (43.75%) of the outstanding stock in Minera Finisterre. Golden acknowledges that West Coast is not obligated to contribute the entire $1,000,000.00 (Cnd.) and may contribute any amount, in West Coast's sole and absolute discretion, up to $1,000,000.00 (Cnd.) and earn equity interest in Minera Finisterre proportionately. 2.03(d) With respect to the timing of the contributions referenced in Articles 2.03(a), (b) and (c), the Parties acknowledge and agree that such contributions by West Coast shall be deemed contributed when deposited into the Exploration and/or Capital accounts referenced in Articles 4.02 and 4.03, respectively. Once the contributions are made to the respective accounts by West Coast, Golden/Finisterre covenant and agree to immediately cause the issuance and/or transfer to West Coast of sufficient shares of Minera Finisterre stock such that West Coast equity ownership of Minera Finisterre will equal its percentage contributions referenced in Articles 2.03(a), (b) and (c) above. By way of example only, immediately upon the conclusion of West Coast's commitment in 2.03(a) and the contribution of $350,000.00 (Cnd.) being deposited by West Coast into either the Exploration or Capital account, Golden and/or Finisterre will cause the immediate issuance and/or transfer of sufficient number of shares to West Coast such that West Coast will own and physically possess twenty-nine and thirteen one-hundredth's percent (29.13%) of the outstanding stock of Minera Finisterre. 2.03(e) Notwithstanding anything in Articles 2.03(a), (b), (c) and (d) above, Finisterre/ Golden shall remain obligated and responsible for prudent and professional development of the Mine. Dilution Clause 2.04 The proportionate level of the respective interests of West Coast and Golden in Minera Finisterre will not change so long as each party contributes its proportionate share of costs and expenses relating to exploration or development programs for the Mine, as approved by the Operating Committee, save and except West Coast's contributions in Articles 2.03(a), 2.03(b) and 2.03(c) above to spend the above-referenced $350,000.00 (Cnd.) and up to $2,000,000.00 (Cnd.) to earn an additional interest in Minera Finisterre. Thus, West Coast has a guaranteed right to receive a forty-three and three-fourth's percent (43.75%) interest in Minera Finisterre through contributions of an additional $2,000,000.00 (Cnd.) up to December 31, 2000. Prior to making any further contributions, Golden must provide West Coast the opportunity to maintain its percentage ownership by a proportionate contribution equal in percentage to the respective interests of the parties to any contribution made by Golden. Thus, by example, in order to maintain its forty-three and three-fourth's percent (43.75%) interest after contribution of the additional $2,000,000.00 (Cnd.) prior to December 31, 2000, West Coast will be required to contribute forty-three and three-fourth's percent (43.75%) of any further contributions by Golden which have been previously approved by the Operating Committee. In respect to subsequent programs or expenditures approved by the Operating Committee, within thirty (30) days of the approval of the program or expenditure by the Operating Committee, each of West Coast and Golden will give written notice to the Operating Committee stating whether or not it elects to contribute its proportionate share of the costs of such program. Failure to give such notice shall be deemed to be an election not to contribute. If either West Coast or Golden elects or is deemed to have elected not to contribute its proportionate share of the costs of a program approved by the Operating Committee, then the other party may give notice in writing to the non-contributing party that it will contribute all of the required expenditures in addition to its own share of the expenditures. Such party shall then be entitled to a respective increase in its interest in Minera Finisterre in proportion to the overall costs expended by such party. Treatment of Prior Contributions by West Coast 2.05 The twenty-five percent (25%) interest in Minera Finisterre earned by West Coast noted in Article 2.02 above, includes the following payments totaling $1,500,000.00 (Cnd.): 1. $85,000.00 (U.S.) (Santa Rosa Claim); 2. $35,000.00 (U.S.) (payments made to Pamicon Developments, Ltd.); 3. $30,000.00 (U.S.) (interest past due from Finisterre/Golden); 4. $500,000.00 (U.S.) (loan satisfaction -- Article 1.03); and 5. $350,000.00 (U.S.) (waiver of accelerated payback). Because West Coast has received equity credit for each of these contributions herein, no further liability for these payments shall exist and West Coast waives any further claims to such amounts. The Parties agree that the May 14, 1998 Amended Proposal executed by and between West Coast and Golden regarding contributions to the Santa Rosa claim and additional funding by West Coast is hereby revoked, cancelled and rescinded and otherwise superseded by this Operating Agreement. Golden Contribution 2.06 Golden's obligations as previously provided in Article 4.03 of the Amended Loan Agreement to contribute $250,000.00 (U.S.) to the Capital Account is hereby waived. Completion of 126 Agreement 2.07 Finisterre/Golden hereby represent and agree that they have satisfied and fulfilled the Option Agreement dated April 23, 1996 between No. 126 Corporate Ventures, Ltd., Golden Hemlock Exploration, Ltd., Ronald H. Tammekand and Dalton D. Dupasquier (the "126 Agreement"), except for the final issuance of the remaining thirty percent (3 0%) of Minera stock pursuant to paragraph 2 of the 126 Agreement. Finisterre/Golden hereby represent and affirm that they will undertake all necessary actions in order to assure this final step in the fulfillment of the 126 Agreement and the complete one hundred percent (100%) acquisition of Minera by Golden on or before thirty (30) days from the execution of this Operating Agreement. Finisterre/Golden covenant and agree that they will provide complete and accurate documentation confirming the fulfillment of the final thirty percent (30%) stock issuance to the Operating Committee, within fifteen (15) days thereof. Finisterre/Golden also represent and covenant that the 126 Agreement is valid and in effect, the parties are not in default or breach and upon closing the remaining thirty percent (30%) of Minera into Golden, the 126 Agreement will be completely performed with no obligations, rights or responsibilities remaining. ARTICLE 3 INDEMNITY 3.01 West Coast shall never be responsible or liable for payment of all or any part of the Operating Expenses, debts, indebtedness, costs, expenses, or liabilities incurred in connection with the Operation of the Mine, nor any financial obligations or responsibilities of Finisterre and Golden and/or against any and all such responsibility and liability Finisterre/Golden covenants with West Coast to indemnify and save it harmless; provided, however, such costs and expenses may be included as Operating Expenses if approved by the Operating Committee. ARTICLE 4 SPECIAL ACCOUNTS 4.01 Trust Account. As security for performance of obligations and responsibilities as provided herein, the Operating Committee has established a trust account in the name of Finisterre (the "Trust Account") with the following bank located in Dallas, Texas: NationsBank - Texas ABA Number: 111 0000 25 Las Colinas Branch Acct. Name: Minera/San Jose De Gracia 5201 N. O'Connor Blvd. Acct. Number: 0047 7046 9775 Las Colinas, TX 75039 (972) 401-6262 (972) 401-6270 (FAX) Finisterre/Golden shall require all purchasers of minerals extracted from the Mine to make payment for the minerals to the Trust Account. Finisterre/Golden shall deposit all other cash, gross receipts, stock or any other consideration received from or in connection with the Operation of the Mine in the Trust Account. Disbursements from the Trust Account may be made only with the consent of the Operating Committee. 4.02 Exploration Account. West Coast shall establish an Exploration Account in which all monies contributed to or designated for exploration of the Mine shall be deposited. Such bank account shall be located in Dallas, Texas. Disbursements from the Exploration Account shall be made in accordance with the exploration budget approved by the Operating Committee; provided that any disbursements over and above the exploration budget approved by the Operating Committee may be made only with the consent of the Operating Committee. Any and all funds deposited into or disbursed from the Exploration Account shall not be considered Operating Expenses and shall not be subject to the lien referenced in Article 7.01 of this Operating Agreement, unless unanimously approved by the Operating Committee as an Operating Expense with such funds being deposited into and disbursed from the Trust Account described in Article 4.01. 4.03 Capital Account. West Coast shall establish a Capital Account in which funds and other contributions shall be deposited for production of the Mine. Such bank account shall be located in Dallas, Texas. Disbursements from the Capital Account may be made only with the consent of the Operating Committee. Any funds deposited into or disbursed from the Capital Account shall not be considered Operating Expense, and shall not be subject to the lien as set forth in Article 7.01 of this Agreement, unless unanimously approved by the Operating Committee as an Operating Expense with such funds being deposited into and disbursed from the Trust Account described in Article 4.01. 4.04 It is the intent of the Parties that all consideration, including money, funds, stock or other things of value contributed or relating to the Mine or generated from or in connection with the Operation of the Mine must flow through one of these three (3) accounts. All capital infusions and injections in cash or other funds for the exploration, development, maintenance or production of the Mine must be a deposited into and disbursed from either the Trust Account, the Exploration Account or the Capital Account, as the case may be; provided that any and all Operating Expenses must be disbursed through the Trust Account. The Secretary of the Operating Committee will have signatory authority on the above Accounts. ARTICLE 5 BOOKS AND RECORDS 5.01 Finisterre/Golden shall keep and maintain proper books and records with respect to all income and expenses, including exploration activities, relating to the Mine. The Operating Committee and West Coast or its representative shall have access to such books and records at all reasonable times during business hours. The books shall be kept in accordance with generally accepted accounting procedures. Finisterre/Golden's books and records relating to the Mine shall be reviewed annually by a certified public accountant selected by the Operating Committee. The selected accountant shall (1) annually prepare and deliver to West Coast and Finisterre/Golden the appropriate tax returns and all schedules to those returns, and (2) within ninety days following the end of each calendar year, deliver to each party financial statements, relating to the Mine, including balance sheets, profit and loss statements, and statements showing allocations and distributions to each party. The costs of such accounting services shall be considered an Operating Expense under Section 2.02. 5.02 Finisterre and Golden covenant and agree, at all times, to timely and properly comply with all laws, statutes, ordinances and the like, promulgated by any regulatory or governing body including, but not limited to, the Vancouver Stock Exchange and to maintain all corporate reporting and existence requirements in conformity therewith. ARTICLE 6 MANAGEMENT OF MINING OPERATIONS General Management of the Mine 6.01 Except as may be otherwise provided in this Agreement, the management and control of all matters relating to the Mine and/or the Operation of the Mine shall rest exclusively with the Operating Committee. Finisterre/Golden are charged with the sole responsibility and obligation to make all property payments and to keep, restore, renew and/or maintain all fights, claims, concessions and the like in the Mine as well as the Mine itself in good standing and valid and enforceable. Finisterre/Golden shall deliver copies of all documents relating to the acquisition, renewal and maintenance of all Concessions to the Secretary of the Operating Committee within fifteen (15) days of the date of such documents. Finisterre/Golden warrant that they will continue to develop the Mine in a reasonable and timely manner. However, all material operations of the Mine shall ultimately be under the control of the Operating Committee, except as expressly delegated by the Operating Committee. Operating Committee 6.02 Finisterre/Golden and West Coast have appointed an Operating Committee whose responsibilities include: control and management of all aspects of the Mine; approval of an annual budget related to Operation of the Mine; approval of disbursements from the Trust Account, Exploration Account and Capital Account pursuant to Article 4; approval of all expenditures related to the Mine pursuant to Section 2.02(c); approval of borrowings or equity infusions; the establishment of Reserves pursuant to Section 2.02(e); control and supervision of all negotiations and discussions relating to prospects for the sale, transfer or exchange of any interests in the Mine; approval of any sale, transfer or exchange of any interest or rights in the Concessions or the Mine; approval of information disseminated to the public relating to the Mine; approval of any transfer of any monies or funds between the accounts referenced in Article 4; and the discharge of other responsibilities set forth in this Agreement. Committee Control of All Activities 6.03 The Operating Committee shall exercise exclusive control over the exploration, development and production of the Mine. The Operating Committee shall hire an independent contractor to direct and manage all the exploration, development and production activities of the Mine. Such independent contractor shall answer to and be subject only to the Operating Committee. Finisterre/Golden hereby represent and agree that they will not interfere with such exercise of control over the independent contractor by the Operating Committee. Committee Membership 6.04 The Operating Committee shall be comprised of four (4) persons. West Coast and Finisterre/Golden shall each designate two (2) persons to serve on the Operating Committee with each person entitled to one vote. The persons comprising the Operating Committee may be removed and replaced by majority vote of the Operating Committee. The initial Operating Committee shall consist of: Dalton Dupasquier Robin Forshaw Koy Diepholz Charles Smith Committee Voting 6.05 All members of the Operating Committee shall cooperate in good faith towards the common goal of timely, efficient and sound operation and development of the Mine. Unless otherwise stated herein, the majority vote of the Operating Committee shall control the activities or decisions of the Operating Committee. If the vote on any particular item or subject is deadlocked (i.e., no clear majority), then the members of the Operating Committee shall diligently and in good faith attempt to resolve the deadlock. If the deadlock remains, the Operating Committee shall, within five (5) business days after an impasse is reached, submit the dispute to non-binding mediation in Dallas, Texas before a mediator mutually agreeable to the members of the Operating Committee. If, after mediation, the deadlock or impasse remains, then the parties shall immediately proceed to arbitration under the provisions of Article 9 hereinafter. Management of the Operating Committee 6.06 One person on the Operating Committee shall be commissioned to manage the Operating Committee (the "Secretary"). Such Secretary shall be assigned the tasks of general oversight of the Operating Committee, including all tasks necessary to assure the proper performance of the Operating Committee's rights and responsibilities hereunder. West Coast shall have the authority and responsibility to designate the Secretary of the Operating Committee through December 31, 2000. Through execution of this Operating Agreement, West Coast hereby nominates and elects Koy Diepholz as the Secretary of the Operating Committee. Mr. Diepholz shall serve as the Secretary of the Operating Committee until written notice of resignation by him or December 31, 2000. Thereafter, the Secretary of the Operating Committee shall be elected by majority vote of the Operating Committee. If any deadlock in the Operating Committee develops, the vote shall be resolved in accordance with the guidelines set forth in Article 6.05 above. Committee Meetings 6.07 The Secretary of the Operating Committee shall be responsible for calling all meetings of the Operating Committee either on his own initiative or upon the request of a member of the Operating Committee. The Secretary shall be responsible for providing written notice to all Committee members of Committee meetings. Such Committee meetings shall be set with written notice at least twenty-one (21) days prior to the meeting date, unless otherwise agreed to by all of the Committee Members or unless shorter notice is required because of emergency circumstances. The Secretary shall further be responsible for issuing the written notice specifying the date, time and place of the meeting, the business to be transacted at the meeting, and providing all Operating Committee members with such material and data as may be reasonably required to enable the members to reasonably evaluate and determine the position they should take with respect to any vote. The Operating Committee shall meet in Irving, Texas at the offices of West Coast, unless otherwise designated by the Secretary. However, any Operating Committee member may participate by telephone conference or other appropriate arrangements. Voting of the Operating Committee may be conducted by verbal, written, facsimile or telex ballot. Alternate Operating Committee Members 6.08 Provided that prior, written, and majority approval of the Operating Committee is obtained, any member of the Operating Committee may appoint an alternative representative by providing at least forty-eight (48) hours written notice to all other Committee members of the name, address and telephone number of the alternate to be appointed by the specific Operating Committee member. Alternate members may attend meetings of the Operating Committee and, in the absence of the member of the Operating Committee, may act and/or vote in the place of the appointer member. Golden Announcement 6.09 Finisterre/Golden represent and agree that, immediately following the execution and final approval of this Operating Agreement, they will issue a public announcement through the Golden Board of Directors: (1) commissioning the Operating Committee to carry out all of its rights and responsibilities herein, including day-to-day management and control of the exploration activities, control over the independent contractor hired to control exploration activities, and control over all other material operations of the Mine; and (2) acknowledging the general terms of this Agreement, with emphasis on the anticipated additional contributions and expected regulatory compliance. Such announcement to be approved by the Operating Committee. ARTICLE 7 SECURITY Trust Account Lien 7.01 As security for satisfaction of the obligations as set forth in this Agreement, Finisterre/Golden grants to West Coast a lien on the Trust Account established pursuant to Article 4, and agrees to execute all necessary documentation perfecting this lien at the request of West Coast. The Parties agree that the Trust Account is set up and Finisterre/Golden covenant and agree to execute any and all documents required by West Coast and/or necessary to perfect the lien referenced in this Article. Equipment Lien 7.02 As further security for repayment of the obligations as provided herein, Finisterre/ Golden grants to West Coast a lien or liens on the equipment identified with Exhibit "C" attached to the Amended Loan Agreement and on all equipment and other tangible assets purchased in connection with or relating to the Mine and Finisterre/Golden agrees that the Pledge Agreement executed on or about December 20, 1996 in connection with the Amended Loan Agreement (Exhibit "C" thereto) shall remain in full force and effect and guarantee all obligations herein as if executed herewith. Foreclosure for Default 7.03 Should Finisterre/Golden default under the terms of this Operating Agreement, in addition to other remedies available under law, the liens provided for in Sections 7.01 and 7.02 of this Agreement may be immediately foreclosed by West Coast. ARTICLE 8 LEGAL FEES Finisterre/Golden agrees to pay or reimburse all legal fees incurred by West Coast in conjunction with this Operating Agreement and the negotiation and preparation of this Operating Agreement and any amendments or supplements thereto, and such payment will be considered an Operating Expense under Section 2.02. ARTICLE 9 ARBITRATION The parties agree to do business in a fair and cooperative spirit for mutual benefit and profits, and also agree to solve amicably any dispute, controversy or difference arising out of or in relation to or in connection with this Operating Agreement, or for the breach thereof, but in case such dispute, controversy or difference is not settled by mutual consent and personal negotiations, the matter will be settled by a panel of arbitrators, composed of one member selected by Finisterre/ Golden, one member selected by West Coast, and a third member selected by the two enumerated arbitrators, all in accordance with the Commercial Rules and Regulations of the American Arbitration Association, in Dallas, Texas, United States of America. Expenses for such arbitration shall be borne equally by the parties. The arbitration panel shall award costs, fees and expenses, including fees for experts and attorneys to the prevailing party in any arbitration. The proceedings shall be conducted in English. Each of the parties hereto hereby recognizes and consents to the jurisdiction of the American Arbitration Association in Dallas, Texas and the entry of judgment in Texas, Mexico and Canada upon the award rendered by the arbitrators, by a court having jurisdiction thereof, providing that the parties thereto serve upon the party to be charged by the demand for arbitration of any such dispute. The Parties acknowledge that if injunctive relief is required to preserve the status quo during the pendency of any dispute that any such injunctive relief may be sought in a court of law in Dallas, Texas, United States of America. ARTICLE 10 GENERAL PROVISIONS Notices 10.01 All notices, payments and other communications required or permitted under this Operating Agreement shall be in writing and shall be effective when delivered to the following addresses: If to West Coast: West Coast Mines, Inc. Towers at Williams Square 5215 N. O'Connor, Suite 200 Irving, Texas 75039 Attn: Koy Diepholz Phone: (972) 868-9066 Fax: (972) 868-9067 If to Finisterre: Minera Finisterre, S.A. de C.V. Av. Camaron Sabalo S/N Plaza Balboa #9 Mazatlan, Sinaloa, Mexico Attn: Ron Tammekand Phone: 011-526-914-3612 Fax: 011-526-916-5258 -- and to -- Dalton Dupasquier 601-43 1 Pacific Street Vancouver, B.C., Canada V6Z 2P6 Phone: (604) 682-0410 Fax: (604) 682-0412 If to Golden: Golden Hemlock Explorations, Ltd. #600 - 700 West Pender Street Vancouver, B.C., Canada V6C 1G8 Attn: Robin Forshaw Phone: 604-688-8836 Fax: 604-682-8728 A party may, by written notice so delivered to the others change the address to which delivery shall thereafter be made. Modification and Waiver 10.02 This Operating Agreement may not be altered nor amended, nor any rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any term, provision or condition of this Operating Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver, of any such term, provision or condition, or as a waiver of any other term, provision or condition of this Operating Agreement. Exchange Rate 10.03(a) The exchange rate to be used to determine the U.S. dollar amount of any amounts paid in pesos shall be the exchange rate (net of bank charges) quoted by Banamex in Mexico City to convert pesos to U.S. dollars on the date on which payment is made in volume equivalent to volume of pesos being valued for conversion. 10.03(b) The exchange rate to be used to determine the U.S. dollar amount of any amounts paid in Canadian dollars shall be the exchange rate (net of bank charges) quoted by Royal Bank of Canada to convert Canadian dollars to U.S. dollars on the date on which payment is made in volume equivalent to volume of Canadian dollars being valued for conversion. Press Releases 10.04 The parties shall consult with each other with regard to all press releases and other announcements concerning this Operating Agreement or the transaction contemplated hereby and neither party shall issue any such press release or make any other announcement without the prior written consent of the Operating Committee. Applicable Law 10.05 This Operating Agreement and the transactions contemplated hereby shall be construed in accordance with and governed by the laws of the State of Texas. The parties expressly acknowledge and agree that Venue and Jurisdiction for any dispute resolution, including litigation, mediation and arbitration shall be Dallas, Texas, United States of America and the parties agree not to challenge or object to same. Entire Agreement 10.06 This Operating Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all negotiations, prior discussions and prior agreements and understandings relating to such subject. Binding Effect 10.07 This Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and except as otherwise prohibited, their respective successors and assigns. Nothing contained in this Operating Agreement, express or implied, is intended to confer upon any other person or entity, any benefits, rights or remedies. Finisterre/Golden shall not assign this Operating Agreement or its obligations under this Operating Agreement, without the express written consent of West Coast. It is expressly acknowledged and understood by the Parties that in the event Finisterre or Golden assign this Operating Agreement or its obligations pursuant to this Operating Agreement, Finisterre and Golden shall nevertheless remain liable to perform all obligations of the Operating Agreement. Execution of Other Instruments 10.08 The parties covenant and agree that they will execute any other instruments and documents that (i) are requested by West Coast; (ii) may become necessary or convenient to effectuate and carry out the purposes of this Operating Agreement; or (iii) may become necessary or convenient to obtain minimum withholding tax liabilities relating to West Coast's Net Profit Interests. Finisterre/Golden covenants and warrants that it will obtain express written approval from its directors regarding the terms and conditions of this Operating Agreement. Finisterre/Golden covenant and agree to obtain full approval from the Vancouver Stock Exchange for this Operating Agreement and provide West Coast confirmation of same. Headings 10.09 The headings used in this Operating Agreement are used for administrative purposes only and shall not be considered in construing the terms of this Operating Agreement. Effect of Partial Invalidity 10.10 If any one or more of the provisions contained in this Operating Agreement shall, for any reason, be held invalid, illegal, or unenforceable in any respect, that invalidity, illegality, or unenforceability shall not affect any other provision of this Operating Agreement, and this Operating Agreement shall be construed as if that invalid, illegal, or unenforceable provision had never been contained in this Operating Agreement. Joint and Several Obligations 10.11 It is the express intent of the Parties hereto that all the obligations, responsibilities and liabilities set forth in this Operating Agreement shall be the joint and several liabilities, obligations and responsibilities of Finisterre and Golden and that West Coast can enforce the provisions of this Operating Agreement against Finisterre, Golden or both Finisterre and Golden, and their respective successors, assigns, parent or subsidiary, related or affiliated companies. EXHIBIT "A" The following claims and/or concessions are located in the State of Sinaloa, Mexico and are listed in the Public Registry of Mining and are governed by the Mine Operating Agreement:
SAN JOSE 190244 06/12/90 06/12/96 LA NUEVA ESPERANZA 162840 19/12/91 18/12/97 GUADALUPE 163357 05/12/90 04/12/2040 NIJEVO ROSARITO 184999 13/12/89 12/12/2049 EL REAL 190736 29/04/91 28/04/97 TRES AMIGOS 2 192290 19/12/91 18/12/97 TRES AMIGOS 172216 27/10/83 26/10/2033 MINA GRANDE 163578 10/10/78 09/10/2028 AMPLIACION SANTA ROSA 163592 30/10/78 29/10/2028 SANTO TOMAS 178649 13/08/86 12/08/95 SAN NICOLAS 163913 14/12/78 13/12/2028 LALJBERTAD 172433 14/12/83 13/12/2033 LA UNION 176214 26/08/85 25/08/2035 AMPLIACION DE SAN NICOLAS 183815 22/11/88 21/11/2038 SAN SEBASTIAN 184473 06/11/89 05/11/2039
Also included within the definition of the Mine and the Concessions are all claims and/or concessions identified and referenced in, and/or referred or relating to the attached chart and maps. The San Jose de Gracia property is a gold - copper project consisting of 24 Concessions located in Sinaloa State, Mexico, particulars of which are as follows: . ------------------------------------------------------------------------------ CLAIM NAME TITLE OR FILE NUMBER HECTARES ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ San Jose 190244 27.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ El Real 190736 2332.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Tres Amigos 2 192290 54.4672 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Lost Tres Amigos 172216 23.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ San Sebastian 184463 40.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ CLAIM NAME TITLE OR FILE NUMBER HECTARES ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ La Nueva Esperanza 209870; formerly 162840 40.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Guadalupe 189470 ; formerly 163357 7.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Nuevo Rosario 184999 32.8781 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Mina Grande 163578 6.6588 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Ampliacion de Santa Rosa 163592 25.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Santo Tomas 187348; formerly 178649 312.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ San Nicolas 163913 55.5490 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ La Libertad 172433 97.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ La Union 176214 4.1098 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Ampliacion de San Nicolas 183815 17.4234 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ CLAIM NAME TITLE OR FILE NUMBER HECTARES ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ El Real 2 201128 393.8510 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Piedras de Lumbre Uno 201946 40.2753 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Piedras de Lumbre 2 201947 34.8484 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Piedras de Lumbre 3 203467 4.3098 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Finisterre Fraccion A 203285 18.7856 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Finisterre Fraccion B 203286 173.4966 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ CLAIM NAME TITLE OR FILE NUMBER HECTARES ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ San Miguel 183504 7.0000 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ Santa Rosa 170557 31.4887 ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ San Andreas 192288 385.0990 ------------------------------------------------------------------------------ Map 1 of Claims (Graphic Omitted) Map 2 of Claims (Graphic Omitted) - -------------------------------------------------------------------------------- Counterparts 10.12 This Operating Agreement maybe executed in any number of counterparts and each counterpart shall for all purposes be deemed to be an original. Gender and Number 10.13 Whenever the context requires, all words in this Operating Agreement in the male gender shall be deemed to include the female or neuter gender, all singular words shall include the plural, and all plural words shall include the singular. Executed and effective as of the date first written above: MINERA FINISTERRE, S.A. de C.V. /S/ Ronald Tammekand -------------------- By: Ronald Tammekand Its: President COUNTRY OF STATE OF SUBSCRIBED AND SWORN TO BEFORE ME by the said Ronald Tammekand on this______ day of______ 1998, to certify which, witness my hand and official seal. Notary Public, My Commission Expires: ______________ MINERA FINISTERRE, S.A. de C.V. /S Dalton Dupasquier ---------------------- By: Dalton Dupasquier Its: Director EX-2.3 12 REPORT EXHIBIT "2.3" DYNARESOURCE, INC. "HAZEN METALLURGY REPORT" TRES AMIGOS ORES Hazen Research, Inc. 4601 Indiana St. - Golden, Colo. 80403 Tel: (303) 279-4501 FAX: (303) 278-1528 Prepared for Lockwood Greene Engineers, Inc. 4201 Spring Valley Road Suite 1500 Dallas, Texas 75244 PROCESS DEVELOPMENT FOR THE TRES AMIGOS ORE BODY August 6, 1999 Hazen Project 9507-04 Prepared by: /S/ Donald M. Podobnick - ----------------------- Senior Project Director Approved by: /S/ Nick Hazen - ---------------- President TABLE OF CONTENTS ================================================================================ Page INTRODUCTION ............................................................... 1 SUMMARY AND CONCLUSIONS .................................................... 2 RECOMMENDATIONS ............................................................ 4 MINERALOGY ......................................................... 4 GRAVITY SEPARATION ................................................. 4 ROUGHER FLOTATION .................................................. 5 CLEANER FLOTATION .................................................. 5 LOCKED-CYCLE TESTS ................................................. 5 METALLURGICAL MAPPING .............................................. 5 MINERALOGY AND HED ANALYSIS ................................................ 6 PROCESS DEVELOPMENT ........................................................ 7 GENERAL FLOTATION CONDITIONS ....................................... 7 GRIND SIZE VERSUS CONCENTRATE GRADE AND RECOVERY ................... 8 GRAVITY SEPARATION ................................................. 11 OPEN CIRCUIT CLEANING .............................................. 17 APPENDIX A - Mineralogical Investigation of Tres Amigos Gold/Copper Ore Samples APPENDIX B - Flotation Data Sheets APPENDIX C - Gravity Separation Data Sheets APPENDIX D - Gravity Separation Plus Flotation Data Sheets INTRODUCTION Lockwood Greene Engineers, Inc. (Lockwood) is evaluating the reinstatement of production at the Tres Amigos gold project in Mexico for West Coast Mines. Mining has reportedly been conducted within the Tres Amigos deposit and in nearby areas for many years, and has produced significant amounts of precious metals. Beneficiation processes used in the past have included gravity separation, amalgamation, and flotation. In April 1999, Lockwood provided Hazen Research, Inc. with six ore samples from the deposit for study. The objectives of the work were to: - Mineralogically and chemically categorize the six ore samples. - Evaluate gravity separation for the recovery of relatively coarse gold and silver. - Evaluate flotation to recover gold, silver, and copper. - Develop preliminary process design criteria. - Describe any obvious metallurgical complications. As discussed herein, these objectives were accomplished, but a bankable feasibility study and/or decision to reinitiate production in the existing plant facilities must be supported by more extensive work. SUMMARY AND CONCLUSIONS The six samples were individually crushed, blended, and split into portions for mineralogical and chemical analyses, grinding evaluations, gravity separation evaluation, and flotation testing. The majority of the work was completed on Sample 49733-1, and only preliminary confirmatory work was completed on the other five samples. The mineralogical examination of the six samples showed that the sulfide mineralization in all of the samples is generally fairly coarse grained and, for the most part, liberated from one another and from gangue at the 10-mesh size. Mutual sulfide intergrowths and intergrowths with gangue occur in moderate to minor amounts and, in general, are structurally simple. The feed grades of these samples varied from less than 0.1 to nearly 0.9 ounce of gold per short ton (oz Au/st), from less than 0.2 to more than 4 ounce of silver per short ton (oz Ag/st), and from less than 0.1% to more than 4% copper. The mineralogical characteristics varied from samples containing high amounts of sulfides with little oxidation to highly oxidized samples containing little sulfides. A gravity separation step in the primary grinding circuit was simulated by stopping the laboratory mill after approximately 50% of the grinding time had elapsed and passing the pulp over a shaking table. The rougher gravity concentrate was cleaned, and all middlings and tailings products were returned to the mill. (The products were decanted and filtered to remove the large amount of water used in the gravity separation.) Up to approximately 20% of the gold reported into a gravity cleaner concentrate, but the gravity separation did not increase the gold recovery over the rougher recovery obtained by flotation alone. However, because a significant percentage of the gold was recovered into the gravity concentrate (especially for the higher grade samples) and because of potential benefits from a gravity circuit (such as preventing gold losses caused by flattening of gold particles during grinding), a gravity step was incorporated into the flowsheet. Flotation was conducted using standard conditions and reagents with a circuit, including primary grinding, gravity separation, and rougher flotation. The pH was maintained at or slightly below 9 to minimize depression of any free gold. Promoter 4037, a dithiophosphate/thionocarbamate formulation produced by Cytech, at an addition of 0.028 pound per short ton (lb/st), was used as the primary collector. To eliminate the need for an agitated conditioning tank, the water-insoluble 4037 was added to the primary grinding mill. Sodium isopropyl xanthate (SJPX) is a water-soluble collector that requires little or no conditioning, and 0.04 lb/st was stage added directly to the flotation. Aerofroth 73 was added on an as-needed basis directly to the flotation cell, again without conditioning. The Aerofroth 73, a Cytech product, is a blend of alcohol frothers and hydrocarbon oil. A rougher flotation time of nine minutes was used. For the six samples studied, gold recovery varied between 62 and 95%, silver recovery varied between 30 and 94%, and copper recovery varied between 14 and 97% into a combined (calculated) gravity cleaner concentrate and rougher flotation concentrate. The lowest recoveries were associated with a highly oxidized sample (Hazen 49733-2). When the results from the highly oxidized sample and results at coarse grinds were ignored, gold recovery varied between 87 and 95%, silver recovery varied between 67 and 94%, and copper recovery varied between 81 and 97% into a combined (calculated) gravity cleaner concentrate and rougher flotation concentrate. For the sulfide samples, when target conditions (primarily grind size) were attained, the rougher flotation conditions were visually excellent, and there were no indications of interference from clays or other components that can interfere with results. No attempts were made to recover oxidized minerals. There are appreciable differences in hardness and grindability among the samples, and gold recovery may be reduced by as much as 15% if the target grind (80% minus 115 mesh) is not maintained. The effect on recovery of a coarse grind may partially explain the reported recovery problems in the operating plant. Based on the results of this initial study, it appears that the Tres Amigos deposit should respond well to the common beneficiation processes of gravity separation and flotation. The recovery of gold, silver, and copper in sulfide ore probably will exceed 90% into a combined gravity cleaner concentrate and rougher flotation concentrate. Based on our experience with other similar deposits and the flotation characteristics of the sulfide samples, a cleaner flotation circuit, including regrinding and two stages of cleaning and scavenging of the first cleaner tailing, should produce a cleaner concentrate containing marketable copper and gold grades at normal and acceptable recoveries. Gold losses into the first cleaner scavenger tailings may be sufficient to warrant additional treatment of this stream. Locked-cycle tests and/or pilot plant testing will be required to quantify the cleaner concentrate grades and recoveries. For future testing, care should be taken to ensure that samples represent ore blends that will be treated in the plant and that the samples include dilution from gangue and/or low-grade material that must be mined with ore. Grades in the ore of up to 4% zinc may result in flotation cleaner concentrates containing sufficient zinc to incur smelter penalties. Future work should evaluate depressing the zinc in the rougher and/or cleaner flotation steps. RECOMMENDATIONS On samples that are representative of material that will be mined and processed, additional orcontinued testing should include the following. MINERALOGY o The observation that precious metals are liberated at relatively coarse particle size should be confirmed on additional samples and ore types. GRAVITY SEPARATION o Additional testing to support the inclusion of a gravity separation unit operation in the primary grinding circuit should be performed. o The influence, if any, of a gravity separation test on gold and silver recoveries should be evaluated in conjunction with both open circuit cleaning tests and locked-cycle tests. ROUGHER FLOTATION o The differences in grinding work indices between ore and rock types should be defined. o The primary grind size versus recovery relationship should be evaluated for all ore or rock types. o The primary grind size versus concentrate (rougher) grade relationship should be evaluated for all ore and rock types. o The influence of pH on the rougher flotation response should be evaluated for all ore and rock types. o Additional collectors should be evaluated on both composite samples and on the more important ore and rock types. We suggest, as a minimum, evaluating three collectors at three addition levels. o Additional frothers should be evaluated. o Depressants for zinc should be evaluated. CLEANER FLOTATION o The regrind product size versus recovery should be evaluated for all ore or rock types. o The regrind product size versus the final concentrate grade should be evaluated for all ore and rock types. o The influence of pH on the operation of the cleaning circuit should be evaluated. o Depressants for zinc should be evaluated. o Precious metal losses into the first cleaner tailings or into the tailings from a scavenger flotation step on the first cleaner tailings should be evaluated. Losses at this point may be reduced by a gravity circuit in the primary grinding circuit, but may still be high enough to warrant additional treatment. LOCKED-CYCLE TESTS The influence of circulating loads and recycled water should be evaluated with locked-cycle tests. These results may result in modifications to the procedure developed in the open circuit tests. METALLURGICAL MAPPING The metallurgical response of various ore and host rock types should be evaluated by testing the procedure developed in the locked-cycle tests on samples spatially distributed throughout the orebody. MINERALOGY AND HEAD ANALYSIS Polished sections of each of the six ore samples were prepared from minus 10-mesh representative splits of each sample. Incident light microscopic analysis showed a relatively simple sulfide mineralogy comprised mainly of pyrite, chalcopyrite, galena, and sphalerite, with minor to trace amounts of bornite, chalcocite, and cove]Iite. Sample 2 is highly oxidized and contains abundant, mostly fine-grained hematite, in addition to sulfides and a small amount of green oxide copper minerals. Sample 6 is moderately oxidized and carries only minor hematite. The sulfide mineralization in all of the samples is generally fairly coarse grained and, for the most part, liberated from one another and from gangue at the 10-mesh size. Mutual sulfide intergrowths and intergrowths with gangue occur in moderate to minor amounts and in general are structurally simple. Precious metal mineralization was detected in only two of the six samples. In Sample 1, native gold was observed as inclusions varying from less than 5 microns to 35 microns in several pyrite particles, and silver was found as hessite, a silver telluride sulfide, and gold-bearing native silver, all occurring intergrown with a single galena particle. Gold was also observed in Sample 4, a 10-micron inclusion in pyrite. The complete mineralogical report is included in Appendix A.
Table I presents the analytical results completed on the six samples and demonstrates the wide variability in metal contents among the samples. Table 1. Summary of Head Analyses ================================================================================================= Hazen Client Au, Ag, Cu, Pb, Zn, Fe, S(T), S , Identification Identification oz/st oz/st % % % % % % ================================================================================================= 49733-1 Sample 1 0.863 4.10 4.61 0.10 1.17 13.7 13.5 13.1 - ------------------------------------------------------------------------------------------------- 49733-2 Sample 2 0.466 0.86 0.36 0.01 0.02 4.56 0.18 0.12 - ------------------------------------------------------------------------------------------------- 49733-3 Sample 3 0.172 0.97 0.95 0.07 0.30 6.18 5.90 5.98 - ------------------------------------------------------------------------------------------------- 49733-4 Sample 4 0.566 0.86 0.27 0.70 4.09 10.8 13.1 13.3 - ------------------------------------------------------------------------------------------------- 49733-5 Sample 5 0.282 0.19 0.05 0.05 0.23 4.05 3.17 3.05 - ------------------------------------------------------------------------------------------------- 49733-6 Sample 6 0.068 0.34 0.15 0.01 0.01 4.52 3.27 3.21 =================================================================================================
PROCESS DEVELOPMENT GENERAL FLOTATION CONDITIONS In general, the flotation conditions presented in Table 2 were selected from our experience with other copper orebodies and from preliminary testing on Sample 49733-1. The target grind, 80% minus 115 mesh, was selected from testing on Sample 49733-1 and will be easily achieved in practice. To simulate the use of a gravity separation step in the primary grinding circuit, the laboratory rod mill was stopped after approximately 50% of the total required grinding time, the mill was emptied, and the slurry was tabled. The rougher table concentrate was cleaned on a Gemini table, and the entire gravity cleaner concentrate was weighed and assayed for gold and silver. The rougher table tailings, the rougher table middling product, and the Gemini cleaner table tailings were recombined, decanted, and filtered. The filtered product was returned to the rod mill, and the grinding step was completed. In the laboratory, because we use so much water in the gravity circuit and because we need to maintain the proper slurry density in the second primary grind, we need to employ decanting and filtering operations. In an industrial flowsheet, these operations would not be required because the slurry densities can be controlled in a continuous operation. Table 2 - General Flotation Conditions (Table Graphic Omitted) The pH was maintained at or slightly below 9 to minimize depression of any free gold. Promoter 4037, a dithiophosphate/thionocarbamate formulation produced by Cytech, was used as the primary collector. To eliminate the need for an agitated conditioning tank, water-insoluble 4037 was added to the primary grinding mill. Sodium isopropyl xanthate (SIPX) is a common water-soluble collector that requires little or no conditioning. Aerofroth 73, also a Cytech product, is a blend of alcohol frothers and hydrocarbon oil. Aerofroth 73 was added directly to the flotation cell without conditioning. Complete data sheets are included in Appendix B. GRIND SIZE VERSUS CONCENTRATE GRADE AND RECOVERY This series, conducted on Sample 49733-I, was designed to provide an initial familiarization with the flotation characteristics of the sample, to evaluate the importance of grind size, and to appraise the relationship between lime additions and pH. As the data presented in Table 3 show, flotation produces very acceptable results, with 95% or more of the gold, silver, and copper being recovered after nine minutes of flotation. The weight percent floated (30 to 34%) with lower copper head grades could be a concern, but Sample 49733-1 has a grade of 4.6% copper. This high head grade requires that the weight percent floating into the rougher concentrate be higher than normally experienced with lower grades. The appearance of the froth and physical conditions of the flotation were excellent. Based on the results from Tests 2671-46, 2671-47, and 2671-48 shown in Table 3, a five-minute rougher flotation step at a grind size of 136 microns is adequate for Sample 49733-1. However, at this point, the response of the other rock types was not known, so slightly conservative conditions (e.g. a grind size of 80% minus 125 microns and a flotation time of seven minutes) were selected for additional evaluation in the second series, which is summarized in Table 4. The pH of Test 2671-55 at 10.2 was higher than the target pH of 9 to 9.5, but the results are similar to those of Test 2671-57. There is no explanation for the variation of pH. Test 2671-56 was a scoping test to evaluate zinc depression by the addition of zinc sulfate (a common depressant for sphalerite) to the grinding mill. For Test 267 1-55, 61% of the zinc reported into the seven-minute rougher concentrate, and for Test 267 1-56, 62% of the zinc reported into the seven-minute rougher concentrate. As shown in Table 4, gold and silver recoveries were lower with the zinc sulfate. For this program, zinc depressants were eliminated. Although the gold, silver, and copper recoveries for Tests 2671-55 and 2671-57 are acceptable, middling particles appeared to remain in the froth after the seven-minute rougher flotation. Based on this observation, the rougher flotation was extended to nine minutes for the remainder of the program. Complete data sheets are included in Appendix B. Table 3. Grind Size Versus Concentrate Grade and Recovery, Sample 49733-1 (Table Graphic Omitted) Table 4. Confirmation of Grind Size Versus Concentrate Grade and Recovery, Sample 49733-1 (Table Graphic Omitted) GRAVITY SEPARATION Reportedly, the Tres Amigos deposit has been the site of sporadic gold mining for many years. Given the available technology, recovery of relatively coarse gold must have been a principal source of production. Because the flotation process may not recover coarse gold, a gravity separation step within the primary grinding circuit would be a relatively inexpensive insurance against losses of coarse gold. To investigate the influence of particle size of the feed to a gravity separation, ore ground to 80% passing sizes (P80s) of 1,040, 389, and 226 microns was treated with a Wilfley shaking table operated as a rougher. The concentrate was then cleaned, without being reground, with a Gemeni table. This initial evaluation of a gravity separation step was conducted only on Sample 49733-1. As the data in Table 5 show, the P80 grind of 1,040 microns produced a 0.5 weight percent Gemeni cleaner concentrate containing 10% of the gold and 3% of the silver and assaying 20 oz Au/st and 24 oz Ag/st. The finer grind P80 size of 389 microns increased the gold and silver recoveries into the Gemeni cleaner concentrate to 17 and 6%, respectively. However, the concentrate only assayed 16 oz Au/st and 25 oz Ag/st. Decreasing the P80 grind size to 226 microns apparently increased the Gemeni cleaner concentrate grade to 34 oz Au/st and 27 oz Ag/st while maintaining gold and silver recoveries of 18 and 3%. In our opinion, the difference in concentrate grades between the P80 grinds of 389 and 226 microns resulted from minor variations in table operation. The lower grade concentrate contained 1% of the feed weight, while the higher grade concentrate contained 0.5% of the feed weight, but the difference in weights is less than 10 grams and is probably not significant. The important observations are that 17 to 18% of the gold and 3 to 6% of the silver reported into the gravity cleaner concentrate at feed sizes that would be easily achieved within the primary grinding/classification circuit, and that these recoveries are not overly sensitive to grind size. Based on these results, a gravity separation step was included in the flowsheet for the remainder of the program. Complete data sheets are included in Appendix C GRAVITY PLUS FLOTATION The next step in the process development was combining the gravity and flotation unit operations into one, unified flowsheet. The initial evaluation was conducted on Sample 49733-1 and confirmatory tests were completed on the other five samples. To simulate the operation of a gravity circuit located in a primary grinding/classifying circuit, the laboratory rod mill was stopped after Table 5. Gravity Separation of Sample 49733-1 (Table Graphic Omitted) approximately 50% of the grinding time. The mill was emptied, and the slurry was passed over a Wilfley shaking table. The Wilfley concentrate was then cleaned on a Gemeni table. The Gemeni table tailings, the Wilfley table middling product, and the Wilfley table tailings were recombined to represent the gravity circuit tailings returning to the grinding mill. Excess water was decanted, and the material was filtered. The decantation and filtering operations were necessary to reject the large amount of water diluting the slurry but would not be necessary in an operating plant where slurry density can be controlled. The filter cake was returned to the rod mill, and the grind was completed for the flotation step. The data for the combined flowsheet are summarized in Table 6. For Sample 49733-1, Test 2671-64, which to this point in the program had been the only sample studied, the gravity circuit concentrate contained 17% of the gold and 5% of the silver, which compares with a gold recovery of 17% and a silver recovery of 6% for the initial testing of the gravity circuit (Table 5). The rougher flotation concentrate contained 79% of the gold, 89% of the silver, and 94% of the copper, and assayed 2.3 oz Au/st. 12.5 oz Ag/st, and 14.5% copper. The metal values recovered into a combined gravity and flotation concentrate were as follows (numbers in parentheses being the typical results from Table 3): 96% (97%) of the gold, 94% (96%) of the silver, and 97% (98%) of the copper. The inclusion of the gravity step did not increase the total recovery of gold or silver over flotation alone, but the gold and silver in this particular sample (that we have seen) are not large enough to be lost in the rougher flotation step. However, we would expect that the gold and silver recoveries will be higher in a circuit containing a gravity separation when the flotation is continued through the regrinding and cleaning operations. Any losses in flotation cleaners should be quantified in the second phase of test work. For Sample 49733-2, Test 267 1-65, the recovery into a calculated combined gravity and rougher flotation concentrate was 62% of the gold, 31% of the silver, and 14% of the copper. As discussed in the mineralogical report, Sample 49733-2 is highly oxidized, and the oxidized characteristics of the sample probably explain the poor results. For this limited program, we did not attempt to recover oxidized minerals. The handling characteristics during decanting and filtering also are indicative of the slimy nature of this sample. The slurry would not form a clear liquor that could be decanted, even though the slurry was allowed to sit for over an hour. The entire slurry had to be filtered before the sample could be returned to the grinding mill, and the filtering operation took most of the day. If this sample represents a major portion of the orebody, an extensive metallurgical program will be required to develop an acceptable flowsheet. Table 6. Gravity and Flotation Processing, Samples 49733-1 through 49733-6 Page 1 of 2 (Table Graphic Omitted) Table 6. Gravity and Flotation Processing, Samples 49733-1 through 49733-6 (Table Graphic Omitted) For Sample 49733-3, Test 2671-67, only 77% of the gold, 90% of the silver, and 95% of the copper were recovered into a calculated combined gravity rougher flotation concentrate. However, the screen analysis of the flotation tailings showed that the grind at 54% minus 100 mesh was significantly coarser than the target 80% minus 115 mesh. The procedure was repeated using a longer grinding time (Test 2671-75) to obtain a grind of 84% minus 100 mesh. Results improved, with 91% of the gold, 92% of the silver, and 97% of the copper reporting into the calculated combined concentrate. The rougher flotation concentrate assayed 1.0 oz Aulst, 5.8 oz Ag/st, and 5.8% copper. The improved flotation recovery demonstrates that on at least some of the ore types, the grind size will have a significant impact on metallurgical performance. The longer grind times used to approach the target size indicate significant differences in the work indices among the samples. For Sample 49733-4, Test 2671-68, 92% of the gold, 82% of the silver, and 81% of the copper were recovered into a calculated combined gravity rougher flotation concentrate. It appears that the apparent low copper recovery is related more to the low head grade (0.27% copper) of this sample than to true metallurgical problems. The rougher flotation tailings assayed 0.07% copper. For Sample 49733-5, Test 2671-69, only 79% of the gold, 56% of the silver, and 81% of the copper were recovered into a calculated combined gravity rougher flotation concentrate. However, the screen analysis of the flotation tailings showed that the grind at 49% minus 100 mesh was significantly coarser than the target 80% minus 115 mesh. The procedure was repeated using a longer grinding time, Test .2671-73, and a grind of 63% minus 100 mesh was obtained. Even though this grind is still coarser than desired, results improved, with 91% of the gold, 67% of the silver, and 85% of the copper reporting into the calculated combined concentrate. The rougher flotation concentrate assayed 3.6 oz Au/st, 1.8 oz Ag/st, and 0.7% copper. This demonstrates again that on at least some of the ore types, the grind size will have a significant impact on metallurgical performance, and there are significant differences in the work indices between samples. Low copper (0.05%) and silver (0.19 oz/st) head grades in this sample contributed to the apparent low recoveries of these two metals. For Sample 49733-6, Test 2671-66, only 81% of the gold, 54% of the silver, and 77% of the copper were recovered into a calculated combined gravity rougher flotation concentrate. However, the screen analysis of the flotation tailings showed that the grind at 64% minus 100 mesh was significantly coarser than the target 80% minus 115 mesh. The procedure was repeated using a longer grinding time (Test 2671-74), and a grind of 83% minus 100 mesh was obtained. Results improved, with 81% of the gold, 84% of the silver, and 89% of the copper reporting into the calculated combined concentrate. The rougher flotation concentrate assayed 0.63 oz Au/st, 1.1 oz Ag/st, and 1 .5% copper. These data again demonstrate that the grind size will have a significant impact on metallurgical performance, and there are significant differences in the work indices between samples. Low copper (0.15%), gold (0.068 oz/st), and silver (0.34 oz/st) head grades in this sample contributed to the apparent low metal recoveries. Complete data sheets are included in Appendix D. OPEN CIRCUIT CLEANING One exploratory test to evaluate recoveries and grades into a flotation cleaner concentrate following regrinding and two stages of cleaning of the rougher flotation concentrate in an open circuit was conducted using Sample 49.733-1. A scavenger flotation step to produce a scavenger concentrate for recycle into the regrind circuit classifiers and a disposable tailings was included in the flowsheet. The results are summarized in Table 7. Reporting into the gravity concentrate was 23% of the gold and 7% of the silver. These results continue to support the inclusion of a gravity separation step into the grinding circuit; if the amount of gold indicated by this test can be recovered into a gravity concentrate, it should be removed and not sent to the flotation circuit. The first flotation cleaner concentrate contained 50% of the gold, 42% of the silver, and 31% of the copper and assayed 9.3 oz Au/st, 38.7 oz Ag/st, and 31.7% copper. The flotation second cleaner concentrate contained 45% of the gold, 31% of the silver, and 21% of the copper and assayed 13.2 oz Au/st, 45.2 oz Ag/st, and 34.1% copper. The metal recoveries into the second cleaner concentrate appear low, but based on our experience with other copper ores, optimization of the cleaning steps will improve metal recoveries without seriously reducing grade. The visual characteristics of the cleaner flotation were that of a clean floating ore. This opinion will need to be confirmed by additional testing and locked-cycle tests. The complete data sheet is included in Appendix D. Table 7. Open Circuit Regrinding and Cleaning, Sample 49733-1 (Table Graphic Omitted) ================================================================================ APPENDIX A Mineralogical Investigation of Tres Amigos Gold/Copper Ore Samples Hazen Research, Inc. 4601 Indiana Street - Golden, CO 80403 Tel: (303) 279-4501 Fax: (303) 278-1528 August 6, 1999 FEDERAL EXPRESS TRANSMITTAL Mr. Wayne Henderson Lockwood Greene Engineers, Inc. 4201 Spring Valley Road Suite 1500 Dallas, TX 75244 Re: Mineralogical Investigation of Tres Amigos Gold/Copper Ore Samples Hazen Project 9507-02 Dear Wayne: The report on the mineralogy of the six Tres Amigos gold/copper ore samples is enclosed. Because the chances of detecting gold in straight head ore are ordinarily very slim, all samples were subjected to gravity concentration to upgrade the gold for observation of a statistically valid number of gold particles. Consequently, the emphasis of this investigation has been on examining the gravity concentrates. Native gold, actually electrum, was detected in all six samples, and some of the gold is already liberated at 10 mesh. From the overall observations, it appears that a combination of gravity concentration and froth flotation should effectively recover the majority of the gold. If selective flotation is planned for production of separate copper, lead, and zinc concentrates with attendant depression of pyrite, some of the gold occurring as fine inclusions in the pyrite might not be recovered. For the most part, the sulfides are relatively coarse, and liberation should not be a problem. Sample 2 is highly oxidized; Sample 6 is moderately oxidized. Please call me if you have any questions. Best regards, /S/ Roland Schmidt - ------------------- Roland Schmidt Director Mineralogical Laboratory RS:wlk Enclosure MINERALOGICAL INVESTIGATION OF TRES AMIGOS GOLD/COPPER ORE SAMPLES As part of the metallurgical test program on the Tres Amigos gold/copper ore samples, mineralogical studies were conducted on six head samples to determine the general mineralogy with emphasis on gold and copper occurrences. The procedures used and the results of the mineralogical investigation follow. X-RAY DIFFRACTION ANALYSIS For determination of the general mineralogy, pulverized portions of the head samples were analyzed by x-ray diffraction. The results are presented in Table Al, which show a moderate to major quartz content for all of the samples, subordinate to major pyrite in Samples 1, 3, 4, 5, and 6, and subordinate potash feldspar in Sample 5. Samples 2 and 6 are highly to moderately oxidized and show the presence of hematite. Table Al. Results of X-ray Diffraction Analysis of Head Samples (Table Graphic Omitted) RESULTS OF MICROSCOPIC STUDIES General Description of Minus 10-mesh Head Ore Samples To determine gross mineralogical features at relatively coarse size, polished sections were prepared of minus 10-mesh representative splits of each sample. Incident light microscopic analysis showed a relatively simple sulfide mineralogy comprised mainly of pyrite, chalcopyrite, galena, and sphalerite, with minor to trace amounts of bornite, chalcocite, and covellite. Sample 2 is highly oxidized and contains abundant, mostly fine-grained hematite, in addition to sulfides and a small amount of green oxide copper minerals. Sample 6 is moderately oxidized and carries only minor hematite. The sulfide mineralization in all of the samples is generally fairly coarse-grained and, for the most part, liberated from one another and from gangue at the 10-mesh size. Mutual sulfide intergrowths and intergrowths with gangue occur in moderate to minor amounts and in general are texturally simple. Table A2 summarizes the chief differences in sulfide mineralogy among the six samples. Table A2. Differences in Sulfide Mineralogy (Table Graphic Omitted) Precious metal mineralization was detected in only two out of the six samples. In Sample 1, native gold was observed as inclusions varying from less than 5 to 35 microns in several pyrite particles, and silver was found as hessite, a silver telluride-sulfide, and gold-bearing native silver, all occurring intergrown with a single galena particle. Gold was also observed in Sample 4 as a 10- micron inclusion in pyrite. The precious metal mineralization for all of the samples, plus the occurrences noted above, are described in greater detail in the following section. Mineralogical Composition of Gravity Concentrates In order to enable detection of the gold and allow examination of the statistically valid number of particles, the six samples Were subjected to gravity concentration to upgrade the gold. In the first step, the minus 8-mesh samples were crushed to minus 10 mesh and panned to recover any coarse free gold in its natural state, that is at least at the 10-mesh feed size. The pan tailings were then ground to minus 100 mesh and tabled on a Deister laboratory shaking table, followed by panning of the rougher table concentrate. This latter step recovered gold that was still locked at 10 mesh. The two sets of pan concentrates were then examined with a binocular microscope to obtain information on the characteristics of the gold occurrences, including shape and particle size. Following the initial microscopic examination, the two pan concentrates were combined and prepared as polished sections for incident light microscopic analysis. The information obtained from the examination of each set of products is combined and summarized in the following single description for each sample. Reference to a specific product will be made where pertinent. For Sample 1, some identifications were made during study of the minus 8-mesh unseparated head ore sample. For the sake of convenience, this information is included with the description of the pan concentrates. Sample 1 - Pan Concentrates The pan concentrates of Sample 1 consist predominantly of pyrite, chalcopyrite, galena with minor sphalerite, native gold, and traces of auriferous silver or high silver electrum, acanthite, hessite, a silver telluride sulfide, and polybasite. The chief sulfides are mostly liberated from each other and are quite coarse, up to over 300 microns, with a typical size range of 75 to 150 microns. The pyrite occurs mostly as angular, sometimes rounded particles but also often as euhedral crystals. Chalcopyrite is angular, and galena occurs generally as cubic cleavage fragments. Gold is plentiful and occurs mostly as liberated, irregular shaped particles with jagged edges. Size range is from about 5 to about 300 microns, with an estimated average range of 50 to 100 microns. A relatively small amount of the gold is intergrown with chalcopyrite and pyrite and rarely sphalerite in the form of simple intergrowths and attachments, as well as inclusions varying from less than 5 to 35 microns, which are more typical for pyrite. All the gold observed is electrum, and electron microprobe analysis of a typical particle showed 74% gold and 26% silver. Auriferous silver or high silver electrum, which is present in trace amounts, assays about 60% silver and 40% gold2. Comparison of the original 10-mesh pan concentrate with the pan concentrate derived from the table concentrate showed significantly more gold in the latter concentrate, indicating that most of the gold was locked at 10 mesh. Also, the effect of grinding on the gold is apparent in the table-pan concentrate, as the gold sometimes is flattened or rolled out and has a micro granular surface texture, which is lacking in the 10-mesh concentrate. Sample 2 - Pan Concentrates The Sample 2 pan concentrates consist predominantly of pyrite and hematite, with minor chalcopyrite, chalcocite, galena, goethite, barite, and green oxide copper minerals. Present in minor to trace amounts are bornite, native gold, covellite, sphalerite, and auriferous silver or silver-rich electrum. The overall particle size of the chief sulfides is somewhat smaller than in Sample 1, with a typical range of 50 to 100 microns. Most of the constituents are liberated from each other. Gold is abundant, occurring mostly as irregular shaped particles often with jagged edges, varying from about 5 to 150 microns and occasionally up to 450 microns. The estimated average size range is from 50 to 100 microns. Fairly frequently, the gold is partially to completely enveloped by goethite. Comparison of the two pan concentrates shows appreciable gold in both, indicating substantial liberation at 10 mesh. The gold in the table-pan concentrate shows the same flattening or rolled out effect noted in Sample 1. Sample 3 - Pan Concentrates The Sample 3 pan concentrates consist chiefly of pyrite and galena, with subordinate chalcopyrite and minor barite, sphalerite, and gold. The pyrite occurs mostly as euhedral, often somewhat rounded crystals and as angular particles, while galena occurs generally as cubic cleavage fragments. The typical size range of the sulfides is from 50 to 100 microns. The majority of all of the constituents is liberated from each other. Gold is relatively abundant and occurs as irregular shaped particles, some with ragged edges, ranging from about 5 to 400 microns and averaging 50 to 100 microns. Occasionally the gold is intergrown with chalcopyrite or shows thin rims of goethite. In the two pan concentrates, the concentrate recovered from straight 10-mesh ore shows very little gold, whereas gold is abundant in the table-pan concentrate, indicating significant locking at 10 mesh. The morphology and surface characteristics of this sample are similar to those described for Samples 1 and 2. Sample 4 - Pan Concentrates The Sample 4 pan concentrates are comprised of mostly galena, with slightly less pyrite, subordinate sphalerite, minor gold, and a trace of auriferous silver or silver-rich electrum. The galena occurs as cubic cleavage fragments and exhibits a bimodal size distribution. At the coarser end of the spectrum, galena is nearly 1 millimeter (mm) in size, and at the finer end, it averages 50 to 100 microns. Pyrite occurs primarily as angular particles and euhedral crystals and shows a similar size distribution as the galena. All constituents are highly liberated from each other. Gold is plentiful, occurring mostly as irregular shaped particles, some with jagged edges. The size range is from 20 to 450 microns, with an estimated average range of 75 to 150 microns. Occasionally, gold is intergrown with pyrite, sometimes in the form of up to 20-micron inclusions. Substantial liberation at 10 mesh is shown by the abundant gold in each of the two pan concentrates. The presence of significantly coarser gold (up to 450 microns) in the table-pan concentrate indicates that flattening with attendant "coarsening' ? has occurred. Again in the latter concentrate, the gold shows the typical micro granular surface texture and sometimes streaks, resulting from grinding the ore. Sample 5 - Pan Concentrates The Sample 5 pan concentrates consist primarily of pyrite, with subordinate galena, minor chalcopyrite, sphalerite, barite, and gold and a trace of auriferous silver or silver-rich electrum. The pyrite occurs as angular particles and euhedral crystals and varies from about 10 microns to over1 mm, with a typical range of 50 to 150 microns. The galena is present as cleavage fragments and covers roughly the same size range as the pyrite. All the constituents are essentially completely liberated. Gold is abundant and occurs as liberated irregular shaped particles and rarely intergrown with pyrite and very rarely with galena. Size variation is from 10 to 450 microns, and as in Sample 4, the coarsest particles are only present in the table-pan concentrate. The average size of the gold in the 10-mesh pan concentrate is 60 to 80 microns; whereas in the table-pan concentrate, it is 150 to 300 microns, and the same comments apply as for Sample 4. Sample 6 - Pan Concentrates The pan concentrates of Sample 6 consist of nearly all pyrite, occurring as angular and rounded particles and euhedral crystals. Minor constituents are hematite, chalcopyrite, bornite, and barite, and trace constituents are gold and auriferous silver?. Gold is the least abundant of all the samples and occurs mostly as irregular shaped liberated particles varying from 10 to 300 microns, with the coarse particles again being prevalent in the table-pan concentrate. The estimated average size range is 35 to 70 microns. Gold is rarely intergrown with pyrite. Figures A1 - A10 illustrate the gold occurrences as observed in the pan concentrates. The concentrate that contained the most gold (either the pan concentrates from the 10-mesh ore or from tabling minus 100-mesh pan tailings) was selected for illustration. For Sample 4, both concentrates were chosen because of the abundance of gold in each concentrate. A few selected photographs of the polished sections are also included. Figure 1. Sample 1 Table Pan Concentrate (Graphic Omitted) Photomicrograph illustrating liberated gold (yellow) measuring up to 65-mesh, galena and pyrite (gray metallic particles) 40x Figure 2. Sample 1 Minus 8-mesh Head Ore (Graphic Omitted) Polished section showing gold (almost white) intergrown with pyrite crystal (cream colored) and chalcopyrite (yellow). Electron microprobe analysis of the gold showed that it is electrum analyzing 74% Au and 26% Ag. 200x Figure 3. Combined Pan Concentrates (Graphic Omitted) Polished section showing liberated gold (light yellow) and gold intergrown with chalcopyrite (yellow brown). Other particles are pyrite (cream colored) and galena (medium gray). 200x Figure 4. Sample 2 Minus 10-mesh Pan Concentrate (Graphic Omitted) Photomicrograph showing gold particles (yellow), some with goethite coatings (brown) and mostly hematite (dark gray and brown). Minor sulfides (white metallic and oxide copper minerals (green). 40x Figure 5. Sample 3 Table-Pan Concentrate (Graphic Omitted) Photomicrograph showing coarse gold (yellow) and euhedral pyrite crystals (square outlines). 40x Figure 6. Sample 4 Minus 10-mesh Pan Concentrate (Graphic Omitted) Liberated, tarnished gold (yellow and brown) and galena (light to dark gray). 40x Figure 7. Sample 4 Table-Pan Concentrate (Graphic Omitted) Abundant coarse gold (yellow) and galena (light to dark gray). Note the substantial size difference and difference in color and surface characteristics of the gold compared to the minus 10-mesh concentrate shown in the previous Figure. 40x Figure 8. Sample 4 Combined Pan Concentrate (Graphic Omitted) Polished section illustrating bimodal size distribution of galena (medium gray, square outlines). Shown also are liberated gold (light yellow) and sphalerite (dark gray) intergrown with the second largest galena fragment. 160x Figure 9. Sample 5 Table-Pan Concentrate (Graphic Omitted) Coarse "mashed"? gold (yellow) and fine pyrite particles in background. 40x Figure 10. Sample 6 Table-Pan Concentrate (Graphic Omitted) Coarse "flattened"? gold (yellow) and fine pyrite in background. 40x EX-2.4 13 PRODUCTION PRO FORMA Exhibit "2.4" DYNARESOURCE, INC. "Production Pro Forma" San Jose de Gracia Lockwood Greene ================================================================================ PRELIMINARY FINANCIAL ANALYSIS Date: 12-July-1999 From: Wayne C. Henderson Re: FINANCIAL ANALYSIS OF PRELIMINARY 1000 STPD TARGET MILL PRODUCTION To: Koy D. Diepholz, WCM cc: Tom Thigpen Dom Perrotta Pat Sapinoso INTRODUCTION: Earlier estimated Capital Costs were developed for a target 1000 stpd gold ore Concentrator/Pressure Cyanidation process (08-July-1999). This target was chosen to be representative of a possible new mill, leaching and gold precipitate production operation in a remote location (e.g. near the Tres Amigos deposit at San Jose de Gracia). The novel LTLP (Low-Temperature, Low-Pressure) Oxygen Cyanidation Process for a gravity/flotation concentrate was chosen as the basis for design. A preliminary financial analysis (i.e. calculating the Internal Rate of Return, IRR, the Net Present Value , NPV, and the NPV/Investment Ratio) was made using both the Capital Costs on a NEW and on a USED Equipment Basis. A project duration of a total of 8 years was used. In addition, for a scenario utilizing an updated and refurbished existing 150 stpd Mill located at San Jose was also looked at. In this Case, project durations of 3, 4 and 5 years (operations for 2.5, 3.5 and 4.5 years respectively) were considered. Tables summarizing Capital Costs (NEW and USED) for Equipment, Operating Costs (@ 1000 stpd with precip being shipped and 150 stpd with concentrate being shipped) were developed to use the financial analysis. These tables and the financial analysis summaries are attached. DISCUSSION: Based on the estimated costs to get into production and the other assumptions for ore grade, etc., the following financial indices were calculated: Page 1 of 2 FINANCIAL ANALYSIS SUMMARY CASE IRR NPV NPV/INV ($MM) (@10% Int.) - -------------------------------------------------------------------------------- NEW MILL - 1000 stpd - -------------------------------------------------------------------------------- NEW EQUIPMENT 56.56% 20.01 1.79 USED EQUIPMENT 82.58% 23.18 3.06 - -------------------------------------------------------------------------------- REFURBISHED EXISTING MILL - -------------------------------------------------------------------------------- 150 stpd, 2.5 YR PROJECT 1010.40% 2.087 2.49 150 stpd, 3.5 YR PROJECT 1017.94% 3.045 3.63 150 stpd, 4.5 YR PROJECT 1018.60% 3.916 4.67 - -------------------------------------------------------------------------------- It should be noted that depending on the acceptable level of project risk (a function of Corporate Policy), typically any project with an IRR > 35-50% is usually a good one. Using the estimated Installed Costs for new equipment, the 1000 stpd project still seems to be a relatively-good one even at the current low gold prices. In addition, the scenario that is based on a Mill with some used major equipment improved the IRR to >82%. An additional criteria is the NPV10%/Inv. Ratio. If this value is > 2.0, a project also is considered to be attractive. The USED equipment scenario at 1000 stpd improves this ratio from 1.79 to 3.06. Thus it would seem that the use of some used equipment, where available, would be a desirable scenario for a small tonnage, i.e. 1000 stpd, operation. Even more attractive as a small-scale project is the use of the existing 150 stpd Mill located at San Jose. With only minimal additional Capital Investment (primarily for some Mining and Mobile equipment) to refurbish and update the existing Mill, a potentially very attractive short-term production scenario is seen. With the very low Capital requirements, the IRR's for either a 3, 4 or 5 year project are all >1000%. A more meaningful indicator, however, is the NPV10%/Investment Ratio. This increases from 2.5 (for a 2.5 year production scenario) to 4.7 (for a 4.5 year production scenario). The existing ore tonnage and grade estimate at the Tres Amigos area should sustain these short duration mining and processing scenarios. It would appear that a short-duration production scenario utilizing the existing Mill at San Jose would be a relatively-attractive, from a financial return, small-scale project. This seems to be consistent with West Coast Mine's earlier perceptions that a small-scale project could be financially justified and rewarding. Page 2 of 2 Equipment Costs By Plant Section 1000 STPD Ore - -------------------------------------------------------------------------------- Area Plant Section Estimated Cost Estimated Cost New EQUIP. Used EQUIP. (1999 $U.S.) (1999 $U.S.) - -------------------------------------------------------------------------------- 100 GRINDING CIRCUIT $2,080,980 $1,080,980 200 GRAVITY CIRCUIT $175,000 $115,000 300 FLOTATION CIRCUIT $193,800 $153,800 400 CONCENTRATE REGRIND CIRCUIT $176,950 $112,950 500 PRESSURE CYANIDATION $822,500 $342,500 600 FILTER CIRCUIT $326,950 $215,000 700 PRECIPITATIONCIRCUIT $275,000 $215,000 800 DORE' PRODUCTION NOT INCL. NOT INCL. 900 PLANT UTILITIES $643,300 $643,300 - -------------------------------------------------------------------------------- TOTAL: $4,694,480 $2,908,480 ESTIMATED INSTALLED COST: $9,400,000 $5,830,000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- APPROXIMATE OPERATING COSTS 1000 STPD ORE, 330 DAYS/YEAR ITEM BASIS UNITS UNIT ANNUAL COST/REC. COST COST OUNCE - -------------------------------------------------------------------------------- $/UNIT MM $/YR $/RecTOZ ORE GRADE MINED 0.2918 tr. oz/st 10.0 grams/mt GOLD MINED 291.8 topd NET RECOVERY (into ppt.) 92.87% OR 271.0 topd @ $270.00 (@93.0% Net Return) 89,428 topy $251.10 MINING - UNDERGROUND 1,000 stpd ORE $20.00 $6.600 $73.80 (ALL-IN COST) MILL COSTS (ALL IN): Milling 1,000 stpd ORE $2.50 $0.825 $9.23 Concentration 1,000 stpd ORE $1.88 $0.619 $6.92 Pressure Cyanidation 100 stpd Conc. $116.44 $3.842 $42.97 Merrill-Crowe Pptn. 271.0 topd $13.20 $1.180 $13.20 Shipping 1,000 lbs/day $0.80 $0.264 $2.95 Maintenance & Repairs 1,000 stpd ORE $995.80 $0.329 $3.67 SUB-TOTAL: $13.659 $152.740 CONTINGENCY/OVERHEAD 10.00% COSTS $1.366 $15.27 TOTAL OPERATING: $45.53 $15.025 $168.01 ANNUAL GROSS REVENUE: $22.455 $251.10 ANNUAL NET REVENUE: $7.430 $83.09 APPROXIMATE OPERATING COSTS 150 STPD ORE, 260 DAYS/YEAR ITEM BASIS UNITS UNIT ANNUAL COST/REC. COST COST OUNCE $/UNIT MM $/YR $/RecTOZ ORE GRADE MINED 0.2918 tr. oz/st 10.0 grams/mt GOLD MINED 43.77 topd NET RECOVERY (into conc.) 96.50% OR 42.2 topd @ $270.00 (@93.0% Net Smelter Return) 10,982 topy $251.10 MINING - UNDERGROUND 150 stpd ORE $20.00 $0.780 $71.03 (ALL-IN COST) MILL COSTS (ALL IN): Milling 150 stpd ORE $2.50 $0.098 $8.88 Concentration 150 stpd ORE $0.28 $0.011 $1.00 Pressure Cyanidation 0 stpd Conc. $0.00 $0.000 $0.00 Merrill-Crowe Pptn. 0.0 topd $0.00 $0.000 $0.00 Conc. Shipping 15 stpd/day $1,000.00 $0.277 $25.26 Maintenance & Repairs 150 stpd ORE $200.00 $0.066 $6.01 SUB-TOTAL: $1.232 $112.175 CONTINGENCY/OVERHEAD 10.00% COSTS $0.123 $11.22 TOTAL OPERATING: $34.75 $1.355 $123.39 ANNUAL GROSS REVENUE: $2.758 $251.10 ANNUAL NET REVENUE: $1.402 $127.71
TARGET PROJECT - 1000 STPD ORE FEED TO MILL NEW EQUIPMENT BASIS CATAGORY NUMBER UNITS INTEREST RATE 15.00% % ROR STONS MINED/PROC. 330,000 stons/yr AVERAGE GRADE 0.2918 troy oz/st RECOVERY INTO PPT. 92.87% GOLD SALES PRICE (NSR) $251.10 troy oz $ CASH FLOW BY YEAR 1 2 3 4 5 6 7 8 CAPITAL EXPENDITURES MINE ($500,000) MILL ($7,050,000) ($2,350,000) MOBIL EQUIPMENT ($500,000) WORKING CAPITAL ($751,245) ($1,690,301) TOTAL INVESTMENT: ($11,151,245) OPERATING MINE $20.00 /ston ore ($4,950,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) MILL $25.53 /ston ore ($6,318,675) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) TOTAL: $45.53 /ston ore ($11,268,675)($15,024,900)($15,024,900)($15,024,900)($15,024,900)($15,024,900)($15,024,900) TONS PROCESSED stons 0 247,500 247,500 247,500 247,500 247,500 247,500 247,500 GOLD PRODUCED troy oz. 0 67,071 89,428 89,428 89,428 89,428 89,428 89,428 GROSS REVENUE $ U.S. $16,841,573 $22,455,431 $22,455,431 $22,455,431 $22,455,431 $22,455,431 $22,455,431 NET REVENUE (CASH FLOW) ($8,801,245) $1,532,597 $7,430,531 $7,430,531 $7,430,531 $7,430,531 $7,430,531 $7,430,531 INTERNAL RATE OF RETURN 56.56% TOTALS: NPV/ ORE PROC. 1,732,500 stons INVEST. AU PROD. 603,641 troy oz. NET PRESENT VALUE (1O%) $20,010,847 1.79 NET PRESENT VALUE (15%) $14,768,907 1.32 NET PRESENT VALUE (20%) $10,889,866 0.98
TARGET PROJECT - 1000 STPD ORE FEED TO MILL USED EQUIPMENT BASIS NUMBER UNITS 15.00% % ROR 330,000 stons/yr 0.2918 troy oz/st 92.87% $251.10 troy oz $ CASH FLOW BY YEAR 1 2 3 4 5 6 7 7 8 ($500,000) ($4,372,500) ($1,457,500) ($500,000) ($751,245) ($1,690,301) ($7,581,245) $20.00 /ston ore ($4,950,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) ($6,600,000) $25.53 /ston ore ($6,318,675) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) ($8,424,900) $45.53 /ston ore ($11,268,675) ($15,024,900) ($15,024,900) ($15,024,900) ($15,024,900) ($15,024,900) ($15,024,900) stons 0 247,500 247,500 247,500 247,500 247,500 247,500 247,500 troy oz. 0 67,071 89,428 89,428 89,428 89,428 89,428 89,428 $ U.S. $16,841,573 $22,455,431 $22,455,431 $22,455,431 $22,455,431 $22,455,431 $22,455,431 ($6,123,745) $2,425,097 $7,430,531 $7,430,531 $7,430,531 $7,430,531 $7,430,531 $7,430,531 82.58% TOTALS: NPV/ ORE PROC. 1,732,500 stons INVEST. AU PROD. 603,641 troy oz. $23,182,541 3.06 $17,772,026 2.34 $13,740,908 1.81
TARGET PROJECT - 750 ST./WEEK ORE FEED TO MILL CATAGORY NUMBER UNITS INTEREST RATE 15.00% % ROR STONS MINED/PROC. 39,000 stons/yr AVERAGE GRADE 0.2918 troy oz/st RECOVERY INTO CONCENTRATE 96.50% GOLD SALES PRICE (NSR) $251.10 troy oz $ CASH FLOW BY YEAR 1 2 3 4 5 6 7 8 CAPITAL EXPENDITURES MINE ($200,000) MILL ($100,000) MOBIL EQUIPMENT ($200,000) WORKING CAPITAL ($338,813) TOTAL INVESTMENT: ($838,813) OPERATING MINE $20.00 /ston ore ($390,000) ($780,000) ($780,000) MILL $14.75 /ston ore ($287,625) ($575,250) ($575,250) TOTAL: $34.75 /ston ore ($677,625) ($1,355,250) ($1,355,250) TONS PROCESSED stons 19,500 39,000 39,000 GOLD PRODUCED troy oz. 5,491 10,982 10,982 GROSS REVENUE $ U.S. $1,378,777 $2,757,553 $2,757,553 NET REVENUE (CASH FLOW) ($137,661) $1,402,303 $1,402,303 INTERNAL RATE OF RETURN 1010.40% NPV/ TOTALS: INVEST. ORE PROC. 97,500 stons NET PRESENT VALUE (1O%) $2,087,353 2.49 AU PROD. 27,455 troy oz. NET PRESENT VALUE (15%) $1,862,675 2.22 NET PRESENT VALUE (20%) $1,670,623 1.99
TARGET PROJECT - 750 ST./WEEK ORE FEED TO MILL CATAGORY NUMBER UNITS INTEREST RATE 15.00% % ROR STONS MINED/PROC. 39,000 stons/yr AVERAGE GRADE 0.2918 troy oz/st RECOVERY INTO CONCENTRATE 96.50% GOLD SALES PRICE (NSR) $251.10 troy oz $ CASH FLOW BY YEAR 1 2 3 4 5 6 7 8 CAPITAL EXPENDITURES MINE ($200,000) MILL ($100,000) MOBIL EQUIPMENT ($200,000) WORKING CAPITAL ($338,813) TOTAL INVESTMENT: ($838,813) OPERATING MINE $20.00 /ston ore ($390,000) ($780,000) ($780,000) ($780,000) MILL $14.75 /ston ore ($287,625) ($575,250) ($575,250) ($575,250) TOTAL: $34.75 /ston ore ($677,625) ($1,355,250) ($1,355,250) ($1,355,250) TONS PROCESSED stons 19,500 39,000 39,000 39,000 GOLD PRODUCED troy oz. 5,491 10,982 10,982 10,982 GROSS REVENUE $ U.S. $1,378,777 $2,757,553 $2,757,553 $2,757,553 NET REVENUE (CASH FLOW) ($137,661) $1,402,303 $1,402,303 $1,402,303 INTERNAL RATE OF RETURN 1017.94% NPV/ TOTALS: INVEST. ORE PROC. 136,500 stons NET PRESENT VALUE (1O%) $3,045,145 3.63 AU PROD. 38,437 troy oz. NET PRESENT VALUE (15%) $2,664,446 3.18 NET PRESENT VALUE (20%) $2,346,888 2.80
TARGET PROJECT - 750 ST./WEEK ORE FEED TO MILL CATAGORY NUMBER UNITS INTEREST RATE 15.00% % ROR STONS MINED/PROC. 39,000 stons/yr AVERAGE GRADE 0.2918 troy oz/st RECOVERY INTO CONCENTRATE 96.50% GOLD SALES PRICE (NSR) $251.10 troy oz $ CASH FLOW BY YEAR 1 2 3 4 5 6 7 CAPITAL EXPENDITURES MINE ($200,000) MILL ($100,000) MOBIL EQUIPMENT ($200,000) WORKING CAPITAL ($338,813) TOTAL INVESTMENT: ($838,813) OPERATING MINE $20.00 /ston ore ($390,000) ($780,000) ($780,000) ($780,000) ($780,000) MILL $14.75 /ston ore ($287,625) ($575,250) ($575,250) ($575,250) ($575,250) TOTAL: $34.75 /ston ore ($677,625) ($1,355,250) ($1,355,250) ($1,355,250) ($1,355,250) TONS PROCESSED stons 19,500 39,000 39,000 39,000 39,000 GOLD PRODUCED troy oz. 5,491 10,982 10,982 10,982 10,982 GROSS REVENUE $ U.S. $1,378,777 $2,757,553 $2,757,553 $2,757,553 $2,757,553 NET REVENUE (CASH FLOW) ($137,661) $1,402,303 $1,402,303 $1,402,303 $1,402,303 INTERNAL RATE OF RETURN 1018.60% NPV/ TOTALS: INVEST. ORE PROC. 175,500 stons NET PRESENT VALUE (1O%) $3,915,865 4.67 AU PROD. 49,419 troy oz. NET PRESENT VALUE (15%) $3,361,639 4.01 NET PRESENT VALUE (20%) $2,910,442 3.47
TYPICAL GOLD CONCENTRATOR CIRCUIT - GRAVITY/FLOTATION BENEFICIATION (Graphic Omitted) 1996 SAN JOSE MILL DESIGN CONFIGURATION (Graphic Omitted) ROSARITA MILL 1999 UPGRADED CONFIGURATION BASED ON TESTS (Graphic Omitted) CASCADE PRESSURE CYANIDATION WITH HOT MERRILL-CROWE PRECIPATION (Graphic Omitted) EX-2.5 14 PAMICON REPORT EXHIBIT "2.5" DYNARESOURCE, INC. "PAMICON REPORT" SAN JOSE de GRACIA SUMMARY REPORT of the SUMMARY REPORT OF THE SAN JOSE DE GRACIA PROPERTY SINALOA STATE, MEXICO 26 degrees O9' North Latitude 107 degrees 53' West Longitude -Prepared for- GOLDEN HEMLOCK EXPLORATIONS -Prepared by- PAMICON DEVELOPMENTS LIMITED DATE OF REPORT: SEPTEMBER 1999 TABLE OF CONTENTS Page ---- 1.0 INTRODUCTION 1 2.0 LOCATION, ACCESS AND TOPOGRAPHY 1 3.0 PROPERTY 2 4.0 HISTORY 3 5.0 GEOLOGY 5 5.1 Regional 5 5.1.1 Regional Tectonics 5 5.2 Property Geology 5 5.2.1 Structural Trends 6 5.2.2 Magmatic Intrusion Trends 6 5.2.3 Mineralization Trends 7 6.0 REVIEW OF 1997 FIELD WORK 8 6.1 Tres Amigos 8 6.2 La Cecena Workings 9 6.3 Rudolphos Workings 10 6.4 Gossan Cap Area 11 6.5 La Union Area 12 6.6 La Purisma Area 12 6.7 Palos Chinos Area 13 6.8 Dead Zone Area 13 7.0 RESERVES AND FUTURE DEVELOPMENT 14 7.1 Resource Calculations 15 7.2 Classification of Resources 15 7.3 Inferred Resource Tres Amigos 15 - 1 gm/t Au cut-off 7.4 Indicated Resources Tres Amigos 17 Nominal 3 gm/t Au Cut-off 7.5 Inferred Mineral Resource 19 Tres Amigos 8.0 METALLURGY 19 9.0 RECOMMENDATIONS 22 10.0 RECOMMENDED BUDGET 24 1.0 INTRODUCTION In 1996 Golden Hemlock Explorations entered into an option agreement with the owners of Minera Finisterre, S.A. de C.V., a private Mexican company to acquire controlling ownership of Minera Finisterre. Terms of the agreement required Golden Hemlock to issue shares to the optioners, make property payments and conduct exploration work on the San Jose de Gracia gold property controlled by Minera Finisterre. Golden Hemlock has informed the writers that it has satisfied these commitments and now owns 100% of Finisterre. The San Jose de Gracia property is located in Sinaloa State, Mexico and consists of some 4, 160 hectares, more or less. The property controls most, if not all, of the mineral properties which formed the San Jose de Gracia mining district. The area was discovered in 1828 with historical gold production from over 67 different occurrences estimated to be in excess of 1,000,000 ounces.* Potential to develop additional gold reserves in the district is considered excellent either from high grade underground mining as historically occurred or from larger tonnage lower grade operations. This report is intended to summarize available information on the property including results from work conducted by or for Golden Hemlock from 1996 to the present date. Recommendations for additional work and proposed budgets for this work are also included. Charles Ikona, P.Eng., of Pamicon Developments Limited, examined the property on behalf of Golden Hemlock between March 6-12, 1996 and made preliminary recommendations to Golden Hemlock at that time. Other Pamicon personnel, Allan Montgomery, P.Geo. and T.C. Scott, F.G.A.C., conducted on site work in the spring of 1997 and July-August, 1999 respectfully. All monetary figures used in this report are in Canadian dollars except where otherwise noted. 2.0 LOCATION, ACCESS AND TOPOGRAPHY The San Jose de Gracia Mining District is located in the northeast portion of the State of Sinaloa some 156 kilometres northeast of the city of Culiacan. Access is by a mountainous road 78 kilometres from the municipal seat of Sinaloa de Leyva or by air to a gravel strip on the property suitable for small to medium sized aircraft. The village of San Jose de Gracia is located in the project area and offers a labor source as well as limited support facilities. Geographical co-ordinates of the project are 26009'N latitude and 107053'W longitude. *De Cservine, Brown and Cheng, Consejo De Recursos minerals et al. GRAPHIC OMITTED Figure 1 SAN JOSE DE GRACIA PROPERTY LOCATION MAP
Topography on the property is characterized by ravines and low mountain ranges with moderate to steep slopes. Elevations range between 400 and 700 metres A.S.L. Extensive unpaved roads and tracks offer 4 wheel drive access to much of the project area. Climate is semi-tropical with a dry season extending from mid November to the end of June and a rainy season from July to mid November. Summers are hot with temperatures to 400C and winters mild. Vegetation consists of mesquites, thorny bushes and shrubs. Some deciduous trees grow in the ravines with abundant underbrush growth during the rainy season. Limited surface water in flooded old workings is available for drilling in several areas of the property. Process water is available from wells in the main river valley near the village but may also be available from possible aquifers elsewhere on the property. 3.0 PROPERTY Golden Hemlock has advised the writers that the following concessions are owned by Minera Finisterre. The writers have examined documents pertaining to these but are not in a position to give a definite title opinion. This should be provided by Golden Hemlock's legal council. CLAIM NAME TITLE OR FILE NUMBER HECTARES San Jose 190244 27.0000 El Real 190736 2332.0000 Tres Amigos 2 192290 54.4672 Lost Tres Amigos 172216 23.0000 San Sebastian 184463 40.0000 CLAIM NAME TITLE OR FILE NUMBER HECTARES La Nueva Esperanza 162840 40.0000 Guadalupe 163357 7.0000 Nuevo Rosario 184999 32.8781 Mina Grande 163578 6.6588 Ampliacion de Santa Rosa 163592 25.0000 Santo Tomas 178649 312.0000 San Nicolas 163913 55.5490 La Libertad 172433 97.0000 La Union 176214 4.1098 Ampliacion de San Nicolas 183815 17.4234 CLAIM NAME TITLE OR FILE NUMBER HECTARES El Real 2 201128 393.8510 Piedras de Lumbre Uno 201946 40.2753 Piedras de Lumbre 2 201947 34.8484 Piedras de Lumbre 3 203467 4.3098 Finisterre Fraccion A 203285 18.7856 Finisterre Fraccion B 203286 173.4966 CLAIM NAME TITLE OR FILE NUMBER HECTARES San Miguel 183504 7.0000 CLAIM NAME TITLE OR FILE NUMBER HECTARES Santa Rosa 170557 31.4887 CLAIM NAME TITLE OR FILE NUMBER HECTARES San Andres 192288 385.0990 - --------------------------------------------------------------------------------------------
Total "4,160 hectres more or less" 4.0 HISTORY Gold was originally discovered on the property in 1828 near the small settlement of El Rosario in the north central portion of the area (Figure 5). Work was restricted to the areas of Mina Grande and Mina San Pablo during this period. In 1852 a local cholera epidemic and news of the gold discoveries in California led to the abandonment of the properties. Further work in the area in the 1870's led to additional production from some of the original mines. In 1893 the first ore body in the Purisma Creek area was discovered. From 1892 - 1895 these ore bodies are reported to have produced some 470,000 ounces of gold at an average grade of 3.48 oz Au/ton (Figures 4 and 5). In 1895 the La Prieta area was discovered which resulted in additional production. By 1902 the La Prieta and Purisma Creek Mining companies were amalgamated. These mines produced until 1910 when the Mexican Revolution halted mining activities. Production during the period 1828 until 1910 is estimated at 1,000,000 oz. This consisted of gold production by mercury amalgamation of arrastre and stamp mill material from 1828 to 1902 and cyanide extraction of stamp mill production from 1902 through 1910. The mines were returned to private control in 1918 with sporadic production until present. This production appears to have been hampered by lack of financial and technical resources. Material mined was salvaged from old operations with no organized attempt to define new reserves. By 1977 the present underlying vendors to Minera Finisterre succeeded in acquiring control of most of the district and installed a 70 ton per day flotation concentrator, which produced erratically. Preliminary modern geological surveys of the area were started in the 1990's by Asarco and Penoles, the Mexican state mining company. Unrealistic expectations by the vendors apparently resulted in neither of these companies pursuing the project. Minera Finisterre acquired the property subsequently and continued some exploration work although most of their resources were spent in erecting a 200 ton per day concentrator. In 1994 Consolidated Samarkand Resources Inc. entered into an agreement with Minera Finisterre to acquire an interest in the property. The agreement was allowed to lapse in 1996 after Samarkand conducted some preliminary surface and underground sampling and mapping. Subsequently Golden Hemlock obtained an option to acquire control of Minera Finisterre and commenced work on the property in 1997. Work for golden Hemlock was conducted by Perforaciones Quest de Mexico (PQM) which consisted primarily of drilling along with some limited trenching and mapping. During this period PQM also attempted to concentrate a limited amount of material from one of the mineralized zones (Tres Amigo's) employing the concentrator previously installed by Minera Finisterre. Due to a lack of understanding of the metallurgy and apparent lack of grind and flotation controls this was not successful in producing an economic concentrate grade and the attempt was abandoned. In 1998 Pamicon was requested to examine results of PQM's work and comment on possible reserves developed by the drilling and on the general status of the property. Results of this work were presented in September 1998. Subsequently Golden Hemlock and its agents arranged to collect samples for metallurgical GOLDEN HEMLOCK EXPLORATIONS MAJOR Au, Ag DEPOSITS OF THE SIERRA MADRE OCCIDENTAL, MEXICO U.S.A. GRAPHIC OMITTED Figure 2 testing during the first half of 1999. In July - August 1999, a short program under the direction of T.C. Scott and M. Mitchell, P.Eng., was conducted to address some problems with the PQM data noted in the 1998 review. 5.0 GEOLOGY 5.1 Regional The San Jose de Gracia project is located in The Sierra Madre Occidental Metallogenic Province which extends along a northwesterly trend from Zacatecus to northern Sonora. The property is located on the western flank of the province within the Barranca Section which straddles the Sinaloa-Chihuahua-Durango border (Figure 2). 5.1.1 Regional Tectonics This metallogenic Province can be considered as a segment of the Circum-Pacific Belt of gold-rich Porphyry and Epithermal gold deposits. The formation of these deposit types is the result of tectonic and magmatic processes associated with the evolution of subduction zones, which develop in response to global tectonism. The resulting mineral deposits occur in both Island Arc and Continental environments and, although older examples do exist, the more readily recognizable examples range in age from the Early Tertiary to Present. The paleography of Mexico from the Cretaceous to present day reveals that the area was affected by a sequence of tectonic and magmatic events related the subduction of the Middle America Trench. In northern of Mexico, subduction gave way to a system of spreading ridges and transform faults within the Gulf of California, which translate into the dextral displacement along the San Andreas Fault system. The tectonic features recognized within the State of Sinaloa were likely developed in response to these events. In the vicinity of the San Jose de Gracia property, the N-S trending Grete Graben is cut by an orthogonal set of NE and NW faults. Together, these structural elements appear to provide the regional structural framework for the property. 5.2 Property Geology The geology of the San Jose de Gracia Mining District is described in the "Geological-Mining Monograph of the State of Sinaloa" as comprising a folded basement sequence of metamorphosed Paleozoic sandstone, pelite and calcareous strata. These sedimentary rocks are unconformably overlain by Cretaceous (?) porphyritic andesites and andesitic volcaniclastic rocks. Both rock types are intruded by dioritic, quartzo-latitic and rhyolitic stocks. All rock units are covered with tuff-sized, rhyolitic volcanoclastics. Cheng (1994), based in part in 1990 mapping by ASARCO and others, suggests the westerly dipping andesitic and rhyolitic volcanic rocks are most likely Tertiary in age and lie unconformably upon Paleozoic sediments. This hypothesis is in direct conflict with Brown and Cheng (1995) which denotes the sediments as belonging to the Mesozoic. While it is likely the andesitic and rhyolitic sequences equate, respectfully, to the lower and upper volcanic units recognized throughout the Sierra Madre Occidental (Clark et al, 1978), a redbed marker horizon, defined as separating the two, has yet to be identified on the property. Intrusions recognized by Cheng (1994) include only diorite and andesite porphyries; rhyolite porphyry, noted on maps by Consejo de Recursos (1980) and Penoles (1992), were redefined by Cheng as crystal tuff and included within the andesitic sequence. However, recent re-examination of drill core and outcrops in the Tres Amigos area indicate the crystal tuff to be the upper and lower elements of rhyolitic ignimbrite with an interior spherulitic zone likely arising from devitrification. This Lignimbrite appears to lie unconformably upon the basement sediments and be overlain by andesitic tuffs and breccias. 5.2.1 Structural Trends The most prominent structure in the map area is a NNE, through-going fault located approximately 1 km west of the La Union workings and appears to juxtapose the Upper and Lower Volcanic Sequences. This fault and a parallel fault segment southeast of La Purisima lie subparallel to the trend of the Grete Graben. The succession of younger fault bounded strata from east to west is suggestive of a major graben lying to the west or that doming has occurred in the eastern portion of the property as a result of dioritic intrusions. A set of complex, near orthogonal structures is concentrated between the previously mentioned two structures, which given the pattern of dislocation along the sediment-volcanic interface, suggests the presence of a series of horst and graben structures with NW axes. Of these, the most prominent, herein called the El Salto Graben, is bounded to the northeast by the El Salto Fault and associated deformation zone. The El Salto Fault structure is shown to truncate all strata but the Upper Volcanic Sequence and displays the greatest amount of apparent lateral offset seen on the property. The sense of movement indicated across the orthogonal NW structures is consistent with the preponderance of NE and SW dipping, normal faults as revealed in the more detailed mine plans and could accommodate the marked dislocation across the deformation zone. The reported changes in dip for the volcanic rocks from mainly NW in the north to SW in the south of the property can be easily accommodated through a rotation on the normal faults as a result of varying degrees of relative uplift to the east. These tectonic features suggest an overall extensional environment for the mineralization at San Jose de Gracia. 5.2.2 Magmatic Intrusion Trends The linear distribution of magmatic intrusions is readily apparent and strongly suggests that at least two, parallel, deep seated structures may control the magmatic events. As these lie parallel to both the NNE fault and Grete Graben trends, it is likely that the intrusions were syntectonic with periodic reactivation along the same fault structures that produced the Grete Graben. While the porphyritic andesites appear be truncated by the orthogonal faulting, the diorite porphyries, dated regionally at 28Ma, are apparently not. It is likely that the emplacement of the porphyritic andesites and their segmentation by the orthogonal fault set was followed by continued development of the Grete Graben in advance of the emplacement of the diontic rocks. This sequence of events is supported by the apparent truncation of the orthogonal fault set to the west by the main NNE fault and the truncation of the porphyritic andesite by the parallel fault segment southeast of La Purisima. A secondary magmatic trend striking WNW is proposed in the area immediately east of the San Pablo workings and pertains only to the diorite porphyry intrusions. Along this trend four small plugs are aligned parallel with the axis of the San Pablo Horst that occurs between the Tres Amigos Graben to the north and the El Salto Graben to the south. To the east of this second trend, within the Arroyo Rosario, the emplacement of the dioritic intusions within the basement rocks provides a mechanism for uplift and rotation on pre-existing structures. 5.2.3 Mineralization Trends A plot of previous mineralization reveals several distinct trends. These are similar to many of the trends discussed above. Most noticeable are the two main groupings of mineralized fissures flanking the San Pablo Horst interpreted to lie immediately to the north of the San Pablo workings. The southerly grouping, containing the most extensively exploited veins, displays three distinct and somewhat orthogonal trends. The strongest of these is a NNW trend defined by both the Palo Chino workings and La Cruz- Del Anglo workings. It remains uncertain if these parallel zones are distinct sets of mineralized structures or a faulted repetition. Almost as prominent is a NE trend which includes the La Barria and Veta Tierra workings. Less well defined is a NNE trending, en echelon set that includes San Pablo and Mina Grande. All of these fissures appear to be located within volcanic stratigraphy and reflect a close spacial and linear relationship with the basement sediment interface, as well as to a conjugate fault set. The northerly mineralization is centered on the Tres Amigos workings. Examination reveals the presence of NNW, NE and NNE trends, similar to those in the south. The dominant mineralized trend is oriented NE as defined by the Tres Amigos-La Cecena workings and is reflected by the subparallel Rudolphos structure located 250 metres to the south. The change in dominant trend, from NW to NE, may reflect a change in the dominance of a set of conjugate structures on either side of the San Pablo Horst. Vein structures appear less abundant within the basement sediments and trends are less definable. One exception occurs in the vicinity the La Prieta area where a NE trend and alteration zone parallels the Tres Amigos trend and is suggestive of a northeasterly continuation to the Veta Tierra trend. Mineralization at SJG is not only hosted within fissure veins, but also, according to drill logs, within a variety of breccia bodies, whose origins are poorly understood. Mineralization trends relating to this mode of occurrence while not assessable at present should not be overlooked in future exploration activities. MAP [GRAPHIC OMITTED] GOLDEN HEMLOCK EXPLORATIONS - --------------------------- SANJOSE DE GARCIA PROPERTY SINALOA STATE, MEXICO PROPERTY MAP The comparison of the structural, magmatic intrusion and mineralization trends strongly suggest that the evolution of regional tectonics has created the favorable structural environment which controls the distribution of magmatic related mineralization at San Jose de Gracia. It is important to reiterate that the above interpretation is preliminary and will require a detailed investigation into the temporal and paragenetic sequences related to ore formation to substantiate. 6.0 REVIEW OF 1997 FIELD WORK This review of the 1997 field activities focuses primarily on the results of the diamond drilling and trenching conducted by PQM. Eight areas of the property were tested with 64 drill holes, which produced an accumulated length of approximately 6500 meters of NQ core. Subsequently, the Gossan Cap and the La Purisima were extensively trenched. 6.1 Tres Amigos Structure (Figures 8 - 18) The 1997 drill program at Tres Amigos comprised 26 holes drilled at various azimuths because of terrain constraints. While the near orthogonal drill pattern was not ideal for assessing the Tres Amigos vein structure, extrapolation of data between the idealized Mine Grid Sections, East (330) and North (060), provided enough continuity to indicate its tenor and trend. Many narrow, seemingly spurious hanging wall intercepts were attributed to intermittent north striking, steeply dipping veins of the Orange Tree grouping. It is not possible, from drill logs to identify these structures with any certainty nor to separate their possible contribution to the grade of the mineralized blocks depicted. The recent survey of drill holes has increased the confidence level in the spatial relationship between the various mineralized intercepts encountered in the Tres Amigos brecciated vein system. Several auriferous veins, occurring approximately 35 meters into the hanging wall of the Tres Amigo vein, were previously interpreted as spurious. On sections east of 5078E, these now appear to define, , a second mineralized structure (the Quarta Amigo) of similar orientation and character as the Tres Amigos. The significance or this mineralized, possibly en echelon, breccia vein, lies not only in its ore potential, but also in that may define a zone of dilation between the two structures. The mineralized, hanging wall splays 0f the Tres Amigos, comprising brecciated quartz-sulphide filled gashes and mineralized wall rock breccias, would be typical of such an environment. Similarly, the hanging wall splays of the Quarta Amigo may signal the presents of additional en echelon structures and dilation zones occurring to the northeast. Conformation and delineation of these zones could greatly increase the systems mineral potential. In preparation of the resource estimate for the Tres Amigos, the following observations and their possible inferences were also apparent: MAP [GRAPHIC OMITTED] Sam Kpse de Gracoa Ridp;[jps DDH 97-48, 97-49 La Cecena DDH 97-50 1. Based primarily on the distribution of gold, anastomosing or sheeted mineralized zones are depicted as striking approximately 060 with a northerly dip which may vary from 20 to 600. 2. The mineralized zones appear to crosscut all sedimentary, volcanic and intrusive lithologies. 3. Significant silver, copper, zinc and lead values were encountered in the drill holes but a definitive correlation between gold and individual elements is not apparent. 4. Several drill holes encountered the sedimentary lithologies which make up the pre-Tertiary basement rock for the region. The dramatic difference in the depth of the sediment interface in adjacent drill holes, as seen in Sections 503 7E, 5078E, 503 SN and 5080N is in sharp contrast to the regularity of the Tres Amigos structure. This suggests that considerable faulting occurred prior to the development of the main mineralized structures. 5. It should also be noted that the auriferous, massive-sulphide vein intersected within the sediments at the bottom of hole SJG 047 is the only significant mineralization encountered below the Tres Amigos vein to date. Although of undefined orientation, adjacent drill holes in the west, tend to eliminate all but an easterly dipping structure that may or may not be directly related to the development of the overlying dilatation zone. With a grade of Au 7.5 g/t, Ag 15.5 g/t, Cu 0.09%, Zn 3.18% and Pb 0.27% over 7 metres including 1.5 metres at Au 23.1 g/t, Ag 42.5 g/t, Cu 0.24%, Zn 8.0% and Pb 0.83%, this structure possibly represents a feeder channel for the mineralizing fluids that permeated into the Tres Amigos system. Delineation or this structure is a priority as it not only offers the potential for encountering mineralization in an environment similar to that of I .~ Prieta but also the potential for manto style mineralization developed within calcareous members of the basement sediments. 6.2 La Cecena Workings (Figure 6) The La Cecena workings are located 200 meters SW from the Tres Amigos workings and drifts northerly into the footwall of a mineralized structure which, based on similarities in orientation and mineral tenor, is interpreted to be an extension of the Tres Amigos mineralization. Drill hole 97-50, collared approximately 70 meters to the west of the workings, was oriented at 063~ at a - -8O0dip. The intention of drilling this diamond drill note was to test the La Cecena structure, which strikes 0490 and displays a variable northerly dip of 450 to 65g. The following comments are based on a review of the drill logs and assays of drill core for this hole. - - Andesite tuffs breccias and porphyries dominate the lithologies encountered in this 155.5 meter diamond drill hole. Sedimentary, felsic and andesitic clasts were noted in a 2 metre breccia zone at 73 metres. The rhyolitic sequence was not encountered, however a 4 metre quartz-feldspar porphyry dyke (?) Was intercepted at 113.5 metres. - - A zone of significant mineralization was encountered between 69 and 80 meters that may reflect a continuation of mineralization encountered in the workings. Encouraging assay results of 5.2 g/t Au - 16.6 g/t Ag and 8.8 g/t Au - 10.8 g/t Ag were returned from 2 samples on both the hanging wall and foot wall of the zone respectively. Sulphide mineralization associated with the zone include sphalerite, galena and minor pyrite. Significant copper values of 0.22% reported with the HW sample and 0.78% Pb with the FW sample. Anomalous precious and base metal values were returned from the intervening samples. - - Faulting and brecciation persisted throughout the section drilled with prominent graphite on minor slips. - - The dominant alteration is chlorite with epidote becoming more pronounced at depth along with fractures filled with talc/gypsum. - Recent surveying and sampling suggests a probable correlation between Tres Amigos and La Cecena yielding a mineralized structure in excess of 450 meters. 6.3 Rudolphos Workings (Figure 6) Drill holes 97-48 and 97-49 were collared 270 meters SE of the Tres Amigos portal adjacent to the Rudolphos workings and tested a mineralized structure that lies subparatiel to the Tres Amigos structure. Hole 97-48, an inclined hole, penetrated 100 meters of the Lower Volcanic Sequence that consisted of andesitic tuffs with diorite porphyry clasts, polymictic conglomerate. rhyolitic tuffs and andesite porphyry. The hole terminated in 20 meters of basement sediments. Hole 97-49, a vertical hole from the same setup, penetrated similar lithologies comprising 128 meters of the Lower Volcanic sequence before terminating in 17 meters of basement sediments. A shallow northerly apparent dip is indicated for the volcanic/sediment interface. - - Hole 97-48 encountered 40 meters of highly anomalous zinc mineralization between 36 and 76 meters which included several 1-2 meter intervals grading between 1 and 4.8% Zn. Anomalous Au values up to 2.5 g/t were encounter between 64 and 69 meters. - - Mineralization in 97-48 is of special significance as it is hosted by heavily quartz veined and brecciated rhyolitic tuff with total sulphides of up to 10% - - The presents of silicified sedimentary clasts within the quartz veining is strongly suggestive of a hydromagmatic breccia. Similar breccias have been reported in the Tres Amigos and La Cecena drilling. - - Hole 97-49 encountered several segments of similar mineralization with elevated gold values in which andesitic rocks were the primary host. - - These drill holes indicate that significant mineralization occurs not only in the andesitic stratigraphy but also within rhyolitic volcanic rocks with structural complexities being the main controls on the location of mineralization. - - Interpretation of results suggest the presence of at least two subparallel mineralized structures with a moderate NW dip. Neither, however, appear to correlate with the targeted Rudolpho surface workings which is in their foot wall. - - Even though initial gold values are low, the drilling has indicated Rudolphos to represent strong system of mineralization worthy of additional drill testing. - - The spacial relationship of the Tres Amigos and Rudolphos systems suggests they are not contiguous and represent separate but similar centers of mineralizing events.) 6.4 Gossan Cap Area In the vicinity of the Gossan Cap area, which lies to the southeast of the San Pablo and Mina Grande underground workings, 12 diamond drill holes were completed. Drilling targeted an auriferous zone identified as a result of surface rock chip sampling conducted during a property inspection by Teck Resources Inc. in 1996. The drill collars have as yet to be surveyed. Field mapping and diamond drilling indicates the bedrock of the Gossan Cap area to be dominated by basement sediments, in contrast to the anticipated Tertiary volcanics. There are, however, several aspects of the drill results that warrant comment. The following observations are based on drill log descriptions: - - Except for the intrusion of a few mafic and felsic dykes, the rock cored comprised siltstone, mudstone, graphitic black shales and calcareous members of the Paleozoic basement for the property. No volcanic rocks comparable to those found overlying the basement rocks at surface appear to have been encountered in the drill holes. - - Intense fracturing and brecciation is evident throughout the core. - - Fe and Mn oxides are prominent to a depth of approximately 35 meters below which sulphides, primarily pyrite, are dominant. - Drill holes 97-15, 17 and 26 were drilled to depths of 55.77m, 54.86m and 66.45m respectively. All other holes were less than 46 meters in depth. - - Although elevated gold values (100-200 ppb) were encountered in most holes, few samples returned values >500 ppb Au. - - Trace levels of silver and base metals increase markedly in the sulphide zones at the bottom of the holes. - - Core recoveries are generally poor in all holes and likely influenced drill core assay results. - - Gold values attributed to surface sampling are not reflected in drill core assays. Discussions with Mr. Montgomery (Pamicon) revealed a high probability of contamination in trench sample material because the roadsides and trenches sampled traversed several pre-existing dumps from various surface workings. - - Elevated zinc values associated with a quartz veined, tectonic breccia in Hole 97-15, between 10.6 and 14.8 meters, suggests that an extension to the mineralized structure at Pozo Mina Grande, may have been intersected. Inferred from these observations are the following; - - Surface weathering probably extends to a depth of approximately 35 meters. - - Either the sediments originally contained only elevated gold values or gold was lost as the result of poor recovery and/or surface leaching. - - Gold values from surface samples may be residually derived from erosion of auriferous volcanic cover. - - Mineralized structures within sediments may be subvertical thus negating their effective detection by vertical drill holes. The drilling in the Gossan Cap area has neither confirmed that surface mineralization continues to depth, nor has it satisfactorily explained the results obtained from previous surface sampling. However, drilling confirms that elevated precious and base metal values do occur in structurally prepared areas within the basement sediments. It will be important to incorporate the data from the Gossan Cap area into the geological data base for the property, to attempt to explain the high values from surface trench samples 6.5 La Union Area A total 716.87 meters of diamond drilling in 8 holes tested the down dip continuity to the fissure veins exposed in the underground workings at La Union. The diamond drill holes encountered a Lower Volcanic Sequence dominated by felsic and mafic porphyries, heterolithic breccias and the basement sediments. Phyllic and argillic alteration is extensive within these well fractured rocks especially where brecciated quartz-chlonte-sulphide veins were encountered. A summary of the more significant assay results is as follows: Drill Hole Sample Interval Width Aug/t Ag /gt Cu% 97-27 20.30-21.30 1.0m 8.99 12.50 - 71.63-78.50 6.9m 0.50 23.00 - 97-28 - 97-29 38.10-41.20 3.1m 4.50 8.50 0.10 97-30 36.25-36.75 0.5m 12.92 25.00 0.81 65.20-65.70 0.5m 3.70 177.20 5.22 75.00-78.10 3.1m 4.70 9.00 0.50 97-31 87.00-91.00 4.0m 2.84 6.70 0.34 97-32 - 97-33 93.10-97.10 4.0m 1.90 2.75 0.05 149.10-153.40 4.3m 1.30 6.50 0.05 97-34 45.70-47.70 2.0m 8.90 4.10 0.14 The results are encouraging and the area requires further evaluation. 6.6 La Purisima Area The lower reaches of the Arroyo Purisima, between the La Cruz and El Salto workings and the area around Trench 5 were tested with 1043 meters of diamond drilling in 14 holes. Bedrock includes a variety of well altered, andesitic to felsic porphyries, tuffs and breccias that are laced with silicified zones, stockworks and quartz breccias. Hematitic and argillic alteration is extensive. Pyrite at 1 to 3 % is pervasive. The core recovery is extremely poor and commonly ranges between 40 and 60%. This sheds doubt on the representativeness of the drill assay results and may account for the surprisingly few core samples with Au > 0.2 g/t from an area where trench sampling commonly returned Au values of 1 to 3 g/t. Contrary to earlier reports, assays show that elevated gold values occur in conjunction with anomalous concentrations of base metals in hematitic and silicic structures, as in hole 97-5 5 at 24.4m: 5.2 g/t Au, 28 g/t Ag, 0.6% Cu, 1.8% Zn, 0.35% Pb over 3 metres and at 114 metres: 2.1 g/t Au, 2.9 g/t Ag, 0.08% Pb over 2 metres. Hole 97-56A (location unknown) similarly reports approximately 1.0 g/t Au with 0.05 Pb over its entire length of 12.2 metres. Trench 5 is an area of extensive mechanical excavation. While sample numbers and significant results are shown, there is no documentation of sample types and lengths or of the rock types collected during sampling. It is obvious that there are several areas that-returned very encouraging results. Unfortunately, without substantial geological data, it is impossible to evaluate the significance of the results other than to say that the area should be resampled and mapped. 6.7 Palos Chinos Area (Figure 7) Drill hole 97-63 (-60/057)was collared on the roadside approximately 100 meters west of the Palo Chinos- tajo Verde workings. These workings explore at least two parallel structures oriented at 340/45SW at an elevation of 495 meters (CRM 1981). This elevation appears to equate to 561 meters on the PQM maps with a surveyed drill collar elevation of 565 meters. A target depth of 80 meters was anticipated. The drill hole intercepted a wide zone of hematitized breccia and quartz stockworks, which contain up to 5% pyrite and noticeable chalcopyrite between 46.4 m and 87.1 m. The arithmetic average for 29.6 meters starting at 52.7 m is 2.65 g/t Au, which includes sections grading 9.25 g/t Au over 0.73 meters and 8.45 g/t Au over 2.7 meters. This wide mineralized structure may possibly be interpreted as extending the Palos Chinos mineralization an additional 80 meters down dip. The 1999 fieldwork at SJG included a survey traverse from the Palos Chinos portal to drill hole SJG 063 and the Tajo Verde portal. This will provide spatial control for follow up drilling of the above mineralization. 6.8 Dead Zone Area The Dead Zone was tested with Drill Hole 97-64. A soft, medium grey, andesite porphyry, characterized by 5 to 10% disseminated, fine grained, black hematite and streaks of red hematite, was encountered throughout the hole. This rock was cut by numerous 0.3 to 2.0 cm gypsum veinlets. The core recovery was extremely poor (<25%) to a depth of 123 meters; thereafter it improved markedly (<95%). As there were no corresponding changes in lithology, etc., the marked change in core recovery at 123 meters may reflect the depth of surficial weathering. Assay results for both core and sludge samples are anomalously low. The highest value returned for all metals tested was 41 ppm zinc. No change in tenor is evident below 123 meters. Unfortunately, references to any specific alteration facies were omitted from the diamond drill logs. However, the presence of gypsum combined with extremely low metal value possibly suggests an environment of leaching by acid sulphate hydrothermal waters. 7.0 RESERVES AND FUTURE DEVELOPMENT The previous sections of this report indicate the extensive potential of the San Jose de Gracia as represented by: o A large area geologically favourable for the possible deposition of significant concentrations of gold. o Historical production estimated to be in excess of 1,000,000 oz. of gold from some 67 known historical workings. o Recent work by Golden Hemlock demonstrating potential reserves on several areas of the project. While a large portion of the property requires additional geological and geotechnical review prior to determining its potential several areas including the Tres Amigos -. La Cecena, Rudolphos and the Palos Chinos areas and possibly the La Union and La Purisma areas have sufficient results to justify additional immediate work. Of the above only the Tres Amigos - La Cecena area has received sufficient work to allow preliminary estimate of possible tonnage and grades to be made. Where exposed on surface the Tres Amigos structure has been developed by three short adits over a vertical extent of some 25 metres and by several shallow trenches. The lower adit (Level #1) is the longest at 83 metres. In this area it appears as a structurally controlled vein type deposit within competent Rhyolites. General altitude appears to be 060~ dipping 50-60~ to the north. Width varies between 2 to 4 metres averaging approximately 3 metres. The vein is highly silicified and contains extensive massive sulphides, primarily pyrite but with some base metals (Copper, Zinc and Lead). The most important economic constituent is gold along with lesser silver. In 1997 Golden Hemlock completed 26 diamond drill holes in the Tres Amigos area. Results from these along with sampling of the adits were employed for preliminary resource calculations (Figures 8 through 18). To date the Tres Amigos area has been drilled over a strike length of 160 metres to a depth of 250 metres. The La Cecena area has been included with the Tres Amigos as it is quite possible that the La Cecena structure as indicated by old workings and drill holes 97-53 represents an extension of the Tres Amigos structure to the south-west. Should this be the case, a strike length of 450 metres open to the south-west might be postulated for the combined area. 7.1 Resource Calculations As part of the Review of the project carried out by Pamicon in June 1998, golden Hemlock requested that preliminary calculations of indicated reserves or resources on the property be conducted. After reviewing the available data it was noted that while drilling on several areas of the property had encountered encouraging intersections, only the Tres Amigos had received sufficient drilling to allow resource calculations. Accordingly only this area was addressed. Although some questions arose, notably with respect to the existing survey data, sufficient continuity from adits and drilling was available to allow preliminary estimations to be made at a nominal 1 gm/ton gold cut-off. At that time it was recommended that calculations of resources at a higher cut-off grade be deferred subject to clarification of the survey data and metallurgy. During 1999 progress on metallurgical testing was made and a re-survey of the Tres Amigos conducted. The Level #1 adit was also remapped and, in part, resampled. Re-interpretation of the data incorporating these results has allowed calculations to be made on a 3 gm/t cut-off as presented in this section. This re-interpretation, although resolving some points in structural attitudes and allowing a possible re-interpretation of the controlling structural features, does not indicate that any significant variation in the overall 1998 resource calculations will occur. Accordingly the 1998 results at a 1 gm/t cut-off grade are presented below. 7.2 Classification of Resources Mineralization in the Tres Amigos' area is classified as Indicated Mineral Resources and Inferred Mineral Resources in accordance with the proposed classification under the International Reserves Definition Initiative reported in the Bulletin of the Canadian Institute of Mining and Metallurgy, Vol. 90, No. 1017, Feb. 1998, pp. 44-45. A summary of these classes is provided in Appendix B. It is anticipated that additional work will allow portions of these to be moved into a Measured Mineral Resource class and possibly into Proven/Probable Mineral reserve upon satisfactory final resolution of metallurgy and economics. 7.3 Inferred Resource Tres Amigos - 1 gm/t Au Cut-off Methodology The available information was compiled using a geological data management program. From the drill pattern used by PQM "best fit" across sections at a scale of 1:500 were developed at right angles to the apparent strike of the Tres Amigos structure. In addition to this, a number of holes had been drilled subparallel to the structure. Accordingly a second set of cross sections was developed on a "best fit" basis at right angles to this direction of drilling. Results from this second set were amalgamated with the first set of sections to develop blocks of mineralization. A Placom KP-90N digital Planimeter was used to measure areas of the mineralized blocks. Grades of intersections were weight averaged using a 1 gm/t gold cut-off value to establish grade for each block. The "best fit" approach results in a non uniform spacing between sections. Lateral influence for each intersection employed were one halfway to an adjoining section or 10 metres from the end sections. Downdip continuity was assumed from interpretation where sufficient drill data was available. Blocks were taken to 8 metres on each side of intersections where no other information was available. This requirement resulted in not including significant portions of the projected Tres Amigos structure on sections 5078E, 5060E and 5037E due to lack of drilling in these areas. Based on the planimeter sections and areas of influence, tonnage calculations for each mineralized block were made. A Specific Gravity of 2.8 was assumed as no information on Specific Gravity measurements are available. Mineralized blocks were then weight averaged to determine total results. Discussion of Drill Results In a report dated March 14, 1997, C.K. Ikona presented an estimate of mineralized resources of the Tres Amigos zone. This was based on sampling of the underground workings by Cheng, surface trenching, and an assumed 70 metre strike extension both to the northeast and southwest for a total strike length of 350 metres. Continuity down dip was assumed as 35 metres. This resulted in an estimate of 96,300 tons grading 4.24 gm/t Au and 0.78% Cu. The 1997 drill program tested the Tres Amigos zone over a strike distance of 160 metres and indicated probable continuity for this distance. No indication of termination of the zone along strike is apparent. On sections 51 14E, 5060, 5020 and 4953E the zone was intersected some 30-40 metres down dip. The corresponding holes on sections 5097E, 5078E, 5037E and 5988E were not drilled. Based on these results, it appears that the assumptions used by Ikona in his report remain valid for tonnage calculations. A total of 7 drill intercepts are within the 93,000 ton block estimate. Assay results vary between 1.74 to 6.47 g/t Au. A similar variation is present in the underground sampling. Accordingly the grade estimate for the 93,000 tons was not adjusted. Intersections of apparent Tres Amigo's mineralization were encountered on most sections to a down dip length of up to 250 metres. These lower intersections were used to calculate the Inferred Mineral Resource which was added by the 1997 drill program. In addition, a number of holes reported multiple intersections of mineralization indicating potential outside the main Tres Amigo's zone. Where sufficient continuity is apparent, resource blocks are also presented for these intersections. Table 1 Summary of Inferred Resource Tres Amigos Area, San Jose de Gracia Project As of May 1998 S.G. = 2.8 cut off= 1 gm/t Au Table 1 - -------------------------------------------------------------------------------- Description Tonnes g/t Au g/t Ag %Cu %Zn - -------------------------------------------------------------------------------- A Resources estimated by Ikona, 93,600 4.24 n/a 0.78 n/a March 1997 to 35 metres below Tres Amigos workings. B Indicated Resource on Tres 283,100 4.62 8.79 0.22 0.19 Amigos zone added by 1997 drilling. C Indicated Resource in other 87,600 2.77 4.9 0.09 0.75 zones in Tres Amigos area added 1997 drilling. - -------------------------------------------------------------------------------- Total Indicated Resource 464,300 4.19 n/a 0.30 n/a - -------------------------------------------------------------------------------- More detailed reserve results on a section basis are presented in Appendix C. 7.4 Indicated Resources - Nominal 3 gm/t Au Cut-off Interpretation New cross sections were plotted for the Tres Amigos area employing the survey of the area conducted during 1999. These show the main Tres Amigos zone to have a relatively consistent strike and dip (-O56~ @ -600N) over the area drilled. In addition, several of the new sections (5078, 5097, 51 14E) appear to indicate the presence of a second zone (tentatively named the Cuarta Amigo) sub parallel to the Tres Amigos and some 35 metres in the Hanging wall. Both of these zones appear to be structurally controlled. Opposing movement on such a set of subparallel structures can cause dilation or wrench type secondary structures between them. The presence of these may be indicated by a number of intersections which previously were interpreted as a significant flattening of the main Tres Amigos zone at depth. In addition section 5078 appears to show the presence of these dilation structures in the hanging wall of the Cuarto Amigo zone. This may indicate the presence of a third, previously unsuspected zone in this direction. Should this new interpretation of the controlling structural features prove correct, the implications for increasing the tonnage potential for the area are significant.
Methodology The resource at a 3 gm cut-off grade was calculated on the sections and interpretation described previously. Parametres on area of influence of drill holes, sections and Specific Gravity were the same as discussed for the 1 gm cut-off grade presented in section 7.3. Cutting of Grades and Results Assays from underground sampling and drilling demonstrate an extensive range in gold grades. Additional information is required to develop a statistically meaningful method of cutting assays. Cutting of grades at this time therefore is somewhat arbitrary. Table 2 shows the tonnage and grade calculated on sections for various portions of the deposit and the uncut weighted average grade of 9.4 gm/t gold. Inspection of results show three tonnage blocks with gold grades substantially above the uncut average (zone T section 5078, zone C section 5078 and zone C section 5114). On a preliminary basis cutting the grade of these to the uncut average shows a cut weighted average grade of 7.4 gm/t gold. No cutting of silver and copper results appear warranted. The Indicated Resource of the Tres Amigos area is therefore 161,696 Tonnes with an uncut average grade of 9.4 gm/t Gold, 15.15 gm/t Silver and 0.44% copper or a cut average grade of 7.4 gm/t Gold, 15.15 gm/t Silver and 0.44% Copper. Table 2 Indicated Resource Tres Amigos Area 3 gm/t Au nominal cut-off S.G. = 2.8 Section Ave t Influence Area Vol. Tonnes g/l Au g/t Ag % Cu Zone (in) (in) (ml) (mi) 4953E 1.6 27.5 60 1650 4,620 11.59 27.5 0.27 T 4988 3.0 33 97.5 3,217 9,009 3.47 2.0 0.71 T 2.0 33 37.5 1,237 3,465 13.5 3.1 0.02 T 1.5 33 90 2,970 8,316 7.24 5.7 0.05 D 5020 2.36 24 272.5 6,540 18,312 8.25 18.4 1.09 T 7.1 24 260.0 6,240 17,472 4.4 21.0 0.43 D 5037 3.35 20 137.5 2,750 7,700 7.88 5.2 0.75 1 5046 2.4 10.5 97.5 1,023 2,866 4.39 5.2 0.48 T 3.0 10.5 232 2,436 6,820 6.12 26.4 0.05 T&D 2.0 10.5 42.5 446 1,249 3.28 1.6 0.01 D 5060 3.1 16.0 280 4,480 12,544 5.47 21.4 0.54 T 2.0 16.0 70 1,120 3,136 10.81 16.3 0.38 D 2 16.0 30 480 1,344 14.88 10.9 0.19 D 5078 3.8 18.5 477 8,824 24,700 17.26 14.0 0.38 T 1.55 18.5 85 1,572 4,400 9.7 11.2 0.07 D 2 18.5 60 1,110 3,100 31.35 6.7 0.03 C 2 18.5 57.2 1,058 2,960 3.0 2.7 0.10 D 2 18.5 57.5 1,063 2,776 5.12 2.2 0.10 C 5097 1.65 18.0 90 1,620 4,536 9.1 8.64 0.11 C 2 18.0 47.5 855 2,390 7.78 2.3 0.37 C 2 18.0 77.5 1,395 3,900 5.18 1.9 0.05 D 2 18.0 57.5 1,035 2,900 7.06 20.6 0.58 T 7 18.0 112.5 2,025 5,670 7.5 15.5 0.09 5114E 1.5 18.5 40 740 2,072 5.66 47.3 1.3 T 2.1 18.5 105 1,942 5,439 21.8 37.8 0.63 C - ------------------------------------------------------------------------------------------------------------- Total uncut 161,696 9.4 15.15 0.44 All ------------------------------------------------- Total cut (gold only) 161,696 7.4 15.15 0.44 All - -------------------------------------------------------------------------------------------------------------
Zones: T = Tres Amigos D = Dilation zone C - Cuarto Amigo 7.5 Inferred Mineral Resource On sections 4988E, 5037E and 5046E significant portions of the main Tres Amigos structure require fill in drilling as the distance between drill intersections and/or underground sampling is greater than the described parameters used for calculation of Indicated Resources. An Inferred Resource of some 125,000 1 can be postulated in this area. Grade is indeterminate but may approach the Indicated Mineral Resource averages. 8.0 METALLURGY The historical gold production from the San Jose de Gracia area was by amalgamation of arrastre and stamp mill production until 1902 and cyanide extraction of stamp mill production until 1910. Ore for this processing appears to have been derived from oxidized and enriched material from above the paleo-water table level. The small flotation concentrator erected in the area operated on material salvaged from historical workings and may have included some primary non-oxidized material but the majority of feed most likely consisted of higher grade oxidized material. Results from this operation both in recovery and concentrate grade were reported to be satisfactory. The flotation concentrator installed by Minera Finisterre in the mid 1990's (reported capacity 200 t/d) was constructed primarily to process material from the Tres Amigos workings. This material is silicified and not oxidized to any significant degree. Little attempt to investigate the metallurgy, install adequate grind control and selective flotation appears to have been made. As a result, gold recoveries were low and concentrate produced of too low a value to be saleable. In the spring of 1999 personnel under the direction of Mr. Wayne C. Henderson, P.E. of Lockwood Greene Engineers visited the property with the purpose of obtaining samples for metallurgical testing. Six samples were collected and forwarded to Hazen Research in Golden, Colorado for test work under the direction of Mr. Henderson. The following description of the samples was provided by Mr. Henderson. Sample 1: This is a bulk composite taken from the lower Tres Amigos Adit over about a 3 meter strike distance. This sample had significant Au, Ag, Cu and Zn grade, higher than expected than that observed or reported from previous Tres Amigos mining and processing efforts. The sample was prepared using hand-gathered, selected vein rock from side-wall and rooffall material in the Adit. Sample 2: This is a bulk, near-surface trench composite taken from previous trenching areas on the Gossan Cap. Although highly oxidized, the Gossan Cap material was tested to see if it was feasible to concentrate using beneficiation techniques. Sample 3: This sample was comprised of composite 1/4-core intervals from a number of Tres Amigos drill holes. The intent was to obtain a composite representative of the vein intercepts (with >6 gpt Au) which was predominately Au and cu mineralization only. Sample 4: Similar to Sample 3, this Sample was intended to represent 1/4-core intervals in the mineralized vein (with >6 gpt Au) where the predominate mineralization was Au, Zn and also some Pb. Sample 5: During the course of the 97 drilling program, a lower ore zone (called the Sediment Zone), which was a fine-grained rock with little or no visible sulfide mineralization, was identified which had significant Au grade. Unfortunately none of the drill holes penetrated this structure and some early holes did not drill into it since it was not a recognized A u-bearing formation. This sample represents a composite of intervals from several drill holes which are typified by: fine-grained rock structure, little visible sulfides; and low Cu, Zn and Pb. Sample 6: One of the last exploratory holes drilled in the 97 program was hole 9 7-63 which drilled at an angle into an ore zone formation indicated by previous, smaller-scale mining activity at Palo Chino and the possible connection of the near-surface ore formation with the San Pablo mining activity. Selected 1/4-core intervals (>3 gpt Au) were combined over a 30
meter mineralized zone to get a nominal 15-kg sample for testing. Unfortunate/v only one drill hole core was available for this formation; thus the composite Sample 6 ended up lower grade than desired (assay head of 0. 070 topt or <2.6 g/mt). This would he a marginal mining grade for a bulk tonnage, near-surface mining. Never-the-less, the metallurgical response for this material (using a non-optimized scenario based on the Tres Amigos Adit ore) was acceptable. Table 3 presents the analytical results completed on the six samples and demonstrates the wide variability in metal contents among the samples. Table 3 Summary of Head Analyses (after Hazen) ------------------------------------------------------------------------- Client Au Ag Cu Pb Zn Fe 5(T) Identification gm/f gm/f % % % % % Sample 1 29.5 140.2 4.61 0.10 1.17 13.7 13.5 Sample 2 15.9 29.4 0.36 0.0] 0.02 4.56 0.18 Sample 3 5.9 33.2 0.95 0.07 0.30 6.18 5.90 Sample 4 19.3 29.4 0.27 0.70 4.09 10.8 13.1 Sample 5 9.6 6.5 0.05 0.05 0.23 4.05 3.17 Sample 6 2.3 11.6 0.15 0.0] 0.01 4.52 3.27 -------------------------------------------------------------------------
The objectives of the work conducted by Hazen were to: o Mineralogically and chemically categorize the six ore samples. o Evaluate gravity separation for the recovery of relatively coarse gold and silver. o Evaluate flotation to recover gold, silver, and copper. o Develop preliminary process design criteria. o Describe any obvious metallurgical complications. Hazen summarized the results of their work as follows. For the six samples studied, gold recovery varied between 62 and 950o, silver recovery varied between 30 and 94%, and copper recovery varied between 14 and 97% into a combined (calculated) gravity cleaner concentrate and rougher flotation concentrate. The lowest recoveries were associated with a highly oxidized sample (Hazen 49 733-2). When the results from the highly oxidized sample and results at course grinds were ignored, gold recovery varied between 87 and 95%, silver recovery varied between 67 and 94%, and copper recovery varied between 81 and 97% into a combined (calculated) gravity cleaner concentrate and rougher flotation concentrate. For the sulfide samples, when target conditions (primarily grind size) were attained, the rougher flotation conditions were visually excellent, and there were no indications of interference from clays or other components that can interfere with results. No attempts were made to recover oxidized minerals. Of the samples, three were Tres Amigos (1, 3, 4) with the others from elsewhere on the project. As only resource calculations were made on the Tres Amigos the following comments are made for these samples only. Most of the test work was directed to the high grade adit sample (Sample 1). Results on this sample both in terms of recovery and concentrate grade (in gold) were excellent. However, while the Tres Amigos will undoubtedly produce some material of this grade and mineralogical tenor, Run of Mine feed considering overall resource and dilution will most likely be of much lower grade. The other two samples (samples 3 and 4) received only cursory test work. Results of this work was very promising from a recovery point of view but concentrate grade was low which will impact negatively on cash flows. The low grade concentrate may be a result of too coarse a grind and flotation selectivity in the tests. This is indicated by the mineralogic study of these samples which appears to indicate that gold occurs as discrete particles which can be liberated by grinding rather than interstitially with the pyrite. Although yet to be demonstrated, the possibility of producing an acceptable grade of concentrate from Run of Mine, Tres Amigos material should be considered good. Hazen recommends additional test work prior to circuit design and detailed economic analysis. For this work care should be taken to ensure that samples represent ore blends that will be treated in the plant and include dilution material. The writers concur with this. 9.0 RECOMMENDATIONS The mineral potential of the San Jose de Gracia mining camp merits further evaluation facilitated by the continuation of both the in-office review of historical data and acquisition of new data derived from field work. To accomplish this, a staged approach to exploration is recommended. An initial stage should address the following: Data Base Up Date: The recent trip to the property resulted in retrieval of most of the data not previously on file at Pamicon's offices and a considerable backlog exists, in the cataloguing, processing, and interpretation of this data. It is recommended that a competent, accredited geologist, with a good background in data and CAD management, a strong background in volcanic hosted, epithermal systems and structural geology, be given the tenure and resources to address the task. This person would also be involved in the collecting and processing of data acquired during the next round of field activities. Road and Camp Rehabilitation: The field trip to SJG in July, 1999, revealed considerable deterioration of the roads to San Jose de Gracia and around the mining property. It is estimated that approximately three weeks of bulldozer supported, road rehabilitation is required to facilitate future road based exploration activities on the property, especially if additional drilling is scheduled. The camp compound is also in need of refurbishment especially in the areas of water supply and refrigeration. It is recommended that the budget for the next period of field work reflects these needs. Geological Mapping and Surveying: While the addition of drill hole survey data has enabled a more confident interpretation of the distribution of subsurface mineralization at Tres Amigos, detailed surface mapping is still required for the correlation of structures, rock units and mineralization trends. Preliminary data, now on hand in the form 1997 field maps and underground geology maps need to be compiled and placed on base maps suitable for interpretation, presentation and field use. Detailed mapping at a scale of 1:500 is required in areas for which drilling is contemplated and should be completed in advance, perhaps during the road and camp rehabilitation stage. Additional mapping for the purpose of developing new drill targets may be conducted during the drilling stage as time and manpower permit. Diamond Drilling: A drill program based on encouraging 1997 drill results is recommended for the property. Initially, three areas should be tested. These include: the Tres Amigos - La Cecena structure, the Palos Chinos - hole SJG 063 structure and the Rudolphos structure. This work should accommodate the completion of current drill sections where necessary and further test the interpreted mineralized structures laterally and to depth. This could be accomplished with a Stage One drill program of approximately 12 drill holes with an accumulated length of 2000 meters. The amount of drilling and priority of collar locations is, however, subject to corporate objectives and budgeting directives. A second stage of work, comprising diamond drilling and mapping, would not only continue to develop the mineral potential within the above target areas but begin exploratory drill investigations of promising targets as derived from the review of historical data and supported by current detailed mapping. 10.0 RECOMMENDED BUDGETS A budget totaling $625,000 Cdn is presented. For corporate purposes we have been asked to prepare this on a two stage basis. The second stage recommendations are not dependent upon results of the first stage. It would be preferable from an efficiency point of view to conduct the second stage in conjunction with the first to eliminate a number of redundant costs. The first stage, however can be viewed as a stand alone program, if necessary. Details of these budgets are presented in Appendix A. Respectfully submitted. /S/ Charles K. Ikona - --------------------------- Charles K. Ikona, P.Eng. /S/ T. Cameron Scott - --------------------------- T. Cameron Scott, FGAC
APPENDIX A DETAILED RECOMMENDED BUDGETS EXPLORATION BUDGET: PHASE 1 - 1999 CLIENT: GOLDEN HEMLOCK PROJECT: 1200 FOOT DRILLING PROGRAM - 45 DAYS TOTAL BUDGET $313,649.44 WAGES GENERAL EXPLORATION DAYS RATE TOTAL Project Geologist 1 90 450.00 40,500 Senior Geologist 1 45 375.00 16,875 Geologist 1 45 350.00 15,750 Samplers 2 45 50.00 4,500 Caretaker 6 45 25.00 6,750 Cook 1 45 275.00 12,375 Preseason Wages 1 10 450.00 4,500 ----- $101,250 RENTALS NO. RATE Office Equip. 45 30.00 1,350 Hand Held Radios 5 45 5.00 1,125 Rock Saw-Core 45 50.00 2,250 Rock Saw-Still 45 20.00 900 Truck 4x4 2 45 100.00 9,000 ----- $14,625 SUBCONTRACTS NO. RATE Fixed Wing 5 Trips 300.00 1,500 Cat Hours 150 Hours 100.00 15,000 Survey 5,000 Drilling 1,200 Feet 35.00 42,000 ------ $63,500 CHEMICAL ANALYSES NO. RATE Core 200 Samples 25.00 5,000 Rock 100 Samples 25.00 2,500 ----- $7,500 MATERIALS AND SUPPLIES DAYS RATE Camp Upgrade 15,000 Camp Equipment 1,000 Camp Food 45 300.00 13,500 Camp Fuel-Gas 2,000 Camp Fuel-Propane 2,000 Field Supplies 5,000 ----- $38,500 SUPPORT NO DAYS RATE Travel-Airfare 5 Round Trips 600.00 3,000 Travel-Hotels/Motels (Mid Program Break) 5,000 Travel-Meals (Mid Program Break) 2,000 Travel-Auto. Exp 4,000 Expediting 2,000 Freight 6,000 Telephone - Satelite 5,000 ----- $27,000 REPORTS & REPRODUCTIONS Maps and Publications 2,500 Reproductions 2,500 Drafting 5,000 Report 15,000 ------ $25,000 PROJECT SUPERVISION 7% on subcontracts on 63,500 4,445 15% on expenses on 112,625 16,894 ------ $21,339 -------- $298,714 -------- CONTINGENCY $14,936 -------- TOTAL BUDGET $313,649 ========
EXPLORATION BUDGET: PHASE 2 - 1999 CLIENT: GOLDEN HEMLOCK PROJECT: 3500 FOOT DRILLING PROGRAM - 30 DAYS DATE: 23-Sep-99 TOTAL BUDGET $312,957.75 Canadian Dollars WAGES GENERAL EXPLORATION DAYS RATE TOTAL Project Geologist 1 60 450 27,000.00 Senior Geologist 1 30 375 11,250.00 Geologist 1 30 350 10,500.00 Samplers 2 30 50 3,000.00 Caretaker 6 30 25 4,500.00 Cook 1 30 275 8,250.00 Preseason Wages 1 10 450 4,500.00 --------- $69,000.00 RENTALS NO. DAYS RATE Office Equip. 30 30 900.00 Hand Held Radios 5 30 5 750.00 Rock Saw-Core 30 50 1,500.00 Rock Saw-Still 30 20 600.00 Truck 4x4 2 30 100 6,000.00 --------- $9,750.00 SUBCONTRACTS NO. RATE Fixed Wing 5 Trips 300 1,500.00 Cat Hours 50 Hours 100 5,000.00 Survey 5,000.00 Drilling 3,500 Feet 35 122,500.00 ---------- $134,000.00 CHEMICAL ANALYSES NO. RATE Core 350 Samples 25 8,750.00 Rock 100 Samples 25 2,500.00 -------- $11,250.00 MATERIALS AND SUPPLIES DAYS RATE Camp Equipment 1,000.00 Camp Food 30 300 9,000.00 Camp Fuel-Gas 2,000.00 Camp Fuel-Propane 2,000.00 Field Supplies 2,500.00 -------- $16,500.00 SUPPORT NO. RATE Travel-Airfare 5 Round Trips 600 3,000.00 Travel-Hotels/Motels (Mid Program Break) 1,500.00 Travel-Meals (Mid Program Break) 1,000.00 Travel-Auto. Exp 2,000.00 Expediting 2,000.00 Freight 2,500.00 -------- Telephone - Satelite $14,500.00 REPORTS & REPRODUCTIONS Maps and Publications 2,500.00 Reproductions 2,500.00 Drafting 2,500.00 Report 15,000.00 --------- $22,500.00 PROJECT SUPERVISION 7.0% on subcontracts on 134,000 9,380.00 15% on expenses on 74,500 11,175.00 --------- $20,555.00 ---------- $298,055.00 CONTINGENCY $14,902.75 ---------- TOTAL BUDGET $312,957.00 ===========
APPENDIX B RESOURCE DEFINITIONS: EXCERPTED FROM DRAFT OF INTERNATIONAL RESOURCE/RESERVE DEFINITIONS CIM BULLETIN VOL. 90, NO. 1017 PP. 44-45 FEBRUARY 1998 Indicated Mineral Resource An indicated mineral Resource is that part of a Mineral Resource which has been explored, sampled and tested through appropriate exploration techniques at locations such as outcrops, trenches, pits, workings and drill holes which are too widely spaced or inappropriately spaced to confirm geological and grade/quality continuity but which are spaced closely enough to be able to assume geological and grade/quality continuity and from which collection of reliable data allows tonnage/volume, densities, shape, physical characteristics, quality and mineral content to be estimated with a reasonable but not high level of confidence. Inferred Mineral Resource An Inferred Mineral Resource is that part of a Mineral Resource inferred from geological evidence and assumed but not verified continuity where information gathered through appropriate exploration techniques from locations such as outcrops, trenches, pits, workings and drill holes is limited or of uncertain quality and reliability but on the basis of which tonnage/volume, quality and mineral content can be estimated with a low level of confidence.
APPENDIX C INTERSECTIONS INCORPORATED IN RESOURCE CALCULATIONS AND INFERRED RESOURCES 1 GM/T Au Cut-off Inferred Resource Tres Amigos Zone >From 1997 Drilling lgm/t Au cut off S.G.= 2.8 - ---------------------------------------------------------------------------------------- Section Ave t Influence Area Vol. Tonnes g/t g/t %Cu %Zn (m) (m) (m2) (m3) Au Ag - ---------------------------------------------------------------------------------------- 4988E 2.0 35 40 1,400 3,900 13.53 3.10 0.02 0.50 5020E 5.8 24.5 927 22,600 63,000 3.28 11.51 0.35 0.20 5037E 8.0 20 132.5 2,650 7,400 2.25 5.5 0.06 0.20 8.0 20 112 2,240 6,300 3.12 23.38 0.78 0.29 5060E 3.2 20.5 57.5 1,180 3,300 1.74 14.08 0.26 0.11 12.6 20.5 1447.5 29,700 83,000 5.41 8.81 0.22 0.24 5078E 9.35 18.5 1895 35,000 98,000 5.37 8.76 0.21 0.17 5097E 4.0 19.5 242 4,700 13,000 1.56 5.0 0.15 0.05 6.0 19.5 95 1,850 5,200 2.59 1.63 0.04 0.02 - --------------------------------------------------------------------------------------- 283,100 4.64 9.29 0.23 0.19 ==========================================
Note: Drilling on sections 4953E and 5114E is within reserve block estimated by Jkona previously and not included in above reserves.
Inferred Resource Other Zones Tres Amigos Drill Area From 1997 Drilling lgm/t Au cutoff S.G. = 2.8 - ------------------------------------------------------------------------------------------- Section Ave t Influence Area Vol. Tonnes g/t g/t Ag %Cu %Zn (m) (m) (m2) (m3) Au - ------------------------------------------------------------------------------------------- 4988E 3.0 35 25 875 2400 5.28 6.2 0.03 3.15 2.7 35 40 1,400 4000 2.76 4.38 0.05 2.69 5020E None 5037E None 5060E 6 20.5 412.5 8,450 23600 4.64 2.7 0.03 0.14 5078E 5.6 18.5 510 9,400 26400 4.29 3.82 0.12 0.50 5097E 6.5 19.5 215 4,200 11700 2.31 4.62 0.17 0.30 6 19.5 102 2,000 5600 1.47 4.37 0.10 0.23 2.8 19.5 45 900 2400 3.8 13.9 0.4 0.07 5.6 19.5 100 2,000 5500 1.27 5.22 0.05 1.0 7 19.5 110 2,100 6000 7.51 15.4 0.09 3.42 - ------------------------------------------------------------------------------------------- 87600 2.77 4.9 0.09 0.75 ==========================================
(Detailed Assay Table Graphic Omitted) p01 (Detailed Assay Table Graphic Omitted) p02 (Detailed Assay Table Graphic Omitted) p03 (Detailed Assay Table Graphic Omitted) p04 (Detailed Assay Table Graphic Omitted) p05 APPENDIX D BIBLIOGRAPHY Boyd, Robert T. (June 15, 1994): A preliminary evaluation of the San Jose de Gracia Gold Property for Consolidated Samarkand Resources Inc. Brown, Robert F. and Charlie X. Cheng (1995): Report on the San Jose de Gracia Project. Brown, Robert F. and Charlie X. Cheng (1995): Report on the San Jose de Gracia Project Sinaloa, Mexico. Unpublished company document prepared for Consolidated Samarkand Resources Incorporated, l8p. Cheng, Charlie, X. (1994): Preliminary Report on the Exploration Project of San Jose de Gracia Gold Property, Sinaloa, Mexico. Unpublished company document prepared for consolidated Smaarkand Resources Incorporated, 9p. Clark, K.F., P. Damon and M. Shafiqullah (1980): Age Trends of Igneous Activity in Relation to Metallogenesis in the Southern cordillera; (source of article unknown); National Science Foundation Grants EAR-781 1535 (Damon-Shafiqullah), INT-7811535 (Damon-Salas), INT-73-07420-A02 (Clark-Salas). Clark, K.F., R.R. Dow and R.D. Knowling (1978): Fissure Vein Deposits Related to Continental Volcanic and Subvolcanic Terrains in Sierra Madre Occidental Province, Mexico. In 5th IAGOD Quadrennial symposium, pp. 189-201. Consejo De Recursos Minerals (1992): Geological - Mining Monograph of the State of Sinaloa (pp 8--84). Corbett, G.J. and T.M. Leach (1998): Southwest Pacific Rim Gold-Copper System. Unpublished Short Course Notes, Corbett Geological Services, 235 p. de Cservina, Z. (Unknown Date): Mexico-Geotectonics and Mineral Deposits, New Mexico Geological Society, Special Publication Number 6, pp. 18-25. Henderson, Wayne c. (1999): Reports on Sampling and Metallurgical Testing for San Jose de Gracia Project. Ikona, Charles, K. and M. Mitchel (1998): Inferred Mineral Reserves, Tres Amigos Area. Ikona, Charles K. (1996): Summary Report of the San Jose De Gracia Property for Golden Hemlock Explorations. Jebrak, M. (1997): Hydrothermal Breccia in Vein-type Ore Deposits: A Review of Mechanisms, Morphology and Size Distribution. Ore Geology Reviews, vol. 12, 1997, pp. 111-13 Lunceford, R. (1996): Sample Descriptions, San Jose de Gracia Property, Sinaloa de Levya, Sinaloa, Mexico. Unpublished company memorandum prepared for Teek Resources Incorporated. McDowell, F.W. and (?) Keizer, (1987): Timing of Mid-Tertiary Volcanism in the Sierra Madre Occidental Province. In Geological Society of America (GSA) Bulletin, vol. 88, 1997, pp. 1479-1487. Miscellaneous: Maps and Preliminary Drill Logs. Perforaciones Quest de Mexico to Golden Hemlock. Podobnik, Donald M. and Nick Hazen (1999): Process Development for the Tres Amigos Orebody. Poulsen, R.F. and Dube, (1997): Gold Deposits and Their Geological Classification. In., eds., Gubins, A.G., Geophysics and Geochemistry at the Millennium - Proceedings of Exploration 97, Fourth Decennial International Conference on Mineral Exploration, pp. 209-220. Scott, T. Cameron and Jason K. Dunning (1998): Preliminary Summary of the Geological Environment for the San Jose de Gracia Property. Sillitoe, R.H., (1985): Ore Related Breccias in Volcanoplutonic Arcs. Economic Geology, vol. 80, 1985, pp. 1467-1514. Sillitoe, R.H. (1997): Characteristics and Controls of the Largest Porphyry Copper-Gold and Epithermal Gold Deposits of the Circum Pacific Region. Australian Journal of Earth Sciences, vol. 44, 1997, pp. 373-388 APPENDIX E STATEMENT OF QUALIFICATIONS ENGINEER'S CERTIFICATE I, CHARLES K. IKONA, of 5 Cowley Court, Port Moody, in the Province of British Columbia, DO HEREBY CERTIFY THAT: 1. I am a Consulting Mining Engineer with offices at Suite 611, 675 West Hastings Street, Vancouver, British Columbia. 2. I am a graduate of the University of British Columbia with a degree in Mining Engineering (1966). 3. I am a member in good standing of the Association of Professional Engineers of the Province of British Columbia. 4. My experience has encompassed a wide range of geological environments and has allowed considerable familiarization of exploration and production of both lode and placer deposits. 5. I have no interest in the project reported on herein or in the securities of any company associated with the project. 6. This report is based on my examination of the San Jose de Gracia project area in March 1996 and on information provided by Minera Finisterre. 7. Permission is hereby given to Golden Hemlock Explorations for use of this report for purposes required by regulatory authorities. DATED at Vancouver, B.C. this 26th day of Sept, 1999. /s/ Charles K. Ikona - -------------------------- Charles K. Ikona, P.Eng. STATEMENT OF QUALIFICATIONS I, T. Cameron Scott of 3925 Fourth Avenue, Port Alberni, in the Province of British Columbia, DO HEREBY CERTIFY THAT: 1. I am a graduate of the University of British Columbia (1973) and hold a B.Sc. in Geology. 2. 1 am a Fellow of the Geological Association of Canada. 3. My primary employment since 1963 has been in the field of mineral exploration. 4. My experience has encompassed a wide range of geological environments and has allowed considerable familiarization with prospecting geophysical, geochemical and exploration drilling techniques. 5. This report is based on data generated by myself under the direction of Charles K. Ikona, P.Eng., on information contained in the various reports listed in the Bibliography and work conducted by myself on the property in July-August, 1999. 6. I have no interest in the property described herein, nor in securities of any company associated with the property, nor do I expect to receive any such interest. 7. Permission is hereby given to Golden Hemlock Explorations for use of this report for purposes required by regulatory authorities. Dated at Vancouver, B.C., this 28th day of September, 1999. /s/ T. Cameron Scott - ------------------------------ T. Cameron Scott, B.Sc., FGAC EX-2.6 15 PHASE II EXPLORATION SAN JOSE DE GRACIA EXHIBIT "2.6" DYNARESOURCE, INC. "PHASE II EXPLORATION GOLDEN HEMLOCK EXPLORATION PHASE II EXPLORATION February 2000 [GRAPHIC OMITTED] INTRODUCTION Exploration on the San Jose de Gracia property will focus on identifying areas of: 1. High-grade, vein-hosted gold mineralization amenable to underground mining methods. 2. Disseminated gold mineralization developed adjacent to veins and amenable to bulk mining methods. Six main target areas have been identified in the property including from southwest to northeast the La Purisima, Palo Chinos, Veta Tierra - Santa Edwiges, San Pablo, La Prieta and Tres Amigos - La Cecena zones (Figure 1). The attributes of the various target areas are presented in Table 1. Table 1. Characteristics of the main target areas on the San Jose de Gracia property. (Table Graphic Omitted) Regional-scale uplift in the San Jose de Gracia area has tilted the strata and mineralizing system to the southwest. Geological mapping and geochemical sampling suggest that the deepest portions of the vein system are exposed in the northeast at Tres Amigos. Here the veins comprise gold bearing, base-metal rich quartz+chlorite breccia veins and stockworks. The veins are hosted within structurally controlled envelopes of chlorite+sericite alteration and silicification. At Veta Tierra - Santa Edwiges and Palo Chinos areas, gold is hosted within crustiform quartz and quartz+chlorite breccia and stockwork veins containing pyrite, chalcopyrite with Au:Ag ratios of 1:2. Alteration in these areas is pervasive and characterized by an assemblage of sericite/illite+chlorite+quartz. Further to the southwest, broad zones of pervasive clay alteration are exposed along the top of La Purisima ridge. SW tiling and changes in the style of alteration and mineralization suggest that the La Purisima, Palo Chinos and Veta Tierra - Santa Edwiges are near the top of the mineralizing system and exhibit the greatest vertical potential for gold mineralization. Based on our current understanding of the vein systems at San Jose de Gracia, the targets with the best exploration potential include: 1. La Purisima, La Prieta since they are the main areas of past production an have seen little or no modern exploration. 2. Palo Chinos for both vein and disseminated gold potential. 3. Veta Tierra - Santa Edwiges since it may represent the northeast and up-dip extension of the La Purisima vein system. Figure 1. Geology of the San Jose de Gracia property (red lines correspond to the surface trace of the main gold bearing veins on the property). (Graphic Omitted) PHASE 2 - PROPOSED WORK The objectives this stage of exploration on the San Jose de Gracia are to advance exploration on the main target areas equally through diamond drilling, underground and surface exploration. Upon the completion of this phase of exploration, Golden Hemlock Exploration will be in the position to focus future exploration activities on those targets with the best chance of success. Exploration activities on the property are separated into two segments commencing in early February and ending at the end of April. For the first month, exploration will concentrate on underground re-habilitation and surface trenching and mapping. Expenditures during this stage of exploration are projected to be CND$ 85,000. Subsequent to initial surface and underground exploration, a drill will be mobilized to the property during the second month. A 1,250 metre, 12 hole drill program with a projected cost of CND$ 268,000 is proposed during this stage of exploration. Total expenditures are projected to be CND$ 353,000. Exploration expenditures for each stage and for the proposed exploration are presented in Appendix 1. Surface Exploration Surface exploration will entail: o Continued 1:1,000 property scale geological mapping outside of the areas covered during Phase 1. o Detailed mapping in the main veins. o Hand trenching along the surface trace of the main vein targets. o Follow-up silt sampling and prospecting to the north and east of Tres Amigos. Twenty-four trenches, totaling 725 metres are proposed for the Palo Chino, Veta Tierra, San Pablo and La Cecena - Tres Amigos areas (Table 2). The purpose of surface trenching is to confirm the along strike continuation of these vein systems prior to drilling. For the location of individual trenches see Figures 2, 4, 6 and 8. Information obtained from detailed geological mapping and trenching along the trace of these vein systems will be used to more effectively locate drill holes proposed for the second stage of exploration. Table 2. Proposed trenching ---------------------------- ---------------------------- Trench Method Length Trench Method Length (m) (m) ============================ ============================ PC-01 By hand 20 SP-02 By hand 25 PC-02 By hand 50 SP-03 By hand 25 PC-03 By hand 40 TA-01 By hand 25 PC-04 By hand 40 TA-02 By hand 25 PC-05 By hand 35 TA-03 By hand 25 VT-01 By hand 30 CE-01 By hand 40 VT-02 Mechanical 30 CE-02 By hand 40 VT-03 By hand 30 CE-03 By hand 25 VT-04 By hand 30 CE-04 By hand 20 Vt-05 By hand 30 CE-05 By hand 25 VT-06 By hand 30 HI-01 By hand 30 SP--1 By hand 25 HI-02 By hand 30 ---------------------------- ---------------------------- Silt sampling to the east and west of Tres Amigos identified a large area of anomalous gold mineralization (Figure 2). Several historical workings in the area, including a number along the northeast trace of the La Prieta vein system, are likely responsible for some of the anomalies. Continued exploration in this area will include: o Follow-up stream sediment sampling to determine the aerial extent of anomalous gold mineralization. o Prospecting to identify the source gold mineralization. o Property scale geological mapping. Figure 2. Northeast target area showing the location of stream sediment samples gold grade (Au in ppb). (Map Graphic Omitted) Golden Hemlock Explorations LTD - ---------------- San Jose de Gracia Northeast Target Area
Underground Exploration The focus of underground exploration will be re-habilitate the Del Angelo mine beneath La Purisima ridge. Historically the vein systems beneath La Purisima ridge have produced the bulk of the gold mined at San Jose de Gracia. To evaluate the up-side exploration potential of the La Purisima vein systems the de Angelo mine will be re-opened so that we can begin mapping and sampling the areas of historic mining. Mapping and sampling of the stopes will provide us with very important information about: o The grade and controls on the distribution of mineralization. o The area of historical mining. This information will provide insight into where additional resources might be located for drill testing. Underground re-habilitation will also focus on o Providing access to several of the stopes and sub-levels within the San Pablo, Veta Tierra - Ste. Edwiges and San Pablo mines so that these areas can be mapped and sampled. o Opening up several of the historical workings, i.e. La Cecena, Los Hilos. Mapping and sampling of the veins within these old workings will increase our understanding of the continuity of the main vein systems. Underground re-habilitation will employ a professional miner and several of the miners already on the Minera Finisterre payroll. Local help will be hired to muck out some of the portals and caved areas. Diamond Drilling A 12 hole, 1250 metre drill program is proposed to evaluate the Palo Chino, Veta Tierra, San Pablo and the south west extension of the Tres Amigos vein system. The drill program is designed to test the upside exploration potential of each of these targets with a series of wide-spaced (50 metres) drill holes located along strike and/or down-dip of known areas. The location, and depth to target for each drill hole is presented in Table 3a, and Figures 3, 5,6,8 and 10. Table3a. Locations for the proposed drill holes (Note: hole locations are subject to change with additional surface and underground exploration). - ------------------------------------------------------------------------------------------------------------------ Hole_id Easting Northing Target Priorty Elevation Azimuth Dip Depth_tp_ Depth Target ================================================================================================================== Hole A 213503.5 2898079 Tres Amigos Initial 650 110 -90 95 115 Hole B 213463.1 289063 Tres Amigos Initial 650 130 -85 110 130 Hole C 213676 2898158 Tres Amigos Initial 603.5 190 -80 70 90 Hole D 212888.9 2897316 San Pablo Initial 658 130 -80 80 100 Hole E 212866.4 2897273 San Pablo Initial 662 130 -80 85 105 Hole F 212933.1 2897362 San Pablo Initial 646 170 -90 65 85 Hole H 213052.2 2896897 Veta Tierra Initial 745 140 -60 60 80 Hole I 213030.5 2896905 Initialeta Tierra Initial 735 160 -60 70 90 Hole L 212842.4 2896423 Palo Chinos Initial 585 57 -62 85 105 Hole M 212806.8 2896460 Palo Chinos Initial 585 57 -62 85 105 Hole N 212881.8 2896333 Palo Chinos Initial 565 57 -53 80 100 Hole O 212807.9 2896381 Palo Chinos Initial 560 57 -60 105 125 - ------------------------------------------------------------------------------------------------------------------ 1230
To locate each drill hole, longitudinal sections were constructed for each vein target. Sample information from underground chip samples and drill hole intercepts were compiled on the longitudinal sections and grade x thickness plots were constructed (Figures 4, 7, 9 and 11) and blocks for the explored (sampled) portions were calculated to characterize the volume, grade and width of each vein (Tables 3 to 6). Subsequent to this, the pierce point of the proposed drill holes were plotted on the longitudinal sections to provide the most information about each target. In the following section, each vein target and the location of the proposed drill holes are discussed.
Included in this proposal is an addition 860 metres of follow-up drill holes that can be considered subsequent to results from the initial phase of drilling (Table 3b). The six drill holes, with the exception of drill hole R, are included in the discussions for each target area, but are not included in the budget. The location of drill hole R, located in the La Purisima area will located pending additional surface work. Table 3a. Locations for the proposed follow-up drill holes (Note: hole locations are subject to change with additional surface and underground exploration). - ------------------------------------------------------------------------------------------------------------------ Hole_id Easting Northing Target Priorty Elevation Azimuth Dip Depth_tp_ Depth Target ================================================================================================================== Hole G 212853.9 2897329 San Pablo Follow-up 660 160 -80 130 150 Hole J 212961.4 2896841 Veta Tierra Follow-up 700 110 -65 95 115 Hole K 213118.7 2896953 Veta Tierra Follow-up 737 150 -70 65 85 Hole P 212870.6 2896355 Palo Chinos Follow-up 563 57 -82 110 130 Hole Q 213341.9 2897971 La Cecema Follow-up 620 130 -45 60 80 Hole R La Purisima Follow-up 300 - ------------------------------------------------------------------------------------------------------------------ 860
TRES AMIGOS - LA CECENA Three diamond drill holes totaling 335 metres are proposed for the Tres Amigos vein between the West Tres Amigos adit and La Cecena (Figure 3). Currently the Tres Amigos vein has been traced on surface for approximately 520 metres along strike and for 200 metres down dip. The vein strikes southwest and dips 50 degrees to the northwest, and is known to bifurcate (split into two veins) in the La Cecena area. Drilling in 1997 primarily tested the Tres Amigos vein down dip of the main workings and identified a northeast plunging shoot of high-grade mineralization averaging greater that 10 gpt Au/metres (Block A in Figure 4). Drill holes A to C are directed to test the vein along strike of the main area drilled in 1997 (Figure 4). To evaluate the utility of the proposed drill hole, the volume of the vein to be tested by holes A to C (Block B) was compared with the area of known mineralization (Block A; Table 4). Based on our current knowledge, holes A to C will test a similar area of the vein as was explored in 1997. Currently, the grade and width of the area to be tested (Block B) is lower than was previously tested, but this is based on limited sampling in the La Cecena and West Tres Amigos adits. Table 4. Estimated size and grade of mineralized blocks for the Tres Amigos vein (tonnes are calculated using an s.g. of 2.7 g/m3). ---------------------------------------------------------------------------- Zone Block Type Width Au_gpt Polygon_area Tonnes ============================================================================ Tres Amigos Block A Assumed 2.60 5.90 19.050 133,731 Tres Amigos Block B Inferred 1.26 4.18 23,400 79,607 ---------------------------------------------------------------------------- Figure 3. Tres Amigos area showing the location of proposed drill holes and trenches. (Graphic Omitted) San Jose de Garcia Tres Amigos - La Cecena Area Proposed Drill holes & Trenching Figure 4. Longitudinal along the Tres Amigos vein. Intercepts reflect Au grade x thickness of the vein. (Graphic Omitted) The fourth drill hole assigned to test the Tres Amigos vein system is located along strike to the southwest (Figure 5). The location of this drill hole is approximate and is contingent on positive results from drill holes A to C. Additional surface mapping in the area during the next stage of exploration will also be used to better locate drill hole Q. Figure 5. Proposed drill hole Q and trenches from La Cecena, southwest to Los Hilos. (Graphic Omitted) SAN PABLO Previous exploration has not focused on the San Pablo vein despite the grade and potential width of the vein defined by chip sampling. The Vein is currently exposed on three levels for 130 metres along strike and 50 metres down dip (Figures 6 and 7). The vein strikes southwest and dips 45 to 70 degrees to the northwest. Based on the areas of underground mining, gold mineralization may be hosted within steeply plunging ore shoots that have yet to be identified by re-sampling of the vein. Four drill holes (holes D to G) totaling 440 metres are proposed for the San Pablo vein. The drill holes will be located to test the down dip potential of the vein along its known strike, and to locate potential ore shoots down dip of the main area of mining. Currently, sampling of the San Pablo vein has outlined a small area with a robust gold grade of 9.4 gpt Au (Table 5). The proposed drilling will more than double the area tested and provide a better understanding of the size of this target. Surface work in the area will concentrate on tracing the vein along strike to the northeast and southwest. Table 5. Estimated size and grade of mineralized blocks for the San Pablo vein (tonnes are calculated using an s.g. of 2.7 g/m3). (Table Graphic Omitted) Figure 6. Location of proposed drill holes and trenches for the San Pablo vein. (Graphic Omitted) Figure 7. Longitudinal along the San Pablo vein. Intercepts reflect Au grade x thickness of the vein (Graphic Omitted) VETA TIERRA - SANTA EDWIGES The Veta Tierra - Santa Edwiges vein has been traced for 250 metres along strike and 90 metres down dip (Figures and 9). The vein strikes southwest and dips 50 degrees to the northwest and in the Santa Edwiges underground the vein averages 21 gpt Au over 0.7 metres. This area, which may form the northeast and up-dip extension of the Del Angelo mine, beneath La Purisima Ridge, contains at least two other know veins and several flat veins. A second southwest striking, northwest dipping vein is exposed in the La Union underground. This vein, in conjunction with a shallow northwest dipping flat vein in the hangingwall, was the focus of drilling during 1997 (Figure 9). Although several high-grade samples were collected from the La Union vein in the underground (up to 202 gpt Au/0.4 metres), drilling failed to return similar grades (up to 8.8 gpt Au/1 metre, SJG97-34). None of the holes drilled in 1997 intercepted the Veta Tierra - - Santa Edwiges vein. The second vein is located to the southeast of the Veta Tierra - Santa Edwiges vein (Figure 8). It has been traced through a series of old workings and sub-crop for 275 metres along strike. Up-coming exploration will concentrate on tracing this vein along strike by trenching and detailed mapping. To date, underground sampling of the Veta Tierra - Santa Edwiges vein has defined two small areas of mineralization (Blocks E and F, Table 6). Table 6. Estimated size and grade of mineralized blocks for the Veta Tierra - Santa Edwiges vein (tonnes are calculated using an s.g. of 2.7 g/m3). (Table Graphic Omitted) Four drill holes (drill holes H to K); totaling 365 metres are proposed to test the vein down dip and between the underground workings at Veta Tierra and Santa Edwiges. These four drill holes will test a much larger area of the vein than has currently been explored and will significantly add to recognizing the up-side potential of this vein. Figure 8. Location of proposed drill holes and trenches for the Veta Tierra - Santa Edwiges vein. (Graphic Omitted) Figure 9. Longitudinal along the Veta Tierra vein. Intercepts reflect Au grade x thickness of the vein. (Graphic Omitted) PALO CHINOS The Palo Chinos vein has been traced for 300 metres underground and 100 metres down dip. The vein strikes northwest and dips 45 degrees to the southwest. Several northeast striking veins cross cut the main Palo Chinos vein (Figure 10). Based on underground samples, higher-grade mineralization may be localized at the intersection of the Palo Chinos and these northeast striking cross veins. Additional underground sampling and mapping will focus on substantiating the controls on mineralization at Palo Chinos. Two type of mineralization at Palo Chinos, including: 1. Vein hosted - contained within crustiform quartz veins and siliceous hematite-pyrite mineralization 2. Lower grad, disseminated gold mineralization within the hanging wall. The second style of mineralization has the potential to be a bulk mineable target, given the orientation of the Palo Chino vein and the slope of the topography to the southwest. To date Exploration has defined two blocks of mineralization (Blocks H and J; Table 7 and Figure 11). To increase our understanding of the Palo Chino area, 5 drill holes (holes L to P), totaling 565 metres are proposed for the Palo Chinos vein. Drilling will focus on testing the vein along strike and down dip of the drill hole SJG97-63 intercept (15.5 metres of 3 gpt Au). The drill holes will be spaced at 50 metre centers and test an area equal to our current understanding of the vein. Table 7. Estimated size and grade of mineralized blocks for the Palo Chinos vein (tonnes are calculated using an s.g. of 2.7 g/m3). ---------------------------------------------------------------------------- Zone Block Type Width Au_gpt Polygon_area Tonnes ============================================================================ Palo Chinos Block H Assumed 1.25 6.49 14,900 50,288 Palo Chinos Block I Assumed 15.50 3.06 2,500 104,625 Palo Chinos Block J Inferred 15.55 3.06 14,000 587,790 ---------------------------------------------------------------------------- Figure 10. Location of proposed drill holes and trenches for the Veta Tierra - Santa Edwiges vein. ( Map Graphic Omitted) In addition to drilling, the Palo Chino vein will be trenched along its surface trace to provide additional information about the extent of lower grade disseminated gold mineralization within the hanging.
Figure 11. Longitudinal along the Palo Chino vein. Intercepts reflect Au grade x thickness of the vein. (Graphic Omitted) Budget for Phase 2 Explorations GOLDEN HEMLOCK - SAN JOSE de GRACIA Project Phase 2 Budget (as of February 9, 2000) - -------------------------------------------------------------------------------------------------------------- Item Description Person # Rate CND$ Days Amount CND$ ============================================================================================================== Technical Geologists Project Geo. $400.00 54 $21,600.00 Expenses Geologist $275.00 59 $16,225.00 Other $325.00 0 $0.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $37,825.00 Non-Technical Camp Manager Luis Dredger $184.00 59 $10,856.00 Expenses Domestic Cook 1 $15.05 59 $887.95 Helper/Laundry 1 $15.05 54 $812.70 Assistants Field Assistants 2 $19.35 30 $1,161.00 Core Geotech 1 $19.35 29 $561.15 Core Splitting 1 $18.28 29 $529.98 Trenchers 8 $18.28 30 $4,386.00 Underground 4 $19.35 30 $2,322.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $21,516.78 Travel Air Vancouver to Culican 4 $850.00 $3,400.00 Air Guimichil - SJG 6 $80.00 $480.00 Charter 2 $600.00 $1,200.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $5,080.00 Accommodation Meals 18 $30.00 $540.00 Hotel 9 $50.00 $450.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $990.00 Analytical Rock Samples Au + ICP Surface 75 $21.71 $1,628.25 Trenching 150 $21.71 $3,256.50 Underground 300 $21.71 $6,513.00 Drilling 400 $21.71 $8,684.00 Silt Samples 100 $16.10 $1,610.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $21,691.75 Surface Work Excavator/Hoe $250.00 0 $0.00 Mob/Demob $0.00 Fuel 200 $1.25 0 $0.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $0.00 Road Prep Excavator/Hoe $250.00 7 $1,750.00 Mob/Demob $0.00 Fuel 200 $1.25 7 $1,750.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $3,500.00 Diamond Drilling Mob/Demob $5,000.00 Water Truck $300.00 24 $7,200.00 Drilling 1250 $145.00 $181,250.00 Fuel 200 $1.35 24 $6,480.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $199,930.00 GOLDEN HEMLOCK - SAN JOSE de GRACIA Project Phase 2 Budget cont'd Item Description Person # Rate CND$ Days Amount CND$ Underground Technical 1 $400.00 6 $2,400.00 Re-hab* Miner 1 $100.00 30 $3,000.00 Equipment $5,000.00 Supplies $5,000.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $15,400.00 Transportation Truck Rental $0.00 Fuel $4,200.00 Maintenance $5,600.00 Freight $1,000.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $10,800.00 Communications Telephone Rental 3 $67.50 $202.50 Calls $1,300.00 Fax $500.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $2,002.50 Camp Supplies Equipment $1,500.00 Generator $100.00 59 $5,900.00 Supplies $2,000.00 Food - GHE 4 $15.00 59 $3,540.00 Food - Drilling 5 $15.00 24 $1,800.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $14,740.00 Field Supplies All inclusive 2,500.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $2,500.00 Reporting Geologists Project Geo $400.00 17 $6,800.00 Geologist $275.00 11 $3,025.00 Drafting $500.00 5 $2,500.00 Printing 0 $500.00 Drill hole Program $4,200.00 1 $4,200.00 - -------------------------------------------------------------------------------------------------------------- Sub-total $17,025.00 Total $353,001.03
*Funds not used during this portion of the exploration project will be diverted to drilling. Approved by: On February 10, 2000 /S/ Dalton Dupasquier /S/ K.D. Diepholz - --------------------- --------------------- Dalton Dupasquier Koy Diepholz EX-3.1 16 AUDITED FINANCIAL STATEMENT MARK L. CLELAND CERTIFIED PUBLIC ACCOUNTANT 17430 CAMPBELL ROAD, SUITE 114 DALLAS, TEXAS 75252 972-735-0033 FAX 972-735-0035 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Dynaresource, Inc. Irving, Texas I have audited the accompanying balance sheet of DynaResource, Inc. as of December 31, 1998 and the related statements of operations and accumulated deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. The financial statements of DynaResource, Inc. of December 31, 1997 audited by other auditors whose report dated March 7, 1998, expressed an unqualified opinion on those statements. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, based on my audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of DynaResource, Inc. as of December 31, 1998, and 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /S/ Mark L. Cleland Dallas, Texas March 8, 1999 DYNARESOURCE, INC. BALANCE SHEETS December 31, 1998 and 1997 ASSETS CURRENT ASSETS: 1998 1997 ---------- ----------- Cash $ 149,663 $ 304,692 Accounts receivable - 89,986 29,585 Interest receivable - 8,460 - Marketable securities 1,500 8,076 Other current assets 5,000 12,000 ---------- ----------- Total Current Assets 254,609 354,353 PROPERTY: Equipment (net) 34,636 41,683 Mining Properties (net 175,798 675,798 ---------- ----------- Total Property 210,434 717,481 OTHER ASSETS: Investment 847,737 - Deposits 2,900 2,900 ---------- ----------- Total Other Assets 850,637 2,900 TOTAL ASSETS $1,315,680 $ 1,074,734 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; 12,500,00 and 50,000,000 shares authorized; 3,183,907 and 3,149,193 shares issued and outstanding at December 31, 1998 and 1997 Respectively $ 31,839 $ 31,492 Additional paid-in capital 2,793,261 2,653,929 Accumulated deficit (1,428,915) (1,508,182) Treasury stock - at cost (80,505) (102,505) Total Stockholders' Equity 1,315,680 1,074,734 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,315,680 $ 1,074,734 See accompanying notes 2 DYNARESOURCE, INC. STATEMENTS OF OPERATIONS For The Years Ended December 31, 1998 and 1997 1998 1997 REVENUE: --------- ---------- Income $ 50,000 $ - Interest income 16,972 8,057 --------- ---------- Total Revenue 66,972 8,057 OPERATING EXPENSE: Consulting 126,029 188,209 Depreciation 7,046 3,857 General and Administrative 81,331 95,008 --------- ---------- Total Operating Expense 214,406 287,074 --------- ---------- OTHER (INCOME) EXPENSE Interest Expense - 1,608 Settlement Income (733,277) - Write down marketable securities 6,576 9,500 --------- ---------- Total Other Expense (726,701) 11,108 --------- ---------- NET INCOME (LOSS): $ 579,267 $ (290,125) ========= ========== Weighted average shares outstanding 3,158,039 2,702,514 ========= ========== INCOME (LOSS) PER SHARE $0.18 ($0.11) ========= ========== See accompanying notes 3
DYNARESOURCE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT December 31, 1998 and 1997 Common Treasury Paid in Accumulated Shares Amount Shares Amount Capital Deficit --------- -------- -------- ------ ---------- ------------ Balance, December 31, 1996 2,642,072 $26,421 - $ - $2,033,421 ($1,218,057) --------- -------- -------- ------ ---------- ------------ Exercise of options and warrants 340,500 3,405 375,345 Acquire treasury shares 63,386 121,449 Issue treasury shares (15,200) (18,944) 53,756 Shares issued for notes payable and accrued interest 40,394 404 161,112 Shares issued for services 126,227 1,262 30,295 Net loss (290,125) --------- -------- -------- ------- ---------- ------------ Balance, December 31, 1997 3,149,193 31,492 48,186 102,505 2,653,929 (1,508,182) --------- -------- -------- ------- ---------- ------------ Shares issued for services 34,714 347 8,332 Unissued shares 131,000 Issue treasury shares (7,400) (37,000) Acquire treasury shares 10,000 15,000 Nonmonetary dividend (500,000) Net income 579,267 --------- -------- -------- ------- ---------- ------------ Balance, December 31, 1998 3,183,907 $31,839 50,786 $80,505 $2,793,261 $(1,428,915) ========= ======== ======== ======== ========== ============
See accompanying notes 4
DYNARESOURCE, INC. STATEMENTS OF CASH FLOWS For The Years Ended December 31, 1998 and 1997 1998 1997 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $579,267 $(290,125) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation 7,046 3,857 Write-down of marketable securities-related party 6,576 - Settlement income (733,277) - Issuance of common stock for interest - 1,516 Issuance of common stock for services 8,679 31,557 Changes in working capital: (Increase) decrease in Accounts receivable - related party (60,400) (29,585) Interest receivable - related party (8,460) - Other current assets 7,000 17,500 Increase (decrease) in Interest payable - (989) -------- --------- NET CASH USED BY OPERATING ACTIVITIES: (193,569) (266,269) -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Equipment purchased - (30,450) Investment in mining company (114,460) - Investment in marketable securities - related party - (8,076) Deposit - (2,900) -------- --------- NET CASH USED BY INVESTING ACTIVITIES: (114,460) (41,426) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes - 145,000 Repay note payable - (6,000) Unissued stock 131,000 - Treasury stock purchased (15,000) (128,949) Treasury stock issued 37,000 80,200 Exercise of options and warrants - 378,777 -------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES: 153,000 469,028 -------- --------- NET INCREASE IN CASH: (155,029) 161,333 CASH AT BEGINNING OF YEAR: 304,692 143,359 -------- --------- CASH AT END OF YEAR: $149,663 $ 304,692 ======== =========
See accompanying notes. 5 DYNARESOURCE, INC. STATEMENT OF CASH FLOWS For the Years Ended December 31, 1998 and 1997 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH ACTIVITIES 1998 - ------ The Company spun-off as a dividend its 24.9% net profits interest in the San Jose de Gracia mining property in Sinaloa, Mexico. This tranaction was recorded at book value in the amount of $500,000. The Company acquired 25% of the outstanding common stock of Minera Finesterre S.A. de CV., the owner of 100% interest (subject to the 24.9% net profits interest) of the San Jose de Gracia mining property. $733,277 of this acquisition is recorded as settlement income. The Company issued 34,714 shares of its common stock to related parties for consulting fees in the amount of $8,679. 1997 - ----- The Company issued 40,394 shares of its common stock to payoff notes payable issued that year including related interest totaling $161,516. The Company issued 126,227 shares of its common stock to related parties for consulting fees in the amount of $31,557. See accompanying notes. 6 DYNARESOURE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note A - Nature of Business and Summary of Significant Accounting Policies: History: The Company, West Coast Mines, Inc., was organized September 28, 1937, as a California corporation. The Company was organized for the purpose of seeking, investigating, and, if such investigation warrants, acquiring assets, properties, and businesses and to engage in any substantial business opportunities. The Company merged with Resolute Mining Corp., a Nevada corporation, on February 28, 1995. This business combination was accounted for as a purchase. In 1994 the Company filed an amendment to its articles of incorporation to increase the authorized number of common stock from 750,000 shares to 50,000,000 shares and changed the par value of its common stock from $1.00 to $0.01 per share. On November 1, 1998, the Company merged with DynaResource, Inc, a newly formed corporation, domiciled in the state of Delaware. This merger resulted in changing the Company's name to DynaResource, Inc., changing the state of incorporation from California to Delaware and reducing the Company's authorized common stock from 50,000,000 shares authorized to 12,500,000 shares authorized. This business combination was accounted for as a purchase. Basis of Accounting: It is the Company's policy to prepare its financial statements on the accrual basis of accounting in accordance with generally accepted accounting principles. Revenue is recorded as income in the period in which it is earned and expenses are recognized in the period in which the related liability is incurred. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. The Company places its cash investments in high quality financial institutions. At times, cash balances may be in excess of the FDIC insurance limit. Property: Property is carried at cost. Upon retirement or disposal, the asset cost and related accumulated depletion are removed from the accounts and any resulting gain or loss is included in the determination of net income. Expenditures for geological and engineering studies, maintenance and claim renewals are charged to expense when incurred. Additions and significant improvements are capitalized and depleted. DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note A - Nature of Business and Summary of Significant Accounting Policies (continued): Long-Lived Assets The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates Generally accepted accounting principals require recognition of impairment of long-lived assets in the event of net book value of such assets exceed the future undiscounted cash flows attributable to such assets. Consequently, the Company assesses its assets annually for impairment and writes down any amounts necessary as a result of the assessment. Income Tax: The Company is subject to the greater of federal income taxes computed under the regular system or the alternative minimum tax (AMT) system. Earnings (Loss) per Common Share: Earnings (loss) applicable to common stock is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The inclusion of common stock equivalents in the loss per share computation have not been included because they would be anti-dilutive under the treasury stock method. Reverse stock split: On January 31, 1997, the Company declared a one-for-four reverse stock split of its common stock. In connection with the stock split, the Company reduced common shares outstanding from 10,685,586, to 2,641,966. All share and per share data have been restated for all periods presented to reflect the stock split. Note B - Accounts receivable - related party: Included in accounts receivable - related party are amounts of $30,170 and $27,015 for reimbursement of legal fees spent during 1998 and 1997 respectively. Both of these amounts accrue interest at a rate of 12% per annum. Also included in this account is a note receivable from the same related party in the amount of $32,800. This note accrues interest at a rate of 10% per annum. Note C - Marketable securities: The Company purchased shares of a related party during 1997. These shares are considered trading securities. In accordance with the Company's policy of impairment of long-lived assets these securities were written down in amounts of $6,576 and $9,500 1998 and 1997 respectively. 8 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note D - Other current assets: Prepaid expenses: The Company recorded prepaid accounting and legal expenses in the amounts of $5,000 and $12,000 for 1998 and 1997 respectively. Note E - Furniture and Equipment: Furniture and equipment is stated at cost and consists of the following: 1998 1997 ------- ------- Office furniture $22,376 $22,376 Lab equipment 14,306 14,306 Computer and peripherals 6,289 6,289 Office equipment 3,448 3,448 ------- ------- 46,419 46,419 ------- ------- Less accumulated depreciation (11,783) (4,736) ------- ------- $33,636 $41,683 ======= ======= Depreciation has been provided for using the straight-line method over estimated useful lives of three to seven years. Note F - Mining Properties: 1998 1997 -------- -------- Pansey Lee mine (560 acres) $631,737 $631,737 Impairment allowance (501,915) (501,915) -------- -------- Subtotal 129,822 129,822 Wikiup Claim (640 acres) 45,976 45,976 Mining interest/note receivable 0 500,000 -------- -------- Total $175,798 $675,798 ======== ======== 9 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note F - Mining Properties (continued): Mining interest/note receivable: The Company owned a 24.9% net profits interest in the San Jose de Gracia mining property in Sinaloa, Mexico. The property includes all mining concessions now held or subsequently obtained within a 10 mile radius from the core of the property. As stated within the mine operating agreement on the San Jose de Gracia property: The Company has no obligation to make additional advances to any party in connection with this mining interest. "Available cash" is defined as: "cash flows", less operating expenses, adjusted for increases or decreases in cash reserves. "Cash flows" is defined as : any consideration, including gross cash receipts from operation of the mine. "Operation of the mine" is defined as all income generating activity, which is derived from, or in any way related to, the San Jose property; including without limitation, the sale of minerals extracted from the property, the sale or licensing of any rights to derive minerals or income from the property; the sale of any rights in the concessions: and the sale, transfer, or assignment of any rights whatsoever to develop, operate, or produce the San Jose property. "Operating expenses" is defined as: the costs, charges, expenses and disbursements incurred in connection with development, maintenance, operation, management and production of the mine. Expressly excluded from such costs are exploration costs and property acquisition & maintenance costs. "Cash reserves" is defined as amounts of cash, derived from production of the mine, held in trust for contingent or unforeseen liabilities or obligations arising out of operation of the mine. This mining interest was spun off and distributed as a dividend in 1998. 10 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note G - Investment: The Company acquired 25% of the outstanding common stock of Minera Finesterre S.A. de CV (Minera), a private Mexican corporation, by way of a litigation settlement. Minera owns a 100% interest in the San Jose de Gracia mining property in Sinaloa, Mexico. Pursuant to this settlement the Company forgave future consideration including a $500,000 note and related interest, plus accelerated payback provisions on cash flows, and elected to retain the 24.9% net profits interest. Subsequent to this settlement the Company spun off and distributed as a dividend the 24.9% net profits interest. Note H - Related party transactions: The Company paid $126,029 and $193,891 in stock and cash to related parties for consulting and other fees during 1998 and 1997 respectively. The Company rented office space from a related party on a month to month basis until May, 1997. The amount paid to a related party for rent amounted to $7,140. Note I - Stockholders' Equity: During the first quarter of 1997, the Company issued notes which converted at $4.00 per share into 40,000 shares of the Company's common stock. Upon the conversion of such notes into common stock, 40,000 "A" Warrants, exercisable at $8.00 per share; and 40,000 "B" Warrants, exercisable at $12.00 per share were issued. All such "A" and "B" Warrants terminate 90 days after the Company's common stock reaches the market price of $12.00 and $16.00 per share respectively. Of the 451,750 stock options outstanding during 1997, 264,000 were exercised at a price of $1.00 per share and another 76,500 shares were converted at $1.50 per share. The remaining options expired on November 1, 1997. On November 1, 1998 the Company authorized a dividend of the mining interest/note receivable referred to in Note F. This dividend was paid to DynaResource Properties, Inc., a private Delaware corporation. At the Record Date, the shareholders of DynaResource Properties, Inc. were identical to DynaResource, Inc. This nonmonetary transaction is charged against retained earnings at book value. 11 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note I - Stockholders' Equity (continued): During 1998 the Company received $131,000 for 131,000 shares of its common stock. These shares have not been issued as of December 31, 1998 and are shown as paid in capital. These shares do not participate in the nonmonetary dividend. Treasury Stock: During 1997 the company acquired 63,386 shares of its own common stock ranging in price from $1.50 to $2.00 per share. The company reissued 15,200 of these shares for a price of $5.00 per share. These transactions were accounted for on a first in first out basis. During 1998 the company sold 7,400 shares from treasury and acquired 10,000 shares. There are 50,746 and 48,186 common shares held in treasury at the end of 1998 and 1997 respectively. Note J - Revenue: The Company received $50,000 during 1998 from a five year lease/sale agreement on its Humboldt County, Nevada (Pansey Lee) 560 acre mining property. The terms of the lease are as follows: A. 1st year (1/23/98): $ 50,000 B. 2nd year (1/23/99): $ 100,000 C. 3rd year (1/23/00): $ 150,000 D. 4th year (1/23/01): $ 250,000 E. 5th year (1/23/02): $ 250,000 Total Lease payments receivable $ 800,000 Sale price option $2,000,000 Total Lease & Sale $2,800,000 If lessor decides to purchase property prior to end of lease term, all lease payments are immediately due and payable. The Company retains a 2.5% gross royalty on any and all production. 12 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 and 1997 Note J - Revenue (continued): Settlement income: The company recorded $733,277 as income in the settlement for 25% of the stock of Minera referred to in Note G. Note K - Income Taxes: The Company has net operating loss carryforwards of approximately $800,000 at December 31, 1998 that is available to offset its future income tax liability. No deferred tax asset has been recognized for the operating loss carryforward as it is more likely than not that All or a portion of the net operating loss will not be realized and any valuation allowance would reduce the benefit to zero. 13 EX-3.2 17 AUDITED FINANCIAL STATEMENT MARK L. CLELAND CERTIFIED PUBLIC ACCOUNTANT 17430 CAMPBELL ROAD, SUITE 114 DALLAS, TEXAS 75252 972-735-0033 FAX 972-735-0035 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of DynaResource, Inc. Irving, Texas I have audited the accompanying balance sheet of DynaResource, Inc. as of December 31, 1999 and 1998 and the related statements of operations and accumulated deficit, and cash flows for each of the two years ended December 31, 1999. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, based on my audits, the financial statements referred to above present fairly, in all material respects, the financial position of DynaResource, Inc. as of December 31, 1999, and 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /S/ Mark L. Cleland - -------------------- Dallas, Tesas February 17, 2000
DYNARESOURCE, INC. BALANCE SHEETS December 31, 1999 and 1998 ASSETS CURRENT ASSETS: 1999 1998 ---------- ---------- Cash $ 416,140 $ 149,663 Accounts receivable - related party 109,946 98,446 Marketable securities - related party 50 1,500 Other current assets - 5,000 ---------- ---------- Total Current Assets 526,136 254,609 PROPERTY: Equipment (net) 27,590 34,636 Mining Properties (net) 175,798 175,798 ---------- ---------- Total Property 203,388 210,434 OTHER ASSETS: Investment 944,007 847,737 Deposits 2,900 2,900 ---------- ---------- Total Other Assets 946,907 850,637 ---------- ---------- TOTAL ASSETS $1,676,431 $1,315,680 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; 12,500,00 shares authorized; 3,739,907 and 3,183,907 shares issued and outstanding at December 31, 1999 and 1998 respectively $ 37,399 $ 31,839 Additional paid-in capital 3,380,535 2,793,261 Accumulated deficit (1,704,761) (1,428,915) Treasury stock - at cost (36,742) (80,505) ---------- ---------- Total Stockholders' Equity 1,676,431 1,315,680 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,676,431 $1,315,680 ========== ==========
See accompanying notes. 2 DYNARESOURCE, INC. STATEMENTS OF OPERATIONS For The Years Ended December 31, 1999 and 1998 1999 1998 ---------- ---------- REVENUE: Income $ - $ 50,000 Interest income 10,895 16,972 Dividend income 449 - ---------- ---------- Total Revenue 11,344 66,972 OPERATING EXPENSE: Consulting 191,778 126,029 Depreciation 7,046 7,046 General and Administrative 94,624 81,331 ---------- ---------- Total Operating Expense 293,448 214,406 ---------- ---------- OTHER (INCOME) EXPENSE Settlement Income - (733,277) Gain on sale of securities (7,708) - Write down marketable securities 1,450 6,576 ---------- ---------- Total Other Expense (6,258) (726,701) ---------- ---------- NET INCOME (LOSS): $(275,846) $579,267 ========== ========== Weighted average shares outstanding 3,482,657 3,158,039 ========== ========== INCOME (LOSS) PER SHARE ($0.08) $0.18 ========== ========== See accompanying notes. 3
DYNARESOURCE, INC. STATEMENTS OF STOCKHOLDERS' EQUITY AND ACCUMULATED DEFICIT December 31, 1999 and 1998 Common Treasury Paid in Accumulated Shares Amount Shares Amount Capital Deficit --------- ------- ------ -------- ---------- ------------- Balance, December 31, 1997 3,149,193 $31,492 48,186 $102,505 $2,653,929 ($1,508,182) --------- ------- ------ -------- ---------- ------------- Shares issued for services 34,714 347 8,332 Unissued shares 131,000 Transfer treasury shares (7,400) (37,000) Acquire treasury shares 10,000 15,000 Nonmonetary dividend (500,000) Net income 579,267 --------- ------- ------ -------- ---------- ------------- Balance, December 31, 1998 3,183,907 31,839 50,786 80,505 2,793,261 (1,428,915) --------- ------- ------ -------- ---------- ------------- Issuance of previously unissued shares 131,000 1,310 (1,310) Shares issued 352,000 3,520 607,925 Transfer treasury shares for services (27,611) (43,763) (36,861) Issue shares for services 73,000 730 17,520 Net income (275,846) --------- ------- ------ -------- ---------- ------------- Balance, December 31, 1999 3,739,907 $37,399 23,175 $ 36,742 $3,380,535 $(1,704,761)
See accompanying notes. 4
DYNARESOURCE, INC. STATEMENTS OF CASH FLOWS For The Years Ended December 31, 1999 and 1998 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(275,846) $579,267 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation 7,046 7,046 Write-down of marketable securities - related party 1,450 6,576 Settlement income - (733,277) Issuance of common stock for services 25,153 8,679 Adjust for prior year treasury stock issuance 9,444 - Changes in working capital: (Increase) decrease in Accounts receivable - related party (11,500) (68,860) Other current assets 5,000 7,000 Increase (decrease) in Interest payable - - --------- --------- NET CASH USED BY OPERATING ACTIVITIES: (239,253) (193,569) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in mining property (96,270) (114,460) Investment in marketable securities - related party - - Deposit - - --------- --------- NET CASH USED BY INVESTING ACTIVITIES: (96,270) (114,460) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock issued 602,000 - Unissued stock - 131,000 Treasury stock purchased - (15,000) Treasury stock issued - 37,000 Exercise of options and warrants - - --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES: 602,000 153,000 --------- --------- NET INCREASE IN CASH: 266,477 (155,029) CASH AT BEGINNING OF YEAR: 149,663 304,692 --------- --------- CASH AT END OF YEAR: $ 416,140 $149,663 ========= =========
See accompanying notes. 5 DYNARESOURCE, INC. STATEMENT OF CASH FLOWS For the Years Ended December 31, 1999 and 1998 SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH ACTIVITIES 1999 - ----- The Company issued 73,000 shares of its common stock to related parties for consulting fees in the amount of $18,250. The Company transferred 27,611 shares from its treasury to a related party for services valued at $6,903. 1998 - ----- The Company spun-off as a dividend its 24.9% net profits interest in the San Jose de Gracia mining property in Sinaloa, Mexico. This transaction was recorded at book value in the amount of $500,000. The Company acquired 25% of the outstanding common stock of Minera Finesterre S.A. de CV., the owner of 100% interest (subject to the 24.9% net profits interest) of the San Jose de Gracia mining property. $733,277 of this acquisition is recorded as settlement income of which $641,617 is noncash. The Company issued 34,714 shares of its common stock to related parties for consulting fees in the amount of $8,679. See accompanying notes. 6 DYNARESOURE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note A - Nature of Business and Summary of Significant Accounting Policies: History: The Company was organized September 28, 1937, as a California corporation under the name West Coast Mines, Inc.. The Company was organized for the purpose of seeking, investigating, and, if such investigation warrants, acquiring assets, properties, and businesses and to engage in any substantial business opportunities. The Company merged with Resolute Mining Corp., a Nevada corporation, on February 28, 1995. This business combination was accounted for as a purchase. In 1994 the Company filed an amendment to its articles of incorporation to increase the authorized number of common stock from 750,000 shares to 50,000,000 shares and changed the par value of its common stock from $1.00 to $0.01 per share. On November 1, 1998, the Company merged with DynaResource, Inc, a newly formed corporation, domiciled in the state of Delaware. This merger resulted in changing the Company's name to DynaResource, Inc., changing the state of incorporation from California to Delaware and reducing the Company's authorized common stock from 50,000,000 shares authorized to 12,500,000 shares authorized. This business combination was accounted for as a purchase. Basis of Accounting: It is the Company's policy to prepare its financial statements on the accrual basis of accounting in accordance with generally accepted accounting principles. Revenue is recorded as income in the period in which it is earned and expenses are recognized in the period in which the related liability is incurred. Cash and Cash Equivalents: For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. The Company places its cash investments in high quality financial institutions. At times, cash balances may be in excess of the FDIC insurance limit. Property: Property is carried at cost. Upon retirement or disposal, the asset cost and related accumulated depletion are removed from the accounts and any resulting gain or loss is included in the determination of net income. Expenditures for geological and engineering studies, maintenance and claim renewals are charged to expense when incurred. Additions and significant improvements are capitalized and depleted. 7 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note A - Nature of Business and Summary of Significant Accounting Policies (continued): Long-Lived Assets The preparation of financial statements in conformity with generally accepted accounting principals requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates Generally accepted accounting principals require recognition of impairment of long-lived assets in the event of net book value of such assets exceed the future undiscounted cash flows attributable to such assets. Consequently, the Company assesses its assets annually for impairment and writes down any amounts necessary as a result of the assessment. Earnings (Loss) per Common Share: Earnings (loss) applicable to common stock is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year. The inclusion of common stock equivalents in the loss per share computation has not been included because they would be anti-dilutive under the treasury stock method. Note B - Accounts receivable - related party: Included in accounts receivable - related party are amounts paid by the Company for the benefit of that same party and also for funds advanced. This related party owns a percentage of Minera Finesterre S.A. de CV, a private Mexican corporation and owner of 100% interest of the San Jose de Gracia mining property located in Sinoloa, Mexico, as described in Note G to these financial statements. The Company has negotiated interest receivable at various rates for different periods of time. The balance of the amount advanced and spent on the related party's behalf and the related interest amounted to $108,446 and $98,446 at the end of 1999 and 1998 respectively. Also included in this account is an amount receivable from another related party in the amount of $1,500. Note C - Marketable securities: The Company purchased shares of a related party during 1997. These shares are considered trading securities. In accordance with the Company's policy of impairment of long-lived assets these securities were written down in amounts of $1,450 and $6,576 in 1999 and 1998 respectively. 8 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note D - Other current assets: Prepaid expenses: The Company recorded prepaid legal expenses in the amounts of $5,000 for 1998. Note E - Furniture and Equipment: Furniture and equipment is stated at cost and consists of the following: 1999 1998 ------- ------- Office furniture $22,376 $22,376 Lab equipment 14,306 14,306 Computer and peripherals 6,289 6,289 Office equipment 3,448 3,448 ------- ------- 46,419 46,419 Less accumulated depreciation (18,829) (11,783) ------- ------- $27,590 $34,636 ======= ======= Depreciation has been provided for using the straight-line method over estimated useful lives of three to seven years. Note F - Mining Properties: 1999 1998 -------- -------- Pansey Lee mine (560 acres) $631,737 $631,737 Impairment allowance (501,915) (501,915) -------- -------- Subtotal 129,822 129,822 Wikiup Claim (640 acres) 45,976 45,976 -------- -------- Total $175,798 $175,798 ======== ======== 9 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note F - Mining Properties (continued): Mining interest/note receivable: The Company owned a 24.9% net profits interest in the San Jose de Gracia mining property in Sinaloa, Mexico. The property includes all mining concessions now held or subsequently obtained within a 10-mile radius from the core of the property. As stated within the mine operating agreement on the San Jose de Gracia property: The Company has no obligation to make additional advances to any party in connection with this mining interest. "Available cash" is defined as: "cash flows", less operating expenses, adjusted for increases or decreases in cash reserves. "Cash flows" is defined as : any consideration, including gross cash receipts from operation of the mine. "Operation of the mine" is defined as all income generating activity, which is derived from, or in any way related to, the San Jose property; including without limitation, the sale of minerals extracted from the property, the sale or licensing of any rights to derive minerals or income from the property; the sale of any rights in the concessions: and the sale, transfer, or assignment of any rights whatsoever to develop, operate, or produce the San Jose property. "Operating expenses" is defined as: the costs, charges, expenses and disbursements incurred in connection with development, maintenance, operation, management and production of the mine. Expressly excluded from such costs are exploration costs and property acquisition & maintenance costs. "Cash reserves" is defined as amounts of cash, derived from production of the mine, held in trust for contingent or unforeseen liabilities or obligations arising out of operation of the mine. This net profits interest was spun off and distributed as a dividend to the then existing shareholders in 1998. 10 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note G - Investment: In 1998 the Company acquired 25% of the outstanding common stock of Minera Finesterre S.A. de CV, a private Mexican corporation and the owner of 100% interest of the San Jose de Gracia mining property, by way of a litigation settlement. In 1999 the Company spent $96,270 on exploration costs on the San Jose de Gracia property to earn an additional 1.7% in Minera Finesterre S.A. de CV for a total ownership interest of 26.7%. Pursuant to this settlement the Company forgave future consideration including a $500,000 note and related interest, plus accelerated payback provisions on cash flows, and elected to retain the 24.9% net profits interest. Subsequent to this settlement the Company spun off and distributed as a dividend the 24.9% net profits interest. Note H - Related party transactions: The Company paid $191,778 and $126,029 in stock and cash to related parties for consulting and other fees during 1999 and 1998 respectively. Note I - Stockholders' Equity: On November 1, 1998 the Company authorized a dividend of the mining interest/note receivable referred to in Note F. This dividend was paid to DynaResource Properties, Inc., a private Delaware corporation. At the Record Date, the shareholders of DynaResource Properties, Inc. were identical to DynaResource, Inc. This nonmonetary transaction is charged against retained earnings at book value. During 1998 the Company received $131,000 for 131,000 shares of its common stock. These shares were issued during 1999 and did not participate in the nonmonetary dividend. During 1999 the Company received $602,000 for 352,000 shares of its common stock. In conjunction with the Company's receipt of the $733,000 received in 1998 and 1999 the Company issued 733,000 common stock options exercisable at a price of $2.50 per share. These common stock options expire August 15, 2001. Treasury Stock: The Company may from time to time purchase and resell its own common stock in order to raise additional capital. These transactions are recorded as treasury stock and any resulting gain or loss is recorded as additional paid in capital. 11 DYNARESOURCE, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 Note I - Stockholders' Equity (continued): Treasury Stock (continued): During 1998 the company sold 7,400 shares from treasury and acquired 10,000 shares. There were 23,175 and 50,786 common shares held in treasury at the end of 1999 and 1998 respectively. There are 733,000 options outstanding at December 31, 1999. Each option is exercisable for one share common stock at a price of $2.50 per share and expires August 15, 2001. There are 40,000 "A" warrants outstanding at December 31, 1999. Each of these warrants entitles the holder to purchase one share of the Company's common stock at a price of $8.00 per share within 90 days of the stock reaching a market price of $12.00 per share. There are 40,000 "B" warrants outstanding at December 31, 1999. Each of these warrants entitles the holder to purchase one share of the Company's common stock at a price of $12.00 per share within 90 days of the stock reaching a market price of $16.00 per share. Note J - Revenue: In 1998 the Company received $50,000 from a five-year lease/sale agreement on its Humboldt County, Nevada (Pansey Lee) 560 acre mining property. The lessor did not pay the second year's lease payment and the lease was subsequently terminated. Settlement income: In 1998 the company recorded $733,277 as income in the settlement for 25% of the stock of Minera Finesterre S.A. de CV referred to in Note G of these financial statements. Note K - Income Taxes: The Company has net operating loss carryforwards of approximately $900,000 at December 31, 1999 thatis available to offset its future income tax liability. No deferred tax asset has been recognized for the operating loss carryforward as it is more likely than not that all or a portion of the net operating loss will not be realized and any valuation allowance would reduce the benefit to zero. 12 EX-3.3 18 AUDITED FINANCIAL STATEMENT EXHIBIT "3.3" Golden Hemlock Explorations, Ltd. "AUDITED FINANCIAL STATEMENT" February 28, 1999 GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Financial Statements February 28, 1999 and 1998 Index: ----- Auditors' Report Consolidated Balance Sheet Consolidated Statement of Operations and Deficit Consolidated Statement of Changes in Financial Position Notes to Consolidated Financial Statements Consolidated Schedule of Deferred Exploration and Development Expenditures ELLIS FOSTER CHARTERED ACCOUNTANTS 1650 West 1st Avenue Vancouver, B.C., Canada V6J 1G1 Telephone: (604) 734-1112 Facsimile: (604) 734-1502 E-Mail: generaldelivery@ellisfoster.bc.ca Auditors' REPORT To the Shareholders of GOLDEN HEMLOCK EXPLORATIONS LTD. We have audited the consolidated balance sheets of Golden Hemlock Explorations Ltd. as at February 28. 1999 and 1998 and the consolidated statements of operations and deficit and changes in financial position for the years then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at February 28, 1999 and 1998 and the results of its operations and the changes in its financial position for the years then ended in accordance with generally accepted accounting principles. As required by the Company Act of British Columbia, we report that, in our opinion, these principles have been applied on a basis consistent with that of the preceding year. Vancouver, Canada July 6, 1999 Chartered Accountants GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Balance Sheet February 28, 1999 and 1998 -------------------------------------------------------------------------- 1999 1998 -------------------------------------------------------------------------- ASSETS Current Cash $ 1,255 $ 10,205 Accounts receivable 46,464 401,190 Prepaid expenses and deposits 13,030 18,311 -------------------------------------------------------------------------- 60,749 429,706 Mineral interests (note 2) 4,928,785 5,024,548 Capital assets (note 3) 399,420 542,449 -------------------------------------------------------------------------- $5,388,954 $ 5,996,703 ========================================================================== LIABILITIES Current Accounts payable and accrued liabilities $ 522,735 $ 1,070,229 Loans payable (note 4) 280,000 385,000 Due to related parties 119,640 508,647 ------------------------------------------------------------------------- 922,375 1,963,876 Long-term debt (note 5) - 683,250 ------------------------------------------------------------------------- 922,375 2,647,126 -------------------------------------------------------------------------- SHAREHOLDERS EQUITY Share capital (note 6) 11,244,240 10,563,980 deficit (6,777,661) (7,214,403) -------------------------------------------------------------------------- 4,466,579 349,577 -------------------------------------------------------------------------- $ 5,388,954 $ 5,996,703 ========================================================================== Approved by the Directors Robin T. Forshaw Dalton Dupasquier GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Schedule of Deferred Exploration and Development Expenditures Years Ended February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Amortization 60213 4372 Assays . 8824 Drilling . 22722 Equipment rental . 8431 Freight . 7505 Fuel costs 2179 48480 Geological fees 50000 . Maintenance and repairs 5653 26856 Project costs . 41931 Rights and permits 33056 . Salaries 41206 62589 Sundry 6357 6304 Supervision 6387 10387 Supplies . 40370 Travel 3545 33473 Increase in deferred exploration and development expenditures 11988 60100 Deferred exploration and development expenditures, beginning of year 48449 3005 Deferred exploration and development expenditures, end of year 9557 63105 ================================================================================
GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Statement of Changes in Financial Position Years Ended February 28, 1999 and 1998 - ------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------ Cash provided by (used for) operating activities Net income (loss) for the year $ 436,742 $ (943,382) Items not invoMng cash Gain on settlement of debt (431,227) - Gain on disposition of subsidiary interests (529,725) - Loss on disposal of capital asset 9,508 30,922 Amortization 63,931 13,137 Foreign exchange 44,466 70,070 Decline in fair market value of marketable securities - 12,250 - ------------------------------------------------------------------------------------------------------ (406,305) (817,003) Net change in non-cash working capital items 387,773 759,251 - ------------------------------------------------------------------------------------------------------ (18,532) (57,752) - ------------------------------------------------------------------------------------------------------ Cash provided by (used for) investing activities Acquisition of mineral interests (92,842) (709,703) Deferred exploration and development expenditures (208,596) (2,288,324) Net assets realized on disposition of subsidiary interests 209,586 - Acquisition of capital assets - (515.982) Proceeds from disposal of capital assets 59,214 57,622 - ------------------------------------------------------------------------------------------------------ (32,638) (3,456,387) - ------------------------------------------------------------------------------------------------------ Cash provided by (used for) financing activities Issuance of share capital for cash 105,000 2,453,906 Share issue costs - (59,737) Proceeds from convertible loans - 355,000 Repayment of convertible loans (105,000) - Advances from related parties, net 42,220 - Repayment of loan payable - (230,597) - ------------------------------------------------------------------------------------------------------ 42,220 2,548,572 - ------------------------------------------------------------------------------------------------------ Decrease in cash positIon (8,950) (965,567) Cash position, beginning of year 10,205 975,772 - ------------------------------------------------------------------------------------------------------ Cash position, end of year $ 1,255 $ 10,205 ======================================================================================================
GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- Significant Accounting Policies (a) Basis of Consolidation These consolidated financial statements include the accounts of the Company and its 75% (1998 - 70%) owned subsidiary, Miners Finisterre S.A. de C.V. (Finisterre), a Mexican incorporated company. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from those estimates. (C) Capital Assets Capital assets are recorded at historical cost. Amortization is charged to earnings in amounts sufficient to allocate the costs over their estimated useful lives using the following annual rates and methods prorated from initial utilization: Office equipment and furniture 10% per annum, straight-line basis Mining machinery and equipment 10% per annum, straight-line basis Automotive equipment 25% per annum, straight-line basis Computer equipment 25% per annum, straight-line basis
(d) Mineral Interests The Company is in the development stage and defers all expenditures related to its mineral interests until such time as the properties are put into commercial production, sold or abandoned. Under this method, all direct costs related to the exploration for and development of the mineral interests are capitalized and do not necessarily reflect current or future values. If the property is put into commercial production, the expenditures will be depleted based upon the proven reserves available. If the property is sold or abandoned, the expenditures will be written off. The Company does not accrue the estimated future costs of maintaining in good standing its mineral interests. Management has determined each property to be a cost centre. Ownership in mineral interests involves certain inherent risks due to the difficulties in determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyancing history characteristic of many mineral properties. The Company has investigated ownership of its mineral properties and, to the best of its knowledge, ownership of its interests is in good standing. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- Significant Accounting Policies (continued) (e) Property Option Agreements From time to time, the Company may acquire or dispose of properties pursuant to the terms of option agreements. Due to the fact that options are exercisable entirely at the discretion of the optionee, the amounts payable or receivable are not recorded. Option payments are recorded as mineral interests costs or recoveries when the payments are made or received. (f) Foreign Currency translation Assets and liabilities denominated in foreign currencies are translated into Canadian dollars at exchange rates in effect at the balance sheet date for monetary items and at exchange rates prevailing at the transaction dates for non-monetary items. Revenues and expenses are translated at average exchange rates prevailing during the period except for amortization which is translated at historical exchange rates. Gains and losses on translation are included as income for the period except for those arising on the translation of long-term monetary items of Canadian and integrated foreign operations which are deferred arid amortized over the lives of those items. 2. Mineral Interests The Company's mineral interest is as follows: Net Deferred Acquisition Exploration Total Total Costs Expenditures 1999 1998 --------------------------------------------------------------------------- San Jose de Gracia $2,035,644 $2,893,141 $4,928,785 $5,024,548 =========================================================================== The San Jose de Gracia project, located in the State of Sinaloa, Mexico, consists of four (4) contiguous groups of mining properties, as follows: (a) San Jose de Gracia I Pursuant to an agreement dated May 15, 1995, and subject to a 50% net smelter return royalty, the Company acquired the rights to explore and mine on a number of mineral claims (La Nueva Experanza, Guadalupe, San Nicolas, Mine Gaflcle, La Union, Ampliacion de Santa Rosa, Santo Tomes. Ampliacion de Santo Tomas, Nuevo Rosario, and La Libertad) for a period of two years. The Company has the option to purchase the properties, mining equipment and improvements on the properties at the end of the two years by making cash payments totalling US$690,000. The Company has made cash payments totalling US$690,000 to the properties' owners, extinguishing the royalty interest. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 2. Mineral Interests (continued) (b) San Jose de Grads II Pursuant to an agreement dated May 14, 1994 and subject to a 10% net smelter returns royalty, the Company acquired the rights to explore and mine on several mineral claims (El Real, Tres Amigos, Tres Amigos II, and San Sebastian) located in the state of Sinaloa Mexico for a period of twenty seven months. Consideration included twenty-four monthly payments of US$8,333 for a total of US$200,000 and the assumption of a term loan of US$450,000. After the end of the twenty seven months and receipt of all payments, the vendors will transfer the titles of the mineral claims to the Company. As at February 28, 1999, the Company had made cash payments totalling $200,000 to the vendors and paid the term loan of US$450,000 of the properties' owner, extinguishing the royalty interest. (c) Santa Rosa Pursuant to three agreements dated May 15, 1996 and subject to a 50% net smelter returns royalty, the Company acquired the right to explore and mine the Santa Rosa mineral claims located in the state of Sinaloa, Mexico for a period of two years. The Company has the option to purchase 68.8% of the property by making cash payments totalling US$172,000. As at February 28, 1999, the Company has made cash payments totalling approximately US$138,000. (d) Finisterre Finisterre consists of various mineral claims (San Jose, Finisterre Fraction A, Finisterre Fraccion B, El Real II, El Real Ill Piedra do Lumbre I, Piedra de Lumbre II, Piedra de Lumbre ill, Finisterre II and Finisterre IV) located in the State of Sinaloa, Mexico. Except for filing fees, the Company does not have to pay any additional consideration for these properties. The Company holds these properties through its subsidiary, which it acquired pursuant to an option agreement April 23, 1996. This agreement provided the Company an initial 70% interest in Finisterre, and the option to acquire the remaining 30% interest in three stages by making aggregate exploration expenditures over a 36 month period totalling $3,500,000 and by issuing additional treasury shares, subject to regulatory approval, based upon certain periodic calculations of proven and probable reserves, such shares to be issued in an amount determined at the rate of $10 per ounce of proven and probable reserves of gold in the first year and $20 per ounce in the second and subsequent years, the number of shares issuable to be determined by the market price of the Company's shares at the valuation dates. To date no such valuations have been completed and no such shares issued. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 2. Mineral Interests (continued) The San Jose properties are subject to a 3% net smelter return royalty, upon which the Company has the option to purchase a 213 interest for the payment of $US3,000,000; this option expires April 23, 2001. In August 1998, the Company entered into an agreement with West Coast Mines, Inc. of Dallas, Texas (`West Coast"), materially altering the terms and conditions of its option to acquire the remaining 30% of Finisterre and the terms and conditions pertaining to the long-term debt described in Note 5. The essential terms of this agreement which apply to the Company's assets and liabilities are summarized as follows: (a) It was agreed that the Company's option to acquire the remaining 30% of Finisterre had been fulfilled. The requirement to issue additional shares based upon reserve calculations remains in effect. (b) West Coast elected to convert the US$500,000 principal balance of the long-term debt described in Note 5 into a retained 24.9% net profits interest, as defined ("the 24.9% NPI"). The Company retains a right of first refusal on the 24.9% NPI. (c) West Coast agreed to waive its right to interest payments aggregating US$1,050,000 and to payments in respect of interest accrued at 6% pursuant to the December 1996 agreement, and to waive the repayment of certain cash advances which had been made by West Coast to the Company during the period March 1, 1998 to July 31, 1998, namely Cdri$50,000 plus US$85,000 (translated as Cdn$121,550). (d) The waivers and conversions described in (ii) and (iii) preceding were ascribed a total value of $1,500,000 calculated as: Conversion of US$500,000 loan $ 683,250 Waiver of US$ advances 121,550 Waiver of CND$ advances 50,000 Waiver of accrued interest 82,500 ----------------------------------------------- Total measured obligations 937,300 Waiver of future considerations 562,700 ----------------------------------------------- $1,500,000 =============================================== In consideration of the value ascribed to the waivers of interest entitlements and other amounts. West Coast acquired 25% of the outstanding shares of Finisterre.
GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 2. Mineral Interests (continued) (e) West Coast committed to contribute $350,000 by December 31, 1999 for the first phase of development at the San Jose properties. Upon completion of this phase, West Coasts equity interest in Finisterre, subject to the 24.9% NPI, would increase to 29.13%. (f) West Coast acquired the option to contribute up to Cdn$650,000 by December 31, 1999 for a second phase of development at the San Jose properties. Upon funding this second phase, West Coast's equity interest in Finisterre, subject to the 24.9% NPI, would increase to 35.7%. (g) West Coast acquired the option to contribute up to Cdn$1,000,000 by December 31, 2000 for a third phase of development at the San Jose properties. Upon funding this third phase, West Coast's equity interest in Finisterre, subject to the 24,9% NPI, would increase to 43.75%. As at February 28, 1999 the Company had received the balance of 30% of Finisterre shares described above and had conveyed 25% of Finisterre shares to West Coast Mines, Inc. (formerly DynaResource, Inc.), leaving the Company with a net interest in Finisterre of 75%. 3. Capital Assets Capital assets are comprised as follows: 1999 1998 ------------------------------------ --------- Accumulated Net Book Net Book Cost amortization value value ------------------------------------------------------------------------- Office equipment, furniture and computer equipment $ 24,535 $ 6,970 $ 17,565 $ 21,438 Mining machinery and equipment 415,604 74,850 340,754 397,877 Automotive equipment 66,764 25,663 41,101 123,134 ------------------------------------------------------------------------- $506,903 $107,483 $ 399,420 $542,449 =========================================================================
4. Loans Payable The loans were issued with a one-year term, maturing October 23, 1998. Outstanding principal amounts plus accrued interest at 10 per cent before and after maturity were not repaid at the maturity date. Subsequent to February 28, 1999 the lenders agreed to accept payment of these loan balances, plus accrued interest to April 30, 1999 of $46,180, by the issue of 1,306,350 shares of the Company after giving effect to the proposed five for one consolidation of capital referred to in Note 6(d). The lenders were related parties at the time these loans were made but had ceased to be related parties at the time the repayment terms were negotiated. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 5. Long-term Debt The Company's long-term debt is comprised as follows: 1999 1998 --------------------------------------------------------------------------- Loan payable (US$500,000) $ - $ 683,250 =========================================================================== Prior to the agreement of August 1998 described in Note 2, the principal financial terms relating to this loan were pursuant to an amended loan agreement dated December 20, 1996, and required the Company to make interest payments to the lender as follows: (a) 70% of the available cash generated by mining operations on Finisterres mining claims until the lender had received US$550,000; (b) thereafter, 60% of the available cash generated by mining operation on Finisterre's mining claims until the lender had received aggregate interest payments in the total cumulative amount of US$800,000; (C) thereafter, 50% of the available cash generated by mining operations on Finisterres mining claims until the lender had received aggregate interest payments in the total cumulative amount of US$1,050,000; (d) thereafter, 24.9% of the available cash generated by mining operations. In addition, commencing February 16, 1996, if interest payments during each twelve month period preceding each anniversary date were to amount to less than 6% per annum on all unpaid principal during that period, a minimum interest charge of 6% became due and payable. The principal was due and payable on the earlier of July 24, 2010 or 30 days after the lenders receipt of aggregate interest payments of US$1,050,000, and the loan was secured by a fixed charge over certain mining equipment. Among the effects of the August 1998 agreement was the cancellation of the interest obligations in items (a) to (c) above and in respect of the 6% per annum accruals, and the conversion of the principal amount of the loan into a 24,9% net profits interest.
GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - ----------------------------------------------------------------------------------------------------------------- 6. Share Capital Authorized: 100,000,000 common shares without par value. Issued: 1999 1998 ---------------------------- ------------------------ Number of Number of State Shares Stated Value Shares Stated Value - ----------------------------------------------------------------------------------------------------------------- < Balance, beginning of year 19,426,656 $10,623,717 8,343,490 $4,426,028 Common shares: Issued for cash 500,000 105,000 3,533,500 2,344,800 Issued in settlement of debt 2,739,300 575,260 - - Issued pursuant to conversion of loans payable - - 1,200,000 660,000 Issued pursuant to conversion of special warrants - - 5,695,428 3,072,058 - ----------------------------------------------------------------------------------------------------------------- 22,666,956 11,303,977 18,772,418 10,502,886 Shares reserved to exercise special warrants - - 21,738 11,725 Subscribed for but unissued - - 632,500 109,106 - ----------------------------------------------------------------------------------------------------------------- 22,665,956 11,303,977 19,426,656 10,623,717 Share issuance costs - (59,737) - (59,737) - ----------------------------------------------------------------------------------------------------------------- Balance, end of year 22,665,956 $11,244,240 19,426,656 $10,563,980 =================================================================================================================
(a) During the year the Company issued the following common shares: (i) 632,500 common shares for cash pursuant to private placement agreements at the price of $0.1725 per share for total proceeds of $109,106. These common shares were subscribed for, and the related proceeds received, during the preceding fiscal year, and the related addition to share capital accounted for in that year. (ii) 500,000 common shares for cash pursuant to the exercise of employees' and directors' stock options at the price of $0.21 per share for total proceeds of $105,000. (iii) 2,739,300 common shares at a deemed price of $0.21 per share for a total amount of $575,260 on the settlement of certain debt of the subsidary. (b) As at February 28, 1999, the Company had outstanding share purchase warrants enabling the holders to purchase 632,500 additional common shares at the price of $0.20 per share expiring December 31. 1999. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 6. Share Capital (continued) (c) As of February 28, 1999, the Company had granted directors' and employees' incentive stock options enabling the holders to purchase 540,000 additional common shares at the price of $0.21 per share expiring May 16 and 22, 1999. These options expired unexercised. (d) At the 1998 annual meeting the shareholders approved a consolidation of the Company's authorized and issued share capital on a one new share for five old share basis, such that the 22,665,956 shares issued are to be consolidated to 4,533,191 issued shares and such that the authorized capital of 100,000,000 shares is to be consolidated to 20,000,000 authorized shares; and also to an increase, subsequent to the consolidation, of the authorized capital back to 100,000,000 shares. This transaction is subject to regulatory approval. 7. Related Party Transactions Included in accounts payable and accrued liabilities is $169,807 (1998 - $8,372) due to officers and directors of the Company. Loans payable consist of $280,000, being the unpaid balance of unsecured cash advances made by two persons who were directors of the Company at the time the advances were made (note 4). The amounts classified as "Due to related parties" consists of unsecured cash advances to the Company's subsidiary made directly or indirectly by a person who became a director subsequent to the making of the advances. During the year the Company entered into the following transactions with related parties: (a) paid management fees of $60,000 (1998 - $60,000) to a director; (b) paid salaries, benefits and severance of $60,807 (1998 - $88,800) to a director in his capacity as a senior officer of the subsidiary; (c) paid for contract exploration services totalling $Nil (1998 - $1,102,813) to a company of which a director was a significant shareholder; (d) settled debt to the company referred to in (c) above of $575,260 by the issue of 2,739,300 shares; (e) agreed to a waiver of US$295,800 (Cdn$431,227) of the amount classified as "Due to related parties" and recorded a gain on settlement of the debt of the same amount. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 6. Subsequent Events (a) In April 1999 the Company entered into a further agreement in principle with DynaResource, Inc. This proposed agreement, which is subject a) to the completion of a formal binding agreement, b) to the approval of the respective boards of directors of the Company and of DynaResource. Inc., and C) to regulatory approval which has not yet been filed for nor obtained, contains the following essential terms which would apply to the Company's assets and liabilities should this agreement be completed as proposed: (i) The Company will acquire from DynaResource, Inc. the 25% of Finisterre shares previously transferred to DynaResource, Inc. pursuant to the August 1998 agreement described in Note 2. (ii) in consideration of the acquisition of these shares of Finisterre from DynaResource. Inc. the Company will cause to be issued to DynaResource. Inc. from its treasury that number of shares such that following their issuance DynaResource. Inc. shall own 25% of the issued share capital of the Company. iii) The number of shares to be issued to DynaResource, Inc. described in the preceding paragraph is to be calculated after giving effect to the proposed consolidation of share capital described in Note 8(c) and after giving effect to a number of other proposed share issuances including the following: a) the settlement of shares for debt described to in Note 8(b); b) the issue by private placement described in Note 8(c); C) the issue of shares in respect of mineral resources established on the San Jose properties described in Note 2. (iv) The commitment by DynaResource to contribute $350,000 to exploration of the San Jose properties is replaced by a commitment by DynaResource to make a private placement in equity of the Company in the amount of $290,000, after giving effect to the proposed consolidation of share capital described in Note 6(d). During the period January to June 1999, DynaResource expended approximately $60,000 for engineering studies related to the San Jose properties. (v) DynaResource is to be granted the right to participate in future equity or debt financings by the Company to the extent of not less than 37.5% of funds to be raised. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 8. Subsequent Events (continued) (b) Subsequent to February 28, 1999 the Company agreed with creditors of the Company, including its subsidiary, to settle an aggregate $857,491 in indebtedness by the issue of 3.429,964 shares at the issue price of $0.25 per share, such shares to be issued after giving effect to the share consolidation described in note 6(d). This amount includes the loan and interest balances referred to in Note 4. These transactions are subject to regulatory approval. (c) Subsequent to February 28, 1999 the Board of Directors agreed to seek shareholder and regulatory approval for an additional consolidation of the Company's authorized and issued share capital on a one new share for five old share basis, after giving effect to the proposed consolidation described in note 6(d), and to offer a private placement of up to $500,000 by way of debentures convertible into units of the Company's common equity at a price to be determined in accordance with regulatory policy. 9. Income Taxes The parent company has non-capital losses available to offset against future income taxes purposes of $2,375,245 which expires follows: 2000 $ 512,871 2001 119,845 2002 152,530 2003 259,332 2004 547,566 2005 458,856 2006 324,245 -------------- $ 2,375,245 ============== The Company is not entitled to the tax benefit of $353,625 worth of expenditures incurred on its mineral interests as this amount was financed using flow-through shares. 10. Comparative Figures Certain 1998 comparative figures have been reclassified to conform with the financial statement presentation adopted for 1999. GOLDEN HEMLOCK EXPLORATIONS LTD. Notes to Consolidated Financial Statements February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 11. Financial Instruments The Company's financial instruments consist of cash, accounts receivable, accounts payable and accrued liabilities, loans payable, amounts due to related parties and long-term debt. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair values of these financial instruments approximate their carrying values, unless otherwise noted. 12. Uncertainty due to the Year 2000 Issue The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in errors when information using Year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Schedule of Deferred Exploration and Development Expenditures Years Ended February 28, 1999 and 1998 - -------------------------------------------------------------------------------- 1999 1998 -------------------- Amortization $ 60,213 $ 69,908 Assays - 74,360 Drilling - 1,398,978 Equipment rental - 8,431 Freight - 7,505 Fuel costs 2179 48,480 Geological fees 50000 - Maintenance and repairs 5653 92,392 Project costs - 304,075 Rights and permits 33,056 - Salaries 41,206 62,589 Sundry 6,357 6,304 Supervision 6,387 75,923 Supplies - 105,906 Travel 3,545 33,473 - -------------------------------------------------------------------------------- Increase in deferred exploration and development expenditures 208,596 2,288,324 Deferred exploration and development expenditures, beginning of year 2,684,545 396,221 - -------------------------------------------------------------------------------- Deferred exploration and development expenditures, end of year $2,893,141 $ 2,684,545 ================================================================================ EX-3.4 19 UNAUDITED STATEMENT EXHIBIT "3.4" GOLDEN HEMLOCK EXPLORATIONS, LTD. "UNAUDITED STATEMENT" NOVEMBER 30, 1999
GOLDEN HEMLOCK EXPLORATIONS LTD. Quarterly Report Nine Months Ended November 30, 1999 Consolidated Balance Sheet November 30, 1999 - unaudited - ------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------ ASSETS Current Cash and term deposits $ 43,721 $ 6,531 Accounts receivable 88,578 65,433 Prepaid expenses and deposits 14,007 15,165 - ------------------------------------------------------------------------------------ 146,306 87,139 Mineral interests 5,254,774 5,309,633 Capital assets 359,208 422,798 - ------------------------------------------------------------------------------------ $ 5,760,288 $ 5,819,770 ==================================================================================== LIABILITIES Current Accounts payable and accrued liabilities (Note 1)$ 610,597 $ 683,682 Loans payable to directors (Note 1) 280,000 280,000 Due to shareholders (Note 1) 112,350 508,647 Private placement advances (Note 1) 564,050 - - ------------------------------------------------------------------------------------ 1,566,997 1,472,329 Long term debt - 683,250 - ---------------------------------------------------------------------------------- 1,566,997 2,155,579 - ------------------------------------------------------------------------------------ SHARE CAPITAL AND DEFICIT Share capital 11,244,240 11,244,240 Deficit (7,050,949) (7,580,049) - ------------------------------------------------------------------------------------ 4,193,291 3,664,191 - ------------------------------------------------------------------------------------ $ 5,760,288 $ 5,819,770 ====================================================================================
Approved by the Directors: "Robin T. Forshaw" "Lawrence D. Barr" Director Director
GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Statement of Operations and Deficit Nine Months Ended November 30, 1999 - unaudited 1999 1998 - ------------------------------------------------------------------------------------ Administrative expenses Amortization $ 2,771 $ 3,718 Investor relations - 7,000 Management fees 80,796 45,000 Office, rent, telephone 13,658 94,951 Professional fees 107,968 76,803 Salaries 35,637 90,818 Shareholder information 2,259 2,457 Transfer agent and regulatory fees 5,036 8,031 Travel 4,793 9,230 - ------------------------------------------------------------------------------------ 252,918 438,008 - ------------------------------------------------------------------------------------ Other expense (income) Interest expense (income) - net 12,651 (113,585) Loss on foreign exchange 7,719 40,627 - ------------------------------------------------------------------------------------ 20,370 (72,363) - ------------------------------------------------------------------------------------ Loss for the period 273,288 365,645 Deficit, beginning of period 6,777,641 7,214,404 - ------------------------------------------------------------------------------------ Deficit, end of period $ 7,050,929 $ 7,580,049 ==================================================================================== Loss per share $ (0.1) (0.02) ====================================================================================
Note 1: Creditors holding $386.911 in accounts payable and accrued liabilities, $280,000 for loans payable to directors and $112,350 for amounts due to shareholders, being an aggregate $779,261, have agreed to accept 3,117.044 common shares issued at the price of $0.25 per share, after giving effect to a proposed one for five consolidation of the Company's shares approved by the 1998 annual meeting, but before giving effect to a further proposed one for five consolidation approved by the 1999 meeting, in settlement of the Company's indebtedness in the amounts listed. The share consolidations and shares for debt agreements are subject to regulatory approval. The private placement advances are expected to convert into equity in due course, as described in Schedule C.
GOLDEN HEMLOCK EXPLORATIONS LTD. Consolidated Statement of Cash Flow Nine Months Ended November 30. 1999 - ------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------- Cash provided by (used for) operating activities Loss for the period $ (273,288) $ (365,645) Items not involving cash Amortization 2,771 3,718 Loss on foreign exchange 7,719 40,627 - ------------------------------------------------------------------------------------- (262,798) (320,705) Net change in non-cash working capital items 29,760 (80,868) - ------------------------------------------------------------------------------------- (233,038) (401,573) - ------------------------------------------------------------------------------------- Cash provided by (used for) investing activities Acquisition of mineral interests (3,208) (103,217) Acquisition of capital assets (4,522) - Deferred exploration and development expenditures, net of depreciation and amortization (28O,816) (133,877) - ------------------------------------------------------------------------------------- (288,546) (237,094) - ------------------------------------------------------------------------------------- Cash provided by (used for) financing activities Receipt of debenture subscriptions 564,050 Issuance of share capital for cash - Issuance of share capital to settle debt - 575,260 Proceeds from disposal of capital assets - 59,732 Repayment of loans from directors - (105,000) - ------------------------------------------------------------------------------------- 564,050 634,992 - ------------------------------------------------------------------------------------- Increase (decrease) in cash position 42,466 (3,675) Cash position, beginning of period 1,255 10,206 - ------------------------------------------------------------------------------------- Cash position, end of period $ 43,721 $ 6,531 =====================================================================================
GOLDEN HEMLOCK EXPLORATIONS LTD. Schedule of Consolidated Deferred Exploration and Development Expenditures Nine Months Ended November 30, 1999 - ---------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------- Amortization and depreciation $ 41,965 $ 48,919 Assaying and metallurgy 121,400 - Fuel costs 179 1,995 Geological fees 101,495 50,000 Maintenance and repairs 2,701 5,974 Permits and rights 27,640 - Salaries 25,330 26,978 Sundry 489 5,636 Supervision - 6,443 Travel 1,582 3,505 - ---------------------------------------------------------------------------------- Increase in deferred exploration and development expenditures 322,781 182,068 Deferred exploration and development expenditures beginning of period 2,893,141 2,684,545 - ---------------------------------------------------------------------------------- Deferred exploration and development expenditures, end of period $ 3,215,922 $ 2,866,613 =================================================================================
GOLDEN HEMLOCK EXPLORATIONS LTD. Schedule B QUARTERLY REPORT Page 1 November 30, 1999 1. Current year-to-date information: During the current year to date a director has been paid management fees of $45,000. 2. (a) Securities issued during the period September 1, 1999 to November 30, 1999: None. See Schedule C for a description of agreements to issue shares on the settlement of debt and convertible debentures which had not been finalized at November 30, 1999; these are subject to regulatory approval. 2. (b) Options granted during the period September 1,1999 to November 30, 1999: None. 3. (a) Particulars of authorized and issued capital: The authorized capital of the Company consists of 100,000,000 common shares without par value. Issued and outstanding: 22,665,956 shares for $11,244,240 net of share issue costs. See Schedule C for a description of certain proposed alterations to share capital. 3.(b) Options, warrants and convertible securities outstanding: Share purchase warrants outstanding as at November 30, 1999: Warrants expiring December 31, 1999 to acquire up to 632,500 common shares at the exercise price of $0.20 per share, based upon the issued capital as at December 31, 1997 and before giving effect to any share consolidation(s) or related alteration(s) in exercise price. These warrants expired, unexercised. See Schedule C for a description of certain proposed issues of convertible securities. Stock options outstanding as at November 30, 1999: None. 3.(d) List of directors: Lawrence D. Barr, Dalton Dupasquier, Robin T. Forshaw, Marvin A. Mitchell Mr. Koy Diepholz of Dallas, Texas is to appointed to the Board upon reinstatement of trading of the company's shares on the Canadian Venture Exchange. GOLDEN HEMLOCK EXPLORATIONS LTD. Schedule B QUARTERLY REPORT Page 2 November 30, 1999 4. Additional Information - Mineral interests Mineral interests are comprised as follows: Balance Additions Balance February 28 during November 30 1999 period 1999 ---------------------------------- Net acquisition costs $ 2,035,644 $ 3,208 $ 2,038,852 Deferred exploration - per schedule 2,893,141 322,781 3,215,922 ---------------------------------- Total $ 4,928,785 $325,989 $ 5,254,774 ================================================================================ A number of optionors of a mineral property for which option payments were due in May 1996 and May 1997 have to date not delivered satisfactory legal documentation entitling them to receive option payments otherwise due to them. The amounts involved are $US76,000 plus related value added taxes of approximately $US13,650. in accordance with the Company's accounting policies, these payments will be recorded when the option payments are made. It is possible the optionors may deliver the requisite documentation at any time. GOLDEN HEMLOCK EXPLORATIONS, LTD. Schedule C QUARTERLY REPORT Page 1 NOVEMBER 30, 1999 Management Discussion General Management of your company continue to work diligently towards the reinstatement of trading of the Company's shares on the Canadian Venture Exchange ("CDNX"). The principal tasks have been the discharge of the majority of the Company's indebtedness, devising a program and budget for ongoing development of the San Jose de Gracia gold project, and the securing of new financing for that exploration work and for the Company's ongoing working capital needs. A filing for reinstatement of trading was made with CDNX in November 1999, and further filings have subsequently been made. Corporate Within the filing for reinstatement of trading are three matters also requiring regulatory approval: 1. Settlement of corporate debt by issuance of shares; 2. Further share consolidation; and 3. Acquisition of the remaining 25% interest in Minera Finisterre for shares. Altbough the above will resu1t in dilution of shareholders' ownership, management is of the opinion they are required to render the company capable of raising new equity to meet the listing requirements of the Canadian Venture Exchange and continue exploration on the San Jose de Gracia project. Investor relations for the third quarter consisted of management responding to investor and investment advisor queries. Recommended Work Programs for San Jose de Gracia During the quarter a program of one month duration was carried out on the property The program of mapping and sampling was designed to delineate areas of interest and define drill targets for the next phase of exploration. Management of your company is very satisfied with the results of that program. As a result a program has been proposed for the next phase. The program calls for 1700 meters of drilling in four target areas expecting to commence in February 2000. Financial Highlights As described in the interim financial statements, the Company has entered into agreements which are subject to regulatory approval with creditors holding an aggregate $779,261 in indebtedness to accept 3,117,044 shares, to be issued on the basis of incorporating the first one for five consolidation approved by the shareholders in 1998 but then subject to the second one for five consolidation approved by the shareholders in 1999. The Company has further entered into agreements which are snbject to regulatory approval with a number of private placement investors in respect of convertible debentures for purposes of discharging the Company's remaining indebtedness, of funding the first phase exploration program on the San Jose de Gracia project, and of providing uncommitted working capital to meet the listing conditions required by CDNX. The private placement agreements provide that these debentures will be convertible into units consisting of one share and one one-year non-transferable warrant, to be priced at the average trading price of the Company's shares during the first 20 days of post-reinstatement trading. The Company expects to hold open the current round of private placements by way of these convertible debentures until a total of approximately $1,000,000 has been raised. The Company expects to file an Annual Information Form pursuant to securities legislation such that the shares issuable on the conversion of the debentures will be subject to a four month hold period. GOLDEN HEMLOCK EXPLORATIONS LTD. Schedule C QUARTERLY REPORT Page 2 NOVEMBER 30, 1999 Conclusion Shareholders and management have endured a very long period during which the Company's financial condition and financing capacity have been severely impaired, with the consequence that there has been no trading capacity or liquidity available. Management believe that the alterations to the Company's capita1ization recently approved are allowing Golden Hemlock, soon to be known as Central Coast Minerals Ltd., to raise the funding needed to continue to seek significant mineral potential at San Jose de Gracia. Our engineering reports are clear on this potential, and we expect that the reinstatement of trading and recommencement of drill programs in Mexico will take place in the fourth fiscal quarter. ON BEHALF OF THE BOARD OF DIRECT0RS "Robin T. Forshaw" Vancouver, British Columbia Robin T. Forshaw, President January 29,2000 EX-23.1 20 CONSENT OF CPA MARK L. CLELAND CERTIFIED PUBLIC ACCOUNTANT 17430 CAMPBELL ROAD, SUITE 114 DALLAS, TEXAS 75252 972-735-8840 FAX 972-735-0035 To the Board of Directors and Stockholders of DynaResource, Inc. I consent to incorporation by reference in the registration statement on Form 10SB of DynaResource, Inc. of my report dated February 17, 2000, relating to the balance sheets of DynaResource Inc. as of December 31, 1999 and 1998 and the related statements of operations and accumulated deficit, stockholders' equity and accumulated deficit, and cash flows for each of the two years ended December 31, 1999. /S/ Mark L. Cleland - -------------------- Mark L. Cleland Dallas, Texas April 7, 2000 -----END PRIVACY-ENHANCED MESSAGE-----