16-May-2013

Annual Report

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K and those discussed in other documents we file with the SEC. In light of these risks, uncertainties, and assumptions, readers are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements represent beliefs and assumptions only as of the date of this Annual Report on Form 10-K. Except as required by applicable law, we do not intend to update or revise forward-looking statements contained in this Annual Report on Form 10-K to reflect future events or circumstances.

Overview

We are an exploration stage company focused on mineral exploration activities in Mexico through our wholly owned Mexican subsidiary, Sunburst Mining de Mexico, S.A. de C.V., (“Sunburst”). We are currently engaged in the exploration and development of one gold and silver project, named the Cieneguita Project, which is made up of several mining concessions. The Cieneguita Project is located in the Sierra Madre region of the State of Chihuahua, Mexico.

To help support our exploration activities, in February 2009 we entered into a joint venture agreement with Minera Rio Tinto, S.A. de C.V. (“MRT”), a mining operator in Chihuahua, Mexico (the “Joint Venture Agreement”). Under the Joint Venture Agreement, we authorized MRT to commence a small scale milling operation at our Cieneguita Project (the “pilot project” or “pilot operation”). MRT commenced the pilot operation in March 2010 after the construction of systems and initial plant facilities for crushing and gravity and flotation circuits were complete and adequate water supplies established. Operations have since been expanded from one to two 12-hour shifts per day with a processing rate up to 750 tonnes per day. The terms of the Joint Venture Agreement (as amended) with MRT are discussed in detail below.

Our financial condition has improved substantially since the current executive group took over management of the Company in late 2009. At the time, the Company’s working capital deficiency was approximately $4.7 million and the Company received no revenues from its operations. Because of lack of capital, the Company faced having its interests in the Cieneguita Project reduced from 40% to 25%.

Since then, the Company’s position has improved dramatically based on the efforts of the current executive group. The Company now receives 35% of net cash flow from pilot operations at the Cieneguita Project, which were 100% financed by MRT under the Joint Venture Agreement, and it retains at all times an 80% ownership interest in the Cieneguita Project. In addition, the Company has substantially reduced the nearly $5 million in debt it had incurred as of the time of the management change in 2009, and has achieved positive working capital.

Gross revenue derived from the pilot project pursuant to the Joint Venture Agreement for fiscal year 2013 was $16,194,000 compared to $10,510,000 for fiscal 2012, an increase of 54%. Net of operating costs, the Company’s net cash flow from pilot project, was $1,894,000 for fiscal 2013 compared to $794,000 in fiscal 2012, an increase of 139%. This was primarily due to the efforts of the Company in renegotiating the Joint Venture Agreement with MRT and obtaining the improved business terms. The increase was also due to the increase in the production rate at the pilot plant, increased efficiencies in the overall operation and higher availability of the milling facilities resulting from the amendments of the Joint Venture Agreement.

We expect to finalize the PEA for the Cieneguita Project in June 2013. We have summarized some of the preliminary work from the PEA to date, which can be found on our website, www.panamgoldfields.com, under the “Recent News” section, March 13, 2013. We believe the preliminary data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project.

In September 2011, because MRT experienced delays in achieving a steady state of production at the pilot project and was unable to complete a feasibility study for the Cieneguita Project within the prescribed time by the initial terms of the Joint Venture Agreement, the current management team was able to renegotiate the terms of the Joint Venture Agreement to increase the Company’s cash flow from the pilot project and its percentage ownership of the overall Cieneguita Project. The Company assumed responsibility to complete a preliminary economic assessment for the Cieneguita Project, and the parties agreed to fund the future feasibility study for the Cieneguita Project on a pro-rata basis according to their respective ownership percentages.

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In September 2012, the Company negotiated a second amendment to the Joint Venture Agreement with MRT, as discussed in more detail below. In the second amendment to the Joint Venture Agreement, the Company was further able to increase cash flow to the Company from the pilot project at the Cieneguita Project, on a retroactive basis to March 2012. The second amendment to the Joint Venture Agreement also increased the Company’s ownership interests in the Cieneguita Project, as well as removed the depth limitations for the pilot project, giving MRT more incentive to implement project efficiencies and increase the production rate of the pilot project. Now, due to the second amendment of the Joint Venture Agreement, we are not wholly dependent on the equity markets for funding the Company’s development, a strategy that has turned out to be prescient given the current market conditions.

As a result of the efforts and strategy of the current executive team, the Company has received revenues from MRT on a regular monthly basis to support the Company’s activities since late 2011.

Recent Developments

Joint Venture Agreement

In September 2011, because MRT experienced delays in achieving a steady state of production at the pilot project and was unable to complete a feasibility study for the Cieneguita Project within the prescribed time by the initial terms of the Joint Venture Agreement, the current management team was able to renegotiate the terms of the Joint Venture Agreement to increase the Company’s cash flow from the pilot project and its percentage ownership of the overall Cieneguita Project. The Company assumed responsibility to complete a preliminary economic assessment for the Cieneguita Project, and the parties agreed to fund the future feasibility study for the Cieneguita Project on a pro-rata basis according to their respective ownership percentages.

In September 2012, we entered into the second amendment of the Joint Venture Agreement with MRT. The parties agreed to the following provisions pursuant to the second amendment of the Joint Venture Agreement:

� Our share of net cash flow from the pilot project operated by MRT on the Cieneguita Project increased from 20% to 29% beginning retroactive to March 1, 2012 through December 31, 2012. Beginning January 1, 2013 through December 31, 2013, our share of net cash flow from the project increases to 35%. After December 31, 2013, we receive 80% of the net cash flow. At all times, the Company retains its 80% ownership interest in the entire Cieneguita project.

� Additional fees previously payable by MRT for minerals processed below the first 15 meters have been eliminated.

� MRT, which is the exclusive operator, must provide us financial information related to the calculation of net cash flow within 30 days of the end of each month and will pay a minimum US $150,000 to us within the first 10 days of each month as a good faith advance against the previous month’s net cash flow. The balance of monies owed (if any) to us for the previous quarter is to be paid within 45 days from the end of each fiscal quarter.

� MRT must provide us with quarterly reports summarizing exploration, development and operations and all related technical results from activities on the Cieneguita Project. All of the books and records and the operations of MRT are subject to audit by us.

� MRT must, at its cost, provide, a quarterly audit within thirty (30) days of the end of each fiscal quarter regarding compliance with environmental laws and steps required to effect remediation or other required actions (if any) to maintain and/or bring the project operations into compliance with all applicable environmental laws. The audit is to be performed by an independent expert environmental consulting firm selected by us and MRT. MRT is solely responsible for any costs of effecting any remediation recommended by the audit.

� The date of the pilot production was extended from December 31, 2012 to December 31, 2013. MRT may terminate the project by providing us with ninety
(90) days advanced written notice, and we may terminate the project upon an uncured breach of the Joint Venture Agreement by MRT.

� At all times, we retain our 80% ownership interest in the entire Cieneguita Project.

Other Projects

In February 2011, we had entered into an agreement with Compa�ia Minera Alto Rio Salado S.A., a private Argentine entity, for the acquisition of the 15,000 hectares Cerro Delta Project in northwest La Rioja Province, Argentina. Under the terms of the agreement, we were required to pay $150,000 upon signing the agreement, $200,000 on the first anniversary, $500,000 on the second anniversary, $750,000 on the third anniversary, $1.2 million on the fourth anniversary, and $2.2 million on the fifth anniversary of the signing, with a final option payment of $5 million to purchase a 100% interest in the Cerro Delta Project payable on the sixth anniversary of the signing. However, due to poor results from a field reconnaissance program, a worsening business environment in the country and the approach of an option payment in the amount of $500,000, we elected to terminate the project in January 2013 in order to focus our resources on the development of the Cieneguita project. Additionally, we sold our Encino Gordo Project in Mexico in May 2012 for a total consideration of $300,000.

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In July 2011, we entered into an agreement with M3 Engineering and Technology Corporation (“M3″) for the execution and completion of a NI 43-101 compliant PEA for the Cieneguita Project. We expect to finalize the PEA in June 2013. We have summarized some of the preliminary work from the PEA to date, which can be found on our website, www.panamgoldfields.com, under the “Recent News” section, March 13, 2013. We believe the preliminary data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project.

Financings

In connection with the Second Amended Agreement, MRT purchased 2 million shares of our common stock at a price of $0.12 per share for net proceeds of $240,000 pursuant to the our private placement Subscription Agreement. We issued the shares to MRT in reliance on exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder.

On July 13, 2012 we entered into a $2.1 million private placement offering. In the offering, we issued 17,500,000 shares of our common stock at a subscription price of $0.12 per share. Of the aggregate purchase price, $1,050,000 was paid in cash and $1,050,000 was paid through the transfer of real property in Argentina valued at $1,050,000. The shares were acquired by an accredited investor (as defined under Rule 501(a) of Regulation D promulgated under the Securities Act). The Company intends to liquidate the real property it acquired as soon as practical and has so far sold one unit for total proceeds of $330,000. We have used the net proceeds we received from the offering for working capital and general corporate purposes, including supporting the PEA for the Cieneguita Project.

Revenue and Production

Pursuant to the amended Joint Venture Agreement, the parties agreed to
restructure cash flows payments and ownership of the Cieneguita Project as
follows:

Net Cash Flow Net Cash Flow Net Cash Flow
Ownership Interest (March Interest Interest
Holder Percentage 1, 2012 until (January 1, 2013 (After
December 31, until December December 31,
2012) 31, 2013) 2013)
MRT 20% 65% 65% 20%
Marje Minerals 0% 6% 0% 0%
Pan American 80% 29% 35% 80%

For fiscal 2013, the joint venture with MRT generated net cash flows to the Company of $1,894,000.

We expect that certain capital improvements, including an improved water collection system and the construction of a small water reservoir adjacent to the Cieneguita mill, along with the addition of a conditioner, a disc filter, additional flotation cell capacity and a conventional thickener, should result in increased production to approximately 800 tons per day from the current rate of 715 tons per day rate at the end of fiscal 2013. Monthly gold and silver production reporting to the sulfide bulk concentrate at Cieneguita rose from 629 oz Au and 36,517 oz Ag to 641 oz Au and 76,079 oz Ag during fiscal 2013. The production rose from 587 tonnes milled per day to 788 tonnes milled per day by the end of fiscal 2013.

Gross revenue derived from the pilot project pursuant to the Joint Venture Agreement for fiscal year 2013 was $16,194,000 compared to $10,510,000 for fiscal 2012, an increase of 54%. Net of operating costs, the Company’s net cash flow from pilot project, was $1,894,000 for fiscal 2013 compared to $794,000 in fiscal 2012, an increase of 139%. This was primarily due to the efforts of the Company in renegotiating the Joint Venture Agreement with MRT and obtaining the improved business terms discussed above. The increase was also due to increase in the production rate at the pilot plant, increased efficiencies in the overall operation and higher availability of the milling facilities resulting from the amendments of the Joint Venture Agreement.

Additional pre-stripping costs of $1,003,000 were incurred as operating costs in the last two quarters of fiscal 2013 for preparing the pilot project. Pre-stripping refers to removing overburden covering the ore materials from the mining areas prior to mining and preparing land for mineral processing. This pre-stripping impacted the Company’s working capital position as of the end of fiscal 2013. Without the expense of this additional pre-stripping, the Company’s working capital position would have been much higher. These costs are booked as current operating costs, even though they are in the nature of a pre-paid expense relating to minerals that will be processed in the future. The additional pre-stripping increased in fiscal 2013 as mineral processing operations moved to a new area in the mine at the pilot project. We believe these increased pre-stripping costs incurred in the last two quarters of fiscal 2013, will defray costs of stripping in the first two quarters of fiscal 2014. Therefore, we expect the working capital position of the Company to benefit in the next two quarters by a similar amount. .

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Financing Needs

The term of the pilot project ends in December 31, 2013. We may extend the term of the Joint Venture Agreement with the goal of reducing our future equity financing needs to support our future development of the Cieneguita Project.

After the term of the pilot project ends, the Company will earn 80% and MRT will earn 20% of the net cash flow interest earned from the extraction and processing of mineralized material from the Cieneguita Project, if any, whether by extension of the pilot operation thereafter operated by the Company, or from the development of a much larger, commercial operation. The results of the PEA are expected to be released during the second quarter of 2013. We have summarized some of the preliminary work from the PEA to date, which can be found on our website, www.panamgoldfields.com, under the “Recent News” section, March 13, 2013. We believe the preliminary data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project. We, however, can make no assurances regarding the final results of the PEA, which is being conducted by a third-party engineering firm.

For the fiscal year ending February 28, 2014, our current operating budget is based on receiving a minimum of $1,200,000 from the pilot project. We believe we will receive more than $1,200,000 from the operations of the pilot project, but we have prepared a conservative operating budget to allow for unexpected operating issues at the pilot project. We may also need capital to pay our outstanding accounts payable or to pursue a feasibility study for the Cieneguita Project.

In the event that the PEA shows a mineral deposit at the Cieneguita Project, of which there is no guarantee, we would need to raise additional capital to prepare a feasibility study and put the Cieneguita Project into production, if so warranted, or, alternatively, pursue the possibility of selling the property. The amount of additional capital we would need is indeterminable at this time until we receive the final PEA results.

In the event that we should find a mineable reserve at the Cieneguita Project, it is management’s intention to contract the mining and milling of any mineralized reserves out to third parties. We do not have any known reserves at this time at the Cieneguita Project.

Exploration Projects – Current Status

Our exploration activities in 2012 focused on the Cieneguita Project. A small reconnaissance drill program was completed in the Piedras Blancas area, approximately 500 meters south of the Cieneguita deposit. The best intercept was hole SM-06 with 39 meters averaging approximately 0.84 g/t Au eq. The next phase of drilling is to focus on the Cieneguita deposit and will consist of infill drilling and defining the southeastern boundaries of the Cieneguita deposit.

In December 2011, we hired Dr. Fedor Zhimulev, MSc., PhD Honors as our chief geologist. He was a former senior researcher at the Sobolev Institute of Geology and Mineralogy and has extensive experience conducting fieldwork. From 2009 to 2011, he was appointed as leader of the Sobolev Institute’s Junior Scientists Community, and last year was awarded the Academican Sobolev prize for junior scientists from the Siberian Branch of the Academy of Sciences. Dr. Zhimulev will work with Alexander Becker PhD, who retains actual management of our exploration programs.

Cieneguita Preliminary Economic Assessment (PEA)

We commenced work on the Cieneguita PEA compliant with Canadian National Instrument 43-101 in October 2011. We retained M3 Engineering, Tucson, Arizona, based on the firm’s extensive recent and relevant experience with mining projects in Mexico. It is anticipated that the results of the PEA will be available in early June 2013.

We expect to finalize the PEA for the Cieneguita Project in June 2013. We have summarized some of the preliminary work from the PEA to date, which can be found on our website, www.panamgoldfields.com, under the “News” section, March 13, 2013. We believe the preliminary data supports a decision to proceed with the completion of a full feasibility study to show the potential of the Cieneguita Project.

Critical Accounting Estimates

The preparation of our financial statements requires management to make various judgments with respect to estimates and assumptions. On an ongoing basis, management regularly reevaluates its estimates and assumptions; however actual amounts could differ from those based on such estimates and assumptions.

We have made certain accounting estimates that have a material bearing on our financial statements. The most significant estimates are:

Mineral property costs

We have been in the exploration stage since March 1, 2004, and until recently have not realized any significant revenues from the Company’s planned operations. We are presently engaged in the acquisition and exploration of mining properties. Mineral property exploration costs are expensed as incurred. When it has been determined that a mineral property can be economically developed as a result of establishing proven and probable reserves, the costs then incurred to develop such property, are capitalized. Such costs will be amortized using the units-of-production method over the estimated life of the probable reserve. If mineral properties are subsequently abandoned or impaired, any capitalized costs will be charged to operations.

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Impairment or disposal of long-lived assets

We account for the impairment or disposal of long-lived assets according to ASC
360 “Property, Plant and Equipment”. ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimate fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.

Stock based compensation

All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued. Stock options and warrants are valued at their fair value utilizing the Black-Scholes option-pricing model.

RESULTS OF OPERATIONS

Year ended February 28, 2013 compared to the year ended February 29, 2012.

In this discussion of our results of operations and financial condition, amounts, other than per-share amounts, have been rounded to the nearest thousand dollars.

The pilot project operations being conduct by MRT at our Cieneguita Project produced 6,487 ounces of gold and 646,586 ounces of silver in bulk concentrate during the year ended February 28, 2013 (“fiscal 2013″), compared to and 5,732 ounces of gold and 309,383 ounces of silver in bulk concentrate for the year ended February 29, 2012 (“fiscal 2012″), an increase of 13% and 109%, respectively. The following is the information on the mineralized materials processed and average sale price of metals received for fiscal 2013 and fiscal 2012.

Mineralized Materials Processed

Bulk
Feed Feed Minerals Concentrate
Grade Grade Processed Produced
(g/t) Au (g/t) Ag Recovery (%) Au Recovery (%)Ag (tonnes) (tonnes)

Fiscal 2013 1.11 130 92.8 94.3 200,639 19,284
Fiscal 2012 1.54 82 89.10 90.32 129,915 12,187

Average Price Received

Gold Silver Lead
(per ounce) (per ounce) (per tonne)
$ $ $
Fiscal 2013 1,636.84 30.12 2,079.38
Fiscal 2012 1,614.49 35.24 2,237.12

This information was provided to us by MRT pursuant to the terms of the Joint Venture Agreement. Under the Joint Venture Agreement, MRT is responsible for processing and selling the concentrate from the pilot project. We are entitled to receive 29% of the net cash flows from the pilot project operations from March 1, 2012 to December 31, 2012, 35% of the net cash flows from January 1, 2013 to December 31, 2013 and 80% of the cash flows after December 31, 2013. We do not have any direct agreement with any third party regarding the sale of concentrate from the pilot project being conducted at the Cieneguita Project.

Revenues

The pilot project generated approximately $4,859,000 million in revenues allocable to us for fiscal 2013 as compared to approximately $2,102,000 for fiscal 2012, an increase of 130%. MRT sold concentrate from the pilot project and pursuant to the terms of the Joint Venture Agreement, we receive a portion of the net cash flows.

During November and December 2012, approximately $500,000 worth of concentrate was stolen while being shipped for processing. During December 2012, MRT revamped its security procedures and changed its shipping methods to prevent further incidents.

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Gross Margin

Our gross margin for fiscal 2013 was approximately $2,978,000 for fiscal 2013 as compared to approximately $1,275,000 for fiscal 2012, an increase of 130%. The increase was primarily attributed to increased revenues received from the operations of the pilot project.

General and Administrative Expenses

The following table shows general and administrative expenses by operating
segment during fiscal 2013:

Mexico Argentina Mongolia Corporate Sub total Cieneguita Total
Operations
Selling
expenses $ – $ – $ – $ – $ – $ 81,172 $ 81,172
Camp costs – – – – – 206,614 206,614
Strip mining – – – – – 425,355 425,355
Consulting
fees – – – 38,630 38,630 – 38,630
Directors’ fee – – – 140,000 140,000 – 140,000
Investor
relations – – – 159,847 159,847 – 159,847
Public company
costs – – – 41,340 41,340 – 41,340
Management
fees – 80,000 – 234,000 314,000 – 314,000
Salaries and
benefits 117,925 – – – 117,925 – 117,925
Office and
miscellaneous 15,731 5,773 – 133,315 154,819 370,006 524,825
Professional
fees 677 9,900 – – 10,577 – 10,577
. . .