PAN AMERICAN GOLDFIELDS LTD

June 27, 2011

Minera Rio Tinto SA

 

Atten: Mr. Mario Ayub

Re: Restructuring of Cieneguita Joint Venture and Ownership Interests

Gentlemen:

This letter (the “Letter Agreement”) constitutes a binding agreement between Pan
American Goldfields Ltd. (“PAN AMERICAN”), a Delaware corporation, and Minera
Rio Tinto SA, a Mexican corporation (“MRT”), concerning the restructuring of a
joint venture agreement and of the ownership interests of PAN AMERICAN and MRT,
as well as other entities, in the Cieneguita project (the “Properties”) in
Chihuahua State, Mexico.

In consideration of the mutual promises and agreements of the parties, including
the efforts of PAN AMERICAN in obtaining financing and capital as well as other
matters, the parties hereby agree as follows:

1.

Restructuring.

The parties hereby agree to amend the agreements and documents currently in
force and relating to the Properties in accordance with the basic terms and
conditions enumerated in Attachment A attached hereto and in accordance with the
provisions of this Letter Agreement (the “Restructuring”).

2.

Definitive Agreement.

The parties shall immediately commence to use their best efforts to negotiate,
finalize and execute definitive agreements, which shall be binding in accordance
with its terms of this Letter Agreement; provided, however, that PAN AMERICAN
shall have the right pending the completion of such definitive agreements to
commence preliminary work and analyses on the Properties and propose preliminary
work plans and budgets for the same, which shall be subject to the approval of
MRT, which approval shall not be unreasonably withheld or delayed. It is
expected that such definitive agreements shall be completed within 60 days of
the date hereof. So long as PAN AMERICAN is negotiating in good faith with MRT,
however, this Letter Agreement shall be binding upon the parties to proceed with
the transactions contemplated herein, and PAN AMERICAN shall have the right to
proceed with expenditures as set forth in the approved preliminary work plans
and budgets and Attachment A. The definitive agreements shall call for a closing
date (“Closing Date”) on or about two weeks from the date of execution of the
definitive agreement. The definitive agreements shall include such terms and
conditions as are common in the industry in an agreement of the type
contemplated, including provisions relating to cash calls, dilution, work plans,
budgets, the rights and duties of the operator and the non-operator(s), etc.

June 27, 2011

Page 2

3.

Termination.

This Letter Agreement may be terminated (a) by mutual written consent of the
Parties hereto or (b) by either Party if the Restructuring is enjoined by a
court or a governmental body.

4.

Closing of the Restructuring.

MRT shall deliver to PAN AMERICAN recordable assignments of any and all
interests in the Properties as called for by Attachment A, and the parties shall
execute such documentation as shall be reasonably necessary to effectuate the
Restructuring, together with such other documentation as may be reasonably
required to give effect to the foregoing. In addition, the following shall
apply:

A.

No Material Obligations.  MRT will not enter into any material obligations
relating to the Properties without the consent of PAN AMERICAN. Material
obligations do not include expenses incurred in the normal course of operations.

B.

Expenses.  Each party shall pay its fees and expenses and those of its agents,
counsel and advisors with respect to the transaction contemplated by this
letter, except that PAN AMERICAN shall pay the reasonable costs of counsel for
the preparation of the original draft of the definitive agreement.

C.

Public Announcements. The parties will work together to coordinate the timing
and language of their respective public announcements.

D.

Facsimile Signatures.  In the event that any signature is delivered by facsimile
transmission, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if facsimile signature page were an original thereof.

E.

PAN AMERICAN operations.  From and after the date of this Letter Agreement, PAN
AMERICAN shall have the right to proceed at its own discretion with activities
and investment in the Properties in accordance with the provisions enumerated
above, and any other operating or developing activities in accordance with
Attachment A, with reasonable consultation with MRT.

F.

Applicable Law.  This Letter Agreement shall be governed by and construed in
accordance with the internal laws of the State of California, and shall be
binding upon the parties hereto, in the United States and worldwide. The federal
and state courts within the State of California shall have non-exclusive
jurisdiction to adjudicate any dispute arising out of this Letter Agreement.

If the above correctly reflects our understanding and agreement with respect to
the foregoing matters, please so confirm by signing this Letter Agreement in the
space provided below, effective as of the date mentioned above.

June 27, 2011

Page 3

Very truly yours,

PAN AMERICAN GOLDFIELDS LTD.

By: /S/ George Young

      Name: George S. Young

      Title: Director

ACCEPTED AND AGREED

As of June 27, 2011

MINERA RIO TINTO SA

By: /S/ Mario Ayub   

       Mario Ayub

Title: President

ATTACHMENT A TO LETTER AGREEMENT

BETWEEN PAN AMERICAN GOLDFIELDS LTD AND MINERO TIO TINTO

TERM SHEET

AMENDED AND RESTATED DEVELOPMENT AGREEMENT

The intent of this Term Sheet is to describe the key terms of an Amended and
Restated Development Agreement by and between Pan American Goldfields, Ltd., a
Delaware corporation (“PAG”), Sunburst Mining de Mexico S.A. de C.V., an entity
organized under the laws of the United Mexican States (“Sunburst”), Minera Rio
Tinto, S.A. de C.V., an entity organized under the laws of the United Mexican
States (“MRT”) and Marje Minerals S.A., an entity organized under the laws of
the United Mexican States (“MM”).

The Amended and Restated Development Agreement will supersede and replace all
existing agreements between the parties in their entirety.

 

Current Project Ownership

Holder

Ownership %

Net Cash Flow % First 15 meters**

Net Cash Flow % for the rest of the project

MRT

54%

74%

54%

MM

6%

6%

6%

PAG

40%

20%

40%

 

Amended Project Ownership

Holder

Ownership %

Net Cash Flow % First 15 meters

Net Cash Flow % for the rest of the project

MRT

20%

74%

20%

MM

0%

6%*

6%

PAG

80%

20%*

80%

*See terms of MM Net Cash Flow

** Based on the topography as it existed in February of 2009

 

The first 15 meters will remain the mining production from the Cieneguita
Property to a maximum depth of 15 meters.  Provided, however, that MRT in
conducting those operations shall not unreasonably interfere with the
feasibility study or development of the project.  It is further provided that,
according to mine plans and sections submitted on a quarterly basis in advance
by MRT to PAG, and subject to the reasonable approval by PAG, MRT may mine up to
a total of 120,000 tons below the 15 meter limit, in which case the percentage
for MRT shall be 54% and for PAG 40% and 6% for MM.  Any amount mined by MRT
over and above the 120,000 tons as approved by PAG shall be 20% for MRT and PAG
74%, and 6% to MM.   It is also provided further, that no operations by MRT on
the first 15 meters may take place at any time after December 15, 2012, and
following such date, the ownership percentages of the parties in both the first
15 meters and in the rest of the project shall be 80% PAG and 20% MRT, subject
to any dilution that may have taken place on or before such time as described
below.  

Initial elevation at the area where mining has been done is 2074. Below 2059,
PAG will receive 40% of net cash flows.

Feasibility Study

PAG shall promptly commence a feasibility study for the Cieneguita Property.
 PAG and MRT shall be responsible for the cost of the feasibility study on a pro
rata basis based on their respective amended ownership percentages of the
Cieneguita Property.  PAG shall be the operator of the feasibility study and of
the Cieneguita Property and shall bill MRT for its pro rata share of all such
expenditures.  MRT shall make its payments for its pro rata share of feasibility
study and development expenditures first from the net revenues allocable to it
from the operations on the first 15 meters, with the balance, if any, required
to be contributed coming from corporate funds of MRT.  The definitive agreement
will provide the terms and conditions relating to submittal, approval by
management committee, performance, and completion of work plans and budgets and
of the feasibility study.  

In the event that either PAG or MRT fails to fund its pro rata portion of the
feasibility study or any development expenditure when due,  the non-contributing
partner will have its ownership interest in the Cieneguita Property decreased by
one percent (1%) for every $100,000 invested on its behalf by the  other
partner.

MM Transaction

PAG and MM will enter into agreements to accomplish the following transactions:

1.  PAG will issue MM 3,333,333 shares of restricted Common Stock in exchange
for its 6 % ownership interest in the Cieneguita Property (not including the
right to receive revenues attributable to 6% of operations from mining, if any,
through December 31, 2012).

2.  MM will assume, or create a new entity in British Columbia or elsewhere that
will assume, all outstanding debt owed by PAG to Mr Ayub, MRT and Robert Knight
(approximately $490,730), in such a way that, as of closing of the
restructuring, will result in any and all liability relating to such debt being
removed from the books of PAG. .  

3.  In exchange for the debt assumption as described in 2 above, and in addition
to receiving 6% of the monthly Net Cash Flows, if any, from mining until
December 31, 2012 as described in 1 above, MM will also receive, directly, half
of all monthly Net Cash Flows the Company is entitled to receive from mining
until the sooner of December 31, 2012 or the date on which the aggregate amount
of Net Cash Flows from half of the Company’s portion so received by MM equals
$490,730.  Thereafter, MM’s shall only be entitled to the 6% until December 31,
2012

4. The above mentioned assumption of debt owed by PAG to Mr. Ayub, MRT and
Robert Knight will be in full satisfaction including any and all accrued
interest with respect to the outstanding debt.

Co-Sale, Drag Along Right and Right of First Refusal Agreement

PAG and MRT will enter into a Co-Sale, Drag Along and Right of First Refusal
Agreement relating to any bona fide, third party industry standard offer or
proposal to buy or sale, which provides:

1.   If PAG places its ownership interest in the Cieneguita Property up for
sale, MRT must, if directed by PAG, agree to offer to sell its ownership
interest to any bona fide third party buyer on the same terms as are being
offered by PAG.

2.  If PAG elects to sell its ownership interest in the Cieneguita Property, MRT
will be required to sell its ownership interest if offered similar terms based
on its pro rata ownership.

3.  If MRT elects to sell its ownership interest in the Cieneguita Property, it
must offer PAG a first right to purchase the ownership interest.

Property Payments

PAG, MRT and Corporativo Minera (the Cieneguita land owner) will confirm the
amounts received by Corporativo Minera and any outstanding amounts currently
owed to Corporativo Minera.  MRT shall be obligated to pay any past due
outstanding amounts owed to Corporativo Minera, and shall continue to pay
Corporativo Minera from 100% of the revenues derived from the first 15 meters of
production, prior to deducting any other operating expenses or making any
payments to participants, in order to meet the payments as required under the
terms of the existing agreement with Corporativo Minera, including any and all
royalties due and owing as of the time of the receipt of such revenues as well
as any and all advance royalties due and accruing as of such time.   It is
anticipated that such payments will, commencing July of 2011, be made pursuant
to a new agreement with Corporativo Minero, at the rate of $30,000 per month.
 As long as MRT operates the operation over the first 15 meters, MRT shall
provide such payments.  As soon as MRT discontinues such operations permanently,
which may occur before December 31, 2012, any balance still due to Corporativo
Minera shall be paid by the joint venture as a joint venture expense, the
failure to contribute for which will result in  dilution of a party’s interest
pursuant to the definitive agreement at the rate of one percent (1%) for every
$100,000 paid by the non-diluting party.

Auditing Rights

PAG shall have customary auditing rights over the operations on the first 15
meters, including rights to audit MRT’s books and records regarding production
and mineral sales derived from the Cieneguita Property and rights to audit MRT’s
mining practices in accordance with applicable law, required permits and best
practices, and to survey and measure production and the extent and depth of the
operations.

First 15 Meters

MRT must withdraw and complete reclamation to the satisfaction of all applicable
laws, regulations and regulatory and governmental entities of all of its mining
operations, equipment and facilities from the Cieneguita Property by December
31, 2012 (except to the extent directed by PAG in connection with the possible
use of any such facilities or equipment in the Cieneguita Property development)
, which shall include reclamation of mined lands and removal of all plant and
equipment (except to the extent directed by PAG).  

Mining Operations

MRT shall conduct its operations at the Cieneguita Property on the first 15
meters accordance with applicable law, required permits and best practices.  MRT
shall be responsible for any liabilities, damages and costs incurred as a result
of its failure to comply with applicable law, required permits and best
practices, and shall indemnify and hold harmless PAG from and against any and
all such damages or liabilities.  At PAG’s request, MRT shall insure against or
provide appropriate bonding to cover any potential exposure of PAG to any such
potential liabilities or damages.  In the event that PAG suffers any loss as a
result of the failure of MRT to operate in accordance with the requirements
outlined above, MRT may at its option allow such loss to be charged against the
interest of MRT in the Cieneguita Property at the rate of $100,000 per 1% of
ownership, or alternatively, provide repayment from MRT’s Net Cash amounts
attributable to its operations on the 15 meters or from the Cieneguita Property
once the project is in operation, failing which, PAG make a claim against MRT
for such amounts   The definitive agreement shall provide for the terms and
conditions under which MRT may ultimately be released from any further liability
as a result of its operations.