UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.20549





Form 10-K/A





(Amendment No. 1)





þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended February 28, 2011





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from ____ to _____





Commission file number:000-23561


___________________________





PAN AMERICAN GOLDFIELDS LTD.


(Exact name of registrant as specified in its charter)





Delaware

84-1431797(State or other jurisdiction of incorporation)

(IRS Employer Identification Number)595 Howe Street, Unit 906

Vancouver, BC
V6C 2T5(Address of principal executive offices)
(Zip Code)




Registrant’s telephone number, including area code: (604) 681-1163





Securities registered under Section 12(b) of the Act:





None





Securities registered under Section 12(g) of the Act:





Title of Each Class                                                                           Name of Each Exchange on Which Registered


Common Stock, par value $0.01 per share                                                       None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.


Yes o No þ





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.


Yes o No þ





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.


Yes þ No o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes o No o





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o




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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.





Large accelerated filer o                                                                                     Accelerated filer o





Non-accelerated filer o(Do not check if a smaller reporting company) Smaller reporting company þ





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ





The aggregate market value of voting Common Stock held by non-affiliates of the Registrant, based upon the average of the closing bid and asked price of Common Stock on the OTC Bulletin Board system on August 31,2010 of $0.26 was approximately $14,040,995.





As of June 13, 2011, the Registrant had 61,118,826 shares of Common Stock issued and outstanding.




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EXPLANATORY NOTE





This Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) to the Annual Report on Form 10-K for Pan American Goldfields Ltd. (“we” or the “Company”) for the fiscal year ended February 28, 2011, initially filed with the Securities and Exchange Commission (the “SEC”) on June 13, 2011 (the “Original Filing”), is being filed in connection with comments received from the staff of the SEC regarding the description of our business in accordance with Industry Guide 7.





For the convenience of the reader, this Form 10-K/A sets forth the Original Filing in its entirety. However, this Form 10-K/A only amends and restates the Original Filing, in each case, solely as a result of, and to reflect, the comments of the SEC. This Form 10-K/A has not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 15 of the Original Filings has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and are attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to this report.





Except for the foregoing amended information, this Form 10-K/A continues to speak as of the dates of the Original Filing, and the Company has not updated the disclosures contained herein to reflect events that occurred at a later date. Other events occurring after the filings of the Original Filing or other disclosures necessary to reflect subsequent events will be addressed in any reports filed with the SEC subsequent to this filing.




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PART I





ITEM 1. DESCRIPTION OF BUSINESS





Background





We are an exploration stage company focused on mineral exploration activities in Mexico and Argentina. Through our wholly owned Mexican subsidiary, Sunburst Mining de Mexico, S.A. de C.V., (“Sunburst”), we are currently engaged in the exploration oftwo gold and silver projects, named the Cieneguita Project and the Encino Gordo Project, each made up of several mining concessions, located in the Sierra Madre region of the State of Chihuahua, Mexico. We are also engaged in the exploration of a gold project located in Argentina, named the Cerro Delta Project.We previously owned another project in Mexico known as the Guazapares Project, which we agreed to sell pursuant to the terms of a definitive agreement, dated July 10, 2009, to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount Gold and Silver Corp., for a total consideration of up to $5.3 million.





To help support our exploration activities, we entered into a development agreement with Minera Rio Tinto, S.A. de C.V. (“MRT”), a mining operator in Chihuahua, Mexico, which is owned by our Chairman, Mario Ayub.  Under the development agreement, we authorized MRT to commence a small scale milling operation at our Cieneguita Project.  As of February 2011 ,MRT’s start-up operations had progressed as planned, and all essential systems and construction for initial plant facilities for crushing, gravity and flotation circuits were complete. Operations had also commenced for one 12-hour shift per day with a processing rate up to 550 tons per day.  The terms of our arrangement with MRT are discussed in detail below.





Recent Developments





On May 3, 2011, we appointed Dr. Alexander Becker as advisor to our board of directors, who has a Ph.D. in Structural Geology, and an extensive, history as an exploration geologist. He was a director of Perseus Mining Limited when it was formed in 2002 and identified and acquired the original assets of Perseus spin-out Manas Resources. He was also Vice President Exploration, Asia, for Apex Silver Mines, which went on to accumulate one of the largest, privately controlled portfolios of silver exploration properties in the world at that time. He is also credited with identifying the gold potential of a known antimony occurrence called the Chaarat, where a 4.4 million ounce gold resource was subsequently outlined. Dr. Becker has advised a variety of companies including Santa Fe Gold prior to its acquisition by Newmont and BarrickGold (Asia). He was a senior scientific researcher at Ben Gurion University and won the Peres Award for tectonic research. Dr. Becker has authored numerous papers in international scientific journals including Geological Society of America, Tectonophysics, Structural Geology, and International Geology Review.





In March 2011, we appointed Bruno Le Barber as a member of the board of directors. Mr. Le Barber has extensive financial expertise and is a co-founder of Vortex Capital (“Vortex”), a Hong Kong based gold fund. Previously he was a Vice President at Morgan Stanley in London where he advised trading desks and a large investor base while publishing macro-economic studies. Mr. Le Barber was also a global technical strategist with ABN Amro in Paris.He manages Vortex together with Emilio Alvarez, former Executive Director, Equity Research with Morgan Stanley in London.





In February 2011, weentered into an agreement with Compañia 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 are required to pay $150,000 upon signing (paid) 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. The vendor will retain a 1% NSR.





In conjunction with the acquisition of the Cerro Delta project, we completed a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,312,000. Each unit consisted of one share of common stock and a warrant to purchase one share of common stock. Each warrant is exercisable for one share of common stock at an exercise price of $0.30 per share for a period of two years from the closing date.





In October 2010, we appointed Miguel F. Di Nanno as President and Chief Operating Officer, replacing George Young effective as of October 15, 2010. Mr. Young remains on our board of directors. Mr. Di Nanno is an Argentina-based mining engineer with extensive mining experience in Argentina. He was the Country Manager in Argentina for Phelps Dodge Corporation developing the Arroyo Cascada Gold deposit, an early stage gold exploration project in Chubut Province he was also Commercial Development Manager, Argentina for the Queensland Government and the COO in Argentina for the Grosso Group. In the areas of acquisition, development and exploration, his clients included MIM Exploration, developing a comprehensive regional geological study of northern Patagonia in Argentina; COMINCO,





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cooperating on a metallogenic Patagonia zone data base; Viceroy Resources, working on the acquisition of gold exploration projects in  such as Cerro Choique, a disseminated gold deposit and others; Cyprus Minerals; Mauricio Hochschild, collaborating on issues related to permitting of the San Jose project; Bema Gold;, and Northern Orion, acquisition of polimetallic projects in Chubut Province. Mr. Di Nanno is credited with discovering the 3.2 million oz gold Aeropuerto deposit in Chubut Province when he was the Zone Manager for Canyon Resources. The Aeropuertodepositwas later renamed Esquel. He has a degree in Mining Engineering – Ore Dressing from the National University of San Juan - Argentina.





In July 2010, we appointed Neil Maedel, Randy Buchamer and Gary Parkison to our board of directors. Mr. Maedel is an investment banker specializing in international resource projects; Mr. Buchamer has extensive experience in business administration and finance; and Mr. Parkison is qualified geologist and project manager with expertise in exploration and development of minerals and metals projects.  He is credited with the Terrazas discovery – now one of Mexico’s largest silver-zinc deposits, and he identified and outlined the San Javier the largest iron oxide copper gold deposit found to date in Mexico.  All of the newly appointed directors have technical and financial industry experience base that will assist us with operations and our planned listing on either the Toronto Stock Exchange or the TSX Venture Exchange, consistent with our status as a producing resource company.





In July 2010, we reincorporated from the State of Colorado to the State of Delaware. The reincorporation was effected pursuant to an agreement and plan of merger (the “Merger Agreement”), by and between us and Pan American Goldfields Ltd.,a Colorado corporation (formerly Mexoro Minerals Ltd.), with Pan American Goldfields Ltd. (“Pan American”) being the surviving corporation. Accordingly, the rights of our shareholders are now governed by Delaware General Corporation Law and the certificate of incorporation and bylaws of Pan American filed with the State of Delaware.





In May 2010, management decided to drop the Sahuayacan project when results from a drilling program indicated that the main auriferous zone at the project did not contain economic concentrations of gold. By dropping this exploration project we eliminate any future concession payments on this project.





In May 2010, Mr. Francisco “Barry” Quiroz and Mr. John Clair resigned from our board of directors. Neither director resigned as a result of a disagreement with us on any matter relating to our operations, policies or practices.





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Market Overview





Chihuahua, Mexico:The Chihuahua region of Mexico is currently attracting significant mineral exploration, development and mining activities. Propelled by advances in mining technology and a resurgence of the global gold markets, a number of intermediate and major companies have returned to or commenced mining activities in this region, including: the San Miguel Project operated by Paramount Gold, the Pinos Altos Project operated by Agnico Eagle and the San Miguel Project operated by Paramount Gold. The map below shows the location of our Cieneguita and Encino Gordo Projects within the Sierra Madre Sierra region of the State of Chihuahua, Mexico.










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Argentina (Maricunga Belt):  Similar the Chihuahua region in Mexico, in response to higher prices and improved methods of precious and base metals extraction, a number of exploration and mining projects are being pursued in eastern Argentina, in a region known as the Maricunga Belt. The Maricunga belt is approximately 20 miles wide and 120 miles long.  The two largest discoveries to date in the Maricunga Belt are the Cerro Casale and Caspiche Projects.  Our Cerro Delta Project is located in the east portion of the Maricunga Belt, in Argentina. It is approximately 12 miles to the east of the Cerro Casale Project, which is in Chile.  The map below indicates the location of our Cerro Delta Project:










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Our Strategy





Since taking effective management and board control of the company in 2010, Pan American has attracted an exceptional team of established explorationists and mine developers. Our strategy is to leverage this considerable capability, by searching, finding, acquiring and eventually developing major exploration assets in Mexico and South America. Our Cieneguita Project is our most advanced stage project. Using the considerable skill set we have available, our plan is, as economically as possible, to eliminate or if of sufficient merit, acquire and develop additional precious metals exploration and development projects. The priority is to identify projects with significant potential coupled with cost efficiency; that is where we can advance dramatically or eliminate an exploration project at minimal cost. The initial drilling at the Cerro Delta, for example is expected to cost approximately $700,000.





In Mexico, we have mineral concession rights for two Projects, Cieneguita and Encino Gordo. In Argentina we have one project called the Cerro Delta Project.  Each of our three projectsis located near pre-existing or starting operations of large mining corporations. The presence of the existing mining companies already operating in the area or new mining companies commencing operations creates the prospects for us to either enter into development agreements or for such companies to acquire the projects from us outright. Our Cieneguita Project is smaller than the other exploration opportunities we are pursuing.  However, because of what we view of its relative low risk compared to its potential value to the Company, a feasibility study is being initiated for our Cieneguita Project.





Our goal is to establish a pipeline of two new drill-stage or near-to-drill stage projects per year. Our proposed exploration program consists of three main components:





·
Create a pipeline of quality properties providing a steady stream of new prospects and/or projects to explore, contract-out and/or enter into development agreements with other mining companies in South America and Mexico.





·
Identify and acquire at low cost early to mid-stage properties in selected locations along the main gold-silver belts in the Americas.





·
Focus on medium-sized gold and/or silver deposits (minimum deposits containing 2,000,000 ounces gold-equivalent).





The proposed exploration program is being undertaken by our exploration team using in-house knowledge along with the support and guidance of consultants with expertise in these regions. We believe our existing management team and key advisors have the necessary exploration and mining expertise to locate, evaluate and bring mining properties to production.





For our Cerro Delta Project, we entered into an agreement with Compania 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. This project is drill ready and we believe it is a high impact exploration project which contains a large anomalous gold zone and other similarities to other deposits in the area. We anticipate working aggressively on this property in concurrence with our work in Mexico. See Cerro Delta below.





We are continuing to evaluate potential new projects, but we currently do not have sufficient funds to implement our strategy of establishing two new drill-stage or near-to-drill stage projects per year.





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Our Cieneguita Project





Summary





Our Cieneguita Project is located in the Baja Tarahumara in Cieneguita Lluvia De Oro, an area of canyons in the Municipality of Urique, in southwest Chihuahua, Mexico. The concessions on the Cieneguita Project cover a total area of 822 hectares (approximately 2,031 acres). A new gold discovery was made by our wholly-owned subsidiary Sunburst de Mexico in early 2008. As a feasibility study has not been completed nor is there any assurance that one can be successfully completed, there are no known reserves on the Cieneguita Project.





Property Ownership





The property associated with our Cieneguita Project is currently owned by Corporativo Minero. Our wholly-owned subsidiary, Sunburst, with the permission of Corporativo Minero, obtained an exclusive option to acquire the Cieneguita property for $2 million. We are required to make yearly payments to Corporative Minero on May 6th of each year in the amount of $120,000 until the outstanding balance owed on the $2 million is paid in full to keep the option in good standing. ,In the alternative, when the Cieneguita Projectis put into production, we are required to pay Corporativo Minero $20 per ounce of gold produced from the Cieneguita Project, in lieu of the yearly payment of $120,000, until we pay Corporativo Minero an aggregate of $2 million.  In the event that the price of gold is above $400 per ounce, the payments payable from production will be increased by $0.10 for each dollar increment the spot price of gold trades over $400 per ounce. The total payment of $2 million does not change with fluctuations in the price of gold. Non-payment of any portion of the $2 million total payment will constitute a default, in which case we will lose our rights to the Cieneguita property and the associated concessions, but we will not incur any additional default penalty.  Because of the mining operations being conducted by MRT at the Cieneguita Project discussed below, we are currently paying Corporativo Minero based on the gold being produced from the Cieneguita Project.





As of June 2011, we have paid $980,000 to Corporativo Minero. Once the full $2 million payment has been made, we will own the Cieneguita property and we will have no further obligation to Corporativo Minero. Corporativo Minero has the obligation to pay, from the funds they receive from us, any royalties that may be outstanding on the properties from prior periods. Corporativo Minero has informed us that there were royalties of up to 7% net smelter return (“NSR”) owned by various former owners of the Cieneguita property. They have informed us that the corporations holding those royalties have been dissolved and that there is no further legal requirement to make these royalty payments. We can make no assurance that these former owners will not contend that we are ultimately responsible to pay all or some of the 7% NSR to these former royalty holders if the Project was ever put into production and Corporativo Minero did not make the payments to the royalty holders. MRT no longer has any ownership interest or payment obligations with respect to the Cieneguita property. There is no affiliation between Corporativo Minero and Pan American or its officers, directors or affiliates.





Development Agreement and Project Ownership





To help fund our exploration activities, we entered into a development agreement with MRT in February 2009, which we amended in December 2009. Pursuant to the terms of the development agreement, as amended, MRT has agreed to invest up to $8 millionto initiate the first phase of productionand to complete a feasibility study on the Cieneguita Project. The first phase of production is limited to the mining of the mineralized material that is available from the surface to a depth of 15 meters (“First Phase Production”). In exchange, we assigned MRT a 74%interest of the net cash flows from First Phase Production and a 54% ownership interest in the Cieneguita project.





To fund our continued operations, we issued $1.5 million of convertible debentures in March 2009, of which an aggregate of $880,000 was issued to Mario Ayub, one of our directors, and to his affiliated entity, MRT. Pursuant to the terms of the convertible debentures, the holders irrevocably converted the debentures into a 10% ownership interest in the Cieneguita Project and a 10% interest in the net cash flow from First Phase Production. In December 2009, Mario Ayub and MRT agreed to resell an aggregate 4% ownership interest in the Cieneguita Project back to us, along with 4% of the net cash flow from First Phase Production, in return for $550,000. In a private transaction not involving us, the other holders contributed their remaining 6% ownership interest in the Cieneguita Project to a newly formed entity, Marje Minerals SA (“Marje Minerals”).





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As a result of our amended development agreement and our agreements with the debenture holders, the ownership interest in the Cieneguita project and the net cash flows from the First Phase Production are held by us, MRT and Marje Minerals as follows:





Holder

Ownership Percentage

Net Cash Flow Interest From First Phase Production

Net Cash Flow Interest Following First Phase ProductionMRT

54%

74%

54%Marje Minerals

6%

6%

6%Pan American

40%

20%

40%





Any additional costs for the First Phase Production and the feasibility study for the Cieneguita project, after MRT invests $8million, will be shared by us, MRT and Marje Minerals on a pro-rata basis based on their respective ownership percentages in the Cieneguita project.





The major terms of the development agreement with MRT and Marje Minerals are as follows:





·
MRT purchased $1 million of secured convertible debentures at 8% interest (payable in stock or cash). The proceeds from this investment were used for continued exploration and development of the Cieneguita Project and general working capital. In November 2009, MRT exercised its conversion rights on the debenture and MRT was issued 3,333,333 common shares and a warrant to purchase 1,666,667 shares of common stock at an exercise price of $0.50 per share.





·
MRT agreed to provide the necessary working capital to begin and maintain mining operations, estimated to be $3 million, to put the first phase of the Cieneguita Project into production. In exchange for these funds, we assigned MRT an interest to 74% of the net cash flow from First Phase Production. The agreement limits the mining during First Phase Production to the mineralized material that is available from the surface to a depth of 15 meters.





·
MRT committed to spend up to $4 million to take the Cieneguita Project through the feasibility stage. In doing so, we would assign MRT a 54% interest in our rights to the Cieneguita Project. After the expenditure of the $4 million, all costs will be shared on a pro-rata ownership basis (i.e. 54% to MRT, 40% to us and 6% to Marje Minerals). If any party cannot pay its portion of the costs after the $4 million has been spent, then their ownership position in the Cieneguita project will be reduced by 1% for every $100,000 invested by the other owners. Our ownership interest in the Cieneguita project, however, cannot be reduced below 25%. In addition, we have the right to cover Marje Minerals’ pro rata portion of costs if they cannot pay their portion of the costs. In return, we will receive 1% of Marje Minerals’ ownership position in the Cieneguita Project for every $100,000 we invest on their behalf.





·
The MRT agreement was contingent on our repaying a debenture to Paramount. In March 2009, we repaid $1 million, or approximately two-thirds of the debt, and Paramount released a security interest it had on the Cieneguita project. In October 2009, we repaid the remaining amount of the debt, and Paramount released its security interests on the Sahuayacan, Guazapares and Encino Gordo properties.





Current Operations





Under the development agreement, we authorized MRT to commence a small scale milling operation at our Cieneguita Project.  As of February 2011,MRT’s start-up operations had progressed as planned, and all essential systems and construction of the initial plant facilities for crushing and gravity and flotation circuits were complete. Operations had also commenced for two 12-hour shifts per day with an approximate processing rate of 700 tons per day. As reported by the Company, MRT has periodically experienced water supply problems during the dry season that has forced it to limit or curtail the processing of ore.  MRT’s right to conduct mining operations at our Cieneguita Project terminates on December 31, 2012.  MRT is required to comply with applicable environmental laws and permits in conducting its operations at the Cieneguita Project.





All the plant and equipment utilized by MRT at the Cieneguita Project were paid for and are owned by MRT.  Because MRT has a limited time on which to conduct operations at the Cieneguita Project (i.e., through December 31, 2012), MRT primarily utilizes used mining equipment that is more than 10 years old.  MRT has also constructed and operates a tailings pond at the Cieneguita Project.  Under the development agreement, MRT is required to remove all of its equipment from the Cieneguita Project at the end of 2012.  As part of that obligation, MRT is required to remediate the tailings pond in accordance with applicable environmental laws by the end of 2012.




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Under the development agreement, MRT is responsible for all mining operations though the sale of concentrate.  MRT starts with primary ore mined from an open pit mine at the west end of the Cieneguita Project. In Cieneguita de los Trejo, Chihuahua, MRT produces a bulk sulfide flotation concentrate that it later ships to Choix Sinaloa, for cleaning and production of a saleable lead concentrate containing gold and silver.  In accordance with the development agreement, MRT pays the Company 20% of the net cash flows from MRT’s mining operations at the Cieneguita Project.  The revenues earned by the Company are the result of the extraction and sale of minerals from the Cieneguita Project, and are not incidental income related to the Company’s exploration activities.





Property Location





Cieneguita is located in the Baja Tarahumara in Cieneguita Lluvia De Oro, an area of canyons in the Municipality of Urique, in southwest Chihuahua State, Mexico. The property is located within one half mile of the small village of Cieneguita Lluvia de Oro. Access to the property is by an all-weather dirt road.





The concessions of the CieneguitaProject cover a total area of 822 Hectares (approximately 2,031 acres).The following table is a summary of the concessions on the Cieneguita Project:





Lot Name

Title Number

Area (Ha)

Term of ValidityAurifero

196356

492.00

7/16/1993 to 7/15/2043Aurifero Norte

196153

60.00

7/16/1993 to 7/15/2043La Maravilla

190479

48.00

4/29/1991 to 4/24/2041Aquilon Uno

208339

222.00

9/23/1998 to 9/22/2048





Claim Status and Licensing





In April 2006, we applied to the Mexican government for a change of use of land permit for 30 hectares of the La Maravilla concession. The La Maravilla concession is the concession that contains the mineralized rock that is the interest of our exploration. We are currently extracting mineralized material from the La Maravilla concession as well as our ongoing exploration program. The purpose of the change of use permit was to allow us, if necessary, to extract the rock from this concession for the purposes of processing the rock to extract the precious metals that it may contain. Because the permitting process takes a period of time, we made the application in advance of any known reserves being discovered on the property. We cannot assure you that we will have sufficient ore reserves, if any, to continue extraction. This permit required negotiations with the government and municipality concerning such things as the removal of timber, building and maintaining roads, and reclamation. The government agency responsible for this permit met with representatives of the Company and toured our property in May 2006 as part of the permit process. The application fee for this permit was approximately $800, but there was an additional negotiated fee charged for the permit in the approximate amount of $67,000 (720,000 Mexican Pesos). In January 2007, the government agency issued the change of use permit, and we subsequently made the required payment of approximately $67,000 (720,000 Mexican Pesos).





In July 2006, we submitted an environmental impact study and a risk analysis study to the Mexican government for a permit to build a heap leach mining operation on the Aurifero concession of our Cieneguita Project. The purpose of this permit is to allow us to construct an ore processing facility through heap leach mining methods. We do not have any ore reserves on our Cieneguita Project and applied for permits in advance of any conclusive results. In January 2007, the necessary permits to allow for the building and operation of a heap leach operation were granted to the Company. Currently, the permit has been updated to allow us to build a crushing and floatation mining operation. The permit is valid until 2016 as long as we continue to provide yearly reports to SEMERNANT (the governing Mexican environmental agency responsible for permitting).





History and Geology





The Cieneguita mines were in limited production in the 1990s. Over a four-year period, the Cieneguita Gold Mine was operated by Mineral Glamis La Cieneguita S. De R.L. De C.V. (“Glamis”), a subsidiary of the Canadian company Glamis Gold Ltd. (“Glamis Gold”). According to Glamis’ records, Glamis mined and processed ore on the property in 1995. Glamis stopped production in the mid-1990s. At that time, Corporativo Minero, the operator of the mine for Glamis, acquired the property. MRT entered into an agreement with Corporativo Minero on January 12, 2004 pursuant to which MRT acquired all of the mineral rights from Corporativo Minero to explore and exploit the Cieneguita concessions and to purchase them for $2 million. Under our agreements with MRT, MRT has assigned this agreement to our wholly-owned subsidiary, Sunburst de Mexico.




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Our exploration work shows that the geology in the mineralization in the zone of sulfides includes pyrite, galena, sphalerite, tennantite and tetrahedrite, pirargirite and traces of chalcopyrite and pyrhotite. These minerals mainly occur as uniform disseminations and as micro-veins. The previous exploration drilling by Cominco and Glamis Gold delineated a zone of altered volcanics, represented by silica, sericite and argillite that are believed to be 1,000 meters long (strike length) and up to 200 meters wide. Within this zone, the oxidation has been shallow and reaches a maximum depth of 20 meters.





Glamis Gold performed a test pilot heap leach operation on the property in the mid 1990’s. The exploration on the property is still in its early stages and significant work needs to be completed before any type of ore reserve calculations, if any, could be made. Our operations are currently exploratory. We have done some initial sampling on the La Maravilla concessions as described below.





A total of 51 diamond drill holes (6,700 meters) drilled by Cominco (now Teck Cominco Ltd.) defined an auriferous zone approximately 1,000 meters long by 200 wide. On such a zone, two mineralized structures were drilled during their exploration program in 1981 and 1982. Later, two drilling programs were performed by Glamis: 135 holes were drilled during 1994 and 62 holes were drilled during 1997. Both programs confirmed the delineation of the two mineralized ore bodies. We have had access to these reports from Cominco and Glamis. The initial exploration conducted by our Company will focus on further delineating the oxide mixed mineralized structures and the sulfide structures.





We used the original data from Cominco and Glamis to delineate the mineralized zone and to plan our present trenching and sampling programs. In April 2006, we completed a sampling of the property that included more than 500 meters of deep trenches from which we took comprehensive channel sampling. The trenches comprised 8 trenches approximately 200 meters long and 2 to 10 meters deep spaced equally along the 1,000 meters strike length of the property. From the walls of these trenches, we took approximately 550 rock samples. We sent one half of these samples to ALS Chemex’s laboratory in Chihuahua for assaying. The sampling protocol followed the best mining practices. The purpose of the sampling was to further define the ore grade and potential of the property. The other half of the sample was used to complete column tests to determine the leachability of the precious metals from the rock. Subsequent drilling indicated that the mineralized material was much larger than originally anticipated and that the heap leaching process was not the best method for extracting the precious metals from the bulk of the mineralized material.





Infrastructure





The town site near the former mine has the following services: electrical power from the public utility, cellular phone, radio communication (CB), a health center and a school. Because the property was previously in production, it has existing infrastructure such as power, water, railroad transportation (within 20 kilometers), and all weather road access year round. We have an existing source of well water, which MRT is currently utilizing for the milling process it is conducting on the Cieneguita Project.  Well water has been scarce during the dry season.  There are all weather roads to the area that were previously mined allowing easy access for production and exploration. Also, the haul roads to the milling area have been significantly upgraded and are in good condition.  We are not required to pay fees to use the roads.





If we put the Cieneguita Project into full development, it is our intention to use the existing heap leach pad area to build the mill site and tailings site to help reduce our costs to re-open the mine. Because some of the infrastructure exists, such as roads and pads, we believe that the investment needed to put this mine into production would be smaller than the investment which would be needed for a mine that was never in production. Because other operating mines exist in the area, infrastructure, such as roads, already exists. There is no other equipment or facilities available to us on the property. Further study needs to be done on the feasibility of using the existing infrastructure of the old mine.  We do not own any of the plant or equipment currently be used by MRT to conduct its operations at the Cieneguita Project





Current Exploration





The main exploration activities for the Cieneguita Project are described below:





·
100 diamond drill holes completed for a total of 20,215 meters of drilling;


·
Broad mineralized intercepts identified, including 111.5 meters with 1.24 g/t Au, 99.6 g/t Ag, 0.45% Pb and 0.73% Zn (Drill Hole C-21) and 94 meters with 1.21 g/t Au, 79.8 g/t Ag, 0.78% Pb and 1.2% Zn (Drill Hole CI-30);


·
Mineralization has been traced over 900 meters along strike and still remains open to the southwest and to depth; and


·
Infill drilling program designed to identify size of the mineralized material.





We have conducted a series of exploration programs at Cieneguita since March 2007. The drilling exploration program commenced in December 2007 with one drill rig and a second rig was added in July 2008. The drilling was completed in December 2008.  The figure below shows the location of the 100 diamond drill holes on the Cieneguita Project:




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Assay results and an analysis of the drilling and exploration work are compiled and described in our recently filed Technical Report on National Instrument Form NI43-101 (“NI 43-101”), which wascompleted following the end of fiscal 2010, and is in compliance with the standards and requirements of Canadian security regulatory authorities. The NI 43-101 report is also available on our website, www.panamericangoldfields.com.





The figure below showsthe main mineralization zones our drilling work identified at the Cieneguita Project. Areas in red on the figure represent zones exhibiting mineralization areas where grades are>1.5 g/t Au.









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Planned Exploration





The recent exploration activities in Cieneguita have shown that additional exploration is warranted. Considering the latest results and findings the proposed work program for Cieneguita will include:





·  Completing the infill drilling program by doing an additional 10,000 meters of drilling to further identify and support mineralization zones;





·  Continue conducting metallurgical tests; and





·  Complete feasibility study and;





The proposed exploration budget for the Cieneguita Project for 2012 will be conducted by our joint venture partner, MRT. They are responsible for spending $4,000,000 to take the property through to feasibility. Pan American’s new management is suitably encouraged by its examination of the Cieneguita data that we are in discussions with MRT to increase our interest and corresponding participation in the Cieneguita’s development.





There are no known reserves on the Cieneguita property.





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Encino Gordo Project





Summary





Our Encino Gordo Project is located in the Barranca section of ChihuahuaState in Mexico, and according to data publicly published by the Mexican Government, is at the interphase between the two main volcanic groups that form the bulk of the Sierra Madre Occidental. The location is 220 kilometers to the southwest of ChihuahuaCity.





During fiscal 2007, the Company carried out a detailed and property scale mapping and sampling program outlining numerous gold, silver and gold-copper coincident geochemical anomalies. Phase 1 of the exploration program was undertaken in an effort to define the style and characteristics of the mineralization areas indicated by the geochemical anomalies. Within this stage several gold and sulphide mineralization areas including pyrite and chalcopyrite have been identified within an over 500 meters stockwork area and fault-veins structure.





All information and field evidence gathered during the mapping and sampling process suggest the presence of “porphyry” style alteration and mineralization characterized by the presence of concentric alteration patterns (potassic alteration grading outward to quartz-sericite and propylitic alteration), coincident Cu, Au and Mo geochemical anomalies and a multiple-event of veining. The property is at the very early stages of exploration, though, and much more work is needed before any decisions can be made as to the viability of the property.There are no known reserves on the Encino Gordo Project.





Concession Status





Sunburst de Mexico, our wholly-owned subsidiary, owns two concessions (Title #225277 and #292013) and has an option to acquire 100% of two additionalconcessionsfrom MRT, subject to a 2.5% net smelter royalty.The following table is a summary of the concessions on the Encino Gordo property:





Lot Name

Title Number

Area (Ha)

Term of Validity

Royalties and PaymentsEncino Gordo

225277

450

8/12/2005 to 8/11/2055

None (1)Encino Gordo

292013

382

8/12/2005 to 8/11/2055

None (1)El Camuchin

220149

100

6/17/2003 to 6/16/2053

Net Smelter Return of 2.5% (2)La Paloma

220148

100

6/17/2003 to 6/16/2053

Net Smelter Return of 2.5% (2)





(1)
Concessions are 100% owned by Sunburst de Mexico with no further payments to be made.





(2)
Sunburst de Mexico has the first right of refusal to acquire these two concessions from MRT in the event MRT receives an offer to purchase any portion of these mining concessions from a third party. Sunburst de Mexico will have 30 days to exercise its first right of refusal.





In August 2009, we dropped one of the concessions we previously owned at the Encino Gordo Project, Encino Gordo 2. We determined that the payments due to the concession holder were too expensive and it was not in the Company’s best interests to keep the concession. There is no plan, currently, to try and negotiate the payments for this Project.





History





The Encino Gordo Property, covering 1,042 hectares (approximately 2,575 acres), is situated near an old mining district with a lengthy production history, according to records in the public domain. Old mining records indicate that mining operations were commenced three kilometers east of this site in the 17th century. Most of the production from those mines came from high-grade vein deposits mined by crude underground methods. To the east of Encino Gordo, the main Guazapares breccia veins were discovered in about 1830. The major period of production was from 1870 to 1900 when there were four silver pan amalgamation mills in operation. Although those deposits contain both gold and silver, the early mills could not recover the gold as it is very fine and occurs along cleavage planes in the pyrite. The mills of the time could only process the oxidized portions of the veins, and the unoxidized, sulfide-bearing material was usually left in the mines as pillars. The principal mine owner of the properties east of Encino Gordo died in 1890, after which the mines of Guazapares slowly sank into disrepair and closed by 1900. In 1905, a U.S. mining company consolidated most of the properties to the east of Encino Gordo and reopened some of the mine workings. That company ran into financial difficulties during 1907 and work halted. Ramon Valenzuela then acquired the properties to the east of Encino Gordo and operated a five stamp mill until 1912. Noranda Exploration, Inc. briefly optioned concessions in the area in the early 1990’s. Kennecott optioned the core concessions east of Encino Gordo in 1993 to 1994, and drilled a few holes in one of the concessions to the east of Encino Gordo. The Encino Gordo property has never been in production.




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Geological Setting and Deposit Types





The geology at the Encino Gordo Project is dominated by flows and tuff of andesitic to dacitic composition intruded by small plugs of porphyritic intrusions varying in composition from diorite to quartz-diorite. Small and localized areas exhibiting dacite porphyries are also common. The volcanic sequence which may be part of the Lower Volcanic Series (LVS) of the Sierra Madre Occidental Volcanic Complex (“SMOVC”) host most of the mineralization in the Encino Gordo area and in the whole Moris district host to Palmarejo deposit and the Guazapares gold hydrothermal system.





We have identified and characterized four main areas at the Encino Gordo Project:





La Junta Area — Most of the alteration and mineralization in this area is associated with andesitic rocks intruded by composite stock (diorite and quartz-diorite) and dacite porphyries. The alteration at La Junta is characterized by propylitic alteration (chlorite-calcite-pyrite) exhibiting small and localized areas with incipient K-silicate alteration, where K-feldspar is mainly replacing groundmass in the intrusion phases.





Mineralization is occurring at La Junta in different styles, including: stockwork, fault-veins, sheeted veins, dissemination and breccias. However, main mineralization consists of an approximately 500-meter wide stockwork fault-vein zone developed in a dilatant jog “flower structure”. In this mineralized area, multiple cross-cutting vein types are present including:





·
Pyrite-only veins


·
Quartz-only veins


·
Quartz + pyrite veins


·
Quartz + chalcopyrite veins


·
Quartz + pyrite + chalcopyrite veins


·
Calcite veins


·
Quartz + galena veins


·
Chlorite + calcite veins





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The following map illustrates thecoincident Cu and Au geochemical anomalies in La Junta area which are spatially associated to a potassic alteration core resembling the classical geochemical-alteration signature of the porphyry systems.











Supergene alteration is represented by an argillic alteration pervasive event developed by the oxidation and alteration of the primary sulfide zone observed at La Junta area. Limonites developed within this supergene event are dominated by goethite (± hematite — jarosite).





The alteration assemblages, the style of mineralization, the content and type of sulfide mineralization suggest that La Junta area might be a mesothermal to near-mesothermal system, resembling a “porphyry-style” alteration-mineralization.





Potential exists in La Junta Area to find a porphyry-style system and a similar gold mineralization, though, no assurance may be given that any mineralization whatsoever will be found.





Structure EmpalmeArea —TheEmpalme vein outcrops northwest of the Elyca structure, inside the Encino Gordo Property and has been mapped for approximately 150 meters. Workings on the breccia-vein consist of two old shafts now filled with water. The host rocks consist of a sequence of volcaniclastic sediments overlain by tuffaceousdacites with moderate silicification and supergene argillic alteration.





Cienega VeinArea —Our exploration shows that the Cienega vein outcrops at one location along a stream bed within the Encino Gordo Property. It consists of brecciated quartz and contains 2-3% disseminated pyrite hosted by brown volcaniclastics.




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Arroyo Los Laureles VeinArea —The vein outcrops in the southeast limit of the San Miguel claim in Arryo Los Laurels. The host rocks consist of intensely fractured volcaniclasticarenites, tuffs and dacites.





The Encino Gordo Property is without known reserves. Our proposed exploration programs are exploratory in nature.





Infrastructure





The Encino Gordo Project is accessible year round by all-weather roads. There is no local electricity or water currently available. We will need to supply our own diesel generated electrical power.





Current Exploration





During fiscal 2007, the Company carried out a detailed and property scale mapping and sampling program outlining numerous gold, silver and gold-copper coincident geochemical anomalies. Phase 1 of the exploration program was undertaken in an effort to define the style and characteristics of the mineralization areas indicated by the geochemical anomalies. Within this stage several gold and sulphide mineralization areas including pyrite and chalcopyrite have been identified within an over 500 meters stockwork area and fault-veins structure.





All information and field evidence gathered during the mapping and sampling process suggest the presence of “porphyry” style alteration and mineralization characterized by the presence of concentric alteration patterns (potassic alteration grading outward to quartz-sericite and propylitic alteration), coincident Cu, Au and Mo geochemical anomalies and a multiple-event of veining. No assurance can be given, though, that we will find such a deposit, if at all.


There are no known reserves on the Encino Gordo property.





Planned Exploration Activities





At present we are re-evaluating the exploration program for Encino Gordo. We expect to revise the exploration budget of Encino Gordo in the second fiscal quarter of 2011.





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Cerro Delta Project





Summary





In February 2011, we entered into an agreement with Compania Minera Alto Rio Salado S.A., a private Argentine entity, for the acquisition of the 15,000 hectare Cerro Delta Project in northwest La Rioja Province, Argentina. Under the agreement, the Company paid $150,000 on signing (paid), and agreed to pay $200,000 on the first anniversary, $500,000 on the second, $750,000 on the third, $1.2 million on the fourth, and $2.2 million on the fifth anniversary, with a final option payment of $5 million due on the sixth anniversary to purchase a 100% interest in the Cerro Delta Project. The vendor will retain a 1% net smelter revenue. All payments are completely optional, and the Company has no work commitments beyond the minimal requirements to maintain the mining rights under Argentine law.The environmental permits and water rights are already in place for the Cerro Delta Project.





Property Location





The Cerro Delta Project is located approximately 20 kilometers east of the 28.8 million ounce (resource) Cerro Casale gold project which is being developed by Barrick and Kinross and 29 kilometers southeast of the even larger Caspiche project currently being evaluated by Exeter Resource Corporation. Cerro Delta is located along a regional fault structure trending west-northwest to east-southeast which is associated with theAldebaran, CerroCasale, QuebradaSeca, and Maricela deposits in Chile before crossing into Argentina and intersecting the Cerro Delta Project.





History





The first sampling campaigns of the Cerro Delta Project were conducted in 1993 and 1994 detecting strong gold anomalies in soils south of the Cerro Delta. The major sampling work was done by Minas Argentinas S.A. showing the gold mineralization in highly altered granitic rocks placed West and South of the Cerro Delta. In 1996 the company Campo de Oro Andino S.A. subsidiary of ElDorado (Canada) conducted a geochemical and geophysical and trenching program (magnetometry, resistivity and IP) defining two drilling targets.





Later, in 2008, Golden Peaks Minera conducted another geophysical study which confirmed the former results and added more detail and precision response.





Infrastructure





The Cerro Delta Project is located 35 kilometers north of the international paved road No 22 from Vinchina (La Rioja) to Copiapo, Chile. The Project can also be accessed with existing roads from the City of Copiapo.There is no local electricity or water currently available. We will need to supply our own diesel generated electrical power.





Claim Status





The Cerro Delta Project has three mining concessions:





Mining Concession

Title Number

Area (Ha)

Term of Validity

Royalties and PaymentsPablo

·9755-C-1991

4,000

-

1% NSRRoberto

·9756-C-1991

3,850

-

1% NSRDelta 1

·34-C-2007

10,000

-

1% NSR





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The following figure shows the location of the mining concessions on the Cerro Delta Project.











Geological Setting and Mineral Deposit





The deposits of the Maricunga Belt are often very large but low grade porphyry gold-copper type deposits with variably oxidized sulfide stockwork or veinlets with or without associated copper (Maricunga, Volcan, Caspiche, Cerro Casale) or high sulfidation type epithermal quartz veins and stockworks with better grades and without copper (La Coipa, Lobo-Marte). It is common to have both deposit types in a single large deposit area such as is the case with the Cerro Delta project. In addition, most deposits in the Maricunga Belt exhibit a zoned alteration pattern with an area of potassic alteration flanked by argillic and advanced argillic alteration with some amount of silicification, which is also common to Cerro Delta. Also common to deposits of the Maricunga Belt are large scale faults and lineaments of a general north-south trend and which tend to localize the emplacement of mineralized intrusions. At Cerro Delta these regional structures are mostly N-S, NNW and E-W with several intersecting zones which appear related to alteration and mineralization.





Current Exploration





The main exploration activities for the Cerro Deltahave included soil sample and rock chip samples.  Assay results and an analysis of the exploration work are compiled and described in our recently filed NI 43-101 for Cerro Delta, and is in compliance with the standards and requirements of Canadian security regulatory authorities. The NI 43-101 report is also available on our website, www.panamericangoldfields.com.





Planned Exploration Activities





The Cerro Delta project is drill ready and we intend to begin drilling in the fourth quarter of 2011.





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Recent Financing Activities





In March 2011, wecompleted a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,312,000. Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Each warrant is exercisable for one share of common stock at an exercise price of $0.30 for a period of two years from the closing date. The securities were issued to U.S. “accredited investors” and Canadian and non-U.S. investors. We paid $89,000 in finders’ fees in conjunction with the private placement.





In September 2009, we entered into private placement subscription agreements, as thereafter amended, with certain U.S. accredited investors and certain non-U.S. investors for the private placement of 12,500,000 unregistered shares of the common stock with 100% warrant coverage at a purchase price of $0.20 per unit. The warrants have an exercise price of $0.30 per share, a two-year term and will not be exercisable until 12months after their date of issuance. The Company received aggregate gross proceeds, prior to any expenses, from the private placement of $2,500,000.





Principal Products





Our principal product is the exploration for precious minerals. Because our properties are in the exploration stage, there is no guarantee that any ore body will be found or extracted.The proposed exploration program is being undertaken by our exploration team using in-house knowledge along with the support and guidance of consultants with expertise in these regions. We believe our existing management team and key advisors have the necessary exploration and mining expertise to locate, evaluate and bring mining properties to production.





Competition





We compete with other mining and exploration companies in connection with the acquisition of mining claims and leases on gold and other precious metals prospects and in connection with the recruitment and retention of qualified employees. Many of these companies are much larger than we are, have greater financial resources and have been in the mining business much longer than we have. As such, these competitors may be in a better position through size, finances and experience to acquire suitable exploration properties. We may not be able to compete against these companies in acquiring new properties and/or qualified people to work on any of our properties.





Given the size of the world market for gold and silver relative to individual producers and consumers of gold and silver, we believe that no single company has sufficient market influence to significantly affect the price or supply of gold and silver in the world market.





Governmental Regulations





Our business is subject to various levels of government controls and regulations, which are supplemented and revised from time to time. Any mineral exploration activities conducted by the Company require permits from governmental authorities. The various levels of government controls and regulations address, among other things, the environmental impact of mining and mineral processing operations and establish requirements for the decommissioning of mining properties after operations have ceased. With respect to the regulation of mining and processing, legislation and regulations in various jurisdictions establish performance standards, air and water quality emission standards and other design or operational requirements for various components of operations, including health and safety standards. Legislation and regulations also establish requirements for decommissioning, reclamation and rehabilitation of mining properties following the cessation of operations, and may require that some former mining properties be managed for long periods of time. In addition, in certain jurisdictions, we may be subject to foreign investment controls and regulations governing our ability to remit earnings abroad.





The Company’s operations and properties are subject to a variety of governmental regulations including, among others, regulations promulgated by SEMARNAT, Mexico’s environmental protection agency; the Mexican Mining Law; and the regulations of the Comisión National del Aguawith respect to water rights. Mexican regulators have broad authority to shut down and/or levy fines against facilities that do not comply with regulations or standards. If we put any of our properties into production, operations may also 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. In Argentina we are subject to comply with the Codigo de Mineria (Argentina ́s Mining Law) and all the provincial regulations.





The need to comply with applicable laws, regulations and permits will increase the cost of operation and may delay exploration. All permits required for the conduct of mining operations, including the construction of mining facilities, may not be obtainable, which would have an adverse effect on any mining project we might undertake. Additionally, failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions, including orders issued by regulatory or judicial authorities causing exploration to cease or be curtailed. 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.




21





Amendments to current governmental laws and regulations affecting mining companies, or the more stringent application thereof, could adversely affect the Company’s operations. The extent of any future changes to governmental laws and regulations cannot be predicted or quantified. Generally, new laws and regulations result in increased compliance costs, including costs for obtaining permits, delays or fines resulting from loss of permits or failure to comply with the new requirements.





To keep our mineral concessions in good standing with the Government of Mexico, we must pay yearly property taxes. These taxes are based on a tariff per hectare and per the number of years (maturity)of each concession. The taxes are paid twice a year. We have paid:





July 2009

MXN $133,626 ($10,179)January 2010

MXN $141,376 ($10,779)July 2010

MXN $110,888 ($8,735)January 2011

MXN $117,215 ($9,685)





We are in compliance with all of our tax payments to the government. We believe that we are in compliance with all material current government controls and regulations at each of our properties.





Compliance with Environmental Laws





Our current exploration activities and any future mining operations (of which we currently have none planned) are subject to extensive laws and regulations governing the protection of the environment, waste disposal, worker safety, mine construction, and protection of endangered and protected species. We have made, and expect to make in the future, significant expenditures to comply with such laws and regulations. Future changes in applicable laws, regulations and permits or changes in their enforcement or regulatory interpretation could have an adverse impact on our financial condition or results of operations. In the event that we make a mineral discovery and decide to proceed to production, the costs and delays associated with compliance with these laws and regulations could stop us from proceeding with a project or the operation or further improvement of a mine or increase the costs of improvement or production.





In Mexico, we are required to submit, for government approval, a reclamation plan for each of our mining sites that establishes our obligation to reclaim property after minerals have been mined from the site. In some jurisdictions, bonds or other forms of financial assurances are required as security for these reclamation activities. We may incur significant costs in connection with these restoration activities. The unknown nature of possible future additional regulatory requirements and the potential for additional reclamation activities create uncertainties related to future reclamation costs.





In Argentina, every two years, we are required to submit an Environmental Study update for every exploration right for government approval and for every main exploration step (i.e., a new drilling campaign). The same requirement is applicable to every new exploration right we claim.





Employees





We currently have five persons working for Sunburst de Mexico, of which, one is a geologist and the rest are employed in administrative capacity. Except for our general manager, Manuel Flores, all of these persons are provided to Sunburst de Mexico under third party contract, either directly or via a personnel service agency. We have hired Miguel F. Di Nanno as our President and Chief Operating Officer, Salil Dhaumya as our Chief Financial Officer and Manuel Flores as our Operations Manager. Other than these employees and our geologists, all of the employees we hire are contracted from third parties specializing in providing employees for Mexican companies. In using third party contractors, we minimize our exposure to Mexican employment law, and all liabilities are undertaken by the third party contractors providing the services. Currently, we do not have any operations in Argentina. Other than our President and Chief Operating Officer, Mr. Di Nanno, who is based in Argentina, we have no employees or personnel contracted under third party contracts in Argentina. We pay a flat rate to the third parties for their services. In the event that our exploration projects are successful and warrant putting any of our properties into production, all such operations would be contracted out to third parties. Also, we rely on members of our management to handle all matters related to business development and business operations.





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ITEM IA. RISK FACTORS





Risks Relating to Our Business and Industry





We have a limited operating history; therefore, it is difficult to evaluate our financial performance and prospects.





We have only completed the initial stages of exploration on our mineral concessions and have no way to evaluate the likelihood that we will be able to operate and develop a successful business. We are considered to be an exploration stage corporation because we are currently engaged in the search for mineral deposits. We will be in the exploration stage until we exploit commercially viable mineral deposits on our properties. Our limited operating history makes it difficult to evaluate our financial performance and prospects, as well as our ability to successfully identify and develop mining projects. We have earned minimal revenues from mineral extraction activities to date at our Cieneguita Project, and we have not emerged from being an exploration stage to a development stage corporation. Because of our limited financial history, we believe that period-to-period comparisons of our results of operations will not be meaningful in the short term and should not be relied upon as indicators of future performance.





Because of our recurring operating losses, stockholder’s deficit, working capital deficit and negative cash flows, our auditor has raised substantial doubt about our ability to continue our business.





We have received a report from our independent auditors on our financial statements for the fiscal years ended February 28, 2011 and February 28, 2010, in which our auditors have included explanatory paragraphs indicating that our recurring operating losses, working capital deficiency, and cumulative losses during our exploration stage cause substantial doubt about our ability to continue as a going concern. By issuing this opinion, our auditors have indicated that they are uncertain as to whether we have the capability to continue our operations.





We have a history of incurring net losses. We expect our net losses to continue as a result of planned increases in operating expenses, and therefore, may never achieve profitability.





We have a history of operating losses and have incurred significant net losses in each fiscal quarter since our inception. Prior to completion of our exploration stage, we anticipate that we will incur increased operating expenses without realizing significant revenues. We expect to continue to incur net losses and negative cash flows for the foreseeable future. Our ability to generate and sustain significant revenues or to achieve profitability will depend upon numerous factors outside of our control, including the precious metals market and the economy. We have no history upon which to base any assumption as to the likelihood that we will prove successful, and we may not be able to generate any operating revenues or ever achieve profitable operations. If we are unsuccessful in addressing these risks, our business, financial condition or results of operations could be materially adversely affected and the business will most likely fail.





If we do not obtain financing when needed, we will need to cease our operations.





As of February 28, 2011, we had cash on hand in the amount of approximately $408,000.  In order for us to perform any further exploration or extensive testing, we will need to obtain additional financing. We will require additional financing if the costs of the exploration of our mineral concessions are greater than anticipated. We also will need supplementary financing to sustain our business operations if we are not successful in earning revenues once exploration is complete. If our exploration programs are successful in discovering and extracting ore of commercial tonnage and grade, we will require a significant amount of additional funds in order to place our mineral concessions into commercial production. We currently do not have any arrangements for additional financing, and we may not be able to obtain financing when required. There can be no assurance that such additional financing will be available to us on acceptable terms, or at all. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustment to reflect the possible future effect on the recoverability and classification of the assets or the amounts and classification of liabilities that may result should we cease to continue as a going concern. If we are unable to obtain additional financing when sought, we will be required to curtail our business plan. Any additional equity financing may involve substantial dilution to our then existing shareholders. There is a significant risk to investors who purchase shares of our common stock because there is a risk that we may not be able to generate and/or raise enough resources to remain operational for an indefinite period of time.





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If we are required for any reason to repay our outstanding promissory notes, we would be required to deplete our working capital, if available, or raise additional funds.





As of February 28, 2011, we have promissory notes outstanding in the amount of $884,022, including outstanding principal and interest. We do not have a sinking fund available to repay this debt. These promissory notes are in default and could require the immediate repayment of the promissory notes. If we are required to repay the promissory notes, we would be required to use our limited working capital and would also be required to raise additional funds to fully repay the promissory notes. If we were unable to repay the promissory notes when required, the noteholders could commence legal action against us. Any such action would require us to curtail or cease operations.





Our success is dependent on retaining key personnel and on hiring and retaining additional personnel.





Our ability to continue to explore and develop our mineral concessions is, in large part, dependent upon our ability to attract and maintain qualified key personnel. There is competition for such personnel, and there can be no assurance that we will be able to attract and retain them. Our development now and in the future will depend on the efforts of key management and directors. The loss of any of these key people could have a material adverse effect on our business, financial condition or results of operations. We do not currently maintain key-man life insurance on any of our key employees.  We may not be able to find qualified geologists and mining engineers on a timely basis or at all to further expand our business plan. Furthermore, if we are able to find qualified employees, the cost to hire them may be too great as there may be other opportunities elsewhere at a higher rate than we are able to pay.





As we undertake exploration and potential development of our mineral claims, we will be subject to compliance with government regulations that may increase the anticipated cost of our exploration program.





There are several governmental regulations that materially restrict mineral exploration or exploitation. We expect to be subject to federal, state and local laws and regulations in Mexico and Argentina regarding environmental matters, the abstraction of water, and the discharge of mining wastes and materials and other similar laws and regulations. Amendments to current laws, regulations and permits governing operations and activities of exploration and development companies, or more stringent implementation thereof, could have a material adverse impact on us and our operating, increase our expenditures and costs and require abandonment or delays in developing new mining properties. Environmental laws and regulations change frequently, and the implementation of new, or the modification of existing, laws or regulations could harm our business, financial condition or results of operations. We cannot predict how agencies or courts in Mexico or Argentina will interpret existing laws and regulations or the effect that these adoptions and interpretations may have on our business, financial condition or results of operations. We may be required to make significant expenditures to comply with governmental laws and regulations.





Any significant mining operations that we undertake in the future will have some environmental impact, including land and habitat impact, arising from the use of land for mining and related activities, and certain impact on water resources near the project sites, resulting from water use, rock disposal and drainage run-off. No assurances can be given that such environmental issues will not have a material adverse effect on our business, financial condition or results of operations in the future. MRT is required to comply with applicable environmental laws and permits in conducting its operations at the Cieneguita Project.  While we believe we do not currently have any material environmental obligations, exploration and development activities may give rise in the future to significant liabilities on our part to the government and third parties and may require us to incur substantial costs of remediation.





Additionally, we do not maintain insurance against environmental risks. As a result, any claims against us may result in liabilities we will not be able to afford, resulting in the failure of our business. 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 exploration and development operations may be required to compensate those suffering loss or damage by reason of the exploration and development activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations and, in particular, environmental laws.





Because our directors and officers may serve as directors or officers of other companies, they may have a conflict of interest in making decisions for our business.





Our directors and officers may serve as directors or officers of other companies or have significant shareholdings in other resource companies and, to the extent that such other companies may participate in ventures in which we may participate, our directors or officers may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. In the event that such a conflict of interest arises at a meeting of our directors, we expect that the director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. Our directors are required to act honestly, in good faith and in our best interests. In determining whether or not we will participate in a particular program and the interest therein to be acquired by us, we expect that the directors and officers will be guided by their fiduciary duties and take into account such matters as they deem relevant, including considering the degree of risk to which we may be exposed and our financial position at that time.




24





Because our officers and directors may allocate their time to other business interests or may be employed by other companies, they may not be able or willing to devote a sufficient amount of time to our business operations, which may adversely affect our business, financial condition or results of operations and cause our business to fail.





It is possible that the demands on our officers and directors, from their existing employment and from other obligations could increase with the result that they would no longer be able to devote sufficient time to the management of our operations and business. This conflict of interest could adversely affect our business, financial condition or results of operations and cause our business to fail.





We are controlled by our directors and officers, and, as such, you may have no effective voice in our management.





Our current directors and officers beneficially own a significant percentage of our issued and outstanding shares of common stock. Accordingly, for the foreseeable future, we expect that our directors and officers will exercise control over all matters requiring shareholder approval, including the possible election of additional directors and approval of significant corporate transactions. If you purchase shares of our common stock, you may have no effective voice in our management.





U.S. investors may experience difficulties in attempting to enforce judgments based upon U.S. federal securities laws against us and our non-U.S. resident directors.





All of our operations in Mexico and Argentina are conducted through subsidiary corporations organized and located outside the United States, all of our assets are located outside of the U.S. and certain of our directors and officers are resident outside of the U.S. As a result, it may be difficult or impossible for U.S. investors to enforce judgments of U.S. courts for civil liabilities against us or against any of our individual directors or officers. In addition, U.S. investors should not assume that courts in the countries in which our subsidiary is incorporated or where the assets of our subsidiary are located (i) would enforce judgments of U.S. courts obtained in actions against us or our subsidiary based upon the civil liability provisions of applicable U.S. federal and state securities laws or (ii) would enforce, in original actions, liabilities against us or our subsidiary based upon these laws.





We do not carry title insurance and do not plan to secure any in the future. We are therefore, vulnerable to loss of title.





We do not maintain insurance against title. Title on mineral properties and mining rights involves certain inherent risks due to the difficulties of determining the validity of certain claims as well as the potential for problems arising from the frequently ambiguous conveyance history characteristic of many mining properties. We cannot give any assurance that title to our properties and claims will not be challenged or impugned and cannot be certain that we will have or will acquire valid title to these mining properties and claims. We cannot assume that counterparties to our title transfer agreements will meet their contractual obligations and transfer title on a timely basis. Furthermore, there is a risk that the Mexican government may in the future grant additional titles in excess of our expectations to currently illegal miners or that disputes may arise as to existing title ownership or planned acquisitions. Furthermore, although we believe that mechanisms exist to integrate the titles of mineral properties currently not owned by us, there is a risk that this process could be time consuming and costly. The possibility also exists that title to existing properties or future prospective properties may be lost due to an omission in the claim of title. As a result, any claims against us may result in liabilities we may not be able to afford resulting in the failure of our business.





In the event that we are unable to successfully compete within the mineral exploration and development business, we may not be able to achieve profitable operations.





The mineral exploration and development business is highly competitive. This industry has a multitude of competitors and many competitors dominate this industry. Many of our competitors have greater financial resources than us. As a result, we may experience difficulty competing with other businesses when conducting mineral exploration and development activities or in the retention of qualified personnel. No assurances can be given that we will be able to compete effectively.





We are required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the price of our shares of common stock.





Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our annual report on Form 10-K for the fiscal year ended February 28, 2011, were required to furnish a report by management on our internal controls over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management.




25





Failure to comply with the new rules may make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers.





There are no known reserves on the Cieneguita Project and we have made a production decision at our Cieneguita property without a feasibility study.





Under our development agreement with MRT, limited production operations have commenced at our Cieneguita Project without completing a feasibility study. A feasibility study would determine if the property has ore reserves and where such reserves are located; the information for such study would come from a completed drill program. We have not completed a drill program to determine the exact location of ore reserves, if any. There is a high degree of risk involved in making a production decision without indicated or measured mineral resources, without a basis for economic analysis, and without an indication of favorable metallurgy by appropriate test work. There are no known reserves on the Cieneguita Project. Our development agreement with MRT may not be success, and may not result in the discovery and development of commercial quantities of ore at the Cieneguita Project.





Because of the speculative nature of exploration and development of mineral concessions and the unique difficulties and uncertainties inherent in the mineral exploration and development business, there is substantial risk that no commercially exploitable minerals will be found and developed and our business will fail.





Exploration for and development of minerals is a speculative venture involving substantial risk. Any figures presented in this report relating to gold deposits adjacent to our properties do not indicate that we will be successful in searching for and extracting gold deposits on our properties. New mineral exploration and development companies encounter difficulties, and there is a high rate of failure of such enterprises. The expenditures we may make in the exploration of the mineral concessions may not result in the discovery and development of commercial quantities of ore. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered in connection with the exploration and development of the mineral properties that we plan to undertake. These potential problems include, but are not limited to, unanticipated problems relating to exploration and development and additional costs and expenses that may exceed current estimates. In addition, problems such as unusual or unexpected mineral formations and other geological conditions often result in unsuccessful exploration and development efforts. In such a case, we would be unable to complete our business plan. The search for and development of valuable minerals also involves numerous hazards. As a result, we may become subject to liability for such hazards, including pollution, cave-ins, the use of explosives, waste disposal, worker safety and other hazards against which we cannot insure or against which we may elect not to insure. The payment of such liabilities may have a material adverse effect on our financial position.





Our mineralization figures are based on interpretation and assumptions and may yield less mineral production under actual conditions than is currently estimated.





Unless otherwise indicated, the mineralization figures calculated from our exploration efforts and presented in this report and in our filings with securities regulatory authorities, press releases and other public statements that may be made from time to time are based upon estimates made by independent geologists and our internal geologists. When making determinations about whether to advance any of our projects for further exploration and development, we must rely upon such estimated calculations as to the mineral reserves and grades of mineralization on our properties. Until ore is actually mined and processed, mineral reserves and grades of mineralization must be considered as estimates only. These estimates are imprecise and depend upon geological interpretation and statistical inferences drawn from drilling and sampling analysis, which may prove to be unreliable.





We cannot assure you that:





·
these estimates will be accurate;





·
reserve, resource or other mineralization estimates will be accurate; or





·
this mineralization can be mined or processed profitably.





Any material changes in mineralization figures and grades of mineralization will affect the economic viability of placing a property into production and a property’s return on capital. In addition, the grade of ore ultimately mined, if any, may differ from that indicated by our technical reports and drill results. There can be no assurance that minerals recovered in small scale tests will be duplicated in large-scale tests under on-site conditions or in production scale. Any material reductions in estimates of mineralization, or of our ability to extract this mineralization, could have a material adverse effect on our results of operations or financial condition.




26





The amount of our working capital could be adversely affected in the event claims are made against us alleging that certain shares we previously issued pursuant to Form S-8 registration statements constituted an illegal public offering because the company was a “shell company” at the time and, as a result, was not eligible to use Form S-8 for registration of shares under the Securities Act of 1933.





In August and October of 2005, the Company issued shares of common stock to an officer of the Company, as compensation for consulting services. The two share issuances were for a combined total of 30,000 shares and each of the share issuances was made pursuant to a registration statement on Form S-8 under the Securities Act of 1933 (the “Act” or “Securities Act”). Although the Company believes these shares were properly issued, a claim could be made that issuance of the shares constituted an illegal public offering because the Company was a “shell company” at the time. Shell companies, i.e. companies which have no or nominal operations and either (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets, are not eligible to use Form S-8 for registration under the Securities Act of 1933. If either of these transactions did violate federal securities laws, subsequent purchasers of the shares may have claims against us for damages or for rescission of their purchase transaction and recovery of the full subscription price paid, together with interest. As of the date of this prospectus, no one has made or threatened any claim against us alleging violation of the federal securities laws. In the event such claims were successfully asserted, there is no assurance that we would have sufficient funds available to pay and it is likely that we would be required to use funds currently designated as working capital for that purpose. That would substantially reduce the amount of working capital available for other purposes and, in that event, we could be forced to cease or discontinue certain operations and to liquidate certain assets to pay our liabilities, including, but not limited to, rescission claims.





Due to numerous factors beyond our control which could affect the marketability of gold and silver, including their respective market price, we may have difficulty selling any gold or silver if commercially viable deposits are found to exist.





The availability of markets and the volatility of market prices are beyond our control and represent a significant risk. Even if commercially viable deposits of gold or silver are found to exist on our property interests, a ready market may not exist for the sale of the reserves. Numerous factors beyond our control may affect the marketability of any substances discovered. These factors include market fluctuations, the proximity and capacity of markets and processing equipment, government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, importing and exporting of minerals and environmental protection. These factors could inhibit our ability to sell the gold or silver in the event that commercially viable deposits are found to exist.





Our due diligence activities with respect to our property interests cannot assure that these properties will ultimately prove to be commercially viable.





Our due diligence activities have been limited, and to a great extent, we have relied upon information provided to us by third-party advisors. Accordingly, no assurances can be given that the properties or mining rights we possess will contain adequate amounts of gold, silver and base metals for commercialization. Further, even if we recover gold, silver and base metals from such mining properties, we cannot guarantee that we will make a profit. If we cannot acquire or locate commercially exploitable precious metal deposits, or if it is not economical to recover the precious metal deposits, our business and operations will be materially adversely affected. At present, none of our properties have proven or probable reserves and the proposed programs are an exploratory search for proven or probable reserves. The mining areas presently being assessed by us may not contain economically recoverable volumes of minerals or metals. We have relied and may continue to rely, upon consultants and others for operating expertise.





Non-payment of our obligations under the agreement with Corporativo Minero could result in Corporativo Minero retaining ownership of the Cieneguita concessions.





MRT entered into an agreement with Corporativo Minero on January 12, 2004 by which it acquired the right to explore and exploit the Cieneguita Property and purchase it for $2,000,000. This agreement gave MRT the exclusive right and option, but not the obligation, to purchase, during the term of the mining concessions of the property, an undivided 100% title to the mining concessions and the exclusive right to carry out mining activities on any portion of the mining concessions. Under our agreements with MRT, MRT has assigned this agreement and all of its rights and obligations to us.





If the Cieneguita Property is put into production, including through our development agreement with MRT, then our contract calls for any remaining payments to be paid from the sale of gold, up to the total of $2,000,000. The payments, if the property should go into production, would be as follows: the remainder of the $2,000,000 payment would be paid out of production from the Cieneguita Property at a rate of $20 dollars per ounce of gold sold. However, in the event that the price of gold exceeds $400, then we would be required to pay an additional $0.10 per each ounce for every dollar the spot price of gold trades over $400. Once $2,000,000 is paid, there is no further obligation to Corporativo Minero. Non-payment of any portion of the $2,000,000 total payment will constitute a default. In such case, Corporativo Minero would retain ownership of the concessions, but we will not incur any additional default penalty.




27





We may be required to pay up to a 7% Net Smelter Royalty fee on any production from Cieneguita Property and seek repayment from Corporativo Minero. If so, our cost of operations will increase, which will decrease any potential profits we might have.





We entered into an agreement with Corporativo Minero in regard to the mineral concessions on the Cieneguita Property. Corporativo Minero has the obligation to pay, from the funds they receive from us, any royalties that may be outstanding on the properties from prior periods. Corporativo Minero has informed us that various former owners of the property owned royalties of up to a 7% Net Smelter Return. They have also informed us that the corporations holding those royalties have been dissolved and that there is no further legal requirement to make these royalty payments. We can make no assurance that Corporativo Minero will satisfy its obligations, and that we will not ultimately be responsible to pay all or some of the 7% Net Smelter Return to these former royalty holders if Corporativo Minero did not make the payments to the royalty holders. If we have to make these royalty payments, any profits from production would be reduced and we will be forced to seek repayment from Corporativo Minero.





If we are unable to obtain all of our required governmental permits, our operations could be negatively impacted.





Our future operations, including exploration and development activities, required permits from various governmental authorities. Such operations are and will be governed by laws and regulations governing prospecting, development, mining, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. There can be no assurance that we will be able to acquire all required licenses or permits or to maintain continued operations at economically justifiable costs.


Our financial position and results are subject to fluctuations in foreign currency values.





Any mining operations we undertake outside of the United States will be subject to currency fluctuations. Fluctuations in the exchange rate between the U.S. dollar and any foreign currency may adversely impact our operations. We do not anticipate that we will enter into any type of hedging transactions to offset this risk. In addition, with respect to commercial operations in Mexico, Argentina or other countries, it is possible that material transactions incurred in local currency, such as engagement of local contractors for major projects, will be settled at a U.S. dollar value that is different from the U.S. dollar value of the transaction at the time it was incurred. This could have the effect of undermining profits from operations in that country.





Our property interests in Mexico and Argentina are subject to risks from instability in those countries.





We have property interests in Mexico and Argentina which may be affected by risks associated with political or economic instability in those countries. The risks with respect to Mexico, Argentina or other developing countries include, but are not limited to: military repression, extreme fluctuations in currency exchange rates, criminal activity, lack of personal safety or ability to safeguard property, labor instability or militancy, mineral title irregularities and high rates of inflation.





In addition, changes in mining or investment policies or shifts in political attitude in Mexico may adversely affect our business. We may be affected in varying degrees by government regulation with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety. The effect of these factors cannot be accurately predicted but may adversely impact our proposed operations in any foreign jurisdiction.





We are in competition with companies that are larger, more established and better capitalized than we are.





We compete with other mining and exploration companies in connection with the acquisition of mining claims and leases on gold and other precious metals prospects and in connection with the recruitment and retention of qualified employees.  Many of our potential competitors have:





·
greater financial and technical resources;





·
longer operating histories and greater experience in mining; and





·
greater awareness of the political, economic and governmental risks in operating in foreign countries.




28




As such, these competitors may be in a better position through size, finances and experience to acquire suitable exploration properties. We may not be able to compete against these companies in acquiring new properties and/or qualified people to work on any of our properties.





Risks Relating to Our Common Stock





There are a large number of shares underlying our warrants that may be available for future sale and the sale of these shares may depress the market price of our common stock.





As of February 28, 2011, we had 54,003,826 shares of common stock issued and outstanding and warrants that may be convertible into 25,826,733 shares of common stock. Each warrant may be exercised to purchase one share of common stock. The sale of these shares may adversely affect the market price of our common stock.





There is a limited trading market for our common stock and if an active market for our common stock does not develop, our investors may not be unable to sell their shares.





Our common stock is presently quoted on the National Association of Securities Dealers Inc.’s Over the Counter Bulletin Board (the “OTC Bulletin Board”) and the Frankfurt Stock Exchange. Quotations and trading volume of our common stock on the OTC Bulletin Board has been sporadic. There is currently very little active trading in the market for our common stock and an active public market may not develop or be sustained in the future. Also, we cannot provide our investors with any assurance that our common stock will continue to be traded on the OTC Bulletin Board or the Frankfurt Stock Exchange. If our common stock is not quoted on the OTC Bulletin Board or Frankfurt Stock Exchange or if an active public market for our common stock does not develop, then investors may not be able to resell the shares of our common stock that they have purchased and may lose all of their investment.





Shares of our common stock are subject to the “penny stock” rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.





Broker-dealer practices in connection with transactions in “penny stocks” are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on the over-the-counter bulletin board administered by FINRA). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, broker-dealers who sell these securities to persons other than established customers and “accredited investors” must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.





The trading market for our common stock is currently subject to rules adopted by the Securities and Exchange Commission which regulates broker-dealer practices in connection with transactions in “penny stocks.” Penny stocks are generally equity securities with a price of less than $5.00, except for securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to make a special written determination that the penny stock is a suitable investment for the purchaser and to receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock and making it more difficult for holders of our stock to sell their shares, as long as the shares are subject to the penny stock rules.





Because our common stock is quoted and traded on the OTC Bulletin Board and the Frankfurt Stock Exchange, short selling could increase the volatility of our stock price.





Short selling occurs when a person sells shares of stock which the person does not yet own and promises to buy stock in the future to cover the sale. The general objective of the person selling the shares short is to make a profit by buying the shares later, at a lower price, to cover the sale. Significant amounts of short selling, or the perception that a significant amount of short sales could occur, could depress the market price of our common stock. In contrast, purchases to cover a short position may have the effect of preventing or retarding a decline in the market price of our common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our common stock. As a result, the price of our common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued at any time. These transactions may be effected on over-the-counter bulletin board or any other available markets or exchanges. Such short selling if it were to occur could impact the value of our stock in an extreme and volatile manner to the detriment of our shareholders.




29





Because we do not expect to pay dividends for the foreseeable future, investors seeking cash dividends should not purchase shares of our common stock.





We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any cash dividends in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Accordingly, investors must rely on sales of their own common stock after price appreciation, which may never occur, as the only way to realize their investment. Investors seeking cash dividends should not purchase our common stock.





Because our stock price can be volatile, investors may not be able to recover any of their investment.





Stock prices in general, and stock prices of mineral exploration companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance or any specifics of the company. Factors that may influence the market price of our common stock include:





·
actual or anticipated changes or milestones in our operations;





·
our ability or inability to acquire mining properties or interests in such properties in Mexico and Argentina;





·
our ability or inability to generate revenues;





·
increased competition within Mexico and elsewhere;





·
government regulations, including mineral exploration regulations that affect our operations;





·
predictions and trends in the gold mining exploration industry;





·
volatility of the gold and silver market prices;





·
sales of common stock by “insiders”; and





·
announcements of significant acquisitions, strategic partnerships, joint ventures or capital commitments by us or our competitors.





Our stock price may also be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuation, as well as general economic, political and market conditions, such as, but not limited to, armed hostilities or acts of terrorism, recessions, acts of God, interest rates or international currency fluctuations, may adversely affect the market price of our common stock.


Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.





If our stockholders sell substantial amounts of our common stock in the public market, including shares being offered for sale pursuant to this prospectus or upon the expiration of any statutory holding period, under Rule 144, or upon expiration of lock-up periods applicable to outstanding shares, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. Recent revisions to Rule 144 may result in shares of our common stock that we may issue in the future becoming eligible for resale into the public market without registration in as little as six months after their issuance.





ITEM IB. UNRESOLVED STAFF COMMENTS





None.





30





ITEM 2. PROPERTIES





We currently maintain an office at 595 Howe Street, Unit 906, Vancouver, BC. V6C 2T5, operating under a month-to-month lease, with a monthly rent of $500.





We also operate a Mexican office located at C. General Retana #706, Col. San Felipe, Chihuahua, Chihuahua, Mexico, CP 31203, operating under the terms of this lease on a month-to-month basis, with a monthly rent of $900.





As described in Item 1 above, we have property rights in the Cieneguita and Encino Gordo Projects in Mexico and in the Cerro Delta Project in Argentina.





ITEM 3. LEGAL PROCEEDINGS





Neither our Company nor our properties are the subject of any material pending legal proceedings.





ITEM 4. Reserved








PART II





ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Our common stock is currently traded on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “MXOM.OB”. The following table sets forth the high and low closing prices for our common stock as reported on the OTCBB for the periods indicated.





Fiscal Year Ending February 28, 2011

High

LowFirst Quarter

$
0.52

$
0.29Second Quarter

$
0.32

$
0.21Third Quarter

$
0.27

$
0.16Fourth Quarter

$
0.25

$
0.18





Fiscal Year Ending February 28, 2010

High

LowFirst Quarter

$
0.39

$
0.25Second Quarter

$
0.40

$
0.25Third Quarter

$
0.49

$
0.27Fourth Quarter

$
0.54

$
0.40





The prices presented are bid prices which represent prices between broker-dealers and do not include retail mark-ups and mark-downs or any commission to the dealer. The prices may not reflect actual transactions.





As of February 28, 2011, there were approximately 247 stockholders of record of the Company's common stock.  The closing price of our common stock on June 9, 2011 was $0.24 per share.





There have been no cash dividends declared or paid on the shares of common stock, and management does not anticipate payment of dividends in the foreseeable future.





ITEM 6. SELECTED FINANCIAL DATA





Not applicable.





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





Special Note of Caution Regarding Forward Looking Statements





Certain statements contained in this Form 10-K, including statements in the following discussion which are not statements of historical fact,constitute "forward-looking statements". These statements, which may be identified by words such as “plans”, “intends”, "anticipates", “hopes”, “seeks”, “will”, "believes", "estimates", "should", "expects" and similar expressions include Pan American’s expectations and objectives regarding our present and future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in such forward-looking statements. Numerous factors and future events could cause us to change such plans and objectives





31





or fail to successfully implement such plans or achieve such objectives, or cause such present and future operations to fail to produce revenues, income or profits.Such risks and uncertainties include those set forth under this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”). These forward-looking statements represent beliefs and assumptions only as of the date of this report. We undertake no obligation to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. No statements contained in the following discussion should be construed as a guarantee or assurance of future performance or future results.We advise you to carefully review the reports and documents we file from time to time with the SEC, particularly our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K.





Overview





We are an exploration stage company and have generated only limited revenues from our Cieneguita Project to date, and have not yet generated or realized any revenue from our other two exploration projects. As of February 28, 2011, we had $407,912 in our bank account.





In February 2011, we entered into an agreement with Compania Minera Alto Rio Salado S.A., a private Argentine entity, for the acquisition of the 15,000-hectare Cerro Delta Project in northwest La Rioja Province, Argentina. Under the terms of the agreement, the Company must pay $150,000 upon signing (paid), $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. The vendor will retain a 1% Net Smelter Revenue (“NSR”).





In conjunction with the acquisition of the Cerro Delta Project, we completed a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,312,000. Each unit consists of one share of common stock and a warrant to purchase one share of common stock. Each warrant is exercisable for one share of common stock at a conversion price of $0.30 for a period of two years from the closing date.





In March 2011, we appointed Bruno Le Barber as a member of the board of directors. Mr. Le Barber has extensive financial expertise and is a co-founder of Vortex, a Hong Kong based gold fund. Previously he was a Vice President at Morgan Stanley in London where he advised trading desks and a large investor base while publishing macro-economic studies. Mr. Le Barber was also a global technical strategist with ABN Amro in Paris.He manages Vortex together with Emilio Alvarez, former Executive Director, Equity Research with Morgan Stanley in London.





In October 2010, we appointed Miguel F. Di Nanno as President and Chief Operating Officer, replacing George Young effective as of October 15, 2010. Mr. Young remains on our board of directors. Mr. Di Nanno has experience in mining and energy exploration and most recently served as president of Somuncurah S.R.L. and AupaS.A., both exploration and development firms focused in Argentina. He has also previously served as the chief operating officer of the Grosso Group, an exploration and new mining business development firm and as the representative and country manager in Argentina for Palladon Ventures Ltd., a gold and silver exploration company. He has a degree in Mining Engineering – Ore Dressing from the National University of San Juan.





In July 2010, we appointed Neil Maedel, Randy Buchamer and Gary Parkison to our board of directors. Mr. Maedel is an investment banker specializing in international resource projects; Mr. Buchamer has extensive experience in business administration and finance; and Mr. Parkison is qualified geologist and project manager with expertise in exploration and development of minerals and metals projects. All of the newly appointed directors have technical and financial industry experience base that will assist us with operations and our planned listing on either the Toronto Stock Exchange or the TSX Venture Exchange, consistent with our status as a producing resource company.





In July 2010, we reincorporated from the State of Colorado to the State of Delaware. The reincorporation was effected pursuant to an agreement and plan of merger (the “Merger Agreement”), by and between us and Pan American Goldfields Ltd.,a Colorado corporation (formerly Mexoro Minerals Ltd.), with Pan American being the surviving corporation. Accordingly, the rights of our shareholders are now governed by Delaware General Corporation Law and the certificate of incorporation and bylaws of Pan American are filed with the State of Delaware.





In May 2010, management decided to drop the Sahuayacan Project due to lack of economic thicknesses and grades of gold mineralization encountered in the drilling program, eliminating any future concession payments for this Project.





Our continued existence and plans for future growth depend on the receipt of funds from our partner MRT from the ongoing operations at the Cieneguita Project. Should there be an interruption in this cash flow it will be necessary to obtain additional capital to operate either through the issuance of additional debt or equity.




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For the year ended February 28, 2011, the joint venture with MRT, as described further below, had generated net cash flows from the tuning and start-up operations of approximately $1,136,000 of which $227,000 is attributable to us under our development agreement. We originally received guidance from MRT that we should expect net cash flow of approximately $140,000 per month beginning December 2010 rising to more than $200,000 per month by May 2011. However due to the current drought, a lack of water supply has sharply reduced the amount of mined material that MRT can process. As a consequence, the income we expected from MRT has not been received to date. MRT initially experienced difficulty in reducing a portion of the mined material to a particle size that would allow for optimum recovery of contained gold, silver and base metals. To achieve the desired grinding –comminution capacity, MRT has recently installed a ball mill which is rated at 750 tons per day and pulverizes the larger material as it is produced. Once the drought ends as expected with the beginning of the June rainy season, and assuming the already established processing capability and recoveries,we expect the overall production capacity to rise to approximately 700 tons per day on a sustained basis, and that recently improved metal recoveries, which have increased significantly due to the grinding circuit improvements and changes in reagent, will also be maintained. Despite the improvements there remains significant risk to us for this type of extracting of mineralized material because we will not have established reserves at Cieneguita until an independent feasibility study is complete. Consequently, neither can we provide any assurance that the feasibility study will be successful nor can we know if the extraction and processing of mineralized material from the Cieneguita property will result in any cash flows for us. As part of the $8 million development agreement, MRT will fund the development of the Cieneguita mill and operations and a bankable feasibility study. Now that the construction and start-up phase is complete, we anticipate that infill drilling, as part of the bankable feasibility study and exploration drilling to test a potential southern extension of the Cieneguita gold-silver mineralization will imminently.





Although this phase of the Cieneguita’s development is funded by our partner MRT, for the 12-month period from March 2011 through April 2012, we need to raise additional capital to pursue our business plan of acquiring, exploring and developing additional high impact mineral properties and to provide a buffer for the possibility that the expected net cash flow currently generated by MRT is interrupted. During this period, we will need to receive from production at the Cieneguita operations a minimum of $1,250,000for general and administrative costs. As continuous operations have only recently begun we cannot ascertain how reliable this income will be. This does not include any capital needed to pay our accounts payables and to execute our exploration programs as described below.




Plan of Operation




Summary





Our business plan is to proceed with the exploration and development of our Mexican and Argentine mineral properties to determine whether they contain commercially exploitable reserves of gold, silver or other metals.





In the event that our exploration and development program finds exploration targets that warrant additional exploration work, including exploration by drilling, we will not have enough cash available to fund an expanded exploration program. If we decide to expand our exploration and development program, we would need to raise additional capital to meet these needs. We currently do not have any sources of additional capital available to us and we may not have any in the future. The failure to raise additional capital would severely curtail our ability to conduct any additional exploration work that might be warranted because of the results of our current exploration program.





On May 3, 2011, we appointed Dr. Alexander Becker as advisor to the board of directors, who has a PhD in Structural Geology, and an extensive history as an exploration geologist to assist us with the selection and development of exploration projects.





In February 2011, we entered into an agreement with Compania Minera Alto Rio Salado S.A., a private Argentine entity, for the acquisition of the 15,000-hectare Cerro Delta Project in northwest La Rioja Province, Argentina. Under the terms of the agreement, the Company must pay $150,000 upon signing (paid), $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. The vendor will retain a 1% NSR.





In conjunction with the acquisition of the Cerro Delta Project, we completed a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,312,000. Each unit consists of one share and one share purchase warrant. Each warrant is convertible into one share at a conversion price of $0.30 for a period of two years from the closing date.





In March 2011, we appointed Bruno Le Barber as a member of the board of directors. Mr. Le Barber has extensive financial expertise and is a co-founder of Vortex Capital (“Vortex”), a Hong Kong based gold fund. Previously he was a Vice President at Morgan Stanley in London where he advised trading desks and a large investor base while publishing macro-economic studies. Mr. Le Barber was also a global technical strategist with ABN Amro in Paris.He manages Vortex together with Emilio Alvarez, former Executive Director, Equity Research with Morgan Stanley in London.




33





In October 2010, we appointed Miguel F. Di Nanno as President and Chief Executive Officer, replacing George Young effective as of October 15, 2010. Mr. Young remains on our board of directors. Mr. Di Nanno has experience in mining and energy exploration and most recently served as president of Somuncurah S.R.L. and AupaS.A., both exploration and development firms focused in Argentina. He has also previously served as the chief operating officer of the Grosso Group, an exploration and new mining business development firm and as the representative and country manager in Argentina for Palladon Ventures Ltd., a gold and silver exploration company. He has a degree in Mining Engineering – Ore Dressing from the National University of San Juan.





In July 2010, we appointed Neil Maedel, Randy Buchamer and Gary Parkison to our board of directors. Mr. Maedel is an investment banker specializing in international resource projects; Mr. Buchamer has extensive experience in business administration and finance; and Mr. Parkison is qualified geologist and project manager with expertise in exploration and development of minerals and metals projects. All of the newly appointed directors have technical and financial industry experience base that will assist us with operations and our planned listing on either the Toronto Stock Exchange or the TSX Venture Exchange, consistent with our status as a producing resource company.





In July 2010, we reincorporated from the State of Colorado to the State of Delaware. The reincorporation was effected pursuant to an agreement and plan of merger (the “Merger Agreement”), by and between us and Pan American Goldfields Ltd.,a Colorado corporation (formerly Mexoro Minerals Ltd.), with Pan American being the surviving corporation. Accordingly, the rights of our shareholders are now governed by Delaware General Corporation Law and the certificate of incorporation and bylaws of Pan American are filed with the State of Delaware.





In May 2010, management decided to drop the Sahuayacan properties due to lack of economic thicknesses and grades of gold mineralization encountered in the drilling program, eliminating any future concession payments on these properties.





In May 2010, Mr. Francisco “Barry” Quiroz and Mr. John Clair resigned from our board of directors. Neither director resigned as a result of a disagreement with us on any matter relating to our operations, policies or practices.





In September 2009, we entered into private placement subscription agreements, as thereafter amended, with certain U.S. accredited investors and certain non-U.S. investors for the private placement of 12,500,000 unregistered shares of the common stock with 100% warrant coverage at a purchase price of $0.20 per unit. The warrants have an exercise price of $0.30 per share, a two-year term and will not be exercisable until 12 months after their date of issuance. As a result of the sale of all the unregistered shares, we received aggregate gross proceeds, prior to any expenses, of $2,500,000from the private placement.





In August 2009, we dropped one of our properties in the Encino Gordo concessions, Encino Gordo 2. Management determined that the property payments due to the concession holder were too expensive and we decided to not make the required option payment. There is currently no plan to renegotiate the payments for this property.





In May 2009, we entered into a letter of agreement and in July 2009, we signed the definitive agreement to sell our Guazapares project, located in south western Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., and the Mexican subsidiary of Paramount Gold and Silver Corp. (“Paramount”) for a total consideration of up to $5.3million. The Guazapares Project is comprised of 12 claims close to Paramount’s San Miguel discovery. The purchase price is to be paid in two stages, with the first payment of $3.7 million released from escrow in February 2010, as the transfer of the 12 claims to Paramount was completed. An additional payment of $1.6 million is due if, by July 10, 2012, either (i) Paramount sells its Mexican subsidiary or (ii) Guazapares is put into production.The definitive agreement closed in October 2009 and a 5.7% commission was paid on the closing of the sale.





In February2009, we entered into a development agreement with MRT, which we amended in December 2009. Pursuant to the terms of the development agreement, as amended, MRT has agreed to invest up to $8million to initiate the first phase of productionand to complete a feasibility study on the Cieneguita Project. The first phase of production is limited to the mining of the mineralized material that is available from the surface to a depth of 15 meters (“First Phase Production”). In exchange, we assigned MRT a 74%interest of the net cash flows from First Phase Production and a 54% ownership interest in the Cieneguita Project.





To fund our continued operations, we issued $1.5 million of convertible debentures in March 2009, of which an aggregate of $880,000 was issued to Mario Ayub, one of our directors, and to his affiliated entity, MRT. Pursuant to the terms of the convertible debentures, the holders irrevocably converted the debentures into a 10% ownership interest in the Cieneguita Project and a 10% interest in the net cash flow from First Phase Production. In December 2009, Mario Ayub and MRT agreed to resell an aggregate 4% ownership interest in the Cieneguita Project back to us, along with 4% of the net cash flow from First Phase Production, in return for $550,000. In a private transaction not involving us, the other holders contributed their remaining 6% ownership interest in the Cieneguita Project to a newly formed entity, Marje Minerals SA (“Marje Minerals”).




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As a result of our amended development agreement and our agreements with the debenture holders, the ownership interest in the Cieneguita Project and the net cash flows from the First Phase Production are held by us, MRT and Marje Minerals as follows:





Holder

Ownership Percentage

Net Cash Flow Interest From First Phase Production

Net Cash Flow Interest Following First Phase ProductionMRT

54%

74%

54%Marje Minerals

6%

6%

6%Pan American

40%

20%

40%





Any additional costs for the First Phase Production and the feasibility study for the Cieneguita Project, after MRT invests $8million, will be shared by us, MRT and Marje Minerals on a pro-rata basis based on their respective ownership percentages in the Cieneguita Project.





The major terms of the development agreement with MRT and Marje Minerals are as follows:





·
MRT purchased $1 million of secured convertible debentures at 8% interest (payable in stock or cash). The proceeds from this investment were used for continued exploration and development of the Cieneguita Project and general working capital. In November 2009, MRT exercised its conversion rights on the debenture and MRT was issued 3,333,333 common shares and a warrant to purchase 1,666,667 shares of common stock at an exercise price of $0.50 per share.





·
MRT agreed to provide the necessary working capital to begin and maintain mining operations, estimated to be $3 million, to put the first phase of the Cieneguita Project into production. In exchange for these funds, we assigned MRT an interest to 74% of the net cash flow from First Phase Production. The agreement limits the mining during First Phase Production to the mineralized material that is available from the surface to a depth of 15 meters.





·
MRT committed to spend up to $4 million to take the Cieneguita Project through the feasibility stage. In doing so, we assigned MRT a 54% interest in our rights to the Cieneguita Project. After the expenditure of the $4 million, all costs will be shared on a pro-rata ownership basis (i.e. 54% to MRT, 40% to us and 6% to Marje Minerals). If any party cannot pay its portion of the costs after the $4 million has been spent, then their ownership position in the Cieneguita Project will be reduced by 1% for every $100,000 invested by the other owners. Our ownership interest in the Cieneguita Project, however, cannot be reduced below 25%. In addition, we have the right to cover Marje Minerals’ pro rata portion of costs if they cannot pay their portion of the costs. In return, we will receive 1% of Marje Minerals’ ownership position in the Cieneguita Project for every $100,000 we invest on their behalf.





·
The MRT agreement was contingent on our repaying a debenture to Paramount. In March 2009, we repaid $1 million, or approximately two-thirds of the debt, and Paramount released a security interest it had on the Cieneguita Project. In October 2009, we repaid the remaining amount of the debt, and Paramount released its security interests on the Sahuayacan, Guazapares and Encino Gordo properties.





In September 2009, we hired George Young as our chief operating officer, Salil Dhaumya as our chief financial officer and Manuel Flores as our operations manager. In November 2009, Mr. Young was appointed president upon the resignation of Francisco “Barry” Quiroz. In October 2010, we appointed Miguel F. Di Nanno as president replacing Mr. Young.Other than these employees, all of the employees we hire are contracted from third parties specializing in providing employees for Mexican companies. In using third party contractors we minimize our exposure to Mexican employment law and all liabilities are undertaken by the third party contractors providing the services. We pay a flat rate to the third parties for their services.





In February 2009 we entered into a development agreement with MRT to provide us with immediate funding to initiate production at our Cieneguita property, to complete a feasibility study and to continue the exploration of its properties. The development agreement was amended in December2009 and calls for project funding of up to $8 million to be spent on First Phase Production and to complete a feasibility study. To date MRT has contributed $1 million in working capital and has spent additional funds on initiating production on the Cieneguita Project through the building of a floatation circuit mill.





Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity. Additionally, if our exploration during that time period is successful, we may need to raise additional capital to fund those exploration programs. At this time, we cannot assess with any accuracy our total capital needs to fund an expanded exploration program beyond our basic program.




35





For the 12-month period from March 2011 through February 2012, we need to raise additional capital to maintain operations. We will need a minimum of $1,500,000 for general and administrative costs. This does not include any capital needed to pay our accounts payables and to execute our exploration programs as detailed below.





In the event that we do discover a mineral deposit on one of our properties, of which there is no guarantee, we would need to expend substantial amounts of capital to put any of our properties into production, if so warranted. The amount of such expenditures is indeterminable at this time as our exploration and development program has not advanced far enough to provide us with results to determine this information.





Such expenditures depend upon the size of the mineralized body, the grade of the mineralized body and the type of mining that is required to extract any minerals that may be found. Regardless, we do not have enough capital available to us to make any such expenditure that would be required to put any mineral property into production, and we therefore would have to raise the additional capital or, if possible, enter into a joint venture for the production phase. If we were to form a joint venture, we cannot assess what our final position in the Project would be. We do not have any sources of capital available to us at this time to fund such a Project if one should be discovered.





In the event that we should find a mineable reserve, 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.




Exploration Projects – Current Status





To date the Sierra Madre gold exploration program has been focused on advancing current exploration projects to the next exploration stage. During most of 2008 and 2009, exploration activities were concentrated on four projects: Sahuayacan, Encino Gordo, Guazapares and Cieneguita. However, exploration activities during the year ended February 28, 2011 were focused on the Cieneguita Project. We dropped the Sahuayacan Project due to lack of economic thicknesses and grades of gold mineralization encountered in the drilling program eliminating any future concession payments on these properties. As well, we sold our Guazapares concessions to Paramount in the fiscal year ended February 28, 2010. To date, most of the data gathered during our field campaigns and drilling programs is completely compiled and is being evaluated. The next exploration stages for the Cieneguita and Encino Gordo Projects are in the planning process.





The exploration program for Cerro Delta Project is under planning and we intend to start the drilling program at the end of 2011. An initial drilling campaign is estimated at a cost of $700,000.





Over the next 12 months, we intend to explore our three Projects to determine whether there are economically attractive concentrations of gold and gold-silver mineralization. We intend to hire additional employees but do not plan to make any purchase of equipment over the next 12 months. At this time, though, the exploration program is only planned for the next 12 months, which we will undertake when the necessary capital has been raised to complete these programs. We do not have any sources of capital identified at this time and no assurance can be given that we will be able to complete the proposed exploration program.





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 the financial statements. The most significant estimates are:





Mineral property costs





We have been in the exploration stage since March 1, 2004, and have not yet realized any significant revenues from its 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.





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





36





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 theBlack-Scholes option-pricing model.





Results of Operations





Year ended February 28, 2011 compared to the year ended February 28, 2010.





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.





During the year ended February 2011, MRT, our joint venture partner,started commercial production at Cieneguita. Following is the information on the ore processed, concentrate produced and average sale price of metals. In the year ended February 2010, MRT had only completed a pilot test and there was no commercial production in place.




Mineralized Materials Processed - Fiscal Year 2011









Tons and Grade of Concentrate Produced – Fiscal Year 2011










Average Price Received – Fiscal Year 2011





Gold


Silver


Lead(per ounce)


(per ounce)


(per tonne)$
1,288.21


$
24.08


$
2,256.65





This concentrate information was provided to the Company by MRT pursuant to the terms of the development agreement between the parties. Under the development agreement, MRT is responsible for mining, processing and selling the concentrate from the Cieneguita Project. The Company is entitled to receive 20% of the net cash flows from MRT’s operations at the Cieneguita Project. The Company does not have any direct agreement with any third party regarding the sale of concentrate from the Cieneguita Project.





Revenues





We earned 20%of proportionate net income of $1,136,000 (2010 - $309,000)from the joint venture with MRT from the gold production during the year ended February 28, 2011. Other than the revenue from the joint venture with MRT, we did not have commercial production of any of our properties in the year ended February 28, 2011. We cannot provide





37





any assurances that we will continue to earn revenues of any significance from the joint venture with MRT, if ever. We are presently in the exploration stage of our business. We can provide no assurance that we will discover commercially exploitable levels of mineral resources on our properties or, if such resources are discovered, that we will enter into commercial production of our mineral properties.





Operating Costs





We incurred operating costs of $326,000 (2010 - $nil) during the year ended February 28, 2011 as a portion of the operating costs of production at Cieneguita in the joint venture with MRT.We did not incur any operating costs during the year ended 2010 due to the fact that we did not achieve production from exploration activities during that year.





Expenses





Our operating loss decreased to $3,122,000 for the year ended February 28, 2011 compared to $5,168,000 for the year ended February 28, 2010, representing a decrease of $2,046,000. The decrease is primarily attributable to lower exploration costs which was due to lack of funding, lower non-cash stock-based compensation expenses and curtailment of exploration on Cieneguita because of the joint venture agreement with MRT, where MRT has agreed to spend up to $4,000,000 to take Cieneguita to a feasibility stage.





In 2011, we incurred lower general and administrative expenses of $2,578,000 compared to $4,274,000 in 2010, and lower mineral exploration expenses of $400,000 in 2011 compared to $938,000 in 2010, which resulted in decrease of expenses.  We reduced our exploration activity as described above.





In the general and administrative expense category for the fiscal year ended February 28, 2011, we expensed $824,000 for stock-based compensation expense compared to $2,173,000 in 2010 as we issued options and warrants to new directors, investor relation consultants and officers to retain their services for the long term. Other than increased management fee of $336,000 in 2011 compared to $143,000 in 2010 due to increase in additional management personnel and increase in office and administration fee of $419,000 in 2011 compared to $388,000 in 2010 due to severance of employees terminated in Mexico, our expenses decreased across all other categories.





For the year ended February 28, 2011, we incurred $719,000 in mineral property costs as payments for our Mexican properties. At February 28, 2011, we tested the carrying amounts of all our Mexican properties for recoverability. Based on our tests, we concluded that the sum of undiscounted cash flows expected to result from the use and eventual disposition of all such properties was $nil as the properties have no known reserves. Accordingly, a mineral property impairment loss of $719,000 has been recognized for the year ended February 28, 2011.Impairment of mineral property costs in 2011 increased from $207,000 for 2010. If we are able to raise additional funds to continue with our business plan, we anticipate that exploration expenditures will increase in fiscal 2010 as a result of anticipated exploration activities on our Mexican and Argentine mineral properties.





Our interest expense decreased to $90,000 for 2011 compared to $435,000 for 2010. The lower interest expense in 2011 pertains exclusively to the promissory notes and loans payables whereas the 2010 expense includes non-cash interest expensed for warrant amortization and beneficial conversion feature of convertible debentures issued by us in May and June of 2008 along with the interest accrued on promissory notes and loans payables.





Net Loss





Our net loss increased to $3,238,000 for 2011 compared to $1,191,000 for 2010. This increase in our loss was primarily attributable to absence of gain recorded on sale of Guazapares Project and 10% sale of Cieneguita Project of $4,390,000 in 2010 along with higher impairment of mineral property costs offset by lower stock-based compensation expense and lower mineral exploration costs.The non-cash component of stock-based compensation costs was $824,000 compared to $2,173,000 for 2010.





We anticipate that we will continue to incur losses until such time that we can identify mineral deposits and achieve significant revenues from sale of gold recovered from our Mexican mineral property, if ever. There is no assurance that we will commence the development stage of our operations at any of our Mexican mineral properties or achieve revenues.





Liquidity and Capital Resources





Since inception, we have undergone two unsuccessful business combinations, which have caused us to incur significant liabilities and have resulted in the accumulation of a substantial deficit during the exploration stage. As of February 28, 2011, we had total assets of $1,322,000, total current liabilities of $2,587,000, and a deficit of $46,294,000 accumulated during the exploration stage.




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Cash and Working Capital





During the year ended February 28, 2011, we did not increase the activities for our exploration program but have continued to incur corporate administrative expenses, for which, we were unable to raise sufficient funds to pay many of our suppliers. Our accounts payable and accrued liabilities decreased from $2,773,000 as of February 28, 2010 to $1,690,000 in the year ended February 28, 2011 by paying some of our suppliers in cash and converting some of the debt into equity. Most of the payables are being carried forward from fiscal 2010.





We will require additional financing during the current fiscal year according to our planned exploration activities. We are in the process of determining our plan to carry out exploration and administration activities on our Mexican and Argentine mineral properties in the current fiscal year. We also anticipate spending approximately $1,500,000 during the next 12 months on general and administrative costs. At this time we do not have the necessary capital to initiate the exploration program and to cover general and administrative costs.





We will need to raise additional working capital to maintain basic operations. We plan to raise those funds through the sale of equity or debt. Other than our definitive agreements signed with MRT, we do not have any other sources to raise additional capital for usat this time and no assurance may be given that we will be able to find sources to raise additional capital. Failure to raise any additional capital would most likely require us to cease operations and abandon all of our exploration properties.





The amount of working capital could be adversely affected further in the event claims are made against us alleging that certain shares we previously issued pursuant to Form S-8 registration statements constituted an illegal public offering because we were a “shell company” at the time and, as a result, was not eligible to use Form S-8 for registration of shares under the Securities Act of 1933. In August and October of 2005, we issued shares of common stock to an officer of Pan American as compensation for consulting services. The two share issuances were for a combined total of 30,000 shares and each of the share issuances was made pursuant to a registration statement on Form S-8 under the Securities Act of 1933. Although we believe these shares were properly issued, a claim could be made that issuance of the shares constituted an illegal public offering because we were a “shell company” at the time. Shell companies  [i.e. companies which have no or nominal operations and either (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets] are not eligible to use Form S-8 for registration under the Securities Act of 1933. If either of these transactions did violate federal securities laws, subsequent purchasers of the shares may have claims against us for damages or for rescission of their purchase transaction and recovery of the full subscription price paid, together with interest. As of the date of this quarterly report, no one has made or threatened any claim against us alleging violation of the federal securities laws. In the event such claims were successfully asserted, there is no assurance that we would have sufficient funds available to pay and it is likely that we would be required to use funds currently designated as working capital for that purpose. That would substantially reduce the amount of working capital available for other purposes and, in that event, we could be forced to cease or discontinue certain operations and to liquidate certain assets to pay our liabilities, including, but not limited to, rescission claims.





Cash Used in Operating Activities





Cash used in operating activities amounted to $3,586,000 for the fiscal year ended February 28, 2011 compared to$1,073,000 used for operating activities in the fiscal year ended February 28, 2010. The cash was used for general and administrative costs and for the exploration programs on the properties.





Cash Used in Investing Activities





Cash used in investing activities amounted to $14,000 for the fiscal year ended February 28, 2011 for purchase of equipment compared to $6,000 provided by investing activities for the fiscal year ended February 28, 2010 from sale of equipment.





Financing Activities





Cash provided by financing activities decreased to $563,000 for the fiscal year ended February 28, 2011 compared to $2,163,000for the fiscal year ended February 28, 2010. Most of the cash provided by financing activities in 2010 was provided by private placement. Cash provided by financing activities was used to fund our operating and investing activities.





In March 2011, we completed a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,312,000. Each unit consists of one share and one share purchase warrant. Each warrant is exercisable for one share of common stock at an exercise price of $0.30 for a period of two years from the closing date.





We anticipate continuing to rely on equity sales of our common stock or issuance of debt in order to continue to fund our business operations. Issuances of additional shares will result in dilution to our existing shareholders.




39





During the year ended February 28, 2009, Paramount provided Pan American $1,370,000 in the form of secured convertible debentures bearing interest at a rate of 8% per annum for a term of one year. Paramount had the option to convert the debt into units.





In March 2009, we entered into an agreement with Paramount restructuring its payment terms on the three outstanding secured convertible debentures held by Paramount. Under the terms of the agreement, we paid Paramount $1,000,000 to cancel two debentures held by them, one issued on May 9, 2008 for $500,000 and another issued on July 11, 2009 for $500,000. We also amended a debenture issued to them on June 18, 2009 in the face amount of $370,000. The amount of that debenture was increased to $521,047.37 which, among other things, included interest accrued on all three debentures to March 31, 2009. We were obligated to make a payment on March 31, 2009 on this debenture in the amount of $393,547.37 and the balance of $127,500 was to be re-paid on April 30, 2009. This remaining amount of $127,500 was interest free as long as the debenture remained in good standing. In April 2009, we repaid $300,000 of the amended convertible debentures. Subsequently, Paramount deferred the remaining payment until the closing of the sale of our Guazapares properties to Paramount. On October 8, 2009, we paid the remaining outstanding balance of $221,047.37 for the amended outstanding debentures.





In February2009, we entered into a development agreement with MRT, which we amended in December2009. Pursuant to the terms of the development agreement, as amended, MRT has agreed to invest up to $8million in First Phase Production and to complete a feasibility study. In exchange, we assigned MRT an interest to 74% of the net cash flows from First Phase Production and a 54% ownership interest in the Cieneguita Project.





To fund our continued operations, we issued $1.5million of convertible debentures in March 2009, of which an aggregate of $880,000 was issued to Mario Ayub, a director of Pan American, and to his affiliated entity, MRT. Pursuant to the terms of the convertible debentures, the holders irrevocably converted the debentures into a 10% ownership interest in the Cieneguita Project and a 10% interest in the net cash flows from First Phase Production. In December 2009, Mario Ayub and MRT agreed to resell an aggregate 4% ownership interest in the Cieneguita Project back to us, along with 4% of the net cash flows from First Phase Production, in return for $550,000. In a private transaction not involving us, the other holders contributed their remaining 6% ownership interest in the Cieneguita Project to a newly formed entity, Marje Minerals SA.





As a result of our amended development agreement and our agreements with the debenture holders, the ownership interest in the Cieneguita Project and the net cash flows from the First Phase Production are held by us, MRT and Marje Minerals as follows:





Holder

Ownership Percentage

Net Cash Flow Interest From First Phase Production

Net Cash Flow Interest Following First Phase ProductionMRT

54%

74%

54%Marje Minerals

6%

6%

6%Pan American

40%

20%

40%





Any additional costs for the First Phase Production and the feasibility study for the Cieneguita Project, after MRT invests $8 million, will be shared by us, MRT and Marje Minerals on a pro-rata basis based on their respective ownership percentages in the Cieneguita Project.





The major terms of the development agreement, as amended, with MRT and Marje Minerals are as follows:





·
MRT purchased $1 million of secured convertible debentures at 8% interest (payable in stock or cash). The proceeds from this investment were used for continued exploration and development of the Cieneguita Project and general working capital. On November 5, 2009, MRT exercised its conversion rights on the debenture and MRT was issued 3,333,333 common shares and a warrant to purchase 1,666,667 shares of common stock at an exercise price of $0.50 per share.





·
MRT agreed to provide the necessary working capital to begin and maintain mining operations, estimated to be $3 million, to put the first phase of the Cieneguita Project into production. In exchange for these funds, we assigned MRT an interest to 74% of the net cash flow from First Phase Production. The agreement limits the mining during First Phase Production to the mineralized material that is available from the surface to a depth of 15 meters.





·
MRT committed to spend up to $4 million to take the Cieneguita Project through the feasibility stage. In doing so, we assigned MRT a 54% interest in our rights to the Cieneguita Project. After the expenditure of the $4 million, all costs will be shared on a pro rata ownership basis (i.e. 54% to MRT, 40% to us and 6% to Marje Minerals). If any party cannot pay its portion of the costs after the $4 million has been spent, then their ownership position in the Cieneguita Project will be reduced by 1% for every $100,000 invested by the other owners. Our ownership interest in the Cieneguita Project, however, cannot be reduced below 25%. In addition, we have the right to cover Marje Minerals’ pro rata portion of costs if they cannot pay their portion of the costs. In return, we will receive 1% of Marje Minerals’ ownership position in the Cieneguita Project for every $100,000 we invest on their behalf.




40




In May 2009, we entered into a letter of agreement to sell our Guazapares Project located in southwestern Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount for a total consideration of up to $5.3 million. A definitive agreement was signed on July 10, 2009 but the closing was subject to the satisfaction of various conditions. The first payment of $3.7 million was released from escrow in February 2010, as the transfer of the 12 claims to Paramount was completed. An additional payment of $1.6 million is due if, within 36 months following execution of the letter of agreement (July 10, 2009), either (i) Paramount Gold de Mexico SA de C.V. is sold by Paramount, either through a stock sale or a sale of substantially all of its assets, or (ii) Paramount’s San Miguel Project is put into commercial production.





Going Concern





Our financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/ or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.





We have a history of operating losses and will need to raise additional capital to fund its planned operations. As at February 28, 2011, we had a working capital deficit of $1,483,000 (2010 - $232,000 working capital) and an accumulated deficit during the exploration stage of $46,294,000 (2010 – $43,056,000). These conditions raise substantial doubt about our ability to continue as a going concern.





There is no assurance that our operations will be profitable. We have conducted private placements of convertible debt and common stock, which have generated funds to satisfy all of the initial cash requirements of our planned Mexican extraction of its mineralized material and exploration ventures. Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity.





Off-Balance Sheet Arrangements





We currently do not have any off-balance sheet arrangements which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.





ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable.





ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The financial statements required to be filed pursuant to this Item 8 are appended to this Annual Report on Form 10-K.





ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.





None.





ITEM 9A(T). CONTROLS AND PROCEDURES.





Disclosure Controls and Procedures





The Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company's controls and other procedures of an issuer that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer’s management, including its chief executive and chief financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Wemaintain such a system of controls and procedures in an effort to ensure that all information which it is required to disclose in the reports it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified under the SEC's rules and forms and that information required to be disclosed is accumulated and communicated to chief executive and chief financial officers to allow timely decisions regarding disclosure.




41





As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our certifying officer, to allow timely decisions regarding the required disclosure.





Internal Control Over Financial Reporting





Management is responsible for the preparation of the financial statements and related financial information appearing in this Annual Report on Form 10-K. The financial statements and notes have been prepared in conformity with accounting principles generally accepted in the United States of America. Management is also responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company's internal control over financial reporting is defined as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.





Management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, not absolute, assurance that the objectives of the control system are met and may not prevent or detect misstatements. Further, over time, control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate.





With the participation of the chief executive officer and chief financial officer, our management evaluated the effectiveness of our internal control over financial reporting as of February 28, 2011 based upon the framework in Internal Control –Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that, as of February 28, 2011, the Company had a material weakness in its internal control over financial reporting. Specifically, the management determined that the Company did not have sufficient personnel resources within the accounting function to segregate the duties and lack of oversight by an audit committee. Accordingly, our internal control over financial reporting is ineffective as of February 28, 2011.





To remediate our internal control weaknesses, management intends to implement the following measures:





·
We will add sufficient accounting personnel to properly segregate duties and to effect a timely, accurate preparation of the financial statements.





·
We will add an independent director who is a financial expert to the board.





The additional hiring is contingent upon us getting sufficiently funded through equity or debt for its continued exploration activities and corporate expenses. Our management expects to secure funds in the coming fiscal year but provides no assurances that it will be able to do so.





This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.




42





Changes in Internal Control over Financial Reporting





There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




ITEM 9B. OTHER INFORMATION.





Not applicable.





43





PART III





ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





The directors and executive officers currently serving the Company are as follows:





Name
Age
TenureMario Ayub
58
Director and Chairman since October 2009Randy Buchamer
54
Director since July 2010Miguel DiNanno
57
President and Chief Operating Officer since October 2010Salil Dhaumya
45
Chief Financial Officer since September 2009Bruno Le Barber
37
Director since March 2011Neil Maedel
53
Director since July 2010Gary Parkison
59
Director since July 2010George Young
59
Director since September 2009





The directors named above will serve until the next annual meeting of our stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders’ meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists or is contemplated. There is no arrangement, plan or understanding between any of the directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current directors to our board. There are also no arrangements, agreements or understandings between non-management shareholders and management under which non-management shareholders may directly or indirectly participate in or influence the management of our affairs. Officers are elected by the board of directors and serve until their successors are appointed by the board of directors. Biographical resumes of each officer and director are as follows:





The following sets forth information regarding the business experience of our directors and executive officers as of February 28, 2011. In addition to the information regarding our directors and skills that led our Board to conclude that the individual should serve as a director, we also believe that all of our directors have a reputation for integrity, honesty and adherence to high ethical standards. We believe they each have demonstrated business acumen and an ability to exercise sound judgment, as well as a commitment of service to our company and our Board.





Mario Ayub





Mr. Ayub has served as a director and Chairman of Pan American since October 2009. He currently serves as President of MRT Investments Ltd. since March 2004 and has served as the President of Minera Rio Tinto S.A. de C.V., a Mexican company, since 1994. Minera Rio Tinto S.A. de C.V. has a joint venture agreement with us to develop and mine our Cieneguita Project in Mexico. He is a former President of the Chihuahua Mining Association and of the National Miners Association of Mexico. He graduated in 1976 from the Universidad Iberoamericana in Mexico City with a degree in chemical engineering, and he has completed post-graduate studies in metallurgy at Comision de Fomento Minero and South DakotaUniversity. Mr. Ayub has put seven mines into production over the past fifteen years. Mr. Ayub has previously served as a director of the Company from May 2004 to November 2008. Mr. Ayub is qualified to sit on the Company’s board of directors due to his extensive mining experience, including his role as a senior executive at Minera Rio Tinto.





Randy Buchamer





Mr. Randy Buchamer, age 54, has an extensive background in business administration and finance. Mr. Buchamer has served as the Chairman of RewardStream, a private B.C.,Canada based technology company, since July 2002. From August 2001 to October 2009, Mr. Buchamer was the CEO of Voice Mobility and directed its transformation into a





44





profitable company. From March 1999 to April 2000 Mr. Buchamer was the Managing Director, Operations of The Jim Pattison Group and was responsible for supporting the operations of the companies owned by The Jim Pattison Group. Prior to joining The Jim Pattison Group, Mr. Buchamer was the CIO and later the COO for Mohawk Oil during its restructuring and listing on the Toronto Stock Exchange. At the time, Mohawk was one of Canada’s largest independent petroleum and convenience store retailers. Mr. Buchamer holds an Executive Management Development Degree from SimonFraserUniversity and a Business Administration Degree from the University of Illinois. He also has significant experience in Securities and Exchange Commission, Toronto Stock Exchange and Sarbanes-Oxley compliance matters. Mr. Buchamer is qualified to sit on the Company’s board of directors due to his significant executive experience and his experience with other publicly traded companies.




Miguel DiNanno





Mr. DiNanno has served as the president since October 2010. Mr. DiNanno previously served as President of Somuncurah S.R.L. and AupaS.A., both of which are mining and energy exploration and development firms focused in Argentina, since 2008. He previously served as the Chief Operating Officer of the Grosso Group, an exploration and new mining business development firm, from 2007 to 2008 and as the Representative and Country Manager in Argentina for Palladon Ventures Ltd., a gold and silver exploration company, from 2005 to 2008. From 2002 to 2005, Mr. Di Nanno served as the Commercial Development Manager in Argentina for Queensland Government and the Australian Industry Group. His prior experience also includes positions as Country Manager in Argentina for Phelps Dodge Corporation and Zone Manager for Canyon Resource Corporation. He has also previously provided consulting services to MIM Exploration, COMINCO, Brancote Holdings, Viceroy Resources, Cyprus Minerals, Mauricio Hochschild, Bema Gold, Northern Orion, and Lakefield Research Ltd. He earned a degree in Mining Engineering – Ore Dressing from the National University of San Juan.  Mr. DiNanno is qualified to sit on the Company’s board of directors due to his extensive mining and engineering experience, and his special focus on mining projects within Argentina.




Salil Dhaumya





Mr. Dhaumya has served as the chief financial officer since September 2009. Mr. Dhaumya currently serves as the corporate controller for IBC Advanced Alloys Corp. since August 2008 and as chief financial officer of War Eagle Mining Company Inc. since August 2010, both Canadian reporting issuers listed on the TSX Venture Exchange. Prior to that time, he served as corporate controller for New Legend Group Ltd., a TSX Venture Exchange-listed capital pool company, from June 2007 to February 2009. Mr. Dhaumya served as our Chief Financial Officer from October 2007 to November 2007. From August 2006 to June 2007, Mr. Dhaumya served as a management consultant at MCSI, providing corporate financial consulting services to Canadian and U.S. listed small reporting companies. From August 2005 to May 2006, Mr. Dhaumya also worked as a business analyst with Heli-One, a division of CHC Helicopters, a company providing helicopter support to the CHC Global Operations and third parties. He has also served as controller of Aquilini Group (also known as Golden Eagle Group), a business conglomerate from March 2002 to July 2005. Mr. Dhaumya graduated with honors in cost accounting at PunjabUniversity in Chandigarh, India in 1986 and is a certified management accountant, a designation obtained in British Columbia, Canada in 2004. It is expected Mr. Dhaumya will spend approximately 70% of his time working for our Company as Chief Financial Officer.





Bruno LeBarber





Mr.Le Barber has served as a director since March 2011. He is a co-founder of Vortex Capital, its Managing Director and co-CIO of Vortex Capital Global Precious Metals Fund Ltd. Prior to that time, Mr. Le Barber spent over three years at Morgan Stanley in London in the GMTS (Global Market Trading Strategy) team. He served as a Vice President and their role was advising internally proprietary trading desk and a large base of Alternative Investment Funds, a global macro team publishing macro-economic studies on a regular basis. Mr. Le Barber also previously served as a global technical strategist and pan-European institutional sales person with ABN Amro in Paris for over two years. Mr. Le Barber began his career as an assistant portfolio manager at Leven Gestion in Paris in 1997, where he took part in the investment committee and was involved in stock selection. Mr. Le Barber holds a Business Degree from Bordeaux's Essica. Mr. LeBarber is qualified to sit on the Company’s board of directors due to his finance experience and his experience in raising funds for development stage mining companies.





Neil Maedel





Mr. Maedel has served as a director since July 2010. Mr. Maedel is a Thailand based financier specializing in international resource projects. Since June 2007, Mr. Maedel served as the Director, Business Development of Manas Petroleum during the period when it acquired interests in Tajikistan, Mongolia, Chile and Albania. Mr. Maedel previously served as a consultant and director of Eden Energy Corp. from October 2004 to December 2006. He is also a director of Andean Invest (Bahamas) through which he acted as an advisor to Pan American during its recent





45





reorganization and continues to advise the company. Mr. Maedel worked as a professional stock trader and researcher in Canada during the 1980’s and has assisted in financing resource companies for the past two decades. Mr. Maedel is qualified to sit on the Company’s board of directors due to his finance experience and his experience in raising funds for development stage mining companies and his service to other mining or energy companies.





Gary Parkison





Mr. Parkison has served as a director since July 2010. Mr. Parkison is a geologist and project manager with diverse expertise regarding the exploration and development of base and precious metals, industrial minerals, and uranium projects. Mr. Parkison is currently President of Praxis Mining Consultants LLC where he has served since November 2008. Mr. Parkison previously served as the Vice President-Exploration and Development for Constellation Copper Corporation from April 2004 to December 2008 and Chief Geologist for Cambior USA, Inc. from 1992 to 2000. He also worked as an exploration geologist for Westmont Mining, Inc. from 1984 to 1992 and for Nicor Mineral Ventures from 1978 to 1984. Mr. Parkison has participated in or been credited for a number of large copper and gold discoveries, and also has had significant experience in the successful completion of feasibility studies and mine development projects. Mr. Parkison has a B.S. degree in geology from UCLA and an M.S. from the University of California at Berkeley. Mr. Parkinson is qualified to sit on the Company’s board of directors due his mining education and his extensive experience in working with development stage mining companies.





George Young





Mr. Young has served as a director of the Company since September 2009. He is the chief executive officer and director of Fellows Energy Ltd., an early stage oil and gas company, since January 2004. Fellows Energy is a US reporting issuer trading on the over-the-counter bulletin board. Mr. Young previously served as Vice President and director of International Royalty Corporation from February 2005 to February 2008. International Royalty Corporation, a Canadian reporting issuer which trades on the Toronto Stock Exchange (“TSX”), is a company which acquires and creates natural resource royalties. Prior to that time, from January 2003 to January 2005, he served as President and director of MAG Silver Corp., a Canadian reporting issuer that trades on the TSX and the American Stock Exchange. MAG Silver is a silver exploration and emerging development company in Mexico. From October 2002 to July 2008, Mr. Young was a director of Palladon Ventures Ltd., a junior exploration and development company based in Salt Lake City, Utah, which trades on the TSX Venture Exchange in Canada. Mr.Young holds a Bachelor of Sciences degree from the University of Utah and a Juris Doctor from the University of Utah, College of Law. Mr. Young is qualified to sit on the Company’s board of directors given his previous mining experience, including his prior experience as a senior executive at International Royalty Corporation and MAG Silver and his prior service as director of Palladon Ventures.





The Board’s Role in Risk Oversight





The Board’s role in risk oversight includes receiving reports from members of management on a regular basis regarding material risks faced by the Company and applicable mitigation strategy and activity, not less than quarterly. The reports cover the critical areas of operations, development, regulatory affairs and legal and financial affairs. The Board and its committees consider these reports; discuss matters with management and identify and evaluate any potential strategic or operational risks, and appropriate activity to address those risks.





Director Independence





We appointed Gary Parkison and Randy Buchamer as directors in July 2010 and Bruno LeBarber in March 2011.  We believe that Mr. Parkison, Mr. Buchamer and Mr. LeBarber are “independent directors,” as that term is defined by applicable listing standards of The Nasdaq Stock Market and SEC rules, including the rules relating to the independence standards of an audit committee and the non-employee director definition of Rule 16b-3 promulgated under the Exchange Act. There are no family relationships among any of our directors or executive officers.





Board Committees





Our Board currently performs the functions and duties generally performed by separately constituted audit, compensation and nominating and corporate governance committees. We intend to recruit additional directors to serve on our Board, and at such time, the Board will form separate Board committees. We intend that a majority of our directors will be independent directors, and that our Board and Board committees will meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we seek listing on a securities exchange. Additionally, the Board will direct each committee to adopt a charter to govern its duties and actions.





Board and Committee Attendance




During the last fiscal year, each of our directors attended at least 75% of the total number of meetings of the Board on which such director served during that period.




46





Executive Sessions





Executive sessions of our independent directors are held at each regularly scheduled meeting of our Board and at other times as necessary. The Board’s policy is to hold executive sessions without the presence of management.





Board Leadership Structure





Mario Ayub serves as Chairman of our Board of Directors. Our Board’s general policy is that separate persons should hold positions of Chairman of the Board and Principal Executive Officer to enhance the Board’s oversight of management. Our Board believes our leadership structure enhances the accountability of our Principal Executive Officer to the Board, balances power on our Board and encourages balanced decision making. Our Board also separated the roles in recognition of the differences in roles. While our Principal Executive Officer is responsible for the day-to-day leadership of the Company, the Chairman of the Board provides guidance to the Board, sets the agenda for Board meetings and presides over the meetings of the full Board and the meetings of the Board’s non-management directors. The Board Chairman also provides performance feedback on behalf of the Board to our Principal Executive Officer. The Board intends to carefully evaluate from time to time whether our Principal Executive Officer and Chairman positions should remain separate based on what the Board believes is best for the Company and its stockholders.





Audit Review





Our Board is responsible for assuring the integrity of our financial control, audit and reporting functions and reviews with our management and our independent auditors the effectiveness of our financial controls and accounting and reporting practices and procedures. In addition, our Board reviews the qualifications of our independent auditors, is responsible for their appointment, compensation, retention and oversight and reviews the scope, fees and results of activities related to audit and non-audit services.





Executive Compensation





Our Board reviews and sets our general compensation policies and executive compensation, including officer salary levels, incentive compensation programs and share-based compensation. Our Board also has the exclusive authority to administer our stock option plan. Miguel DiNanno, our president, has abstained from any Board discussions with respect to his compensation.





Nominating and Corporate Governance





Our Board is responsible for identifying and selecting potential candidates for our Board. Our Board reviews the credentials of proposed members of the Board, either in connection with filling vacancies or the election of directors at each annual meeting of stockholders. The Board will consider qualified nominees recommended by stockholders. The Board intends to periodically assess how well it is performing, and make recommendations regarding corporate governance matters and practices. Nominees for director are selected on the basis of their depth and breadth of experience, integrity, ability to make independent analytical inquiries, understanding our business environment and willingness to devote adequate time to their board duties.





Stockholder Nominees





Our Board will consider written proposals from stockholders for nominees for director. Any such nominations should be submitted to the Board c/o the secretary of the Company and should include the following information: (i) with respect to each nominee, (a) the name, age, business address and residence address of the nominee, (b) the principal occupation or employment of the nominee, (c) the class and number of shares of the Company that are beneficially owned by the nominee, (d) a description of all arrangements or understandings between the stockholder submitting the nomination and the nominee pursuant to which the nomination is to be made by the stockholder, and (e)any other information relating to the nominee that is required to be disclosed in solicitations of proxies for the election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) with respect to the stockholder submitting the nomination, (a) the name and address of the stockholder, as they appear on our books, (b) the class and number of shares of the Company that are beneficially owned by the stockholder and (c) any material interest of the stockholder in the nomination. Such information should be submitted in the time frame described under our proxy statement.





Process for Identifying and Evaluating Nominees





Our Board believes that we are well served by our current directors. In the ordinary course, absent special circumstances or a material change in the criteria for Board membership, the Board will renominate incumbent directors who continue to be qualified for Board service and are willing to continue as directors. If an incumbent director





47





is not standing for re-election, or if a vacancy on the Board occurs between annual stockholder meetings, the Board will seek out potential candidates for Board appointment who meet the criteria for selection as nominees and have the specific qualities or skills being sought. Director candidates will be selected based on input from members of the Board, our senior management and, if the Board deems appropriate, a third-party search firm. The Board will evaluate each candidate’s qualifications and contact relevant references. Based on this input, the Board will evaluate which of the prospective candidates is qualified to serve as a director.





Communications with Directors





Stockholders who wish to communicate with our Board may do so by writing to our corporate secretary at our principal executive office located at 595 Howe Street, Unit 906, Vancouver, B.C. Canada, V6C 2T5.





Code of Ethics





Our Board of Directors adopted a code of business conduct and ethics policy, the “Code of Ethics”. The Code of Ethics allows us to focus our Board and each Director and officer on areas of ethical risk, provide guidance to Directors to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct and help foster a culture of honesty and accountability. A copy of our Code of Ethics may be obtained by writing to our corporate secretary at 595 Howe Street, Unit 906, Vancouver, B.C. Canada, V6C 2T5. Any amendments to, or waivers from, a provision of our code of ethics that applies to any of our executive officers will be posted on our website in accordance with the rules of the SEC.





Section 16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act requires our directors, officers (including a person performing a principal policy-making function) and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities of ours. Directors, officers and 10% holders are required by SEC regulations to send us copies of all of the Section 16(a) reports they file. Based solely upon a review of the copies of the forms sent to us and the representations made by the reporting persons to us, except as set forth below, we believe that during the fiscal year ended February 28, 2011, our directors, officers and 10% holders complied with the filing requirements under Section 16(a) of the Exchange Act.





48





ITEM 11. EXECUTIVE COMPENSATION.





The following table sets forth executive compensation for our named executive officers for the fiscal years ended February 28, 2011 and 2010.





Summary Compensation Table





Name And Principal Position

Fiscal year Ended February


Salary

($)


Bonus ($)


Stock Awards ($)(1)


Options Awards ($)(1)


All Other Compensation ($)


Total

($)Miguel DiNanno

President(2)


2011

2010



44,194

-



-

-



-

-



187,000

-



-

-



231,194

-Salil Dhaumya

CFO(3)


2011

2010



84,000

39,833



-

-



-

-



-

189,000



-

-



84,000

228,833George Young,

Former President(4)


2011

2010



76,645

53,333



-

-



-

-



-

333,000



-

-



76,645

386,333Francisco Quiroz

Former President(5)


2011

2010



-

102,000



-

-



-

280,000



-

-



-

-



-

382,000





(1)
Column represents the aggregate grant date fair value of stock options granted to the named executives recognized for financial statement reporting purposesin accordance with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.


(2)
In October 2010, Mr. DiNanno was appointed President.


(3)
On September 21, 2009, Mr. Dhaumya was appointed as Chief Financial Officer.


(4)
In October 2010, Mr. Young resigned as President.


(5)
On November 16, 2009, Mr. Quiroz resigned as President.




Employment Agreements





On October 15, 2010, the Company has entered into an employment agreement with Mr. Miguel DiNanno to serve as the Company’s President and Chief Operating Officer. He receives a monthly salary of $10,000. On January 24, 2011, the Company also granted Mr. Di Nanno options to purchase 1,000,000 shares of our common stock pursuant to our 2009 Nonqualified Stock Option Plan and form of Nonqualified Stock Option Agreement. The options vest in six equal installments, with the first installment vesting on the grant date and the remaining installments vesting every six months thereafter. The options have an exercise price of $0.20 per share.





Grants of Plan-Based Awards





Name
Grant Date

Number of Shares of Stock or Units


Number of Securities Underlying Options


Exercise or Base Price of Option Awards


Grant Date Fair Value of Stock and Options AwardsMiguel DiNanno
01/24/2011


-



1,000,000



-


$
187,000





Outstanding Equity Awards at Fiscal Year End





Name

Number of Securities Underlying Unexercised Options (#) Exercisable


Number of Securities Underlying Unexercised Options (#) Unexercisable

Number of Securities Underlying Unexercised Unearned Options

(#)

Option Exercise Price ($)

Option Expiration DateMiguel DiNanno


166,667



833,333
(1)
Nil


0.20

2/24/2021George Young


750,000



250,000
(2)
Nil


0.36

9/21/2019Salil Dhaumya


25,000
(3)


-

Nil


0.90

12/21/2017166,667



33,333
(4)
Nil


0.16

02/10/2019375,000



125,000
(5)
Nil


0.44

11/01/2019




49




(1)
Mr. DiNanno received 1,000,000 options under the 2009 Nonqualified Stock Option Plan. These options vest in six equal installments, with the first installment vesting on January 24, 2011. The remaining 833,333 options vest as: 166,667 options vest on July 24, 2011, 166,667 options vest on January 24, 2012, 166,667 options vest on July 24, 2012, 166,666 options vest on January 24, 2013 and 166,666 options vest on July 24, 2013.(2)
Mr. Young received 1,000,000 options under the 2009 Nonqualified Stock Option Plan. These options vest in eight equal installments, with the first installment vesting on September 21, 2009. The remaining 750,000 options vest as: 125,000 options vest on March 21, 2010, 125,000 options vest on June 21, 2010, 125,000 options vest on September 21, 2010, 125,000 options vest on December 21, 2010, 125,000 options vest on March 21, 2011, and 125,000 options vest on June 21, 2011.(3)
Mr. Dhaumya received 25,000 options under the 2007 Nonqualified Stock Option Plan. These options vested every six months over a two and a half year period beginning on the initial grant date. The remaining 4,165 options vest on June 21, 2010.(4)
Mr. Dhaumya received 200,000 options under the 2008 Nonqualified Stock Option Plan. These options vest every six months over a two and a half year period beginning on the initial grant date. The remaining 33,333 options vest on August 10, 2011.(5)
Mr. Dhaumya received 500,000 options under the 2009 Nonqualified Stock Option Plan. These options vest in eight equal installments, with the first installment vesting on November 1, 2009. The remaining 125,000 options vest as: 62,500 options vest on May 1, 2012, and 62,500 options vest on August 1, 2012.





Options Granted During the Last Fiscal Year





As of February 28, 2011, the Company granted 1,000,000 options under the 2009 Option Plan during the prior fiscal year.





Aggregate Option Exercises in Last Fiscal Year





None of the named executive officers exercised options during the year ended February 28, 2011.




50





Director Compensation





The following table sets forth information concerning the compensation paid to each of our non-employee directors during the fiscal year ended February 28, 2011 for their services rendered as directors.





DIRECTOR COMPENSATION FOR FISCAL YEAR ENDED FEBRUARY 28, 2011





Name

Fees

Earned

Or Paid

in

Cash

($)


Stock

Awards

($)


Option

Awards

($)(1)


Non-

Equity

Incentive

Plan

Compensation

($)


Nonqualified

Deferred

Compensation

Earnings

($)


All Other

Compensation

($)


Total

($)Mario Ayub


120,000
(2)


-



-



-



-



-



120,000John Clair


13,333
(3)


-



-



-



-



-



13,333Neil Maedel


80,000
(4)


-



142,000



-



-



-



242,000Gary Parkison


14,400



-



142,000



-



-



-



156,400George Young


8,000



-



-



-



-



-



8,000Randy Buchamer


14,400



-



142,000



-



-



-



156,400





(1) No option awards have been granted to the directors as compensation for their service as director.





(2) Represents $120,000 of fees paid pursuant to the Consulting Agreement, dated September 21, 2009, entered into with MRT,an entity affiliated with Mario.





(3)Represents $13,333 of fees paid pursuant to the Consulting Agreement, dated September 21, 2009, entered into with the Decerto Group,an entity affiliated with John Clair. OnMay 21, 2010, Mr. Clair resigned from our board of directors.





(4) Represents $80,000 of fees paid relating to corporate development, investor relations and corporate finance advisory services.





Directors are reimbursed for their reasonable out-of-pocket expenses incurred while attending board or committee meetings.





51





ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.





The following table sets forth information regarding the beneficial ownership of our common stock as of May 18,2011 of each person known by us to be the beneficial owner of more than 5% of our common stock.





Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to the shares. Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them. Common stock beneficially owned and percentage ownership is based on 59,618,826 shares outstanding on May 18,2011, and assuming the exercise of any options, which are presently exercisable as of May 18,2011.





Name and Address

Amount and Nature of Beneficial Owner


Percent of ClassMario Ayub

Pascual Orozco # 2117-A

Chihuahua, Chih. 31310

Mexico


8,573,333
(1)


14.38
%George Young

402 Linden

Borger, TX79007


1,065,000
(2)


1.79
%Salil Dhaumya

8895 – 112A Street,

Delta, BC. Canada V4C 4Z8


879,167
(3)


1.47
%Neil Maedel

173-4 Moo 4  Noppararhara 12 Muang, Krabi,

Thailand


8,775,000
(4)


14.72
%Gary Parkison

1194 Silverheels Drive

Larkspur, CO 80118


375,000
(5)


0.63
%Bruno LeBarber

P.O Box 309 Ugland House

George Town, Grand Cayman, KY1 - 1104

Cayman Islands


2,918,785
(6)


4.90
%Randy Buchamer

4275 Canterbury Crescent

North Vancouver, BC. Canada V7R 3A8


375,000
(7)


0.63
%Dr. Alex Becker


2,645,833
(8)


4.44
%Miguel Di Nanno

San Martin 3625 - San Carlos de Bariloche

Rio Negro Province

Argentina. 8400


166,667
(9)


0.28
%All officer and directors as a group


25,773,785



43.23
%





(1)

Includes 1,458,000 shares held by MRT Investments Inc, 3,333,333 shares held by Minera Rio Tinto SA DE CV and 1,115,333 shares owned by family members or companies owned by family members. Also includes 700,000 vested options owned by Mr. Ayub and 1,966,667 vested warrants owned by MRT Investments Inc.(2)

Includes 95,000 shares owned by Mr. Young. Also includes 875,000 vested options and 95,000 warrants, which are owned by Mr. Young.  52
  (3)

Includes 125,000 shares and 125,000 warrants held by Koios Corporate Financial Services Ltd. Also includes 629,167 vested options owned by Mr. Dhaumya.(4)

Includes 1,550,000 shares held by Andean Invest and 150,000 shares held by family members. Also includes 6,550,000 warrants held by Andean Invest, 375,000 vested warrants held by Neil Maedel and 150,000 warrants held by family members.(5)

Includes 375,000 vested warrants held by Mr. Parkison.(6)

Includes 250,000 vested warrants held by Mr. LeBarber and 2,668,785 shares held by Vortex Capital Ltd., of which, Mr. LeBarber is the managing director.(7)

Includes 375,000 warrants held by Mr. Buchamer.(8)

Includes 1,250,000 shares, 83,333 vested options and 1,312,500 vested warrants held by Dr. Becker.(9)

Includes 166,667 vested options held by Mr. DiNanno.




53





EQUITY COMPENSATION PLAN





The following table summarizes our compensation plans under which our equity securities are authorized for issuance as of February 28, 2011:





Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)

Weighted average exercise price of outstanding options, warrants and rights(b)

Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) (c)Equity compensation plans approved by security holders

32,561,733

$0.43

25,000Equity compensation plans not approved by security holders

-0-

$0.00

-0-Total

32,561,733

$0.43

25,000




54





ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.





Except for those noted below, we have not engaged in any transaction since February 28, 2010 in which the amount involved exceeds the lesser of $120,000 or 1% of the average of our total assets at year end for fiscal 2010 and 2009 and in which any of our directors, named executive officers or any holder of more than 5% of our Class A common stock, or any member of the immediate family of any of these persons or entities controlled by any of them, had or will have a direct or indirect material interest.





In February 2009, we entered into a development agreement with MRT, which we amended in December 2009. Pursuant to the terms of the development agreement, as amended, MRT has agreed to invest up to $8 million in First Phase Production and to complete a feasibility study. In exchange, we assigned MRT an interest to 74% of the net cash flows from First Phase Production and a 54% ownership interest in the Cieneguita Project.





As a result of our amended development agreement and our agreements with the debenture holders, the ownership interest in the Cieneguita Project and the net cash flows from the First Phase Production are held by the Company, MRT and Marje Minerals as follows:





Holder

Ownership Percentage

Net Cash Flow Interest From First Phase Production

Net Cash Flow Interest Following First Phase ProductionMRT

54%

74%

54%Marje Minerals

6%

6%

6%Pan American

40%

20%

40%





Any additional costs for the First Phase Production and the feasibility study for the Cieneguita Project, after MRT invests $8 million, will be shared by the Company, MRT and Marje Minerals on a pro-rata basis based on their respective ownership percentages in the Cieneguita Project.





The major terms of the development agreement, as amended, with MRT and Marje Minerals are as follows:





·
MRT purchased $1 million of secured convertible debentures at 8% interest (payable in stock or cash). The proceeds from this investment were used for continued exploration and development of the Cieneguita Project and general working capital. On November 5, 2009, MRT exercised its conversion rights on the debenture and MRT was issued 3,333,333 common shares and a warrant to purchase 1,666,667 shares of common stock at an exercise price of $0.50 per share.





·
MRT agreed to provide the necessary working capital to begin and maintain mining operations, estimated to be $3 million, to put the first phase of the Cieneguita Project into production. In exchange for these funds, we assigned MRT an interest to 74% of the net cash flow from First Phase Production. The agreement limits the mining during First Phase Production to the mineralized material that is available from the surface to a depth of 15 meters.





·
MRT committed to spend up to $4 million to take the Cieneguita Project through the feasibility stage. In doing so, we assigned MRT a 54% interest in our rights to the Cieneguita Project. After the expenditure of the $4 million, all costs will be shared on a pro rata ownership basis (i.e. 54% to MRT, 40% to the Company and 6% to Marje Minerals). If any party cannot pay its portion of the costs after the $4 million has been spent, then their ownership position in the Cieneguita Project will be reduced by 1% for every $100,000 invested by the other owners. Our ownership interest in the Cieneguita Project, however, cannot be reduced below 25%. In addition, we have the right to cover Marje Minerals’ pro rata portion of costs if they cannot pay their portion of the costs. In return, we will receive 1% of Marje Minerals’ ownership position in the Cieneguita Project for every $100,000 we invest on their behalf.





In February, 2011, we entered into private placement subscription agreements, with certain U.S. accredited investors and certain non-U.S. investors for the private placement of 6,560,000 unregistered shares of the common stock with 100% warrant coverage at a purchase price of $0.20 per unit. The Company retains the right to increase the size of the private placement. The warrants have an exercise price of $0.30 per share for a two-year term. Koios Corporate Financial Services Ltd., a limited liability company affiliated with Salil Dhaumya, our chief financial officer, purchased 125,000 unregistered shares of common stock with 100% warrant coverage, and Neil Maedel, a director in the Company, converted $10,000 of its debt into 50,000 unregistered shares of common stock with 100% warrant coverage in the private placement.




55





Indemnification of Officers and Directors





Our articles of incorporation, as amended, provide that, to the fullest extent permitted by Delaware law, our directors or officers shall not be personally liable to us or our shareholders for damages for breach of such director's or officer's fiduciary duty. The effect of this provision of our articles of incorporation, as amended, is to eliminate our rights and our shareholders’ rights (through shareholders' derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our Articles of Incorporation, as amended, are necessary to attract and retain qualified persons as directors and officers.





Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act" or "Securities Act") may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.





Conflicts of Interest





Salil Dhaumya, our chief financial officer, will only devote a portion of his time to our affairs. In addition, other officers of the Company may have business interests outside of the Company. There will be occasions when the time requirements of our business conflict with the demands of the officers’ other business and investment activities. Such conflicts may require that we attempt to employ additional personnel. There is no assurance that the services of such persons will be available or that they can be obtained upon terms favorable to us.





ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Audit Fees





The aggregate fees billed by Meyler& Company LLC for the audit of our annual financial statements were $50,000 for the fiscal year ended February 28, 2011 and $80,000 for the fiscal year ended February 28, 2010. The aggregate fees billed by Meyler& Company LLC for review of our financial statements included in its quarterly reports on Form 10-Q were $15,000 during the year ended February 28, 2011 and $33,325 during the year ended February 28, 2010.





Audit-Related Fees





The aggregate fees billed by Meyler& Company LLC for assurance and related services that were related to its audit or review of our financial statements were $nil and $nil during the fiscal years ending February 28, 2010 and February 28, 2009.





Tax Fees





The aggregate fees billed by Meyler& Company LLC for tax compliance, advice and planning were $nil for the fiscal year ended February 28, 2011 and $nil for the fiscal year ended February 28, 2010.





All Other Fees





Meyler& Company LLC billed the Company$nil for reviewing our response to SEC’s comment letter and $nil for providing an opinion letter for the Registration Statement during the fiscal year ended February 28, 2011 and $2,628 and $19,175, respectively for the fiscal year ended February 28, 2010.




56




ITEM 15. EXHIBITS


Exhibit

Number
Description2.1
Agreement and Plan of Merger dated July 2, 2010, by and between Pan American Goldfields Ltd. (formerly known as Mexoro Minerals Ltd.), a Colorado corporation, and Pan American Goldfields Ltd., a Delaware corporation (filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on July 6, 2010).3.1
Certificate of Incorporationof Pan American Goldfields Ltd. (filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on July 6, 2010).3.2
Bylawsof Pan American Goldfields Ltd. (filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on July 6, 2010).4.1
Registration Agreement dated April 20, 2004, by and among Sunburst Acquisitions IV, Inc., a Colorado company, and each of the purchasers in a private placement of shares of Sunburst (Herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 25, 2006).4.2
Stock option plan approved by the shareholders of Mexoro Minerals, Ltd. on February 13, 2006. (Herein incorporated by reference from the Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on April 7, 2006).4.3
2008 Equity Compensation Plan (Herein incorporated by reference from the Company’s current report on Form 8-K/A dated April 7, 2008, and filed with the Securities and Exchange Commission on April 11, 2008).4.4
2009 Nonqualified Stock Option Plan. (Herein incorporated by reference from the Company’s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on December 24, 2009).#10.1
Agreement made and entered in the City of Chihuahua, State of Chihuahua as of the 18th day of August, 2005 among Compania Minera De Namiquipa, S. A. de C.V. a company duly incorporated and validly existing pursuant to the laws of the United Mexican States, and Minera Rio Tinto, S. A. de C.V. a company duly incorporated and validly existing pursuant to the laws of the United Mexican States, and Mario Humberto Ayub Touche having a domicile at San Antonio No. 2036 Chihuahua, Chihuahua and Sunburst Mining De Mexico, S. A. de C.V., a company duly incorporated and validly existing pursuant to the laws of the United Mexican States (herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on December 18, 2006).10.2
Agreement made and entered at the City of Chihuahua, State of Chihuahua on this the 18th day of August of the year 2005, among Minera Rio Tinto, S. A. de C.V. a company duly incorporated and validly existing pursuant to the laws of the United Mexican States, and Sunburst Mining de Mexico, S. A. de C.V. a company duly incorporated and validly existing pursuant to the laws of the United Mexican States (Encino Gordo) (Herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 25, 2006).10.3
The New Agreement entered into on December 8, 2005 among the Company, Sunburst de Mexico, and MRT (herein incorporated by reference from the Company’s current report on Form 8-K for report date December 8, 2005 and filed with the Securities and Exchange Commission on December 14, 2005).10.4
Amendment to the New Agreement, dated April 6, 2006 by and among Mexoro Minerals, Ltd., Sunburst Mining de Mexico S.A. de C.V., and Minera Rio Tinto, S.A. de C.V. (Herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 25, 2006).10. 5
Addendum To Purchase Contract Of Mining Rights To Lump Sum Entered Into On May 6, 2004 by Corporativo Minero, S.A. De C.V. And Sunburst Mining De Mexico, S.A. De C.V., dated March 24, 2006 (Herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on September 25, 2006).
  57
  10.6
Original Agreement between MRT and Corporativo Minero dated 2004 concerning the Cieneguita property (herein incorporated by reference from the Registration Statement on Form SB-2/A filed with the Securities and Exchange Commission on December 18, 2006). 10.7 Agreement to Defer Cieneguita Property Payments, entered into on May 4, 2007 by Corporativo Minero S.A. de C.V. and Sunburst de Mexico S.A. de C.V. (herein incorporated by reference to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on January 14, 2008).10.8
Entry into a material definitive agreement for development of Cieneguita Project with Minera Rio Tinto (herein incorporated by reference from our current report on Form 8-K dated February 17, 2009 filed with the Securities and Exchange Commission on February 18, 2009).10.9
Agreement for the Assignment of Mining Agreements dated July 8, 2009, by and between Mexoro Minerals, Ltd., its subsidiary, Sunburst Mining de México S.A. de C.V, Paramount Gold and Silver Corp., a Delaware corporation, and its subsidiary, Paramount Gold de Mexico S.A. de C.V., a Mexican corporation (herein incorporated by reference from the Company’s current report on Form 8-K dated July 8, 2009 and filed with the Securities and Exchange Commission on July 27, 2009).10.10
Form of Private Placement Subscription Agreement, dated September 21, 2009, by and between the Company and the U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.11
Form of Private Placement Subscription Agreement, dated September 21, 2009, by and between the Company and the Canadian and Non-U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.12
Form of Warrant, by and between the Company and the U.S. subscribers (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.13
orm of Warrant, by and between the Company and the Canadian and Non-U.S. subscribers (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.14
Form of Director and Officer Indemnification Agreement (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.15
Form of Nonqualified Stock Option Agreement (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009). 10.16 Form of Warrant, by and between the Company and MRT Investments Ltd. (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).10.17
Employment Agreement, dated September 21, 2009, by and between the Company and Manuel Flores (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).#10.18
Employment Agreement, dated September 21, 2009, by and between the Company and George Young (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).#10.19
Consulting Agreement dated September 21, 2009, by and between the Company and MRT Investments Ltd. (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).
  58
  10.20
Employment Agreement, dated September 21, 2009, by and between the Company and Salil Dhaumya (herein incorporated by reference from the Company’s current report on Form 8-K dated September 21, 2009, and filed with the Securities and Exchange Commission on September 25, 2009).#10.21
Form of Amendment No. 1 to the Private Placement Subscription Agreement, dated November 5, 2009, by and between the Company and the U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated November 5, 2009, and filed with the Securities and Exchange Commission on November 12, 2009).10.22
Form of Amendment No. 1 to the Private Placement Subscription Agreement, dated November 5, 2009, by and between the Company and the Canadian and Non-U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated November 5, 2009, and filed with the Securities and Exchange Commission on November 12, 2009).10.23
Securities Purchase Agreement, dated December 23, 2009 by and between the Company and Mr. Ayub (herein incorporated by reference from the Company’s current report on Form 8-K dated December 23, 2009, and filed with the Securities and Exchange Commission on December 23, 2009).10.24
Form of Warrant, by and between the Company and Mr. Ayub (herein incorporated by reference from the Company’s current report on Form 8-K dated December 23, 2009, and filed with the Securities and Exchange Commission on December 23, 2009).10.25
Acknowledgment and Agreement, by and among the Company, Sunburst Mining De Mexico, S.A. De C.V., Minera Rio Tinto S.A. and Marje Minerals S.A. (herein incorporated by reference from our current report on Form 8-K dated December 23, 2009 filed with the Securities and Exchange Commission on December 23, 2009).10.26
Amendment No. 1 to the material definitive agreement for development of Cieneguita Project with Minera Rio Tinto and Marje Minerals (herein incorporated by reference from our current report on Form 8-K dated December 23, 2009 filed with the Securities and Exchange Commission on December 23 2009).10.27
Cancellation of Debt and Release Agreement, dated December 23, 2009, by and among the Company, and Minera Rio Tinto S.A. and Mr. Ayub (herein incorporated by reference from the Company’s current report on Form 8-K dated December 23, 2009, and filed with the Securities and Exchange Commission on December 23, 2009). 10.28 Form of Indemnification Agreement for officers and directors (filed as an exhibit to the Current Report on Form 8-K, filed with the SEC on July 6, 2010).10.29
Employment Agreement, dated October 15, 2010, by and between the Company and Miguel DiNanno.#10.30
Form of the Private Placement Subscription Agreement, by and between the Company and the Canadian and Non-U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated March 8, 2011, and filed with the Securities and Exchange Commission on March 8, 2011).10.31
Form of the Private Placement Subscription Agreement, by and between the Company and the U.S. investors named therein (herein incorporated by reference from the Company’s current report on Form 8-K dated March 8, 2011, and filed with the Securities and Exchange Commission on March 8, 2011).10.32
Form of Warrant, by and between the Company and the Canadian and Non-U.S. subscribers(herein incorporated by reference from the Company’s current report on Form 8-K dated March 8, 2011, and filed with the Securities and Exchange Commission on March 8, 2011).10.33
Form of Warrant, by and between the Company and the U.S. subscribers(herein incorporated by reference from the Company’s current report on Form 8-K dated March 8, 2011, and filed with the Securities and Exchange Commission on March 8, 2011).10.35
Material Agreement with Compania 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.
  59
  31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act.*31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act.*32.1
Certification of the Chief Executive Officer Pursuant to Section 906, Sarbanes-Oxley Act of 2002.*32.2
Certification of the Chief Financial Officer Pursuant to Section 906, Sarbanes-Oxley Act of 2002.*


*

Filed herewith





60





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) 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.





Date: March 13, 2012

PAN AMERICAN GOLDFIELDS LTD.By: /s/Miguel F. Di NannoMiguel F. Di NannoPresident




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Signature

Title

Date/s/Miguel F. Di Nanno

President and Director

March 13, 2012Miguel F. Di Nanno

(Principal Executive Officer)/s/ Salil Dhaumya

Chief Financial Officer

March 13, 2012Salil Dhaumya

(PrincipalFinancial andAccounting Officer)/s/ Gary Parkison

Director

March 13, 2012Gary Parkison/s/ George Young

Director

March 13, 2012George Young/s/ Bruno LeBarber

Director

March 13, 2012Bruno LeBarber/s/ Randy Buchamer

Director

March 13, 2012Randy Buchamer/s/ Neil Maedel

Director

March 13, 2012Neil Maedel





61




PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)





CONSOLIDATED FINANCIAL STATEMENTS





(Expressed in U.S. Dollars)





February 28, 2011 and 2010





Index to Consolidated Financial Statements


Report of Independent Registered Public Accounting Firm
62Consolidated Balance Sheets
63Consolidated Statements of Stockholders’ Equity (Deficiency)
64Consolidated Statements of Operations and Comprehensive Income (Loss)
69Consolidated Statements of Cash Flows
70Notes to Consolidated Financial Statements
71
  62





MEYLER & COMPANY, LLC


ONEARIN PARK


1715 HIGHWAY 35


MIDDLETOWN, NJ 07748





Report of Independent Registered Public Accounting Firm




To the Board of Directors and


Stockholders of Pan American Goldfields Ltd.


Broomfield, Colorado





We have audited the accompanying consolidated balance sheets of Pan American Goldfields Ltd. (an Exploration Stage Company) as of February 28, 2011 and 2010 and the related consolidated statements of stockholders’ equity (deficiency), operations and comprehensive income (loss), and cash flows for the two year period ended February 28, 2011 and for the period from March 1, 2004 (Inception of Exploration Stage) to February 28, 2011. These consolidated 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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. We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of  Pan American Goldfields Ltd. as of February 28, 2011 and 2010, and the results of its operations and its cash flows for each of the two years in the period ended February 28, 2011 and for the period from March 1, 2004 (Inception of Exploration Stage) to February 28, 2011 in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has a history of operating losses and a cumulative loss during the exploration stage of $46,293,923. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.





Meyler & Company, LLC


Middletown, NJ


June 13, 2011





63





PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Balance Sheets


(Expressed in U.S. Dollars)





February 28, 2011
February 28, 2010AssetsCurrentCash and cash equivalents
$
407,912
$
3,377,404Accounts receivable

409,692

137,933Prepaid expenses

136,141

310,953Deposits

150,000

-1,103,745

3,826,290Equipment (note 4)

217,875

242,887Total assets
$
1,321,620
$
4,069,177LiabilitiesCurrentAccounts payable and accrued liabilities
$
1,690,208
$
2,772,572Loans payable (note 9)

12,876

45,303Promissory notes (note 7)

884,022

775,9752,587,106

3,593,850Total liabilities

2,587,106

3,593,850Stockholders’ equity (deficiency)Capital stockPreferred stockAuthorized: 20,000,000 shares without par value (note 10)Issued: nilCommon stockAuthorized: 200,000,000 shares without par valueIssued: 54,003,827 (2010 –53,753,827) (note 11)

30,750,401

30,700,401Additional paid-in capital

15,262,405

14,438,352Stock subscriptions

781,000

166,000Accumulated deficit from prior operations

(2,003,427)

(2,003,427)Accumulated deficit during the exploration stage

(46,293,923)

(43,055,507)Accumulated other comprehensive income

238,058

229,508Total stockholders’ equity (deficiency)

(1,265,486)

475,327Total liabilities and stockholders’ equity (deficiency)
$
1,321,620
$
4,069,177




Going-concern (note 3)


Commitments (notes 6 and 13)


Subsequent events (note 17)





The accompanying notes are an integral part of these consolidated financial statements.





64


PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Stockholders’ Equity (Deficiency)


(Expressed in U.S. Dollars)


Period from March 1, 2004 (Inception of Exploration stage) to February 28, 2011





Number of

shares


Amount


Additional

paid-in capital


Stock

subscriptions


Deficit

accumulated

from prior

operations


Deficit

accumulated

during the

exploration

stage


Accumulated Other

comprehensive

income (loss)


Total

stockholders

equity (deficiency)Balance from prior operations, March 1, 2004


709,168


$
1,701,843


$
194,391


$
67,025


$
(2,003,427
)

$
-


$
8,929


$
(31,239
)Common stock issued in share exchange


860,000



10,965,000



-



-



-



-



-



10,965,000Options issued as finders’ fees


-



-



1,523,000



-



-



-



-



1,523,000Common stock issued for cash


113,222



269,134



-



(67,025
)


-



-



-



202,109Options exercised


50,000



35,000



-



-



-



-



-



35,000Options issued


-



-



86,955



-



-



-



-



86,955Warrants exercised


5,512



-



-



-



-



-



-



-Beneficial conversion feature


-



-



500,000



-



-



-



-



500,000Foreign exchange translation adjustment


-



-



-



-



-



-



(3,050
)


(3,050
)Net loss for the year


-



-



-



-



-



(13,912,488
)


-



(13,912,488
)Balance, February 28, 2005


1,737,902


$
12,970,977


$
2,304,346


$
-


$
(2,003,427
)

$
(13,912,488
)

$
5,879


$
(634,713
)Common stock issued for consulting services


30,000



90,000



-



-



-



-



-



90,000Options exercised


32,000



43,000



-



-



-



-



-



43,000Common stock issued on conversion of debenture


2,000,000



300,000



-



-



-



-



-



300,000Common stock issued in property acquisition


2,000,000



2,100,000



-



-



-



-



-



2,100,000Common stock issued for cash


7,000,000



70,000



-



-



-



-



-



70,000Options issued


-



-



248,000



-



-



-



-



248,000Warrants issued


-



-



487,250



-



-



-



-



487,250Beneficial conversion feature


-



-



952,000



-



-



-



-



952,000Stock subscriptions


-



-



-



170,000



-



-



-



170,000Foreign exchange translation adjustment


-



-



-



-



-



-



(4,828
)


(4,828
)Net loss for the year


-



-



-



-



-



(4,425,885
)


-



(4,425,885
)Balance, February 28, 2006


12,799,902


$
15,573,977


$
3,991,596


$
170,000


$
(2,003,427
)

$
(18,338,373
)

$
1,051


$
(605,176
)




The accompanying notes are an integral part of these consolidated financial statements.




65





PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Stockholders’ Equity (Deficiency)


(Expressed in U.S. Dollars)


Period from March 1, 2004 (Inception of Exploration stage) to February 28, 2011





Number of

shares


Amount


Additional

paid-in capital


Stock

subscriptions


Deficit

accumulated

from prior

operations


Deficit

accumulated

during the

exploration

stage


Accumulated Other

comprehensive

income (loss)


Total

stockholders’

equity (deficiency)Balance, February 28, 2006


12,799,902


$
15,573,977


$
3,991,596


$
170,000


$
(2,003,427
)

$
(18,338,373
)

$
1,051


$
(605,176
)Common stock issued on conversion of debenture


5,835,000



2,917,500



-



-



-



-



-



2,917,500Common stock issued on settlement of promissory notes


1,651,200



412,800



-



-



-



-



-



412,800Common stock issued for cash


750,000



375,000



-



(170,000
)


-



-



-



205,000Warrants exercised


50,000



50,000



-



-



-



-



-



50,000Shares returned to treasury


(50,000
)


(25,000
)


-



-



-



-



-



(25,000
)Options issued


-



-



496,000



-



-



-



-



496,000Warrants issued


-



-



1,949,000



-



-



-



-



1,949,000Beneficial conversion feature


-



-



2,265,500



-



-



-



-



2,265,500Foreign exchange translation adjustment


-



-



-



-



-



-



(3,098
)


(3,098
)Net loss for year


-



-



-



-



-



(7,393,034
)


-



(7,393,034
)Balance, February 28, 2007


21,036,102


$
19,304,277


$
8,702,096


$
-


$
(2,003,427
)

$
(25,731,407
)

$
(2,047
)

$
269,492Warrants exercised


4,344,400



3,674,377



-



-



-



-



-



3,674,377Options issued


-



-



974,841



-



-



-



-



974,841Fair value of warrants expensed


-



-



1,478,750



-



-



-



-



1,478,750Stock subscriptions


-



-



-



330,000



-



-



-



330,000Foreign exchange translation adjustment


-



-



-



-



-



-



(8,301
)


(8,301
)Net loss for the year


-



-



-



-



-



(8,096,604
)


-



(8,096,604
)Balance, February 29, 2008


25,380,502


$
22,978,654


$
11,155,687


$
330,000


$
(2,003,427
)

$
(33,828,011
)

$
(10,348
)

$
(1,377,445
)





The accompanying notes are an integral part of these consolidated financial statements.





66


PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Stockholders’ Equity (Deficiency)


(Expressed in U.S. Dollars)


Period from March 1, 2004 (Inception of Exploration stage) to February 28, 2011





Number of

shares


Amount


Additional

paid-in capital


Stock

subscriptions


Deficit

accumulated

from prior

operations


Deficit

accumulated

during the

exploration

stage


Accumulated Other

comprehensive

income (loss)


Total

stockholders’

equity (deficiency)Balance, February 29, 2008


25,380,502


$
22,978,654


$
11,155,687


$
330,000


$
(2,003,427
)

$
(33,828,011
)

$
(10,348
)

$
(1,377,445
)Notes converted into shares


2,936,028



1,470,522



-



-



-



-



-



1,470,522Options issued


-



-



603,801



-



-



-



-



603,801Warrants issued


-



-



122,260



-



-



-



-



122,260Fair value of warrants embedded in convertible debentures


-



-



480,800



-



-



-



-



480,800Value of beneficial conversion feature of convertible debentures


-



-



312,399



-



-



-



-



312,399Stock subscriptions


-



-



-



121,258



-



-



-



121,258Shares issued for subscriptions


330,000



330,000



-



(330,000
)


-



-



-



-Accounts payable settled with shares


206,000



103,000



-



-



-



-



-



103,000Shares issued for services


672,000



262,090



-



-



-



-



-



262,090Shares issued to management as bonuses


1,050,000



232,750



-



-



-



-



-



232,750Cash received for options issued


-



-



1,961



-



-



-



-



1,961Shares issued on private placement


444,772



179,885



-



-



-



-



-



179,885Foreign exchange translation adjustment


-



-



-



-



-



-



460,072



460,072Net loss for the year


-



-



-



-



-



(8,036,208
)


-



(8,036,208
)Balance, February 28, 2009


31,019,302


$
25,556,901


$
12,676,908


$
121,258


$
(2,003,427
)

$
(41,864,219
)

$
449,724


$
(5,062,855
)




The accompanying notes are an integral part of these consolidated financial statements.




67




PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Stockholders’ Equity (Deficiency)


(Expressed in U.S. Dollars)


Period from March 1, 2004 (Inception of Exploration stage) to February 28, 2011





Number of

shares


Amount


Additional

paid-in capital


Stock

subscriptions


Deficit

accumulated

from prior

operations


Deficit

accumulated

during the

exploration

stage


Accumulated Other

comprehensive

income (loss)


Total

stockholders’

equity (deficiency)Balance, February 28, 2009


31,019,302


$
25,556,901


$
12,676,908


$
121,258


$
(2,003,427
)

$
(41,864,219
)

$
449,724


$
(5,062,855
)Notes converted into shares


3,333,333



1,000,000



-



-



-



-



-



1,000,000Options issued


-



-



720,202



-



-



-



-



720,202Warrants issued


-



-



1,172,500



-



-



-



-



1,172,500Fair value of warrants embedded in convertible debentures


-



-



165,042



-



-



-



-



165,042Value of beneficial conversion feature of convertible debentures


-



-



98,700



-



-



-



-



98,700Shares issued for subscriptions


404,193



121,258



-



(121,258
)


-



-



-



-Shares issued for management bonus


1,000,000



280,000



-



-



-



-



-



280,000Accounts payable settled with shares


2,504,142



751,242



-



-



-



-



-



751,242Notes settled with shares


2,250,000



250,000



-



-



-



-



-



250,000Shares issued for services


492,857



158,500



-



-



-



-



-



158,500Shares issued for interest costs


250,000



82,500



-



-



-



-



-



82,500Financing costs


-



-



(245,000
)


-



-



-



-



(245,000
)Finders’ fees on private placement


-



-



(150,000
)


-



-



-



-



(150,000
)Shares issued on private placement


12,500,000



2,500,000



-



-



-



-



-



2,500,000Subscription proceeds on private placement


-



-



-



50,000



-



-



-



50,000Accounts payable converted to subscriptions


-



-



-



116,000



-



-



-



116,000Foreign exchange translation adjustment


-



-



-



-



-



-



(220,216
)


(220,216
)Net loss for the year


-



-



-



-



-



(1,191,288
)


-



(1,191,288
)Balance, February 28, 2010


53,753,827


$
30,700,401


$
14,438,352


$
166,000


$
(2,003,427
)

$
(43,055,507
)

$
229,508


$
475,327





The accompanying notes are an integral part of these consolidated financial statements.




68


PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Stockholders’ Equity (Deficiency)


(Expressed in U.S. Dollars)


Period from March 1, 2004 (Inception of Exploration stage) to February 28, 2011





Number of

shares


Amount


Additional

paid-in capital


Stock

subscriptions


Deficit

accumulated

from prior

operations


Deficit

accumulated

during the

exploration

stage


Accumulated Other

comprehensive

income (loss)


Total

stockholders’

equity (deficiency)Balance, February 28, 2010


53,753,827


$
30,700,401


$
14,438,352


$
166,000


$
(2,003,427
)

$
(43,055,507
)

$
229,508


$
475,327Options issued


-



-



824,053



-



-



-



-



824,053Shares issued for subscriptions


250,000



50,000



-



(50,000
)


-



-



-



-Subscription proceeds


-



-



-



640,000



-



-



-



640,000Debt converted into subscription proceeds


-



-



-



25,000



-



-



-



25,000Foreign exchange translation adjustment


-



-



-



-



-



-



8,550



8,550Net loss for the year


-



-



-



-



-



(3,238,416
)


-



(3,238,416
)Balance, February 28, 2011


54,003,827


$
30,750,401


$
15,262,405


$
781,000


$
(2,003,427
)

$
(46,293,923
)

$
238,058


$
(1,265,486
)





The accompanying notes are an integral part of these consolidated financial statements.





69


PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Operations and Comprehensive Income (Loss)


(Expressed in U.S. Dollars)





Period fromMarch 1, 2004(Inception ofExplorationYear Ended


Stage)February 28,


February 28,


to February 28,2011


2010


2011Net sales

$
1,158,923


$
524,510


$
1,683,433Cost of goods sold


583,760



274,593



858,353Gross profit


575,163



249,917



825,080ExpensesGeneral and administrative


2,578,022



4,273,697



19,585,938Mineral exploration


400,415



937,843



9,240,484Impairment of mineral property costs


719,031



206,528



17,310,274Operating loss


(3,122,305
)


(5,168,151
)


(45,311,616
)Other income (expenses)Deposit on equipment written off


(25,300
)


-



(25,300
)Foreign exchange (loss)


(114,270
)


(42,758
)


(349,778
)Interest


(90,360
)


(434,649
)


(5,314,182
)Other income


65,691



193,331



259,022Gain on disposal of assets


15,130



-



15,130Loss on sale of assets


-



4,389,954



4,388,374Gain (loss) on settlement of debt (note 6)


32,998



(129,015
)


44,427Net loss


(3,238,416
)


(1,191,288
)


(46,293,923
)Other comprehensive income (loss)Foreign exchange translation adjustment


8,550



(220,216
)


238,058Total comprehensive loss

$
(3,229,866
)

$
(1,411,504
)

$
(46,055,865
)Total loss per share– basic and diluted

$
(0.06
)

$
(0.03
)Weighted average number of shares ofcommon stock – basic and diluted


53,957,252



39,978,569




The accompanying notes are an integral part of these consolidated financial statements.




70


PAN AMERICAN GOLDFIELDS LTD.


(An Exploration Stage Company)


Consolidated Statements of Cash Flows


(Expressed in U.S. Dollars)


Year Ended February 28


Period From March 1, 2004 (Inception of Exploration Stage)

to

February 28,2011


2010


2011Operating activitiesNet loss

$
(3,238,416
)

$
(1,191,288
)

$
(46,293,923
)Adjustments to reconcile net (loss) to net cash flowsWrite-off of note receivable


-



-



57,500Impairment of mineral property costs


-



-



13,645,000Shares issued for consulting services


-



158,500



510,590Shares issued for interest costs


-



82,500



82,500Amortization


50,365



72,094



305,383Discount on convertible debenture


-



86,191



569,549Deposit on equipment written off


25,300



-



25,300Gain on disposal of assets


(15,130
)


-



(15,130
)Gain on sale of assets


-



(4,389,954
)


(4,389,954
)Gain (loss) on settlement of debt


(32,998
)


129,015



(86,242
)Stock-based compensation


824,053



2,172,701



10,966,611Beneficial conversion feature


-



51,192



4,081,091Net change in operating assets and liabilities:Prepaid expense


262,193



(357,835
)


(132,088
)Accounts receivable


(142,392
)


432,794



(35,545
)Customer deposits


(150,000
)


-



(194,809
)Notes payable


-



-



109,337Accounts payable and accrued liabilities


(1,169,025
)


3,826,921



6,736,951Cash used in operating activities


(3,586,050
)


1,072,831



(14,057,879
)Investing activitySale of equipment


-



29,437



33,316Purchase of property and equipment


(14,226
)


(23,258
)


(602,473
)Cash used in investing activity


(14,226
)


6,179



(569,157
)Financing activitiesProceeds from loans payable


28,500



33,750



288,067Proceeds from notes payable


-



98,531



3,162,196Proceeds from convertible debentures


-



1,673,510



7,462,500Proceeds from exercise of options


-



-



78,000Proceeds from exercise of warrants


-



-



3,144,377Repayment of loans payable


(61,108
)


(63,162
)


(268,310
)Repayment of notes payable


(44,674
)


(158,676
)


(586,620
)Repayment of convertible debentures


-



(1,521,047
)


(2,051,047
)Stock subscriptions


640,000



-



931,258Issuance of common stock (net)


-



2,100,000



2,756,994Cash provided by financing activities


562,718



2,162,906



14,917,415Inflow of cash and cash equivalents


(3,037,558
)


3,241,916



290,379Effect of foreign currency translation on cash


68,066



96,784



95,456Cash and cash equivalents, beginning


3,377,404



38,704



22,077Cash and cash equivalents, ending

$
407,912


$
3,377,404


$
407,912





Supplemental cash flow information (note 16)





The accompanying notes are an integral part of these consolidated financial statements.





71




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010





1.
BASIS OF PRESENTATION




Pan American Goldfields Ltd. (formerly Mexoro Minerals, Ltd and Sunburst Acquisitions IV, Inc.) ("Panam" or the “Company”) was incorporated in the state of Delaware on March 23, 2010 and on July 2, 2010 changed its name to Pan American Goldfields Ltd. pursuant to an agreement and plan of merger between the Company and Mexoro Minerals Ltd. The Company was formed to seek out and acquire business opportunities. Between 1997 and 2003, the Company was engaged in two business acquisitions and one business opportunity, none of which generated a significant profit or created sustainable business. All were sold or discontinued. The Company had previously been pursuing various business opportunities and, effective March 1, 2004, the Company changed its operations to mineral exploration.Currently, the main focus of the Company’s operations is in Mexico and Argentina.




On February 12, 2009, the Company entered into a joint venture through a definitive agreement for development of its Cieneguita Project with Minera Rio Tinto, S.A. de C.V. (“MRT”), a private company duly incorporated pursuant to the laws of Mexico, which is controlled by the chairman of the Company. The purpose of the joint venture is to put the Cieneguita property into production. Pursuant to the agreement, MRT is to provide the necessary working capital to begin and maintain mining operations at Cieneguita, which are estimated to be $3,000,000. MRT plans to spend 100% of the money to earn 74% of the net cash flow from production (notes 5 and 6). The Company will receive 20% of the net cash flows from production.




On May 25, 2004, the Company completed a “Share Exchange Agreement” with Sierra Minerals and Mining, Inc. (“Sierra Minerals”), a Nevada corporation, which caused Sierra Minerals to become a wholly-owned subsidiary of the Company. Sierra Minerals held certain rights to properties in Mexico that the Company now owns or has an option to acquire. Through Sierra Minerals, the Company entered into a joint venture agreement with MRT. In August 2005, the Company cancelled the joint venture agreement in order to directly pursue mineral exploration opportunities through a wholly-owned Mexican subsidiary, Sunburst Mining de Mexico S.A. de C.V. (“Sunburst de Mexico”). On August 25, 2005, the Company, Sunburst de Mexico and MRT entered into agreements providing Sunburst de Mexico the right to explore and exploit certain properties in Mexico. In December 2005, the Company and Sunburst de Mexico entered into a new agreement with MRT (the “New Agreement”) (note 6). On January 20, 2006, Sierra Minerals was dissolved.




72




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2.
SIGNIFICANT ACCOUNTING POLICIES




(a)
Principles of consolidation




The accompanying financial statements include the accounts and activities of the Company and its wholly-owned subsidiary, Sunburst de Mexico. All intercompany balances and transactions have been eliminated in consolidation.




(b)
Financial instruments





(i)
Fair value




The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities and promissory notes approximate their fair values because of the short-term maturity of these financial instruments. The carrying value of convertible debentures approximates their fair value because these instruments earn interest at the market rate.





(ii)
Interest rate risk




The Company is not exposed to significant interest rate risk due to the short-term maturity of its monetary current assets and current liabilities. The convertible debentures are not exposed to interest rate risk because the interest rate is fixed to maturity.





(iii)
Credit risk




The Company's financial assets that are exposed to credit risk consist primarily of cash that is placed with major financial institutions. The Company maintains its cash in bank deposit accounts which at times may exceed federally insured limits of $250,000. The Company has not experienced any losses related to this concentration of risk. On February 28, 2011, the Company had $50 at Chase Bank and $25,310 at Wells Fargo in the US, $12,653 at HSBC bank in Mexico and $369,898 held in escrow by the Company’s attorney.





(iv)
Translation risk




The Company translates the results of non-U.S. operations into U.S. currency using rates approximating the average exchange rate for the year. The exchange rate may vary from time to time. This risk is considered moderate, as the Company’s mining project expenses are recorded in Mexican pesos and converted to U.S. currency.





(c)
Equipment




Equipment is recorded at cost less accumulated depreciation. Depreciation is provided on the following basis:




Software

2 years straight-lineMachinery

10% declining-balanceVehicles

25% declining-balanceComputer equipment

30% declining-balanceOffice equipment

30% declining-balance





All equipment is held by Sunburst de Mexico in Mexico.





(d)
Cash and cash equivalents




The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.




73




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2.      SIGNIFICANT ACCOUNTING POLICIES (continued)




(e)
Mineral property costs




The Company has been in the exploration stage since March 1, 2004, and has not yet realized any significant revenues from its planned operations. It is primarily 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.




(f)
Basic and diluted income (loss) per share




The Company computes income (loss) per share in accordance with ASC 260, "Earnings per Share", which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. All previously stated share and per share balances have been restated to give retroactive effect to the 1:50 reverse stock split that occurred on February 15, 2006. Dilutive loss per share has not been presented because the effects of all common share equivalents were anti-dilutive.




(g)
Impairment or disposal of long-lived assets




The Company accounts 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.




(h)
Use of estimates




The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas of estimate include the impairment of assets and rates for amortization, accrued liabilities, future income tax balances and the inputs used in calculating stock-based compensation. Actual results could differ from those estimates and would impact future results of operations and cash flows.




74




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2.      SIGNIFICANT ACCOUNTING POLICIES (continued)




(i)
Consideration of other comprehensive income items




ASC 220 “Comprehensive Income” requires companies to present comprehensive income (consisting primarily of net loss plus other direct equity changes and credits) and its components as part of the basic financial statements.




(j)
Stock-based compensation




The Company utilizes the fair value recognition provisions of ASC 718 “Compensation – Stock Compensation” (formerly, SFAS No. 123R “Share Based Payments”), which requires the company to use the Black-Scholes pricing model to estimate the fair value of the options at the grant date.






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 (see note 11 & 12).




(k)
Income taxes




Income taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized. The Financial Accounting Standards Board (FASB) has issued ASC 740 “Income Taxes” (formerly, Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” – An Interpretation of FASB Statement No. 109 (FIN 48)). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740. As a conclusion, the tax position of the Company has not met the more-likely-than-not threshold as of February 28, 2011.




(l)
Foreign currency translation




Sunburst de Mexico maintains accounting records in its functional currency, Mexican pesos. Sunburst de Mexico translates foreign currency transactions into functional currency in the following manner: at the transaction date, each asset, liability, revenue and expense is translated into the functional currency by the use of the exchange rate in effect at that date; at the period end, foreign currency monetary assets and liabilities are re-evaluated into the functional currency by using the exchange rate in effect at the balance sheet date. The resulting foreign exchange gains and losses are included in operations.




75




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2.      SIGNIFICANT ACCOUNTING POLICIES (continued)




(l)           Foreign currency translation (continued)




In preparing consolidated financial statements, the Company translates the assets and liabilities of its subsidiary into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenue and expenses are translated into U.S. dollars at the average exchange rate for the applicable period. Any gain or loss from such translations is included in stockholders’ equity as a component of other comprehensive income.




(m)
Asset retirement obligations




The Company accounts for asset retirement obligations (ARO) in accordance with ASC 410 “Asset Retirement and Environmental Obligations” (formerly, FASB Statement No. 143, Accounting for Asset Retirement Obligations (FAS 143)). This accounting standard applies to the fair value of a liability for an ARO that is recorded when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. Obligations associated with the retirement of these assets require recognition in certain circumstances: (1) the present value of a liability and offsetting asset for an ARO, (2) the subsequent accretion of that liability and depreciation of the asset, and (3) the periodic review of the ARO liability estimates and discount rates. In 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143 (FIN 47), which was effective for the company on December 31, 2005. FIN 47 clarifies that the phrase "conditional asset retirement obligation," as used in FAS 143, refers to a legal obligation to perform asset retirement activity for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the company. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Uncertainty about the timing and/or method of settlement of a conditional ARO should be factored into the measurement of the liability when sufficient information exists. ASC 410 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an ARO. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an ARO.






The Company is in an early stage of mineral exploration and has no known reserves as of February 28, 2011. Accordingly, the Company cannot reasonably estimate the fair value of those obligations because of their indeterminate settlement dates.




(n)
Revenue recognition




The Company recognized revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is determinable and collection is reasonably assured. All revenues resulted from the proportionate consolidation of the joint venture with MRT, as discussed in Note 5.




(o)
Recent accounting pronouncements





(i)
In May 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-19, Foreign Currency (Topic 830): Foreign Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments in this Update are effective as of the announcement date of March 18, 2010. The Company does not expect the provisions of ASU 2010-19 to have a material effect on the financial position, results of operations or cash flows of the Company.




(ii)
In April 2010, the FASB issued ASU 2010-17, Revenue Recognition-Milestone Method (Topic 605): Milestone Method of Revenue Recognition. The amendments in this Update are effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity should apply the amendments retrospectively from the beginning of the year of adoption. The Company does not expect the provisions of ASU 2010-17 to have a material effect on the financial position, results of operations or cash flows of the Company.




76




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(o)           Recent accounting pronouncements (continued)




(iii)
In January 2010, the FASB issued Accounting Standards Update 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.




(iv)
In January 2010, the FASB issued Accounting Standards Update 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. Effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.




(v)
In September 2009, the FASB issued Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its financial statements.




77




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010





2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(o)           Recent accounting pronouncements (continued)




(vi)
In September 2009, the FASB issued ASC 105, formerly FASB Statement No. 168, the FASB Accounting Standards Codification (“Codification”) and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”), a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 establishes the Codification as the single source of authoritative GAAP in the United States, other than rules and interpretive releases issued by the SEC. The Codification is a reorganization of current GAAP into a topical format that eliminates the current GAAP hierarchy and establishes instead two levels of guidance — authoritative and non-authoritative. All non-grandfathered, non-SEC accounting literature that is not included in the Codification will become non-authoritative. The FASB’s primary goal in developing the Codification is to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular accounting topic in one place. The Codification was effective for interim and annual periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it did not have a material impact on the Company’s financial statements.




(vii)
Effective July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments to ASC 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material impact on the Company’s results of operations or financial condition.




(viii)
Effective June 30, 2009, the Company adopted three accounting standard updates which were intended to provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. They also provide additional guidelines for estimating fair value in accordance with fair value accounting. The first update, as codified in ASC 820-10-65, provides additional guidelines for estimating fair value in accordance with fair value accounting. The second accounting update, as codified in ASC 320-10-65, changes accounting requirements for other-than-temporary-impairment (OTTI) for debt securities by replacing the current requirement that a holder have the positive intent and ability to hold an impaired security to recovery in order to conclude an impairment was temporary with a requirement that an entity conclude it does not intend to sell an impaired security and it will not be required to sell the security before the recovery of its amortized cost basis. The third accounting update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates were effective for fiscal years and interim periods ended after June 15, 2009. The adoption of these accounting updates did not have a material impact on the Company’s financial statements.




78




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




(o)           Recent accounting pronouncements (continued)




(ix)
Effective June 30, 2009, the Company adopted a new accounting standard for subsequent events, as codified in ASC 855-10. The update modifies the names of the two types of subsequent events either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In addition, the standard modifies the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statements are issued (for public entities) or available to be issued (for nonpublic entities). The update did not result in significant changes in the practice of subsequent event disclosures, and therefore the adoption did not have a material impact on the Company’s financial statements.




(x)
Effective January 1, 2009, the Company adopted an accounting standard update regarding the determination of the useful life of intangible assets. As codified in ASC 350-30-35, this update amends the factors considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under intangibles accounting. It also requires a consistent approach between the useful life of a recognized intangible asset under prior business combination accounting and the period of expected cash flows used to measure the fair value of an asset under the new business combinations accounting (as currently codified under ASC 850). The update also requires enhanced disclosures when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. The adoption did not have a material impact on the Company’s financial statements.




(xi)
Effective January 1, 2009, the Company adopted a new accounting standard update regarding business combinations. As codified under ASC 805, this update requires an entity to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. The adoption did not have a material impact on the Company’s financial statements.




79




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




3.
GOINGCONCERN




The accompanying financial statements have been prepared on a goingconcern basis. The Company has a history of operating losses and will need to raise additional capital to fund its planned operations. As at February 28, 2011, the Company had a cumulative loss, during itsdevelopment period, of $46,293,923 (February 28, 2010 - $43,055,507). These conditions raise substantial doubt about the Company’s ability to continue as a going concern.




The Company intends to reduce its cumulative loss through the attainment of profitable operations from its investment in a Mexican mining venture (note 6). In addition, the Company has conducted private placements of convertible debt and common stock (notes 8 and 11), which have generated a portion of the initial cash requirements for its planned Mexican mining ventures (note 6).




In February 2009, the Company signed a definitive agreement with MRT which was amended in December 2009, to provide funding of up to $8,000,000 to the Company to initiate production at its Cieneguita property, complete a feasibility study, as well to continue the exploration of its properties (note 6).




In July 2009, the Company signed a definitive agreement to sell its Guazapares Project located in southwest Chihuahua, Mexico to Paramount Gold de Mexico, SA de C.V., the Mexican subsidiary of Paramount Gold and Silver Corp. (“Paramount”) for a total consideration of up to $5,300,000. The purchase price is to be paid in two stages. The first payment of $3,700,000 was released from escrow in February 2010, as the transfer of the 12 claims to Paramount was completed. An additional payment of $1,600,000 is due if, within 36 months following execution of the letter of agreement (July 10, 2009), either (i) Paramount Gold de Mexico SA de C.V. is sold by Paramount, either through a stock sale or a sale of substantially all of its assets, or (ii) Paramount’s San MiguelProject is put into commercial production.




In September 2009, the Company entered into private placement subscription agreements, as thereafter amended, with certain U.S. accredited investors and certain non-U.S. investors for 12,500,000 unregistered shares of common stock with 100% warrant coverage at a purchase price of $0.20 per unit. The warrants have an exercise price of $0.30 per share with a two-year term and will not be exercisable until 12 months after their date of issuance. The Company received aggregate gross proceeds, prior to any expenses, from the private placement of $2,500,000.




In February 2011, the Company entered into private placement subscription agreements, with certain U.S. accredited investors and certain non-U.S. investors for 5,000,000 unregistered shares of common stock with 100% warrant coverage at a purchase price of $0.20 per unit. The warrants have an exercise price of $0.30 per share with a two-year term. As of February 28, 2011, the Company has received aggregate gross proceeds, prior to any expenses, from the private placement of $640,000.




80




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




4.
EQUIPMENT




February 28,

2011


February 28,

2010Accumulated


Net Book


Net BookCost


Depreciation


Value


ValueSoftware

$
24,616


$
17,882


$
6,734


$
6,357Machinery


297,819



117,396



180,423



198,850Vehicles


96,263



76,490



19,773



22,998Computers


29,902



28,972



930



3,557Office equipment


17,454



7,439



10,015



11,125$
466,054


$
248,179


$
217,875


$
242,887




5.
JOINT VENTURE WITH MRT




On February 12, 2009, the Company entered into a joint venture through a definitive agreementfor development of its Cieneguita Project with MRT. The purpose of the joint venture is to put Cieneguita property into production. As per the agreement, MRT is to provide the necessary working capital to begin and maintain mining operations estimated to be $3,000,000. MRT will spend 100% of the funds in exchange for a 75% interest in the net cash flow from production. The agreement was amended in December 2009 for MRT to earn a 74% interest in the net cash flow from production (note 6). The agreement limits the mining of the mineralized material that is available from the surface to a depth of 15 meters or approximately 10% of the mineralized material found as of the date of the definitive agreement. The Company incurs no obligations to the joint venture’s creditors as the operations and working capital requirements are controlled by MRT as such the Company has concluded that it is not the primary beneficiary of the joint venture. Accordingly, the Company’s share of income and expenses are reflected in these financial statements under the proportionate consolidation method.




The Company’s proportionate share of revenues was $1,158,923 and proportionate share of the net loss was $225,304 for the year ended February 28, 2011. The Company’s proportionate share of accounts receivable of the joint venture was $170,897 at February 28, 2011. The joint venture did not have any other assets or liabilities at February 28, 2011.




6.
MINERAL PROPERTIES




The Company incurred exploration expenses as follows in the year ended February 28, 2011:




Sahuayacan


Cieneguita


Encino Gordo


New Projects


TotalDrilling and sampling

$
67,063


$
-


$
-


$
-


$
67,063Geological, geochemical, geophysics


148,191



-



5,413



1,277



154,881Land use permits


10,360



14,775



3,712



-



28,847Automotive


-



54



-



-



54Travel


2,429



9,880



6,131



-



18,440Consulting


7,501



62,107



13,159



-



82,767Equipment


1,006



4,327



2,152



-



7,485General


8,162



22,898



9,818



-



40,878$
244,712


$
114,041


$
40,385


$
1,277


$
400,415




81


PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




6. MINERAL PROPERTIES (CONTINUED)




The Company incurred exploration expenses as follows in the year ended February 28, 2010:




Sahuayacan


Cieneguita


Encino Gordo


New Projects


TotalDrilling and sampling

$
119,004


$
69,339


$
-


$
-


$
188,343Geological, geochemical, geophysics


161,015



119,837



-



1,026



281,878Land use permits


5,174



131,825



4,077



-



141,076Travel


12,747



18,855



-



-



31,602Consulting


43,097



132,768



-



-



175,865Equipment


4,362



5,541



-



-



9,903General


37,598



71,424



154



-



109,176$
382,997


$
549,589


$
4,231


$
1,026


$
937,843




Since May 2004, the Company has held interests in gold exploration properties in Mexico.




In August 2005, the Company formed its wholly owned subsidiary, Sunburst de Mexico, which allowed the Company to take title to the properties in the name of Sunburst de Mexico. On August 25, 2005, the Company entered into property agreements with MRT, which provided Sunburst de Mexico options to purchase the mineral concessions of the Cieneguita and Guazapares properties and the right of refusal on three Encino Gordo properties. The Company also entered into an exploration and sale agreement, in October 2006, with Minera Emilio S.A. de C.V. for the mineral concessions of the Sahuayacan property.




In August 2005, the parties also entered into an operator’s agreement, that gave MRT the sole and exclusive right and authority to manage the Cieneguita property, and a share option agreement which granted MRT the exclusive option to acquire up to 100% of all outstanding shares of Sunburst de Mexico if the Company did not comply with the terms of the property agreements. The operator’s agreement and share option agreement were subsequently cancelled when the Company and Sunburst de Mexico entered into a new contract with MRT as described below under “Encino Gordo”.




In February 2009, the Company entered into a development agreement with MRT, which was amended in December 2009. Pursuant to the terms of the development agreement, as amended, MRT agreed to invest up to $8,000,000 to put the first phase of the Cieneguita Project into production and to complete a feasibility study. The first phase of production is limited to the mining of the mineralized material that is available from the surface to a depth of 15 meters (“First Phase Production”). In exchange, the Company assigned MRT an interest to 74% of the net cash flows from First Phase Production and MRT will earn a 54% ownership interest by spending up to $4,000,000 to take the Cieneguita Project through the feasibility stage.




82




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




6. MINERAL PROPERTIES (CONTINUED)




The material provisions of the property agreements are as follows:




Cieneguita




MRT assigned to Sunburst de Mexico, with the permission of the Cieneguita property’s owner, Corporativo Minero, S.A. de C.V. (“Corporativo Minero”), all of MRT’s rights and obligations acquired under a previous agreement (the Cieneguita option agreement), including the exclusive option to acquire the Cieneguita property for a price of $2,000,000. Prior to assigning the Cieneguita property to the Company, MRT had paid $350,000 to Corporativo Minero. As the Cieneguita property was not in production by May 6, 2006, Sunburst de Mexico was required to pay $120,000 to Corporativo Minero to extend the contract. Corporativo Minero agreed to reduce the obligation to $60,000, of which $10,000 was paid in April 2006 and the balance paid on May 6, 2006. The Company made this payment to Corporativo Minero and the contract was extended.




The Company has the obligation to pay a further $120,000 per year for the next 13 years and the balance of the payments in the 14th year, until the total amount of $2,000,000 is paid. The Company renegotiated the payment due May 6, 2007, to $60,000 payable on November 6, 2007, which was paid, and the balance of $60,000 was paid on December 20, 2007. The Company paid $60,000 on May 12, 2008, of the $120,000 due on May 6, 2008, and the balance was paid in June 2008. The Company paid $30,000 each for a total of $120,000 on May 22, 2009, June 26, 2009, September 4, 2009 and November 20, 2009. In 2010 the Cieneguita Project was put into production under the development agreement as described above and the payment terms were changed based on the following formula:




“If the Cieneguita property is put into production, the Company must pay the Cieneguita owners $20 per ounce of gold produced from the Cieneguita property to the total of $2,000,000 due. In the event that the price of gold is above $400 per ounce, the property payments payable to the Cieneguita owners from production will be increased by $0.10 for each dollar increment over $400 per ounce. The total payment of $2,000,000 does not change with fluctuations in the price of gold. Non-payment of any portion of the $2,000,000 total payment will constitute a default. In such case, the Cieneguita owners will retain ownership of the concessions, but the Company will not incur any additional default penalty.”




Based on production at Cieneguita, the Company paid $120,000 during the fiscal year ended February 28, 2011 to the Cieneguita owners. As of February 28, 2011, Corporativo Minero has been paid a total of $950,000 for the Cieneguita property. The Company is not in default on its payments for the Cieneguita property.




83




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




6. MINERAL PROPERTIES (CONTINUED)




On February 12, 2009, the Company entered into a definitive agreement for development of the Cieneguita Project with MRT. The definitive agreement covered project financing of up to $9,000,000. The major points of the agreement were as follows:




(i)
MRT and/or its investors will subscribe for $1,000,000 of a secured convertible debenture at 8% interest (payable in stock or cash). The debenture was convertible into units at $0.60 per unit. Each unit comprised two common shares and one warrant. Each warrant is exercisable at $0.50 per share for a period of three years. The placement will be used for continued exploration of the Company’s properties and general working capital.





(ii)
MRT is to provide the necessary working capital to begin and maintain mining operations estimated to be $3,000,000 used for the purpose of putting the Cieneguita property into production. MRT will spend 100% of the money to earn 75% of the net cash flow from production. The agreement will limit the mining to the mineralized material that is available from surface to a depth of 15 meters or approximately 10% of the mineralized material found to date.





(iii)
MRT will spend up to $5,000,000 to take the Cieneguita property through the feasibility stage. In doing so, MRT will earn a 60% interest in Panam’s rights to the property. After the expenditure of the $5,000,000 all costs will be shared on a ratio of 60% to MRT and 40% to Panam. If the Company elects not to pay its portion of costs after the $5,000,000 has been spent, the Company’s position shall revert to a 25% carried interest on the property.




To generate funding for the Company’s continued operations, the Company issued $1,500,000 of convertible debentures in March 2009, of which an aggregate of $880,000 was issued to Mario Ayub, a director of the Company, and to his affiliated entity, MRT. Pursuant to the terms of the convertible debentures, the holders irrevocably converted the debentures into a 10% ownership interest in the Cieneguita Project and a 10% interest in the net cash flow from First Phase Production.




In December 2009, Mario Ayub and MRT agreed to resell an aggregate 4% ownership interest in the Cieneguita Project back to the Company, along with 4% of the net cash flow from First Phase Production, in return for $550,000. In a private transaction not involving the Company, the other holders contributed their remaining 6% ownership interest in the Cieneguita Project to a newly formed entity, Marje Minerals SA (“Marje Minerals”).




The Company amended the development agreement and its agreements with the debenture holders in December 2009. According to the amended development agreement, the ownership interest in the Cieneguita Project and the net cash flows from the First Phase Production are held by the Company, MRT and Marje Minerals as follows:




Holder
Ownership Percentage

Net Cash Flow Interest From First Phase Production

Net Cash Flow Interest Following First Phase ProductionMRT
54% (1)

74%

54% (1)Marje Minerals
6%

6%

6%Panam
40%

20%

40%




(1) To be earned by MRT by spending $4,000,000 to take the Cieneguita Project through the feasibility stage.




Any additional costs for the First Phase Production and the feasibility study for the Cieneguita Project, after MRT invests $8,000,000, will be shared by the Company, MRT and Marje Minerals on a pro-rata basis based on their respective ownership percentages in the Cieneguita Project.




84




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




6. MINERAL PROPERTIES (CONTINUED)




The major terms of the amended development agreement with MRT and Marje Minerals are as follows:





(i)
MRT purchased $1,000,000 of secured convertible debentures at 8% interest (payable in stock or cash). The proceeds from this investment were used for continued exploration and development of the Cieneguita Project and general working capital. On November 5, 2009, MRT exercised its conversion rights on the debenture and MRT was issued 3,333,333 common shares and a warrant to purchase 1,666,667 shares of common stock at an exercise price of $0.50 per share.





(ii)
MRT agreed to provide the necessary working capital to begin and maintain mining operations, estimated to be $3,000,000, to put the first phase of the Cieneguita Project into production. In exchange for these funds, the Company assigned MRT an interest to 74% of the net cash flow from First Phase Production. The agreement limits the mining during First Phase Production to the mineralized material that is available from the surface to a depth of 15 meters.





(iii)
MRT committed to spend up to $4,000,000 to take the Cieneguita Project through the feasibility stage. In doing so, the Company assigned MRT a 54% interest in its rights to the Cieneguita Project. After the expenditure of the $4,000,000, all costs will be shared on a pro rata ownership basis (i.e. 54% to MRT, 40% to the Company and 6% to Marje Minerals). If any party cannot pay its portion of the costs after the $4,000,000 has been spent, then their ownership position in the Cieneguita Project will be reduced by 1% for every $100,000 invested by the other owners. The Company’s ownership interest in the Cieneguita Project, however, cannot be reduced below 25%. In addition, the Company has the right to cover Marje Minerals’ pro rata portion of costs if they cannot pay their portion of the costs. In return, the Company will receive 1% of Marje Minerals’ ownership position in the Cieneguita Project for every $100,000 the Company invests on their behalf.





(iv)
The MRT agreement was contingent on the Company repaying its debenture to Paramount. In March 2009, the Company repaid $1,000,000, or approximately two-thirds of the debt, and Paramount released a security interest it had on the Cieneguita Project. In October 2009, the Company repaid the remaining amount of the debt and Paramount released its security interests on the Sahuayacan, Guazapares and Encino Gordo properties.





Encino Gordo




On December 8, 2005, the Company and Sunburst de Mexico entered into a “New Agreement” with MRT to exercise their option under the sale and purchase of the mining concessions agreement, dated August 18, 2005, to obtain two mining concessions in the Encino Gordo region. The New Agreement also provided the Company the option to obtain three additional concessions in the Encino Gordo region.




The following are additional material terms of the New Agreement:




(a)
The share option agreement with MRT was cancelled;





(b)
The Company granted MRT the option to buy all of the outstanding shares of Sunburst de Mexico for $100 if the Company failed to transfer $1,500,000 to Sunburst de Mexico by April 30, 2006. On April 6, 2006, MRT agreed to waive its option to purchase the shares of Sunburst de Mexico and also waived the Company’s obligation to transfer $1,500,000 to Sunburst de Mexico. The property agreements were modified to change the net smelter return (“NSR”) to a maximum of 2.5% for all properties covered by the agreements. The property agreements contained NSRs ranging from 0.5% to 7%;




85


PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010


6. MINERAL PROPERTIES (CONTINUED)




(c)
The Company agreed to issue 2,000,000 shares of the Company’s common stock to MRT within four months of the date of signing of the New Agreement. These shares were issued to MRT and its assignee at the market value of $1.05 per share on February 23, 2006, and $2,100,000 was charged to operations for the year ended February 28, 2006. This issuance fulfilled the Company’s payment obligations under the previous property agreements;





(d)
The Company agreed to issue 1,000,000 additional shares of the Company’s common stock to MRT if and when the Cieneguita Property is put into production and reaches 85% of production capacity over a 90-day period, as defined in the New Agreement; and





(e)
The operator’s agreement with MRT was cancelled.




Sunburst de Mexico purchased two of the Encino Gordo concessions from MRT for a price of 1,000 pesos (approximately US$100), and MRT assigned to Sunburst de Mexico a first right of refusal to acquire three additional Encino Gordo concessions. The total payments to acquire 100% of these three additional concessions were as follows: $10,000 on June 30, 2006 (paid); $25,000 on December 31, 2006 (paid), $50,000 on December 31, 2007 ($20,000 of this payment was made on January 3, 2008 and the balance was paid on February 29, 2008) and $75,000 on December 31, 2008 (the payment was not made and the Company was in default). In August 2009, the Company decided to surrender the Encino Gordo 2 mining concession eliminating any future concession payments on these properties.




Sahuayacan




In May 2010, the Company management decided to drop the Sahuayacan properties due to lack of economic thicknesses and grades of gold mineralization encountered in the drilling program eliminating any future concession payments on these properties.




Cerro Delta




In February 2011, the Company management entered into an agreement with Compania Minera Alto Rio Salado S.A., a private Argentine entity, for the acquisition of the 15,000 hectare Cerro Delta Project in northwest La Rioja Province, Argentina. Under the terms of the agreement, the Company must pay $150,000 upon signing, and $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 Project payable on the sixth anniversary of the signing. The vendor will retain a 1% NSR. (Note 17)




86


PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




7. PROMISSORY NOTES




As at February 28, 2011, the Company had $884,022(February 28, 2010 - $775,975) of promissory notes outstanding, comprising the following:




(a)
During the year ended February 29, 2008, the Company converted accounts payable of $465,994 (Swiss Franc (“CHF”) 565,000) into promissory notes. The Company had an implied obligation to pay the accounts payable in CHF as the funds to pay the expense came from Swiss investors in CHF. Accordingly, the promissory notes were issued in CHF. The notes consist of one warrant for each CHF 5.00 of notes issued, exercisable at $1.00 each. The principal and interest on the notes became due and payable on April 30, 2008.The Company has not repaid the promissory notes as of February 28, 2011 and is in default. The principal and interest on the notes due and payable as of February 28, 2011 was $826,984. The interest rate payable during the default period is 12%.





(b)
$15,000 of the promissory notes accrues interest of 8% per year that has no repayment terms. The interest accrued as of February 28, 2011 is $2,778.





(c)
$10,668 of promissory notes is due to related parties that were to be repaid over a 12 month period as part of a debt settlement agreement. These notes bear no interest (note 14). The Company has not made the monthly payments according to the settlement agreement and is in default.





(d)
$12,048 of promissory notes is due to an associate of a related party that bear no interest and have no repayment terms.





(e)
$16,544 of promissory notes bear no interest and have no repayment terms.




87


PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010


8. CONVERTIBLE DEBENTURES




There were no convertible debentures issued, outstanding, repaid or converted during the year ended February 28, 2011.




On May 5, 2008, the Company signed a letter of intent (“LOI”) to enter into a strategic alliance with Paramount. The agreement called for Paramount to invest a minimum of $4,000,000 and maximum of $6,000,000 into the Company, fixed at a price of $0.50 per unit by June 23, 2008.  The investment timeline was extended until July 21, 2008, and then to August 5, 2008. On August 6, 2008, the Company terminated the LOI with Paramount as Paramount did not meet the terms of the agreement.




The Company issued secured convertible debentures to Paramount as follows:




·
On May 9, 2008, the Company issued $500,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.


·
On June 10, 2008, the Company issued $70,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.


·
On June 25, 2008, the Company issued $300,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.


·
On July 11, 2008, the Company issued $500,000 in convertible debentures to Paramount, with a maturity date of one year, accruing interest at 8% per year payable in arrears and convertible at the option of the holder.


·
On March 19, 2009, the Company entered into an agreement with Paramount restructuring its payment terms on the three outstanding secured convertible debentures held by Paramount. Under the terms of the agreement, the Company paid Paramount $1,000,000 to cancel two debentures held by them, one issued on May 9, 2008 for $500,000 and another issued on July 11, 2009 for $500,000.




The Company also amended a debenture issued to Paramount on June 18, 2009 in the face amount of $370,000. The amount of that debenture was increased to $521,047, which, among other things, included interest accrued on all three debentures to March 31, 2009. The Company was obligated to make a payment on March 31, 2009 on this debenture in the amount of $393,547 and the balance of $127,500 was to be re-paid on April 30, 2009. This remaining amount of $127,500 was interest free as long as the debenture remained in good standing. On March 31, 2009, the Company paid $300,000 of the debenture issued to them on June 18, 2009. As per the agreement, the remaining amount of $221,047 accrued interest at 8% per year payable monthly, in arrears on the 10th day of each month. On July 8, 2009, the Company entered into a definitive agreement with Paramount to sell the Guazapares Project. As part of the agreement, Paramount waived the interest charges due on the convertible debenture.




As part of a restructuring fee, the Company issued to Paramount 150,000 shares of common stock. As part of the agreement, Paramount released its security interest on the Company’s Cieneguita properties. The Company also repaid the remaining amount of the amended debenture of $221,047 on October 8, 2009, from the escrow funds for the payment of Guazapares properties. The Company recognized a loss of $196,045 on the liquidation of the debentures with Paramount. Upon receipt of this payment from the Company, Paramount released its security interests in the Company’s assets, including its security interests in the Company’s Sahuayacan, Guazapares and Encino Gordo properties.




88




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




8. CONVERTIBLE DEBENTURES (CONTINUED)




The value assigned to the beneficial conversion feature of the convertible debentures issued to Paramount ($221,047) was $nil. The fair value of the warrants attached to the convertible debentures was estimated to be $48,500. The fair value of the warrants was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions:




2009Expected volatility

110.36%Weighted-average volatility

110.36%Expected dividend rate

-Expected life of warrants in years

3-4Risk-free rate

1.21-1.45%




The weighted average fair value of the warrants was $0.75 per warrant, while the weighted average stock price on the dates granted was $0.35. Stock-based compensation for these warrants of $48,500 was being amortized over the one year term of the convertible debentures starting on March 19, 2009.




In March 2009, the Company approved the issuance of $1,500,000 in convertible debentures to four investors, of which $1,300,000 was received in cash and used to liquidate the debentures issued to Paramount (former debenture holders) during the period of May 2008 to July 2008. Additionally, the Company converted $100,000 of accounts payable into the convertible debenture and received $100,000 in cash for the remaining debenture in October 2009. The debenture was due in one year from the date of issuance and accrued interest at 15% per annum, to be paid quarterly in either cash or stock of the Company valued at a 20% discount of the 20 day trading average prior to the date of payment. The holders had several options to convert the debentures. On July 24, 2009, all of the holders of the convertible debentures agreed to irrevocably convert the debentures into a 10% ownership interest in the Company’s Cieneguita Project. The Company has valued the Cieneguita Project at approximately $15,000,000. The 10% ownership interest in the Cieneguita Project thus approximates the value of the debentures to be converted.




As consideration for the debentures, the Company granted a security interest in its Cieneguita properties to these debenture holders, which was released upon conversion.




On October 12, 2009, the debentures were converted into 10% ownership interest in Cieneguita. The Company recognized a gain on sale of assets in the amount of $1,500,000 for the year ended February 28, 2010.




During the quarter ended May 31, 2009, the Company issued 273,510 warrants to MRT under a convertible debenture agreement, where one warrant was issued for each $0.60 of convertible debentures issued (note 6). The warrants can be exercised at any time at a price of $0.50 for three years.




In November 2009, MRT converted $1,000,000 debenture into units of $0.60 each. The Company recognized a loss on extinguishment of debenture of $114,980.




The value assigned to the beneficial conversion feature of the convertible debentures issued to MRT was $71,866. The fair value of the warrants attached to the convertible debentures was estimated to be $51,800. The fair value was estimated at the date of the grants using the Black-Scholes option pricing model with the following weighted average assumptions:




2009Expected volatility

108.54-110.36%Weighted-average volatility

108.54-110.36%Expected dividend rate

-Weighted-average expected life of warrants in years

3Risk-free rate

1.36-1.45%




The weighted average fair value of the warrants was $0.19 per warrant, while the weighted average stock price on the dates granted was $0.32.




89


PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010


9. LOANS PAYABLE




As at February 28, 2011, there were loans payable in the amount of $12,876 (February 28, 2010 - $45,303), which are all current. The loans are repayable in monthly instalments of $3,272 (February 28, 2010 – $5,716), including interest of 7.50% per annum.




10. PREFERRED STOCK




The Company is authorized to issue 20,000,000 shares of preferred stock. The Company’s board of directors is authorized to divide the preferred stock into series, and with respect to each series, to determine the preferences and rights and qualifications, limitations or restrictions thereof, including the dividend rights, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions, and the number of shares constituting the series and the designations of such series. The board of directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting rights of the holders of common stock, which issuance could have certain anti-takeover effects.




11. COMMON STOCK




In May 2010, the Company converted subscription proceeds of $50,000 and issued 250,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of the Company’s common stock and one warrant each exercisable at $0.30, which expire in two years.




In December 2009, the Company converted subscription proceeds of $2,275,000 and issued 11,375,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of Company’s common stock and one warrant each exercisable at $0.30, which expire in four years.




In November 2009, the Company received subscription proceeds of $65,000 and issued 325,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of Company’s common stock and one warrant each exercisable at $0.30, which expire in four years.




In November 2009, MRT converted the $1,000,000 debentures into units of $0.60 each. Each unit comprises 2 common shares and 1 warrant. Each warrant is exercisable at $0.50 per share for a period of 3 years. The Company issued 3,333,333 shares and 1,666,667 warrants to MRT.




In October 2009, the Company received subscription proceeds of $20,000 and issued 100,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of Company’s common stock and one warrant each exercisable at $0.30, which expire in four years.




In September 2009, the Company received subscription proceeds of $40,000 and issued 200,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of Company’s common stock and one warrant each exercisable at $0.30, which expire in four years.




In July 2009, the Company received subscription proceeds of $100,000 and issued 500,000 shares of common stock in a private placement. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.20 of subscription proceeds. Each unit consists of one share of Company’s common stock and one warrant each exercisable at $0.30, which expire in four years.




90




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




11. COMMON STOCK (CONTINUED)




In June 2009, the Company converted $622,500 of debt into subscription proceeds and issued 2,075,000 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.60 of debt. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.50, which expires on December 31, 2010.




In June 2009, the Company issued 1,000,000 shares of common stock to an officer of the Company as bonus. The Company assigned a value of $0.28 per share for a total of $280,000 to these shares.




In May 2009, the Company converted $128,742 of debt into subscription proceeds and issued 429,141 common shares. The subscribers to the subscription proceeds have agreed to purchase one unit for each $0.60 of debt. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.50, which expires on December 31, 2010.




In May 2009, the Company converted $121,258 of stock subscriptions and issued 404,193 common shares. The subscribers have agreed to purchase one unit for each $0.60 of stock subscriptions. Each unit consists of two shares of Company’s common stock and one warrant each exercisable at $0.50, which expires on December 31, 2010.




In May 2009, the Company issued 42,837 shares for $13,500 of investors’ relations services as per the agreement.




In April 2009, the Company issued 2,250,000 shares under an escrow agreement as security against convertible debentures issued in the amount of $250,000. In October 2009, the Company defaulted on the terms of the agreement of the convertible debentures and released the shares from escrow in settlement of the convertible debentures.




In March and April 2009, the Company issued 700,000 shares pursuant to amended convertible debenture agreement and financing arrangements.




12. STOCK COMPENSATION PROGRAM




On March 18, 2009, the board of directors approved the granting of stock options according to the 2009 Nonqualified Stock Option Plan (“2009 Option Plan”) whereby the board is authorized to grant to employees and other related persons stock options to purchase an aggregate of up to 6,000,000 shares of the Company's common stock. Subject to the adoption of the 2009 Option Plan, the options were granted and vest, pursuant to the terms of the 2009 Option Plan, in six equal instalments, with the first instalment vesting at the date of grant, and the balance vesting over 2 1⁄2 years, every six months.




In the year ended February 28, 2011, the Company awarded 1,000,000 options to purchase common shares (2010 – 2,150,000) and recorded stock-based compensation expense for the vesting options of $546,054 (2010 - $1,000,201). The following weighted average assumptions were used for the Black-Scholes option-pricing model to value stock options granted in 2010 and 2009:




2011

2010Expected volatility
111.59%

105.61%-110.36%Weighted-average volatility
111.59%

106.89%Expected dividend rate
-

-Expected life of options in years
10

3 -10Risk-free rate
3.43%

1.40% – 3.49%




There were no capitalized stock-based compensation costs at February 28, 2011 or February 28, 2010.




91




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




12. STOCK COMPENSATION PROGRAM (CONTINUED)




The summary of option activity under the 2009 Option Plan as of February 28, 2011, and changes during the period then ended, is presented below:




Weighted


Number of


Weighted-


AggregateAverage


Shares


Average


IntrinsicExercise





Remaining


ValuePrice





ContractualOptions







TermBalance at March 1, 2010

$
0.51



6,560,000Options granted


0.20



1,000,000Options exercised


-



-Options cancelled/forfeited


0.49



(825,000
)Balance at February 28, 2011

$
0.46



6,735,000



7.66


$
154,400Exercisable at February 28, 2011

$
0.52



5,358,333



7.23


$
99,917




The weighted-average grant-date fair value of options granted during the year ended February 28, 2011 and February 28, 2010 was $0.19 and $0.32, respectively.




A summary of the status of the Company’s nonvested options as of February 28, 2011, and changes during the year ended February 28, 2011, is presented below:




Weighted-averageGrant-DateNon-vested options

Shares

Fair ValueNon-vested at February 28, 2010

2,570,832

$ 0.29Granted

1,000,000

0.19Vested

(2,030,833)

0.27Cancelled/forfeited

(163,333)

0.22Non-vested at February 28, 2011

1,376,666

$0.26




As of February 28, 2011, there was an estimated $147,700 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2007, 2008 and 2009 nonqualified stock option plans. That cost is expected to be recognized over a weighted-average period of approximately 1.68 years.




92




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




13. WARRANTS




As at February 28, 2011, the Company had a total of 25,826,733 warrants (February 28, 2010 –25,380,900) outstanding to purchase common stock. Each warrant entitles the holder to purchase one share of the Company’s common stock. The Company has reserved 25,826,733 shares of common stock in the event that these warrants are exercised.




During the year ended February 28, 2011, the Company received $nil from warrants exercised.




The following table summarizes the continuity of the Company’s share purchase warrants:




Number of

Warrants
Weighted Average Exercise PriceBalance, February 28, 2009
7,102,890
$
1.03Issued
22,887,500

0.38Cancelled/expired
(4,609,490)

1.11Exercised
-

-Balance, February 28, 2010
25,380,900
$
0.43Issued
3,000,000

0.25Cancelled/expired
(2,554,167)

0.44Exercised
-

-February 28, 2011
25,826,733
$
0.41




As at February 28, 2011, the following share purchase warrants were outstanding:




Number of Warrants
Exercise Price

Expiry Date3,000,000
$ 0.25

July 26, 2012166,666
0.30

May 8, 20121,125,000
0.30

July 23, 2011 to November 5, 201111,375,000
0.30

December 30, 2011300,000
0.36

July 23, 2011200,000
0.40

March 24, 2012600,000
0.50

August 15, 20125,000,000
0.50

December 24, 20121,666,667
0.50

November 5, 2012200,000
0.65

June 30, 20121,793,400
0.75

April 2012 to August, 2013200,000
1.30

June 30, 2012200,000
$ 2.00

June 30, 201225,826,733




93




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




14. RELATED PARTY TRANSACTIONS




For the year ended February 28, 2011, the Company paid or accrued management fees of $441,639 (February 28, 2010 - $244,297) to certain officers and directors. The Company also paid or accrued $118,399 (February 28, 2010 - $30,436) to certain officers and directors for travel, office and other related expenses.




The Company also paid consulting fees of $93,333 (February 28, 2010 - $26,667) to companies owned by directors.




As at February 28, 2011, accounts payable of $207,399 (February 28, 2010 - $247,725) was owing to directors and officers of the Company and $43,226 (February 28, 2010 - $5,903) was owing to companies controlled by the directors. In addition, promissory notes of $10,668 (February 28, 2010 - $10,091) were owed to a company controlled by a director (note 7).




All related party transactions are in the normal course of business at the exchange amount agreed to by each party.




15.
INCOME TAXES




Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The components of the net deferred income tax assets are approximately as follows:




2011

2010Deferred income tax assetsEquipment
$
34,000
$
34,000Net operating loss and credit carry forwards

8,329,000

7,375,000Gross deferred tax assets

8,363,000

7,409,000Valuation allowance

(8,363,000)

(7,409,000)$
-
$
-




As at February 28, 2011, the Company's net operating loss carry-forwards for income tax purposes were approximately $21,172,000 (February 28, 2010 - $18,672,000). If not utilized, they will start to expire in 2017.




94




PAN AMERICAN GOLDFIELDS LTD.

(An Exploration Stage Company)

Notes to the Consolidated Financial Statements

(Expressed in U.S. Dollars)

Years Ended February 28, 2011 and 2010




16.
SUPPLEMENTAL CASH FLOW INFORMATION




Year Ended February 28, 2011

Year Ended February 28, 2010

Period From Inception of Exploration stage (March 1, 2004) to

February 28, 2011Interest paid
$
30,000
$
-
$
310,053Common stock issued on conversion of debt

-

872,500

4,193,000Common stock issued on settlement of notes payable

-

1,250,000

3,133,322Common stock issued for interest costs

-

82,500

82,500Common stock issued for financing costs

-

145,000

145,000Common stock issued for mineral property costs

-

-

580,000Common stock issued for bonuses

-

280,000

512,750Shares issued for services
$
-
$
158,500
$
510,590




17.
SUBSEQUENT EVENTS




In March 2011, the Company appointed Bruno Le Barber as a member of its board of directors.Mr. Le Barber is the co-founder of Vortex Capital (“Vortex”), a Hong Kong based gold fund. Previously he was a Vice President at Morgan Stanley in London where he advised trading desks and a large investor base while publishing macro-economic studies. Mr. Le Barber was also a global technical strategist with ABN Amro in Paris. He manages Vortex together with Emilio Alvarez, former Executive Director, Equity Research with Morgan Stanley in London.




In March 2011, the Company paid the initial $150,000 payment, as required under the agreement, for the acquisition of the 15,000 hectare Cerro Delta Project in northwest La Rioja Province, Argentina.




In conjunction with the agreement, the Company completed a private placement of 6,560,000 units at $0.20 per unit, for total proceeds of $1,277,000. Each unit consists of one share and one share purchase warrant. Each warrant is exercisable for one share of common stock at an exercise price of $0.30 for a period of two years from the closing date.




In March 2011, the Company and a note holder agreed to cancel $17,778 in outstanding debt in exchange for 55,000 shares of the Company’s common stock.




In March 2011, the Company issued 500,000 shares of common stock and warrants to purchase 500,000 shares of common stock at $0.30, expiring on December 31, 2012, to a consultant.




In April 2011, the Company agreed to issue 423,753 of its common stock pursuant to a debt settlement agreement. The shares were valued at the time of the debt settlement agreement of $0.28 per share.




95