LSMG Lode Star Mining Inc (PK)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes appearing elsewhere in this Quarterly Report. In addition to historical financial information, the following discussion includes forward-looking statements that reflect our plans, estimates and our current views with respect to future events and financial performance. Forward-looking statements are often identified by words such as: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results

Mineral Property Interest

Further to a Mineral Option Agreement (the “Option Agreement”) dated October 4, 2014, on December 5, 2014, we entered into a subscription agreement (the “Subscription Agreement”) with Lode-Star Gold INC., a private Nevada corporation (“LSG”) in which we agreed to issue 35,000,000 shares of our common stock, valued at $230,180, to LSG in exchange for an initial 20% undivided beneficial interest in and to LSG’s Goldfield property (the “Acquisition”), which made LSG our largest and controlling shareholder.

LSG’s Goldfield Bonanza property is comprised of 31 patented mineral claims owned 100% by LSG, located on approximately 460 acres in the district of Goldfield in the state of Nevada (the “Property”). The Property is clear titled, with a 1% Net Smelter Royalty (“NSR”) existing in the favor of the original property owner.

LSG was incorporated in the State of Nevada on March 13, 1998 for the purpose of acquiring exploration stage mineral properties. It currently has one shareholder, Lonnie Humphries, who is the spouse of Mark Walmesley, our President and Chief Financial Officer. Mr. Walmesley is also the Director of Operations and a director of LSG.

The execution of the Subscription Agreement was one of the closing conditions of the Option Agreement, pursuant to which we acquired the sole and exclusive option to earn up to an 80% undivided interest in and to the Property. To earn the additional 60% interest in the Property, we are required to fund all expenditures on the Property and pay LSG an aggregate of $5 million in cash from the Property’s mineral production proceeds in the form of an NSR. Until we have earned the additional 60% interest, the NSR will be split 79.2% to LSG, 19.8% to us and 1% to the former Property owner.

The Option Agreement can be found as Exhibit 10.1 to our report filed on Form 8-K on October 9, 2014 and is incorporated herein by reference. The Subscription Agreement can be found as Exhibit 10.7 to our report filed on Form 10-K/A on January 11, 2017 and is incorporated by reference.

If we fail to make any cash payments to LSG within one year of October 4, 2014, we are required to pay LSG an additional $100,000, and in any subsequent years in which we fail to complete the payment of the entire $5 million described above, we must make quarterly cash payments to LSG of $25,000 until we have earned the additional 60% interest in the Property.

LSG granted us a series of deferrals of the payments, with the most recent being granted on January 11, 2017. LSG agreed on that date to defer payment of all amounts due in accordance with the Option Agreement until further notice. On January 17, 2017, the Company and LSG agreed that as of January 1, 2017, all outstanding balances shall carry a compound interest rate of 5% per annum. It was further agreed that the ongoing payment deferral shall apply to interest and principal.

LSG acquired the leases to the Property in 1997 and became the registered and beneficial owner of the Property on September 19, 2009. Since the earlier of those dates, it has conducted contract exploration work on the Property but has not determined whether it contains mineral reserves that are economically recoverable. LSG is an exploration stage company and has not generated any revenues since its inception. The Property represents its only material asset.

The Property is located in west-central Nevada, in the Goldfield Mining District at Latitude 37° 42’, and Longitude 117° 14’.  The claims comprising the Property are located in surveyed sections 35 and 36, Township 2 South, Range 42 East, and in sections 1, 2, 11, and 12, Township 3 South, Range 42 East, in Esmeralda County, Nevada. The Property is accessible by traveling approximately one-half mile northeast of the community of Goldfield, along a county-maintained road that originates at U.S. Highway 95, which runs through “downtown” Goldfield. The town of Goldfield, which is the Esmeralda county seat (population 300), is approximately 200 air miles south of Reno and 180 air miles north of Las Vegas. Surface access on the Property is excellent and the relief is low, at an elevation of approximately 6,000 feet.  Vegetation is sparse, consisting largely of sagebrush, rabbitbrush, Joshua trees and grasses. Water, electricity and other sundry needs such as restaurants, lodging, minor medical needs, fire station, and police are within 1 mile of the property.

All properties, claims, buildings, equipment, and supplies are owned by LSG and we have free access to utilize and manage all those items. Operations are managed from a 6,000 sq. ft. office and warehouse facility complete with showers and laundry amenities. Two residential trailer sites are immediately adjacent to this building for crew needs.

The Property has one working shaft, the February Premier, which has access to the 300 ft level, with approximately 1/2 mile of ventilated drift. Underground work has identified 2 high-grade gold-bearing zones which the company plans to further explore. The program that we envision undertaking includes the mining of approximately 10,000 tons of non-NI 43-101 compliant gold mineralization at an approximate grade of 0.9 ounces per ton. The estimated grade is based on historic drilling work done by LSG, for which the 1.5-inch core samples were consumed by assay requirements. In order to provide adequate sample weights to the assaying lab, the entire core was processed for individual samples.

While we have encountered several additional high-grade drill anomalies throughout the property, it is important to note that we have no proven and/or probable reserves at the present time and therefore the program is exploratory in nature. Much of the property remains under-explored and it is our belief that the district’s high-grade, million-ounce ore zones repeat themselves. Further surface and underground exploration work need to be executed.

The Property has two operating water monitoring wells that were mandatory for us to receive a water pollution control permit. Part of the permitting application is for the allowance of the company to store its waste rock underground. The property has no milling onsite and we must rely on a third party to receive our mineralized material and tombstone our tailings.

Amendment to Option Agreement

On October 31, 2019, we entered into an amendment (the “Amendment”) to the Option Agreement with LSG.

Under the Amendment, the exercise of the 60% option was restructured into two separate 30% options, such that we may now earn a 30% interest in the Property (for a total of 50%) (the “Second Option”) by completing the following actions:

Following the exercise of the Second Option, we may earn an additional 30% interest in the Property (for a total of 80%) (the “Third Option”) by completing the following actions:

The primary effect of the Amendment is therefore to increase to the purchase price for the additional 60% interest in the Property from $5 million to $10 million, while at the same time separating it into tranches.

The Amendment also corrects a number of inconsistences in the Option Agreement, updates the defined terms to accommodate the creation of the Second Option and Third Option, and includes our acknowledgements regarding accrued and unpaid penalty payments and amounts owing by us to LSG as of September 30, 2019.

The foregoing description of the Amendment includes a summary of all the material provisions but is qualified in its entirety by reference to the complete text of the Amendment included as Exhibit 10.8 to our report filed on Form 8-K on November 6, 2019 and incorporated herein by reference.

We agreed with LSG that upon the successful completion of a toll milling agreement after permitting is achieved, there will be a basis to form a joint management committee to outline work programs and budgets, as contemplated in the Option Agreement and for us to act as the operator of the Property. To the date of this report LSG has borne all costs in connection with operations on the Property. We expect the first work program, entailing Property-related costs for which we will be responsible, to be approved in early 2021.

Milling

On February 17, 2017, we executed an agreement with Scorpio Gold Corporation (Scorpio) for a pilot toll milling test. We completed the first test in May 2017 and both companies have determined that further testing needs to be completed to determine a definitive cost analysis and other operational details. The sample processed was historic material stockpiled on the property surface and therefore of limited metallurgical value, but indicative of material that will be run through the mill. Milling throughput did identify specific equipment configuration details that need to be considered for future runs. Both parties agree that additional milling circuitry is needed for the most optimum gold yield.

On January 22, 2020, we executed a toll milling agreement (the “Agreement”) with Scorpio’s affiliate, Goldwedge LLC. The Agreement will allow for the processing of ore delivered from the Property to the 400 ton per day Goldwedge milling facility located in Manhattan, Nevada.

Based on previous metallurgical testing, our ore requires gravity combined with flotation for optimal recoveries of contained precious metals. The Goldwedge milling circuit is currently configured with a gravity recovery circuit. Under the terms of the Agreement, we will advance funds required for the design, engineering, permitting and modifications to the Goldwedge facility to include the addition of a flotation circuit, supporting reagent tanks/silos, secondary lining of process containment ponds, leak detection and monitoring wells associated with fluid containments.

The Agreement provides for us to recoup the advanced funds through a reduction in toll milling rates until all advanced funds have been repaid. Following repayment, the toll charges will revert to standard rates.

Property - Previous Exploration Work, Mineralization and State of Exploration

The Property is wholly owned by LSG, our largest shareholder, and is clear titled. A 1% net smelter royalty exists in the favor of the original property owner. The property consists of 31 patented claims on approximately 460 acres. LSG, over the past 15 years and continuing, has spent close to $8 million on underground rehab of approximately 1/2 mile of drift at the 300ft sub-surface level. LSG also executed 22 surface core drill holes for a total of 10,400ft and 152 underground core drill holes for a total of 23,000ft.

It is important to note the following sample preparation and quality controls used by LSG and by ICN, a previous operator of the Property:

Lode-Star Gold drill hole core sampling and analytical protocol

All drill core samples were prepared and delivered to ALS Minerals in Reno by Tom Temkin, our COO. Individual sampled intervals varied from one to five-foot lengths, based on geologic parameters, and included 100% of core intervals. No core splitting was conducted. No duplicate samples or standards were introduced other than those inserted and utilized by ALS for their internal quality control. Lab preparation of individual samples included crushing and grinding to minus 200 mesh, followed by a 1-ton assay for gold. All samples that initially assayed over 1.0 opt Au were systematically re-assayed.

ICN drill hole core and Rotary RC sampling and analytical protocol

All drill core samples were prepared by ICN personnel and either delivered to the assay lab or were picked up on-site by lab personnel. Rotary RC chip drilling samples were collected on-site and transported to Reno by the respective labs. The labs used included ALS Minerals and American Assay Lab. Core was sawn by ALS Minerals and/or ICN personnel. Individual core sampled intervals varied from one to five-foot lengths, based on geologic parameters, and included one-half of the original core material. Rotary RC samples were taken at five-foot intervals entirely. Quality control for all samples included a protocol of inserting duplicate samples, blanks, and known standards, at repeating intervals to maintain .08% check sampling. Lab preparation of Individual samples included crushing and grinding to minus 200 mesh, followed by a 1-ton assay for gold. All samples that initially assayed over 1.0 opt Au were systematically re-assayed.

Underground work has identified 2 high-grade gold-bearing zones that can support mine development utilizing our current infrastructure. The property is now permitted for production and is mine ready.

Third Party Assay Data Audit

Mine Development Associates (MDA Reno), a highly regarded third party NI 43-101 service provider, has audited our drill hole database and performed a comparative QA/QC check assay analysis on selected drilling and determined no inconsistencies to exist and assays were repeatable.

NI 43-101 Update Status

We filed an independent Technical Report written in accordance with National Instrument 43-101 - Standards of Disclosure for Mineral Projects (NI 43-101) on our property located in Goldfield, Nevada. Although not required for OTC listing, we had this report prepared under NI 43-101 guidelines to provide a summary of the Goldfield Bonanza Project. This NI 43-101 is required documentation for future possible business transactions and listings on Canadian exchanges. The Technical Report titled “Technical Report on the Goldfield Bonanza Project Esmeralda County Nevada U.S.A.” dated January 15, 2020 has been prepared by Mr. Robert M. Hatch, SME Registered Geologist.

The report is available for review on EDGAR (https://www.sec.gov/edgar/searchedgar/companysearch.html) and SEDAR (https://www.sedar.com/) under Lode-Star Mining’s issuer profile.

Metallurgy Reports

To date the Company has had three metallurgy reports prepared. In order they are: Kappes Cassady & Associates located in Reno, NV dated July 10, 2006, Newmont Mining located in Carlin, NV dated May 27, 2010, and McClelland Laboratories, Inc. located in Reno, NV dated January 26, 2016. Indications are that we can expect at a minimum, an 85% AU recovery from floatation milling. Better recovery is achieved by Agitated Leach processing, which show results closer to +90%. The best recovery results, +95%, due to the high sulphide content of the ore, is achieved through roasting. An additional lab report has been generated by Kappes Cassady & Associates to determine ore compatibility for processing at Scorpio Gold’s milling circuit.

Key Developments

On November 20, 2018 we were issued Water Pollution Control Permit NEV2017109 from the Nevada Department of Environmental Protection (NDEP) regarding production at the property. This Permit authorizes the construction, operation, and closure of approved mining facilities in Esmeralda County, Nevada. The Permit is effective for 5 years until November 20, 2023 and authorizes the processing of 10,000 tons of ore per year from Lode-Star’s underground operations. 100% of the permitting cost has been borne by our largest shareholder, Lode Star Gold INC.

Unique to our production permit, the Nevada Department of Environmental Protection has endorsed the Company’s intentions to temporarily store waste rock underground. Once stockpiled, waste rock is brought to the surface to backfill and remediate our historic abandoned mine shafts. This will save us the significant time and expense of having to permit and build a surface waste containment facility.

We have received our ATF blasting permit. Long term road closures on the Property to curtail public access and ensure safety are underway.

Recent Events

The Covid-19 pandemic has had minimal effect on the execution of our milestones.

Manpower:

We now have a crew of 4 miners and 1 grade-control geologist working underground. The manpower component allows for mine development to advance in multiple headings.

Milling:

We signed a Toll Milling Agreement with Scorpio Gold Corporation’s affiliate, Goldwedge LLC. The Agreement allows for the processing of ore delivered from our Goldfield Bonanza Project to Scorpio’s 400 ton per day Goldwedge milling facility located in Manhattan, Nevada. Under the terms of the Agreement, we are to advance funds required for the design engineering, permitting and mill modifications for a new flotation circuit. To date the design engineering work has been completed and Scorpio filed for its Goldwedge mill modification permit with the Nevada Department of Environmental Protection (NDEP) on May 5, 2020. Lode-Star Gold, INC, our largest shareholder, has purchased the flotation equipment to be placed within the Goldwedge milling system.

The filing of the mill modification application on May 5, 2020 started the clock running with NDEP. We anticipate a favorable permitting outcome sometime in November which will allow us to proceed with the flotation circuit installation. Lode-Star Gold purchased and sent to the Goldfield site 26 50 cu.ft. MinPro Flotation Cells on our behalf. Included are two banks of 10 cells designated as roughers and cleaners, with the remaining bank of 6 cells as scavengers. Also purchased and received were a drum filter and vacuum system. All other items are more readily available and can be purchased closer to actual installation need.

Mine Development:

Since the beginning of the year Lode-Star Gold staff have completed underground rehabilitation and progressed the Bonanza Project into mine development. The project currently has two headings in which we intend to conduct mining. Respectively, these are named the Red Hills Stope Zone and Decline Vein Zone. In February, we commenced blasting inside these zones to assess the nature of rock breakage and refine blasting technique. It is essential that we apply a highly disciplined ore grade control. To date we have executed 9 gold zone blasts. Each blast has been catalogued and compartmentalized for further metallurgical testing. Additional muck bays are being developed for storage. The plan is to develop the capacity for 1600 tons of underground storage for stockpiling of ore for delivery to Scorpio once mining commences. Samples for grade control have been analyzed in Scorpio’s Mineral Ridge Gold laboratory. Scorpio has assayed a variety of grade-control samples including channel samples, blast-hole samples and muck pile samples. We continue to refine our blasting technique and most recent blasts have been very well shaped. We are now understanding breakage patterns and rock shatter variability between ore and waste. Our April 30 blast in the Red Hills Stope zone yielded high grade assays from channel sampling including SC014A and SC014B, of 8.09 oz/ton Au and 1.75 oz/ton Au, respectively, and a muck sample SM-11, that assayed 2.65oz/ton Au. Our May 14 sampling in the Red Hills Stope zone yielded another series of high grade assays in blast hole SB014 coming in at 3.559/(3.550 repeat assay) oz/ton Au and muck pile sample SM-013 coming in at 6.248/(6.240 repeat assay) oz/ton Au. We view these measurements as encouraging as we proceed towards being mineable.

We expect to soon file our mine plan with MSHA and commence creating our Secondary Escape-way (an MSHA requirement). The development plan for the Escape-way is to repurpose either the property’s existing historical Church shaft or January Whiterock shaft and ultimately incorporate additional hoisting capability for ore. This should double our daily extraction capability. The outcome of our drilling campaign, as outlined below, will allow us to decide which shaft to use.

Step Out Drilling and Exploration:

Drilling is underway on the property. The Company is currently waiting for assays from its first hole. The plan will be to drill approximately twelve holes at a rate of two to three holes per month. This conservative drilling rate will give us time to assay each hole before we methodically drill the next. The objective is to understand the geometry of this gold bearing zone and to identify additional cross cutting features.

The immediate target area, as described in our most recent NI 43-101, is the high-grade area referred to as the Church Vein Zone. This zone measures up to 40 feet in width and trends at least 600 feet north-northeasterly, immediately west of the Church shaft. Drilling by ICN in 2011 included 19 core holes with varying results. Some holes did not hit the intended target and will be re-drilled to better test the target. As drilling progressed into the vein area, marginal gold was identified. Three holes, ICN-003, ICN-013 and ICN-014 (results below) hit solid high- grade intercepts which need further drilling to define. (Grams per Metric Tonne = 34.2857).

Hole ICN-003: included 9.5 ft (2.90 m) weighted averaged assays of 40.79 oz/ton (1398.6 g/t) gold. Hole ICN-013: included 4.5 ft (1.37 m) with 51.46 oz/ton (1764.2 g/t) gold. Hole ICN-014: included 3.5 ft (1.00 m) with 68.02 oz/ton (2332.0 g/t) gold. Hole ICN-001 included 3.0 ft (0.90 m) with averaged assays of 6.29 oz/ton (215.7 g/t) gold and ICN-023 included 4.0 ft (1.22 m) with averaged assays of 1.44 oz/ton (49.35 g/t) gold.

The figure below indicates the relationship between the overall ICN core drilling, high-grade gold intercepts, underground workings, the Church shaft, January/Whiterock shaft and our planned first two holes (approximately). Geologic modeling to date has identified what may prove to be a robust production area. Our drilling phase will determine the accuracy of that modeling.

Mine Design and Utilization of Equipment

The mine will be designed through the interpretation of detailed drilling data in cross sections and the use of conventional software. Currently there are two areas, the Red Hills and the Church, containing high-grade gold mineralization identified that are to be incorporated into the mine plan. Currently the mine is equipped with a 1-yard scoop-tram loader. Mining activity will be conducted with the utilization of this loader, pneumatic equipment and by an existing conveyor system providing for the transfer of ore to the surface.

Production Mining Method

We intend to maximize profitability through a disciplined approach involving the separation of high-grade gold ore from waste rock during the mining stage, thus avoiding the additional cost of pre-shipment concentration. In order to maintain the highest grade of ore production the blast holes will be sampled during drilling, then assayed to determine ore boundaries prior to blasting. The current plan is to ship ore directly from the mine to an offsite mill employing a toll-milling arrangement.

Mine Development - Drilling the Northeast Corridor

For technical details, see our report filed on Form 10-K for the year ended December 31, 2019. The Property’s Red Hills and Church zones can support mine development utilizing the Company’s current infrastructure. Underground mining in the Red Hills area will extract ore on the 300-level. We anticipate mining to begin by the end of 2020. We plan to initially mine 10,000 tons of material per year at a rate of approximately 50 tons per day.

We have a $5.0 million exploration and mine development program that is focused on defining the Property’s existing and mineable gold mineralization; to advance the geologic modeling in preparation for mining; and bulk sampling of the Project’s current underground workings as well as for working capital purposes.

Funding

Details of the development program are as follows:

Line items 1, 2, 3 and 5 above, totaling $3.0 million are required for bulk sampling of the Property’s current workings.

Line item 4 accounts for the Development Drilling totaling $2.0 million required to fully assess the Northeast Corridor.

The estimates above are for planning purposes only. No information contained herein should be considered an official corporate offering. The application of funds shown above is an estimate and may not exactly match the actual future costs.

Funding

All of our ongoing operations, since the inception of our Mineral Option Agreement on October 4, 2014, have been funded by monies advanced to us by Lode-Star Gold INC. (LSG) our largest shareholder. We do not currently have enough funds to carry out our entire plan of operations, so we intend to meet the balance of our cash requirements for the next 12 months through a combination of debt financing and equity financing through private placements. There is no assurance that we will be successful in completing any such financings

If we are unsuccessful in obtaining sufficient funds through our capital raising efforts, we may review other financing options, although we cannot provide any assurance that any such options will be available to us or on terms reasonably acceptable to us. Further, if we are unable to secure any additional financing then we plan to reduce the amount that we spend on our operations, including our management-related consulting fees and other general expenses, so as not to exceed the capital resources available to us. Regardless, our current cash reserves and working capital will not be sufficient for us to sustain our business for the next 12 months, even if we decide to scale back our operations.

Personnel

We have no employees. Since January 1, 2020, we have incurred consulting fees of $25,000 per quarter to a company controlled by our president and CEO, Mark Walmesley, for services provided to us by Mr. Walmesley. We expect to continue to use outside consultants, advisors, attorneys and accountants as necessary.

Our Chief Operating Officer, Thomas Temkin, who is also a director, is a Certified Professional Geologist and a Qualified Person under National Instrument (NI) 43101, with more than 40 years of experience in the mining industry, primarily in exploration in the Western United States. He is currently a consulting geologist working with LSG. Mr. Temkin has been associated with LSG and the Property for over 20 years and has been instrumental through its entire exploration program to date.

Our Corporate Secretary, Pam Walters, has been associated with the mining industry for over 25 years and has managed the corporate finance and business operations of LSG and its owners.

Going Concern

There is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital to pay our expenses. This is because we have not generated any revenues to-date and we cannot currently estimate the timing of any possible future revenues. Currently, our only source of cash is from loans or investments by others in our common stock.

Results of Operations

The following summary of our results of operations for the three months and nine months ended September 30, 2020 and 2019 should be read in conjunction with our financial statements for the period ended September 30, 2020, included above in Part I, Item 1.

Revenues

We had no operating revenues during the three-month and nine-month periods ended September 30, 2020 and 2019. We recorded a net loss of $93,176 for the current quarter (2019: $72,536) and $337,557 for the nine months ended September 30, 2020 (2019: $229,075) and have an accumulated deficit of $3,338,818. The possibility and timing of revenue being generated from our mineral property interest remains uncertain.

Consulting services expense in the third quarter of 2020 included $25,000 for mine development and strategic planning, with no equivalent in Q3 of 2019. The third quarter of 2020 also included an expense of approximately $1,000 related to options granted in 2018, a decrease of approximately $7,000 over the equivalent expense in Q3 of 2019. The net of those two items was the primary reason for the change of approximately $17,000 year over year for Q3.

Exploration and evaluation expense in Q3 of 2020 was for assay costs. No such costs were incurred in 2019.

Professional fees were lower in 2020 primarily due to the costs in Q3 2019 of approximately $2,000 for an NI-43-101 report and approximately $2,000 for a US tax filing, with no equivalents in Q3 2020.

Interest, bank and finance charges were higher in Q3 of 2020 as a result of higher balances in interest-bearing amounts due to related parties, i.e. loans, plus accrued mineral option fees and related interest.