MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
This Management's Discussion and Analysis ("MD&A") supplements, but does not form part of, the unaudited condensed consolidated interim financial statements of Lupaka Gold Corp. ("Lupaka Gold") and the notes thereto for the three months ended March 31, 2025 and 2024 (collectively referred to hereafter as the "Financial Statements").
The Financial Statements have been prepared in accordance with IAS 34, Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ("IFRS"). As such, the interim financial statements do not include all the information required by IFRS for annual financial statements and should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2024, in addition to any new accounting policies applicable for the period ended March 31, 2025.
The Company's certifying officers are responsible for ensuring that the Financial Statements and MD&A do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made. The Company's certifying officers certify that the Financial Statements together with the other financial information included in the filings fairly present in all material respects the financial condition, financial performance and cash flows of the Company as of the date of and for the periods presented in the filings.
The Company's Audit Committee and the Board of Directors provide an oversight role with respect to all public financial disclosures by the Company. The Board of Directors approves the Financial Statements and MD&A after the completion of its review and recommendation for approval by the Audit Committee, which meets periodically to review all financial reports, prior to filing.
In this MD&A, "Lupaka", the "Company", or the words "we", "us", or "our", collectively refer to Lupaka Gold and its 100%-owned subsidiaries, Andean American Gold Corp. ("AAG", Canada), Lupaka USA Limited ("LPKUSA", USA), Lupaka Gold Peru S.A.C. ("LGP"), Andean Exploraciones S.A.C. (Peru) and Greenhydro S.A.C. (Peru).
This MD&A provides management's comments on Lupaka's operations for the three months ended March 31, 2025 and 2024, and the Company's financial condition as of March 31, 2025, as compared with the prior year-end.
The effective date of this MD&A is May 22, 2025 (the "MD&A Date").
For a complete understanding of the Company's business environment, risks and uncertainties and the effect of accounting estimates on its results of operations and financial condition, this MD&A should be read together with the Company's Financial Statements. Additionally, historical references are made in this MD&A to the Company's Annual Information Form filed March 30, 2015, which can be found at https://www.sedar.com.
All currency amounts are expressed in Canadian Dollars unless otherwise indicated.
The Financial Statements and the MD&A were approved by the Board of Directors on the MD&A Date.
Forward-Looking Statements
Statements contained in this MD&A that are not historical facts are "forward-looking statements" or "forward-looking information" (collectively, "Forward-Looking Information") (within the meaning of applicable Canadian securities legislation) that involve risks and uncertainties. Forward-Looking Information includes, but is not limited to, statements relating to: the amount of financings needed; management's expectations regarding the ability to raise equity capital and/or any outcome of the Company's Arbitration Claim against the Republic of Peru; expected use of proceeds; business objectives and strategies; the assets and liabilities of Lupaka; the acquisition of interests in mineral properties; the timing of completion and success of community relations (including with respect to agreements with local communities), exploration and development activities; requirements for additional capital; the estimation of mineral resources; the effect of government policies and announcements; and changes to applicable laws in Peru or the USA on the
Company's operations. In certain cases, Forward-Looking Information can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will be taken", "occur" or "be achieved".
The Forward-Looking Information is based on certain assumptions that the Company believes are reasonable, including: with respect to any mineral resource estimates, the key assumptions and parameters on which such estimates are based; the assumption that any additional financing needed will be available on reasonable terms; the exchange rates of the USA and Canadian currencies in 2023 will be consistent with the Company's expectations; that the demand for gold and other metals potentially produced by the Company will be sustained; that general business and economic conditions will not change in a material adverse manner; and that the Company's interests in Peru or the USA will not be adversely affected by political, social or economic instability in Peru or by changes in the government of Peru or its politics and tax policies. Other assumptions are discussed throughout this MD&A.
Forward-Looking Information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the Forward-Looking Information. Such risks and other factors include, among others: risks related to the completion of financings and the use of proceeds; that mineral resources are not as estimated; unexpected variations in mineral resources, grade or recovery rates; operations and contractual rights and obligations; actual results of the Company's development activities being different than those expected by management; changes in exploration programs based upon results of exploration; changes in estimated mineral resources; future prices of metals; currency and interest rate fluctuations; financial risk exposure of the Company such as credit and liquidity risk; availability of third party contractors; increased costs of labour, equipment or materials; increased costs as a result of changes in project parameters; availability of equipment; failure of equipment to operate as anticipated; accidents, effects of weather and other natural phenomena and other risks of the mineral exploration industry; political risks involving the Company's operations in a foreign jurisdiction; environmental risks; risks related to community relations and activities of stakeholders; and unanticipated delays in obtaining or failure to obtain community, governmental, judicial or regulatory approvals, or financing; as well as those factors referenced in the section entitled "Risk Factors" in this MD&A. Although the Company has often attempted to identify important factors that could affect the Company and may cause actual actions, events or results to differ materially from those described in Forward-Looking Information, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that Forward-Looking Information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on Forward-Looking Information.
The Forward-Looking Information in this MD&A is made only as of the date hereof. Except as required under applicable securities legislation, the Company does not intend, and does not assume any obligation to update the Forward-Looking Information contained in this MD&A.
Cautionary Note to US Investors
Information concerning mineral properties in this MD&A has been prepared in accordance with Canadian disclosure standards under applicable Canadian securities laws, which are not comparable in all respects to United States disclosure standards. The terms "mineral resource", "measured resource", "indicated resource" and "inferred resource" (and similar expressions) used in this MD&A are Canadian mining terms as defined in accordance with National Instrument 43-101 under guidelines set out in the standards set by the Canadian Institute of Mining, Metallurgy and Petroleum.
While the terms "mineral resource", "measured resource", "indicated resource" and "inferred resource" are recognized and required by Canadian regulations, they are not defined terms under the standards of the U.S. Securities and Exchange Commission ("SEC"). As such, certain information contained or incorporated by reference in this MD&A concerning descriptions of mineralization and resources under Canadian standards is not comparable to similar information made public by USA companies subject to the reporting and disclosure requirements of the SEC. An "inferred resource" has a great amount of uncertainty as to its
existence and as to its economic and legal feasibility. It can't be assumed that all or any part of an "inferred resource" will ever be upgraded to a higher category. Under Canadian rules, estimates of inferred resources may not form the basis of feasibility or other economic studies. Investors are cautioned not to assume that all or any part of measured, indicated or inferred resources will ever be converted into Mineral Reserves. Investors are also cautioned not to assume that all or any part of an "inferred resource" exists or is economically or legally mineable.
Overall PerformanceLupaka Gold is a Peru-focused mineral development and exploration company, focused on the resolution of its claim against the Republic of Peru under the 2009 Canada-Peru Free Trade Agreement (the "Arbitration Claim").
Activities and events of note for the last twelve months are as follows:
In March 2025, the Tribunal provided the Parties to the Arbitration Claim with an update reaffirming the Arbitration Tribunal's progress with the Claim (see Outlook/Arbitration Claim made under the 2009 Canada-Peru Free Trade Agreement);
In December 2024, ICSID provided the Parties to the Arbitration Claim with an update reaffirming the Arbitration Tribunal's progress with the Claim (see Outlook/Arbitration Claim made under the 2009 Canada-Peru Free Trade Agreement);
On October 29, 2024, the Company closed a non-brokered private placement to raise gross proceeds of
$75,000, by issuing 1,500,000 units at a price of $0.05 per unit (see Liquidity and Capital Resources/Share Capital/Private Placements); and
In July 2024 and March 2024, ICSID provided the Parties to the Arbitration Claim with updates as to the Arbitration Tribunal's intended timeline for their decision (see Outlook/Arbitration Claim made under the 2009 Canada-Peru Free Trade Agreement).
Management is continuing to actively seek out additional exploration projects for potential development and investment, in addition to waiting on the decision of the Arbitration Tribunal regarding the Company's Claim against the Republic of Peru.
Loss of Invicta and the Company's Arbitration Claim
By agreement with PLI Huara Holdings LP ("PLI") dated June 30, 2016 and amended August 2, 2017, the Company executed the PLI Financing Agreement with PLI to fund US$7 million for the completion of development and to initiate production at Invicta Mining Corp.'s ("IMC") Invicta Gold Project ("Invicta").
In October 2018, Invicta was significantly impacted by an illegal blockade and demonstrations by a local community of Paran (the "Paran Blockade"). Management is not aware whether or not the Paran Blockade remains in place and/or continues to prevent access to the Invicta mine site.
Overall, project development was over 90% complete and initial shipments had been sent to regional processing plants for processing. In addition, a substantial amount of mineralized material had been mined and prepared for transportation to toll mills for processing, while the final inspection for the issuance of a mining exploitation license, which was originally scheduled for October 2018, could not take place.
The illegal Paran Blockade resulted in:
the termination of the Company's ability to develop and operate the Invicta minesite, including the inability to obtain the mining exploitation license and realize commercial production;
an inability to perform on-site health, safety and environmental assessments;
the termination of the Company's Invicta staff;
significant and continuing delays in scheduled payments to local suppliers and vendors;
the loss of contracted toll milling capacity;
an inability for the Company to achieve operational cash flow and make its PLI Financing Agreement loan repayments as originally scheduled;
On July 3, 2019 the Company announced that PLI had issued a formal notice of acceleration on the PLI Agreement, as well as declaring an early termination date of the loan and immediate payment of US$15,581,654; and
The Company received notice dated August 25, 2019, that PLI had completed foreclosure proceedings and seized the shares of Invicta Mining S.A.C. ("IMC"), the Company's previously wholly-owned subsidiary.
Despite numerous requests for resolution assistance from local and federal government officials of the Republic of Peru, the requested assistance was not provided and the blockade continued, resulting in the Company's loss of its ownership of IMC and the Invicta Gold Project in August 2019.
Arbitration Claim made under the 2009 Canada-Peru Free Trade Agreement ("CPFTA")
The specified claims of default relate primarily to the Company's inability to make scheduled repayments against the PLI Financing Agreement as a result of the ongoing illegal road blockade carried out by the community of Paran at Invicta. Despite numerous requests for resolution assistance from local and federal government officials of the Republic of Peru, the requested assistance was not provided and the blockade continued, resulting in the Company's loss of its ownership of IMC and the Invicta Gold Project.
On October 21, 2019, the Company delivered to the Peruvian Minister of Economy and Finance a Request for Arbitration in accordance with the CPFTA. In this respect, the Company has engaged international law firms Lalive SA and Boles Schiller Flexner LLP to represent its interests in the Arbitration Claim, which primarily centers on a claim for US$47.7 Million plus interest at a rate of LIBOR+2% compounded annually from August 27, 2019 until payment is received by Lupaka.
On August 4, 2020, the Company reported that it had entered into an Arbitration Funding Agreement with Bench Walk Advisors ("BWA") to support the Company's Arbitration Claim. The Arbitration Funding Agreement allows for BWA to provide up to USD$4.1 million to support the arbitration and related costs. Amounts advanced by BWA are repayable only upon completion of a successful claim and recovery. The actual amount received by BWA will vary in accordance with the actual settlement received by the Company from the Republic of Peru. As such, the financing is non-dilutive to current Lupaka shareholders. Precise terms of the Arbitration Funding Agreement (other than those set out herein) are confidential.
On October 29, 2020, the Company announced that it had completed the next step in its arbitration claim against the Republic of Peru. The Company has now submitted a Request for Arbitration in accordance with Article 36 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID") and Article 824 of the CPFTA. This announcement was a follow up to Lupaka's earlier news releases on December 16, 2019 regarding the filing of a Notice of Intent to Submit a Claim to Arbitration and on August 4, 2022 regarding Lupaka entering into a Finance Agreement for its Arbitration Claim under the CPFTA. The Request has been filed with ICSID in Washington D.C., USA.
In December 2020, the Company provided an update regarding progress in the arbitration and announced that it had received notification that the Republic of Peru had appointed their arbitrator for the arbitration process.
In February 2022, the third and final arbitrator position was filled. This position is also the chairman of the committee. With the constitution of the Arbitration Tribunal now complete, the arbitration process can continue to proceed forward. The next step is assembly of supporting materials by each side in the arbitration.
By May 2022, the Company had selected a Quantum Expert, who is tasked with preparing a detailed evaluation of the Company's claim; a definitive time schedule was agreed to between the parties and the ICSID Tribunal.
By October 2022, the first round of comprehensive submissions supporting Lupaka's claim were submitted to the Arbitration Tribunal. This began a process of updated Lupaka claim submissions and responses from the Republic of Peru and its legal team.
In 2023, the Company, its legal team at Lalive and other advisors and experts continued to build the Company's Arbitration Claim. Document review, Expert reports and interviews with former employees and related personnel progressed on schedule and with good success through 2023.
From March 27 to April 3, 2023, the arbitration hearing stage of the Company's Arbitration Claim against the Republic of Peru convened in Washington, D.C. Subsequent to the completion of the arbitration hearings, the Tribunal granted the Parties an opportunity to answer specific questions that the Tribunal had. These questions and information requests were received and answered by the Parties in late June 2023.
During the week of October 16, 2023, the Company and the Republic of Peru each submitted their request for payment of arbitration expenses to the ICSID Tribunal, which management believes to be the last documents to be submitted for the Arbitration Claim process.
In November 2023, ICSID requested a further advance of USD250,000 from each of the Parties, which for the Company was funded by BWA pursuant to the Company's BWA Arbitration Funding Agreement.
In March 2024, ICSID advised the Parties on behalf of the President of the Tribunal that the Tribunal had held deliberations on the case and drafting of the ruling was well underway. However, work remained, given the very extensive arguments presented by both Parties. The Tribunal was working with a view to completing its drafting by the summer of 2024, with the goal to release the ruling in the course of the second half of the year, bearing in mind also the time necessary to finalize the ruling in the two procedural languages.
In July 2024, the Tribunal advised the Company that it was proceeding as indicated previously in March 2024 and that it had held a second round of deliberations in Washington in May 2024 and had agreed on many core issues, and the drafting required to address the Parties' extensive legal and factual contentions was continuing. After the Tribunal's ruling is completed, the text would be formatted, cite-checked and translated. The time required for translation would depend on factors that are not within the Tribunal's control.
In December 2024, the Tribunal advised the Company that work on the ruling was continuing since the last (July 2024) update, and completion of the English text was nearing the final stage. Considering the time necessary to finalize the ruling for dispatch in the two procedural languages, the Tribunal estimated that it would be in a position to dispatch its ruling to the Parties in the course of the first quarter of 2025.
In March 2025, the Tribunal advised the Company that the ruling was in the final translation stage but the process of translation and checking had been unexpectedly time-consuming. Considering the time necessary to finalize the ruling for dispatch in the two procedural languages, the Tribunal anticipated and intends that the ruling would be dispatched in the Spring of 2025.
Some relevant points established in the Company's Arbitration Claim, are as follows:
The police developed a comprehensive and detailed plan to remove the illegal blockade and restore the Company's access to the mine. Permission to execute this plan was requested from senior authorities in Lima but permission was not provided;
Many meetings were held and correspondence traded between the Company's representatives and multiple levels of the Peruvian government. Despite the evidence that the situation should be resolved by the authorities, this was not done;
The company that foreclosed on and now owns the Invicta Project expressed a high level of confidence that they would have the community issues resolved and full access to the mine in a very short time frame. To the best of our knowledge the illegal blockade remains in place today (now five years since the permanent blockade was put in place) and the group that erected the illegal blockade is known to have been exploiting the mine; and
The Company had all key permits in place as well as valid agreements with the two communities owning the surface rights on which mining activities were to take place and was about to go into full production when the illegal and violent blockade occurred.
Background to the Arbitration Claim
The dispute arises out of Peru's breaches of the FTA in relation to Lupaka's investments in Peru. More specifically, the dispute stems from the Republic of Peru's actions, namely the illegal acts of its subdivision, the Community of Parán, which illegally invaded Lupaka's project held through IMC and set up a permanent blockade to the site, as well as from the lack of support from the Peruvian police force, prosecutors and central government officials to remove the illegal blockade and restore Lupaka's rights to its investment.
By September 2018, IMC had developed approximately 3,000 meters of underground workings, secured community agreements from communities that own the superficial lands within the project area, completed a 29-kilometer access road sufficient to handle 40-tonne ore trucks and completed numerous metallurgical tests ranging in size from a few hundred to a few thousand tonnes. In September 2018, IMC requested that the final inspection of the completed works take place in order to allow exploitation to begin.