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«DEFIANCE SILVER CORP. MANAGEMENT’S DISCUSSION & ANALYSIS For the year ended June 30, 2013 The following Management Discussion and Analysis ...»

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Santa Elena Property On May 20, 2011, the Company signed an assignment agreement with an individual (“the Assignor”) to acquire a 100% interest in two mineral concessions, known as the Carina and Juanito claims, in the State of Zacatecas, Mexico. In consideration, the Company issued 225,000 common shares with a value of $60,750, and the assumption of existing option obligations. The two exploration concessions are optioned from two Mexican individuals for total option payments of US$315,000 plus value-added-tax (“VAT”) over a period of three years.

After further evaluation, management decided not to renew the option agreement and wrote off the related costs of $60,750 in the year ended June 30, 2012.

Selected Annual Information

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Year ended June 30, 2013 For the year ended June 30, 2013, the Company incurred a net loss of $890,654 (2012 or $0.04 (2012 - $0.08) per share. The net loss primarily relates to expenses incurred for management, legal and audit, general corporate and regulatory fees, and travel costs.

Included in the loss for 2013 was share-based compensation of $184,252 (2011 $38,600) resulting from the issuance of share options to directors and advisors. The loss during the year 6 ended June 30, 2012 included a $468,942 write-off of mineral property interests compared to no write-off during the current year.

The Company spent $728,491 cash on operating activities during the year ended June 30, 2013 as compared to $463,211 during the previous year.

Results of Operations Summary of Quarterly Results The following tables summarize information derived from the Company’s financial statements

for each of the eight most recently completed quarters:

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Quarter ended June 30, 2013 The Company’s loss for the quarter ended June 30, 2013 totaled $243,262 ($0.01 per share) as compared to a loss $693,078 ($0.04 per share) for the quarter ended June 30, 2012. The write-off of the Storm mineral property interest of $408,192 contributed to 59% of the prior year’s fourth quarter loss.

Operating expenses totaled $245,258 (2012-$274,691). The significant quarterly expenses were investor relations and promotion of $12,235, professional fees of $80,597, management fees of $96,996 and travel costs of $21,356, together representing 86% of operating expenses.

Liquidity The Company is in the acquisition and early exploration stage and therefore has no cash flow from operations. At June 30, 2013, the Company had cash of $81,712 (2012 - $339,848) and a working capital deficiency of $159,187 (2012 - $63,071).

At present, the Company’s operations do not generate cash flows and its financial success is dependent on management’s ability to discover economically viable mineral deposits. The mineral exploration process can take many years and is subject to factors that are beyond the Company’s control.

Subsequent to year end, the Company raised $215,000 by way of private placements to fund acquisitions, exploration and development programs.

7 Capital Resources The Company will continue to seek capital through public markets by issuing common shares pursuant to private placements. The Company manages its capital structure to maximize its financial flexibility making adjustments to it in response to changes in economic conditions and the risk characteristics of the underlying assets and business opportunities. The Company does not presently utilize any quantitative measures to monitor its capital and is not subject to externally imposed capital requirements.

Outstanding Share Data

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Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements as at June 30, 2013 or as of the date of this report.

Related Party Transactions As of June 30, 2013, accounts payable and accrued liabilities include $133,366 payable to directors, officers and companies controlled by or related to directors and/or officers. Amounts payable to related parties have no specific terms of repayment, are unsecured and do not bear interest.

During the year ended June 30, 2013, the Company:

(a) paid or accrued management fees of $135,000 (2012 - $125,510) to Winfield Consulting Ltd., a company controlled by W.D. Bruce Winfield, the current CEO, President and director of the Company.

(b) paid or accrued management fees of $62,195 (2012 - $70,446) to Richard Tschauder, an officer of the Company.

–  –  –

(e) paid or accrued $24,000 (2012 - $16,000) in rent expense, included in office and administration, to a company related by common directors.

(f) paid or accrued $nil (2012 - $20,000) in mineral properties expenditures to a company with a common director.

(g) Issued 735,000 (2012 – 60,000) stock options to directors and officers with a fair value of $141,153 (2012 - $19,300).

Proposed Transactions At the present time, there are no proposed transactions that should be disclosed.

Risks and Uncertainties No Source of Revenue The Company has no source of revenue other than interest income earned on cash held in investment accounts. All of the Company's short to medium-term operating and project expenses must be derived from its existing cash position or from external financing.

Unproven Mineral Right Interests The Company has not been able to identify a known body of commercial grade ore on its mineral property interests. The ability of the Company to realize the costs it has incurred to date on these mineral property interests is dependent upon the Company being able to lever its property interests and cash, by way of exploration activities and option/joint ventures, into assets of greater value.

Financial Instruments The Company’s financial instruments consist of cash, receivables and accounts payable and accrued liabilities. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from the financial instruments.

The fair value of the financial instruments approximates their carrying value due to their shortterm maturity or capacity of prompt liquidation.

Foreign exchange risk is the risk arising from changes in foreign currency fluctuations. The Company does not use any derivative instruments to reduce its exposure to fluctuations in foreign currency rates. It is the opinion of management, however, that the foreign exchange risk to which the Company is exposed is minimal.

Critical Accounting Policies and Estimates The Company’s significant accounting policies are described in Note 2 of the consolidated financial statements for the year ended June 30, 2012. Management considers the following policies to be critical in understanding the judgments that are involved in the preparation of the 9 financial statements and the uncertainties that could impact the results of operations, financial

condition and cash flows:

Use of estimates The preparation of consolidated financial statements in accordance with accounting policies consistent with IFRS requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the year. Actual results could differ from these estimates. Significant accounts that require estimates relate to the impairment of mineral property interests, valuation allowance applied against future income tax assets and share-based compensation.

Mineral property interests The Company defers all costs related to investments in mineral properties on a property-byproperty basis. Such costs include mineral property acquisition costs and exploration expenditures, net of any recoveries. Costs are deferred until such time as the extent of mineralization has been determined and mineral properties are either developed or the Company’s mineral rights are allowed to lapse.

All deferred mineral property expenditures are reviewed each reporting period, on a propertyby-property basis, to consider whether there are any conditions that may indicate impairment.

When the carrying value of a property exceeds its net recoverable amount that may be estimated by quantifiable evidence of an economic geological resource or reserve, joint venture expenditure commitments or the Company’s assessment of its ability to sell the property for an amount exceeding the deferred costs, provision is made for the impairment in value.

From time to time, the Company may acquire or dispose of a mineral property pursuant to the terms of an option agreement. As the options are exercisable entirely at the discretion of the optionee the amounts payable or receivable are not recorded. Option payments are recorded as property costs or recoveries when the payments are made or received.

Income taxes

Income tax on the profit or loss for the periods presented comprises current and deferred tax.

Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at period end, adjusted for amendments to tax payable with regards to previous years.

Deferred tax is recognized in respect of temporary differences, between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities which affect neither accounting nor taxable loss as well as differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the consolidated statement of financial position date.

10 A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.

Additional income taxes that arise from the distribution of dividends are recognized at the same time as the liability to pay the related dividend. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Share-based compensation

The Company accounts for stock-based compensation using a fair value based method with respect to all stock-based payments to directors, employees and non-employees. For directors and employees, the fair value of the options is measured at the date of grant. For nonemployees, the fair value of the options is measured on the earlier of the date at which the counterparty performance is completed or the date the performance commitment is reached or the date at which the equity instruments are granted if they are fully vested and non-forfeitable.

The fair value of the options is accrued with the offset credit to contributed surplus. For directors and employees the fair value is recognized over the vesting period and for nonemployees the fair value is recognized over the related service period. If and when the stock options are ultimately exercised, the applicable amounts of contributed surplus are transferred to share capital.

The Company grants stock options to acquire common shares of the Company to directors, officers, employees and consultants. An individual is classified as an employee when the individual is an employee for legal or tax purposes, or provides services similar to those performed by an employee.

The fair value of stock options is measured on the date of grant, using the Black-Scholes option pricing model, and is recognized over the vesting period. Consideration paid for the shares on the exercise of stock options is credited to share capital.

In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured at fair value of the share-based payment. Otherwise, share-based payments are measured at the fair value of goods or services received.

Note Regarding Forward-Looking Statements

Except for historical information, this MD&A may contain forward-looking statements. The statements involve known and unknown risks, uncertainties, and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievement expressed or implied by these forward-looking statements.

11 The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions; changes in financial markets; the impact of exchange rates; political conditions and developments in countries in which the Company operates;

changes in the supply, demand and pricing of the metal commodities which the Company hopes to find and successfully mine; changes in regulatory requirements impacting the Company’s operations; the sufficiency of current working capital and the estimated cost and availability of funding for the continued exploration and development of the Company’s exploration properties.

This list is not exhaustive and these and other factors should be considered carefully, and readers should not place undue reliance on the Company’s forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements and neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements (except as required by applicable law).

Additional information relating to the Company can be found on SEDAR at www.sedar.com.


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