Dakota Gold Corp. (DC) FY 2023 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of financial condition and results of operations of Dakota Gold Corp. together with our financial statements and the related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review Item 1A. Risk Factors above for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

This management's discussion and analysis should be read in conjunction with the annual consolidated financial statements of Dakota Gold Corp. and notes thereto as set forth herein. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors which affect our business, including without limitation, the disclosures made under Item 1A. Risk Factors.

Our audited annual consolidated financial statements are stated in United States dollars and are prepared in accordance with United States generally accepted accounting principles.

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Change in Fiscal Year

In August 2022, the Board of Directors of the Company, pursuant to the bylaws and based upon the recommendation of its Audit Committee, approved a change in the Company's fiscal year end from March 31 to December 31. The Company's fiscal year now begins on January 1 and ends on December 31 of each year, starting on April 1, 2022. As a result of the change, we reported our financial results for the transition period of the nine months ended December 31, 2022 on our Transition Report on Form 10-KT filed with the SEC on March 22, 2023, and we are reporting our results for the first full fiscal year ended December 31, 2023 in this annual report. The consolidated statements of operations and cash flows for the nine-month transition period ended December 31, 2022, along with the unaudited consolidated statements of operations and cash flows for the nine-month period ended December 31, 2021 are presented in the notes to the consolidated financial statements.

In this Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, when financial results for the fiscal year ended December 31, 2023 are compared to financial results for the prior transition period, the results compare the twelve-month period ended December 31, 2023 to the results for the nine-month period ended December 31, 2022. See Note 11 to the financial statements in the 10-K.

Reverse Stock Split

On March 8, 2022, the Company completed a reverse split of its common stock on a 1 for 35,641,667 / 49,398,602 basis. All share numbers and common stock prices presented give effect to the reverse split.

Overview

The Company's goal is to create stockholder value through the acquisition, responsible exploration, and future development of high caliber gold properties in the Homestake District of South Dakota. Management and the technical teams cumulatively have several hundred years of international mining and exploration experience and key personnel have more than 50 combined years in the Homestake District, mostly with the Homestake Mining Company, as well as other exploration companies that have operated in the region. The Company believes this experience uniquely positions the Company and will allow it to leverage its direct experience and knowledge of past exploration and mining activities in the Homestake District. Combined with the use of modern exploration and mining techniques, and new geologic understanding from experience in other mines, new research and information extracted from its new geophysical surveys, the Company hopes to focus its programs and build upon dominance where the historic Homestake Mining Company left off in the 1990's.

The Homestake District has yielded approximately 44.6 million ounces of gold production with most of it coming from within a small area. The production ledges of the Homestake Mine define a cumulative surface projection area of much less than 3 square miles. Homestake Mining Company's historic gold production and exploration in the Homestake District was overwhelmingly focused on the underground mine. Modern statistical studies of ore deposit trends and understanding of the distribution of large gold camps around the world indicates that large gold deposits generally form in distinct camps and normally occur in clusters that show predictable distributions (Zipf's Law Applied to Ore Deposits). The Company believes this might be true for the Homestake District. Outside of the mine area, the Homestake District has been underexplored and lacks the modern exploration efforts required to search for other deposits especially under the cover of younger rocks that dominate the surface.

Since 2012, the Company has consistently pursued a strategy of expanding its portfolio of brownfield properties located exclusively within the Homestake District to build a dominant land position with the goal of consolidating possible mineral potential. Property acquisitions are focused and based on past exploration, the access to proprietary data sets the Company has assembled over the years, and new research and remote data acquisition (Magnetics, Gravity and Radiometric) that was recently conducted over the Homestake District that hosts the Homestake Gold Deposit.

Other than the future inaugural mineral resource estimate for its Richmond Hill property to be completed in 2024, none of our other properties are sufficiently drilled to prepare an estimate of mineral resources under S-K 1300. The Company believes the Homestake District is in a safe, low-cost jurisdiction with well-developed infrastructure and is in a favorable regulatory environment in which authorities have consistently demonstrated a willingness to work with responsible operators to permit well-planned compliant projects.

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Drill Programs and Results

Permitting and site preparations were initiated for the first drilling program on the iron-formation target and other Tertiary-age replacement targets in the Maitland area and drilling commenced in early 2022. The Company has since expanded its drilling operations to the Richmond Hill Project and now has four drill rigs operating on Dakota Gold properties. Dakota Gold has completed permit applications and environmental field work for exploration on several target areas and currently has nine active permits in place: four on the Maitland Project, three on the Richmond Hill Project, one on the City Creek Project and one on the Cambrian Unconformity Project. Permitting for targets for some of the other Dakota Gold Properties may be advanced for drilling as exploration activities continue throughout the year.

Dakota Gold completed 24 holes for 78,040 feet (23,787 meters) of core drilling on three projects in 2022. The areas drilled were the Maitland Project, the Richmond Hill Project, and the Cambrian Unconformity Project. The Company also completed 89 holes for 174,659 feet (52,992 meters) of core on two projects in 2023: The areas drilled were the Maitland Gold Project (78,589 feet; 23,954 meters) and the Richmond Hill Project (96,070 feet; 29,282 meters). In total, Dakota Gold has completed 113 drill holes for 252,699 feet (77,023 meters) since drilling started in 2022.

On February 8, 2023, the Company announced the discovery of the Unionville Zone in MA22C-009, which intercepted mineralized, Precambrian hosted, Tertiary-age, epithermal gold mineralization in a structurally controlled breccia generally located beneath the horizon of the Cambrian hosted Tertiary replacement gold mineralization on the Maitland Mine. On May 4, 2023, the Company announced the discovery of the JB Zone in MA23C-017, which intercepted significant high-grade, Homestake-type, Precambrian mineralization over potentially mineable widths that has since been followed -up with multiple gold intercepts in multiple limbs of Homestake iron formation, the geometry of which is indicative of the West-Ledge system at the Homestake Mine.

On April 13, 2023, the Company announced commencement of an infill and step-out drilling program at the Richmond Hill Property to convert and expand known gold mineralization identified in 880 historical drill holes, and expanded by new Dakota Gold drilling, into the maiden S-K 1300 compliant resource, which is planned for release in 2024. On September 27, 2023, the Company announced commencement of an infill drilling program at the Unionville Zone on the Maitland Project for the purpose of advancing to a S-K 1300 compliant resource for 2025.

Planned Activities

The Company's planned activities in fiscal 2024 will be focused on advancing exploration and resources development drilling on its Maitland and Richmond Hill projects. Additional field work, specifically data compilation, sampling and mapping, are planned for Dakota Gold's West Corridor, Blind Gold and Poorman Anticline properties during the 2024 field season. The Company will also release an inaugural resource for its Richmond Hill property in 2024.

The Company continues to upgrade and utilize it proprietary geophysical data sets for use in evaluating both regional and project specific targets, and the Company continues to locate, evaluate, and add to the historic information in its regional and project level geologic and geochemical data sets documenting the 145-year mining and exploration history of Homestake Mining Company in the Black Hills of South Dakota.

Additional land acquisition is possible and will be conducted on an opportunistic basis in order to enhance our ability to conduct efficient exploration and/or for control of developing targets found through the company's ongoing exploration efforts.

With four drill rigs operating at the at the Black Hills Property, the Company anticipates expenditures of approximately $30 million during the calendar year ending December 31, 2024. To fund expenditures at this level, the Company will be required to raise further capital. Should we be unable to raise capital, the Company can scale down the exploration program in order to maintain greater than 12 months of funding as of December 31, 2024.

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The Company's projects are all at the exploration stage and do not generate revenues. Other than the future 2024 mineral resource in progress for the Richmond Hill property, the Company has not established that any of its properties or projects contain mineral resources or mineral reserves as defined under S-K 1300. Expenditure projections are subject to numerous contingencies and risk factors beyond the Company's control, including exploration and development risks, competition from well-funded competitors, and the Company's ability to manage growth and assessments of ongoing exploration activities and results. The Company cannot offer assurance that its expenses will either meet or exceed its projections.

Liquidity and Capital Resources

The Company is in the exploration-stage and currently does not generate revenues. As such, the Company finances its operations and the acquisition and exploration of its mineral properties through the issuance of common stock, and the Company could be materially adversely affected if it is unable to raise capital because of market or other factors.

As of December 31, 2023, the Company had working capital of approximately $21.74 million and a retained deficit of approximately $42.66 million. The Company had a net loss for the fiscal year ended December 31, 2023, of approximately $36.45 million.

During year ended December 31, 2023, the Company issued 6,666,667 shares of common stock for net proceeds of $16,820,227 pursuant to the Orion Equity Investment, a total of 6,470,564 shares of common stock under the ATM program for net proceeds of $17,946,505, another 68,750 shares of common stock for the exercise of stock options for proceeds of $72,000 and 9,018 shares of common stock for the exercise of share purchase warrants for proceeds of $18,757, for a total of $34,857,489.

During the twelve months ending December 31, 2024, the Company anticipates cash expenditures of approximately $30 million.

Based on the Company's cash balance at December 31, 2023 of approximately $25.55 million and the anticipated ability to utilize the ATM program during the year, the Company believes that it will have sufficient funds to fund its activities for the twelve months ended December 31, 2024. The actual timing of expected expenditures is dependent upon a number of factors, including the management of variable exploration expenditures.

Should it be unable to raise sufficient capital, the Company plans to scale down the exploration program in order to maintain greater than 12 months of funding as of December 31, 2024.

Results of Operations

Year Ended December 31, 2023 and Nine Months Ended December 31, 2022

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Revenue

We had no operating revenues during the fiscal year ended December 31, 2023 and nine months ended December 31, 2022. We had a net loss of approximately $36.45 million for the fiscal year ended December 31, 2023, compared to a net loss of approximately $19.28 million for the nine months ended December 31, 2022.

Exploration Expenses

During the fiscal year ended December 31, 2023, our exploration expenses totaled approximately $28.35 million, compared to $13.75 million during the nine months ended December 31, 2022. The period-over-period increase primarily related to (i) the level of activity associated with drilling, which increased by approximately $7.60 million compared to the nine months ended December 31, 2022; (ii) payroll-related costs, which increased by approximately $3.08 million compared to the nine months ended December 31, 2022 due to an average of four drills operating on the Black Hills property during 2023; (iii) assay costs, which increased by approximately $1.63 million; and (iv) equipment costs, which increased by approximately $0.38 million compared to the nine months ended December 31, 2022 due to drilling that commenced in early 2022 and ramped up through the year to finish in December 2022 with four drills operating. Study costs increased by approximately $0.86 million, primarily related to work on preparing a maiden S-K 1300 compliant resource for Richmond Hill in 2024. Included in these costs were non-cash exploration-related stock-based compensation expenses of approximately $0.73 million and $0.71 million for the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, respectively.

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General and Administrative Expenses

Our general and administrative expenses for the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, were approximately $9.69 million and $7.93 million, respectively. These expenditures were primarily for legal, accounting, and professional fees, investor relations, and other general and administrative expenses necessary for our operations. During the fiscal year ended December 31, 2023, support costs included in general and administrative costs were approximately $4.59 million compared to $3.97 million for the nine months ended December 31, 2022, stock-based compensation allocated to administration expenses were approximately $3.60 million compared to $2.75 million for nine months ended December 31, 2022, and consulting expenses were approximately $0.08 million compared to $0.20 million for the nine months ended December 31, 2022, largely relating to the acquisition of Dakota Territory. Investor relations expenses decreased from $0.36 million for the nine months ended December 31, 2022 to approximately $0.14 million during the fiscal year ended December 31, 2023, largely because there were higher costs related to the DTRC merger and listing on the NYSE American during the nine months ended December 31, 2022. Professional fees rose to approximately $1.00 million during the fiscal year ended December 31, 2023 compared to $0.49 million during the nine months ended December 31, 2022 due to increased audit and tax work required by the Company.

Other Income

We earned interest income from bank accounts for the fiscal year ended December 31, 2023 and nine months ended December 31, 2022 of approximately $0.41 million and $0.16 million, respectively.

We had losses from operations for the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, totaling approximately $38.04 million and $21.68 million respectively, losses before income tax of approximately $37.67 million and $21.61 million, respectively, income taxes of $0.03 and $0.06 million, respectively, and deferred tax benefits of approximately $1.25 million and $2.38 million respectively, leading to net losses $36.45 million and $19.28 million, respectively.

The effective tax rate for the fiscal year ended December 31, 2023 is less than the statutory rate as the Company does not expect to benefit from the losses generated during the year.

Cash Flows Used in Operating Activities

During the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, the Company's net cash flows used in operating activities were approximately $31.20 million and $18.42 million, respectively. Cash used in operations for year ended December 31, 2023 increased period over period, primarily as a result of having four active rigs for the entirety of 2023, compared to 2022 where the number of drill rigs increased from one in January 2022 to four by the end of 2022. In addition, the Company increased the amount of land staking and associated annual claim maintenance costs, completed an airborne geophysical survey and engaged additional personnel to review and commenced the compilation of historical geological data obtained through the Barrick option agreements.

Cash Flows Used in Investing Activities

During the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, cash flow used in investing activities were approximately $1.76 million and $1.30 million, respectively. In the fiscal year ended December 31, 2023, the cash used for investing activities consisted of approximately $0.61 million for the acquisition of mineral properties and approximately $1.05 million for the purchases of property and equipment. In the fiscal year ended December 31, 2022, the cash used for investing activities consisted of approximately $1.10 million for the acquisition of mineral properties and approximately $0.20 million for the purchases of property and equipment. The decrease in property acquisition costs was due to having completed strategic acquisitions by the end of 2022. The higher acquisition of property and equipment in 2023 related to the acquisition and construction of a longer-term core storage facility.

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Cash Flows from Financing Activities

During the fiscal year ended December 31, 2023 and nine months ended December 31, 2022, cash flows from financing activities were approximately $34.59 million and $2.22 million respectively. In the fiscal year ended December 31, 2023, the Company issued 6,666,667 shares of common stock for net proceeds of $16,820,227 pursuant to the Orion Equity Investment, a total of 6,470,564 shares of common stock under the ATM program for net proceeds of approximately $17.95 million, another 68,750 shares of common stock for the exercise of stock options for proceeds of approximately $0.07 million and 9,018 shares of common stock for the exercise of share purchase warrants for proceeds of approximately $0.02 million. In addition, the Company paid income taxes related to vested RSUs and PSUs totaling approximately $0.26 million on behalf of the employees.

In the nine months ended December 31, 2022, the Company issued 1,000,000 shares of common stock pursuant to the ATM program for net proceeds of approximately $2.76 million, 37,500 shares of common stock for the exercise of stock options for proceeds of approximately $0.01 million and 3,607 shares of common stock for the exercise of warrants for proceeds of approximately $0.01 million. The Company paid withholding taxes related to vested RSUs totaling approximately $0.56 million on behalf of an employee.

Off-Balance Sheet Arrangements

As of December 31, 2023 and nine months ended December 31, 2022, we did not have, and we do not currently have, any off-balance sheet arrangements, as defined by the SEC.

Critical Accounting Estimates

Management's discussion and analysis of financial condition and results of operations is based on the Company's consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and the related disclosures of contingencies. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that the Company's consolidated financial statements are fairly presented in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from the Company's assumptions and estimates, and such differences could be material. Management believes that the following critical accounting estimates and judgments have a significant impact on the Company's consolidated financial statements; valuation of options granted to directors and officers using Black-Scholes and Monte Carlo models. The Company's accounting policies are described in greater detail in Note 2 to the Company's audited annual consolidated financial statements for the fiscal year ended December 31, 2023.