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Executives

Tim Friesen - Communications Director

Ian Berzins - President, CEO and COO

Gestur Kristjansson - CFO

Michael Michaud - Vice President, Exploration

Analyst

Christos Doulis - Stonecap Securities

Cosmos Chiu - CIBC World Markets

Amine Benali - Manulife Asset Management

San Gold Corporation (OTCQX:SGRCF) Q1 2013 Earnings Call May 10, 2013 10:00 AM ET

Operator

Good morning. My name is Donna and I will be your conference operator today. At this time I would like to welcome everyone to San Gold Corporation’s 2013 First Quarter Results Conference Call. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Tim Friesen, Communications Director, you may begin your conference.

Tim Friesen

Thank you, Donna. Welcome to San Gold’s 2013 first quarter results conference call. Today’s presenters are Ian Berzins, President & CEO and Chief Operating Officer; Gestur Kristjansson, CFO and Michael Michaud, Vice President, Exploration who is joining us today from Toronto.

Before we begin today’s management presentation, I will make a cautionary statement regarding forward-looking statements. This presentation includes statements that may constitute forward-looking statements or information. Any forward-looking statements made or information provided reflect the company’s current plans, estimates and views. Forward-looking statements and information, which includes all statements that are non-historical facts, are based on certain material factors and assumptions that are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated or suggested by the forward-looking statements or information. Consequently, undue reliance should not be placed on these forward-looking statements and information.

The information contained in our annual information form and in our quarterly management discussion and analysis, which is available on our website and on SEDAR, identifies some factors and assumptions upon which these forward-looking statements or information are based on and the risks, uncertainties and other factors that could cause actual results to differ. All forward-looking statements and information made or provided during this presentation are expressed, qualified in their entirety by this cautionary statement and the cautionary statements contained in our press release and management discussion and analysis dated May 09, 2013.

With that, I’d like to hand the call over to San Gold’s President, CEO and Chief Operating Officer, Ian Berzins.

Ian Berzins

Thanks Tim. Good morning everyone and welcome to San Gold’s 2013 first quarter conference call. During the first quarter of 2013 as Chief Operating Officer, I was primarily responsible for execution on the operational aspects of our mine plan. And once again we missed targets in the areas of grade and gold production. This is the second quarter in a row where we have failed to meet expectations in terms of grade and gold production. And as a result, we have recently initiated several actions to address this problem. This does not mean that we did not enjoy a number of operational successes during the quarter, but in aggregate we failed to perform and we have more work to do. Since our last analyst call, on April 12th, our share price and market capitalization has continued to decline. We continue to be significantly discounted relative to our peer group, considering the infrastructure we have in place, the current level of our production profile, the quality of our resources and the quality of our people.

However, we continue to have a strong balance sheet with 33.7 million in cash and cash equivalents as of March 31, 2013. As a fellow shareholder, I find our overall situation very disconcerting but I know it is fixable. Simply put, this is a tough quarter for us. However, there is no question to my mind that we can and will get the operation to a positive cash flow situation towards the end of the year. I’ve now been in the new role as President and CEO for approximately six weeks. This new and expanded role gives me greater latitude to better orientate the strategic direction of the company to what I feel are the most salient constraints and opportunities at the Rice Lake Property. As such, our drive to profitability in the near-term will be based on reducing cash operating costs, critically looking at the capital costs required to sustain our current levels of production, reviewing our exploration activities with a focus on converting resources to reserves, reducing overheads, and divesting of non-core assets.

Grade is the most important metric for this operation and we are now focusing on higher quality ounces as compared to using incremental ounces to supplement the mill fee. We expect to see an increase in grade by the third quarter of this year. This will be accomplished by deferring the mining of some lower grade stopes in Hinge and 007 until such time is the underground infrastructure of 16 level at Rice Lake has been extended to allow for more efficient mining of lower grade material in 2014 and 2015. In addition, planned outages in the Rice Lake shaft for 2013 have been lessened and ore production from the established areas in Rice Lake from 26 level and the new 710 zone which is also accessible from 26 level will be brought into the plan. To reiterate, our first priority is to find the most direct route to free cash flows. We are not going to grow for the sake of growth but instead will focus on getting the project to an optimal run rate where there is a proper balance between operating, capital and exploration requirements.

Let’s now take a look at the overall matrix for Q1 2013 and then we will discuss our go forward plan. As announced on April 16th, we produced 17,354 ounces of gold in the first quarter of 2013 at a mill grade of 4.15 grams per ton. Grades have remained below normal levels of 5 per ounce per ton to 5.5 per ounce per ton for the last six months which remains a concern. For the second successive quarter, the operation was able to mine and mill higher tonnages than planned but not sufficient enough to offset the overall effect of lower grade. Given the lower gold price environment we are currently in, we are in the process of evaluating the cost effectiveness of mining certain zones at this time in lieu of waiting for higher gold prices and/or delaying mining to a time when the underground infrastructures can’t be in place to allow a lowering of haulage costs.

Compared with the same quarter last year, the company reduced its total cash operating cost by 1.7 million while achieving a small increase in tons of ore milled. In addition, the company reduced its planned capital and property, plant and equipment spending by 5 million or 25% of the planned spend. Subsequent to the end of the quarter, the company has completed additional operational improvements to reduce operating capital, corporate overhead and exploration costs. The company expects to continue a significant reduction to capital development and PP&E spending requirements for the balance of the year and we are maintaining our production guidance of 75,000 to 90,000 ounces of gold.

I’ll now take a few minutes to review the company’s first quarter operating activities. Following that, Gestur will discuss the financials and Michael will discuss our exploration activities.

Firstly, I want to commend our employees and contractors for the continued commitment to safe production. We finished the quarter with no lost time accidents and as of March 11th, we marked our first full year without a lost time accident. We continued to remain competitive in terms of our ability to attract skilled and experienced people to the company as well as bringing in new people to our industry. We finished the quarter with approximately 450 employees and 170 contractors supporting the project. We will continue to focus on training and developing capacity from local communities. The company mined approximately 144,000 tons at an average mining rate of 1,598 tons per day and we milled approximately 156,000 tons of ore at an average milling rate of 1,733 tons per day. Surface stockpiles decreased from approximately 16,300 tons at the start of the quarter to approximately 4,200 tons at the end of the quarter. Mill recovery was 92% as a result of lower than planned grade. We expect – sorry, we expect recovery will improve following the reconfiguration of the flotation circuit. We have made good progress during the quarter on extending the Rice Lake mine infrastructure into the Hinge and 007 deposits from 16 level. Development work on 16 level will remain a priority for the balance of the year.

As a result of positive recent drilling results from the 26 level in Rice Lake into the new 710 vein, we have accelerated development in this area and expect to cross cut the 710 vein and begin some mining before the end of the second quarter. I am also pleased to report that we were granted a renewal of our mineral lease ML63 from the Manitoba Mines branch for a second term of 21 years, effective April 1, 2013 and up until April 1, 2034. As always, we continue to focus on building a safer and more reliable operation. I would once again like to thank all our employees and contractors for continuing to execute on the strategy. I’ll be happy to answer any questions you may have during the Q&A portion of the conference call.

I’ll now turn the call over to Gestur to provide a review of the financial results. Gestur?

Gestur Kristjansson

Thanks Ian. Good morning, everyone. I’ll start by highlighting a couple of points. First as Ian mentioned cash operations costs were reduced by approximately $1.7 million over the same period last year. Additionally, we’ve reduced forward operating and corporate overhead costs and planned capital expenditures. These changes should show a benefit in the coming quarters.

I’ll now discuss the balance sheet, the income statement and the cash flow statement for the quarter. All amounts presented here are in Canadian dollars. Starting with the balance sheet, we ended the quarter with current assets of $65 million and a working capital surplus of 39 million. During the quarter, the company invested $16 million on the capitalization of development of mineral properties and $3 million in PP&E. Notably; we completed the issuance of $15 million unsecured convertible debenture during March of the quarter. Current liabilities are approximately the same as in the same quarter last year and are down from year-end.

Moving on to the income statement, San Gold reported revenues of $24 million compared with revenues of 36 million in the same quarter last year. The decrease in revenues is due to a 31% reduction in the ounces of gold sold and a 5% decrease in the realized price per ounce of gold sold. Loss from operations was 39,000 compared with income from operations of $7 million in the comparable quarter last year. The decrease in income from operations is due to reduced gold production and gold sales in the first quarter of 2013 and was partially offset by decreased depletion expense as a result of the updated mineral resource and reserve estimate. The company recognized $5.5 million in depletion expenses which is a slight decrease compared with the first quarter of 2012. Additionally, $847,00 of mine administration costs, largely associated with travels at site, and formerly categorized with general and administrative expenses was recast to operational expenses.

Cash cost per ounce increased to $1,113 per ounce of gold sold compared with cash cost of $840 in the comparative quarter. Again, this is a function of the number of ounces as the absolute expense is less. General and administrative expenses were 5.4 million compared with 3.8 million in the first quarter of 2012. Increases due to employee severance and other charges of approximately 2.5 million, excuse me, which are expected to result in annual cost savings of approximately $3 million.

After exploration, general, administrative and other net expenses including the recognition of 1.5 million of income tax recovery on flow-through shares total and comprehensive loss for the quarter was $9.7 million or $0.03 per share compared to a net loss of 0.7 million or $0.00 per share in the same period of 2012.

Moving on to statement of cash flows, cash flows used by operating activities before changes in non-cash working capital is 2.2 million or $0.01 per share during the quarter, compared to the contribution of 10 million or $0.03 per share in 2011. After changes in non-cash working capital operating activities used $6.5 million or $0.02 per share in the first quarter of 2013 compared to the contribution of 14.2 million or $0.05 per share in the same quarter last year. Capital spending in Q1 was focused on improving key infrastructure and purchasing and commissioning of certain mobile equipment. The company’s marketable securities increased by $31 million during the quarter as a result of the convertible debenture financing completed.

That concludes my review of the financial statements. If anyone has any further questions, I’d be happy to answer them during the Q&A session.

With that, I’ll turn the call back over to Ian.

Ian Berzins

Thanks Gestur. I will now ask Mike Michaud, San Gold’s Vice President of Exploration to provide an overview of our exploration activities. Mike?

Michael Michaud

Thanks Ian. Good morning, everyone. The company started 2013 where it left off at the end of last year by continuing its aggressive exploration drilling program. Already in Q1, in excess of 60,000 meters of drilling has been completed to better delineate and extend the norm zones of gold mineralization, particularly at the 007 zone where drilling is focused on converting the large, inferred mineral resource to measured and indicated resources and subsequently to mineral reserves. As part of this aggressive drilling campaign the company recently established a new underground drilling station located on the 26th level of the Rice Lake mine, approximately 1,180 meters underground to provide better access to the 007 structures at depth. Initial drill results from the 6130 drill station demonstrate robust grades and width and confirm the strong vertical continuity of the 007 gold mineralization structures to depth and will provide greater confidence in future resource estimation and mine planning and forecasting. Also of significance, the company announced in April results from two drill holes that intersected a new gold structure in the immediate hanging wall of the 710 lens of the 007 deposit.

Drilling returned 22.5 gram per ton gold over 4.2 meters and 8.2 grams per ton over .7 meters. Both of these holes were designed to follow-up on previous drilling that returned 12 grams per ton gold over 6 meters in the 710 lens, excuse me, and 15.5 grams per ton gold over 11.1 meters in what is now considered to be the new hanging wall structure. The company is extremely pleased with the initial results from this drilling platform. The first stage of drilling has already confirmed the vertical continuity of the 007 structures from surface as well as identified additional structures outside of the current geological model that are within close proximity to the existing mine infrastructure on 26 level the Rice Lake mine. The company is currently tunneling towards 710 lens and expected to reach the lens in the second quarter of 2013. This will provide access for mining over the 710 lens and the opportunity to establish new drill stations in close proximity to the 007 structures.

The ongoing mine exploration drilling program as part of the company’s overall strategy to increase the mineral reserve base and fully develop the deposit for mining. More regionally, the company continues to focus exploration drilling, unknown gold mineralization within the mine lease that could be developed in the relative short-term and add incremental fee to the Rice Lake mill. Specifically, this includes exploration along the eastern extension of the Shoreline Basalt and SAM units, the SG1 and SG3 zones as well as other areas where previous exploration has discovered zones of gold mineralization requiring further exploration. In order to assist in these exploration efforts, the company has commissioned a comprehensive three dimensional structural interpretation to refine the geologic model for exploration targeting, both within the active mining areas and more regionally. We’ve planned to announce results throughout the year as drilling progresses.

And with that, I’ll turn it back to you Ian.

Ian Berzins

Thanks Michael. Once again, I’d like to emphasize that we are in a period of transition and transition is never easy. Although we were optimistic that gold prices will improve, we must plan and operate with more conservatism and the understanding that prices could drop further. We must look at all costs not just focusing on cash costs and we must live within our means. I expect the grade will begin to improve in Q2 and at this time we are maintaining our guidance to produce between 75,000 and 90,000 ounces of gold with cash costs between $800,000 and $900,000 per ounce. We expect to reduce our previously announced capital spending by approximately 20% per quarter for the balance of the year and we’ve already deferred or canceled certain planned spends in Q2.

I anticipate that the changes we have made in the recent weeks and the additional changes that will be forthcoming will provide the company with a great deal of resilience going forward and position the company for improved margins as grades return to normalized levels.

At this time, I’d like to ask Donna to open the lines up for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Berzins. We will now take questions from the telephone lines. (Operator Instructions). And the first question is from Christos Doulis. Please go ahead.

Christos Doulis - Stonecap Securities

Hey guys, just on your, on the grade issue improving here. Any kind of thoughts on what Q2 might look like? I know you say that you expect Q3 to get back to a normalized level and you expect the grades to improve in Q2. Do you think that they will end up coming in above 5 grams, is I think what I am asking?

Ian Berzins

That’s certainly the target Christos. Good morning, by the way.

Christos Doulis - Stonecap Securities

Good morning.

Ian Berzins

And we’re certainly looking to be exiting the second quarter with grades into that range for sure.

Operator

Thank you. (Operator Instructions). The next question is from Cosmos Chiu from CIBC. Please go ahead.

Cosmos Chiu - CIBC World Markets

Hey, got a few questions here. Ian, I guess in the past, since you’ve kind of taken on the chair of CEO, you’ve also talked about looking at it, doing a comprehensive review of not just a mine plan, also CapEx and it’s good to hear today that you’re cutting back CapEx by 20%. Would you be giving us more detail in terms of year-by-year CapEx, year-by-year tonnages and things like that hopefully in the near future?

Ian Berzins

Our intent certainly through Q2 is to be reworking our five-year plan and I think we’ll be in a better position towards the end of the quarter to share where we see that going which will largely include capital requirements. So, our base models will be on similar run rate to where we are right now and we’re going to try to see what the property will look like. So certainly, I think we’ll be in good shape by the end of Q2 to share some of that with you. I will say that relative to the budget right now, we have 11% less employees. So we’ve got 52 people less than we set out to run this operation at. And as I mentioned before, we’re also going to be looking at all the capital spends.

Cosmos Chiu - CIBC World Markets

Great. And then, going back to the 75,000 to 90,000 ounces of guidance that you’ve given us for the year, would you be able to share some of the underlying ton per day assumptions and also average rate for the year that you’ve used yourself to come up with that number with us?

Ian Berzins

Well, certainly, as we go, as we advance in the year where we’re intending that our grade up between 5 and 5.5 grams, our original budget numbers was 0.15 which is I believe about 5.1 grams. So, that currently is our plan. There is always some timing of stoping blocks but certainly, we feel quite comfortable that we’ll be able to execute. Now, the big change is that we have accelerated Rice Lake. Rice Lake originally did not contribute any ounces to the plan this year while we were doing the capitalized development. So Rice Lake will be a larger component than it otherwise would be. I would suggest it will be a minimum of 10% of our overall ounces and it could be upward to 12.

Cosmos Chiu - CIBC World Markets

And what was the last year, in terms of Rice Lake’s contribution to the entire tonnage?

Ian Berzins

I am thinking about 20%.

Operator

Thank you. The next question is from Amine Benali from Manulife Asset Management. Please go ahead.

Amine Benali - Manulife Asset Management

Good. You make the statements about lower planned grades from Hinge, else low (23:05), which essentially is the majority of the operation. Can you give us a breakdown of tones mined from those three areas?

Ian Berzins

In the first quarter Hinge was a large contributor, over 40%. And as we transitioned into the second quarter, it was intended to be a little bit lower number. So 007 will continue to be at least 60% of the overall feed. And what it means it that some of the grade or some of the stopes at a $1,400 gold price that are kind of on the bubble, we would rather have the infrastructure out on 16 level before we tried to haul that towards the surface. And then, as far as grade goes, Hinge is a little lower grade than 007 and also the Rice Lake mine. So that’s how we see getting the grade up. There won’t really be a difference in mining method. Although I must say we are doing a test stope with a modified mining method using Alimak and long haul which will allow us to tackle some of the narrower sections of the ore body. So if that is successful, that could be an interesting opportunity for us with the go forward.

Amine Benali - Manulife Asset Management

Okay. But, in your release, you sort of imply that the grades, understanding the differences between the two zones, the grades were even lower than you have initially anticipated, right?

Ian Berzins

Certainly, we were disappointed in the overall grade in the Hinge complex which is the L8 and the L10 lenses. And in terms of 007, it’s an issue of sequencing. We have four lenses that we mined and we will be having a higher percentage of production from the 730 lens coming on in Q2, which we expect to be some of the better grades that we have in front of us in 007.

Amine Benali - Manulife Asset Management

So fixing the grades then, is it function of just packing up the development drilling before you had a mine or is it targeting better blocks in the model?

Ian Berzins

It would be more the latter, targeting better blocks. I mean we continued to look at efficiency and mining with our mechanized cut and fill and long haul methods but we’re going to attempt to be a bit more selective before when we were pushing to put all ounces including incremental through the mill, there were arguably ounces that might have been mined at a different time. So rather than tried to choke feed the mill, we want to send a higher quality product to the mill and then some of these other areas may in fact be more economic at different gold prices.

Amine Benali - Manulife Asset Management

Okay. And what was your mining rate for the quarter, how much ore was mined? I know you’ve said how much you processed with mill but I am curious what your mining grade is at the moment?

Gestur Kristjansson

The mining rate currently is around 1,800 ton a day.

Amine Benali - Manulife Asset Management

And that’s expected to remain at this level or you are changing that?

Gestur Kristjansson

I think what’s going to happen towards the end of the quarter is that we’re going to decrease that probably towards about 1,600ish in that range because we’re going to be a bit selective on a few of the stopes that otherwise might have been in the plan.

Amine Benali - Manulife Asset Management

Okay. All right, so then the way we should see it is – can you give us an indication of grades for Hinge and 007? For the quarter? How they were during the first quarter?

Ian Berzins

In general, the Hinge areas were above – between 3 grams, 3.5 grams and the 007 was between 4.5 grams and 5 grams, and some areas of 007 were over 5 grams. So that’s how it aggregate, we ended up with 4.15.

Amine Benali - Manulife Asset Management

Okay. So for you guys to get to the 5 to 5.5, would essentially mean more selective mining at Hinge and necessarily you’re going to have to push some tones from Rice Lake?

Ian Berzins

Yes. And Rice Lake historically, the 98 zone in Rice Lake which is currently between, around 24 level, that’s been historically some of our highest grade material.

Amine Benali - Manulife Asset Management

And in the second quarter we’ll have some Rice Lake tons in it or is that the second half event?

Ian Berzins

No, we’re going to be blending in some Rice Lake just about every quarter going forward. So we before we hadn’t plan to but we’ll have an input from Rice, plus the exciting thing for us will be cross-cutting the new 710 structure and so we need to drill it as well but we’ll be doing at least a bulk sample in there towards the end of the second quarter. Certainly, we’re going to be doing more drilling in proximity. And I think as you may have seen in one of our previous press releases, we’ve got a new structure that’s in the hanging wall that Mike referred to of 710. So, that’s brand new to us and again, we have to understand why it’s there and how does that tie in with the down dip extension of the 007 zone.

Amine Benali - Manulife Asset Management

Okay. And your cost numbers above $1,000, kind of disappointing in comparison to previous cost numbers, given the fact that you have embarked in this cost cutting program. How much of that cost cutting was already reflected in this cost number that we have here and/or should we look at this as strictly grade pointing off, tonnage pointing off and therefore you have this higher tonnage costs.

Michael Michaud

Yeah, the biggest reason for the higher cost per ounce was simply the lack of ounces. That’s the – we didn’t have a large enough denominator. But some of the cuts that we have made such as the corporate overheads, we’re looking at those on an annualized basis to be above $2.5 million to $3 million savings and so we will continue to get those and yeah…

Ian Berzins

Headcount is below our forecast (29:41) at this time. Now that the G&A cuts that we’ve made are not going to be impact our cost per ounce because they’re below the line. We also did a re-class of some G&A expense into operational expense, kind of for twofold reason. Partly to more actually reflect but also to make it manageable so that guys at site are seeing these costs and these are costs that are in their control that we’re trying to reduce overall. So, I think our philosophy is moving a little bit away from cash cost per ounce and looking at total costs. So capital as dollars just as much as operational expense or dollars. So we’re trying to deal with that reality.

Amine Benali - Manulife Asset Management

Okay. And then, your ending cash balance of 34.7, that obviously includes the 50 million that you received on the coverts, right?

Ian Berzins

Yeah, there is a big receivable you noticed. Our current assets are quite high. Marketable securities was -- at the end of the quarter was 40.4 million.

Amine Benali - Manulife Asset Management

Okay. So the cash burn was, and I kind of remember how much should end up the fourth quarter in terms of cash but it was a significant cash burn in Q1?

Ian Berzins

Yeah, I mean, our payables were up quite high. We changed the suppliers so there was a payout of that. And then we were – it was just a function of our liquidity at year-end, so that our current liabilities are down kind of $6 million through the quarter.

Operator

Thank you. (Operator Instructions). There are no further questions at this time.

Ian Berzins

Thanks Donna. Once again, I’d like to thank everyone who attended the call today with the review of these results. Thank you and have a good day.

Operator

Thank you, Mr. Berzins. For more information, please visit San Gold’s website at www.sangold.ca or contact Tim Friesen, Communications Director at 855-585-4653 or by email at info1@sangold.ca. This concludes today’s conference call. You may now disconnect.

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