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Executives

Robert LaVallière – VP, IR

Benoit Desormeaux – President and CEO

Analysts

Paolo Lostritto – National Bank Financial

Cosmos Chiu – CIBC World Markets

Leily Omoumi – Scotia Bank

Don Blyth – Paradigm Capital

SEMAFO Inc. (OTCPK:SEMFF) Q2 2013 Earnings Call August 7, 2013 10:00 AM ET

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to Semafo’s 2013 second quarter financial results and operations review conference call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). Please note that today’s call is being recorded.

I will now turn the conference over to Mr. Robert LaVallière, Semafo’s Vice President and Investor Relations. You may go ahead sir.

Robert LaVallière

Thank you France. Good morning. Members of the senior management team joining me for the call today are Benoit Desormeaux, President and CEO; Martin Milette, CFO; Michel Crevier, Vice President, Exploration and Mine Geology; and Patrick Moryoussef, Vice-President, Mining Operations.

I would like to remind listeners that some of the matters to be discussed during today’s call may contain forward-looking statements. Forward-looking statements include but are not limited to items such as our expectations regarding the market price of gold, timetables, mining operation expenses, capital expenditures, guidance and resources and reserves estimates. Such statements are given as of the date of this conference call and involve risks and uncertainties. A number of factors and assumptions were made in preparing such statements and actual results could differ materially. Accordingly you should not place undue reliance on forward-looking statements.

For additional information with respect to forward-looking statements, risk and assumptions, please consult our 2012 annual MD&A as updated in Semafo’s first quarter MD&A and 2013 second quarter MD&A and other fillings made with the Canadian Securities Regulatory Authorities and available on Semafo’s website at www.semafo.com. Semafo disclaims any obligation to update or revise any forward-looking statements except as required by law. I make this cautionary statement on behalf of all Semafo's spokesperson who may address you during this conference call today.

With that said, I would like to turn the call over to Benoit Desormeaux. Benoit?

Benoit Desormeaux

Thank you Robert. Early in 2013 we made reference to the economic turbulence that we were anticipating during the year and thus far, it has effectively been very challenging. Financially, it was a very difficult quarter with a significant 25% drop in the price of gold in less than three months. This has evidently affected our financial results and, at the same time, occasioned numerous industry-wide challenges. We appreciate that we cannot solely rely on the gold price to generate shareholder value. This was evidenced when, in April, we saw the price of gold fall to $1,380 per ounce and in June, gold fell yet again to $1,192 per ounce.

Clearly, we have made a number of difficult decisions for our organization recently, such as no longer investing long-term money in our non-core assets and reducing our corporate office headcount by 20%. During the quarter we generated cash flow from operating activities of $24.3 million, or $0.09 per share representing a decrease of $18.3 million compared to the same period last year. This decrease is almost entirely due to the drop in the market price of gold, which is reflected in the $244-per-ounce decline of our average realized selling price compared to the second quarter of 2012.

Second quarter 2013 adjusted operating income totaled $16 million compared to $29.1 million in 2012. Adjusted net income attributable to equity shareholders totaled $12.8 million or $0.05 per share compared to $19.4 million or $0.07 per share in the second quarter of 2012. Our financial positioned remained solid with $116 million in cash and no debt.

Operationally, the second quarter was a very positive one. Results are within guidance with a total production of 58,600 ounces of gold. Total cash cost came in below guidance at $752 per ounce. We firmly believe that value creation is generated through the creation of future cash flow in our [quest] to focus on the production of quality ounces at our Mana mine. Our flagship Mana property produced 41,500 ounces of gold, representing almost 80% of our total production.

The second quarter results validated our optimization efforts where, owing to activities undertaken in combination with a lower strip ratio, Mana’s total cash cost was $675 per ounce down from $709 per ounce in the first quarter of 2013 and representing a 9% decrease compared to $739 in the second quarter of 2012. Mana’s cash operating cost per ton processed fell by 18% to $36 per ton compared to $44 per ton in the second quarter of 2012.

On the exploration side, the table has been set and as part of our value creation strategy, our focus remains on the high grade Siou Sector. As announced in our recent press release, infill drilling has been completed, demonstrating good continuity and extending the mineralization. Precedence was placed on drilling the near surface portion of the deposit, down to approximately 150 meters.

In the second quarter additional steps were taken to accomplish this goal with the advancement and completion of the drilling program on the Siou south sector, which was originally scheduled for the fourth quarter of 2013. Results confirmed continuity, grade and extension of the mineralization further to the south. The completion of this program in the second quarter will allow us to include these results in our upcoming reserves and resources update.

In the coming months, we will continue to focus our exploration effort on the area of the Siou sector and the Kokoi Trend. Ongoing exploration on the Mana property includes other NRC drilling as well as soil sampling. We have completed and filed the Siou environmental impact study and are on track to begin the permitting process in the fourth quarter of 2013. Based on the estimated time required to acquire the necessary permits, we expect to be in a position to begin stripping activities in the third quarter of 2014, three months earlier than originally scheduled. Our short term priorities include issuing the reserve and resources estimate and mine plan in the third quarter of 2013. Moving forward with permitting process, being in a position to commence stripping activities in the third quarter of 2014 and continuing exploration within 20 kilometer radius of the Mana processing plant.

Earlier in the year, we made reference to the consideration of strategic alternatives for our non-core assets, the Samira Hill and Kiniero mines. The recent drop in the price of gold has further impacted these two properties, which continue to be extremely sensitive to additional downturns in the price of gold or technical parameters.

Accordingly, the Corporation recorded a non-cash impairment of $32.8 million as we have decided to wind down operations to an eventual care and maintenance status at our Kiniero mine in Guinea during the second half of the year. The drop in gold price also led to an additional non-cash impairment charge of $14.7 million in this second quarter relating to the Samira Hill mine.

At Samira Hill mine during the second quarter of 2013, we produced a total of 12,300 ounces at a total cash cost per ounce sold of $1020 compared to 13,800 ounces of gold at $853 an ounce in the second quarter of 2012. In July, we entered into a heads of agreement for the sale of our interest in the Samira Hill mine. Several conditions will have to be met prior to the closing of the transaction, which is scheduled to take place prior to September 30, 2013.

At Kiniero in Guinea, we produced 4800 ounces of gold during the quarter at a total cash cost of $910 per ounce compared to 420 ounces of gold at $759 per ounce in the second quarter of 2012. We made considerable progress on the implementation of our strategic plan in the second quarter of 2013. Our focus on quality ounces is clear with the advancement of the Siou South Sector and our decisions regarding non-core assets. We have cut our corporate overhead and anticipate further reductions in expenditures as a result of an ongoing company review with the objective to streamline the organization, while maintaining efficiency.

Accordingly, we will continue to focus on disciplined capital allocation and optimization programs. Today, we are pleased with what we have accomplished throughout the entire organization and we intend to make sure that we remain focused on our priorities.

SEMAFO is maintaining its annual production and total cash cost guidance of between 153,000 and 168,000 ounces of gold at a total cash cost of $805 to $855 per ounce at the Mana mine. Guidance will not be maintained for the Kiniero and Samira mines, as the Corporation winds down operations to an eventual care and maintenance status at these two non-core assets.

This concludes our presentation portion of this conference call. I would now like to open up the lines for the question and answer session. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Paolo Lostritto from National Bank Financial.

Paolo Lostritto – National Bank Financial

Just a quick question, follow-up on your statement regarding the 20% cut, your G&A is now down to 4.2 million. Is that a representative level because if I took -- the last fourth quarter’s took 20% off of that and that gets me something close to 5.8 and yet you are here at 4.3 million for the quarter. So I am just trying to get a benchmark on what we should be using going forward on your G&A?

Benoit Desormeaux

Paolo, we announced at the beginning of the year a guidance of $23 million. With this recent reduction and all the improvements we’ve made we are expecting to be close to $20 million this year. And of course, it’s going to be lower in the next year because of what it was – those improvements and [cut up] made during the year, so of course, next years can be lower.

Paolo Lostritto – National Bank Financial

And then as a follow-up, Mana, the strip ratio obviously you’re kind of at 3.1, 3.2 level. Are we still expecting to capitalize about $12 million a quarter as you’re doing the pre-strip there and should we be using the strip ratio of about kind of 3.1, 3.2 going forward at Mana?

Benoit Desormeaux

What you have to consider is really what we have announced as guidance. It was a total strip ratio of 12 to 1, 5 was in operating cost and 7 was in capital expenditures. We’ve been lower for the first part of the year. So there will be a reverse situation in the next six months. But we will still be within guidance as we haven’t changed our mine plant so far.

Paolo Lostritto – National Bank Financial

Okay. So we should have a little bit of higher strip ratio on the back half?

Benoit Desormeaux

Exactly and lower strip ratio.

Paolo Lostritto – National Bank Financial

And then to that effect, the unit operating cost $34 a ton should be after you account for the stripping – the delta on the stripping you’re probably close to $40 on a go-forward basis?

Benoit Desormeaux

Exactly.

Operator

Our next question is from the line of Cosmos Chiu with CIBC World Markets.

Cosmos Chiu – CIBC World Markets

I’ve got a few questions here. Benoit, you’ve talked about the stripping and you’ve talked about the guidance. I am looking at the guidance right now for the full year in terms of the superbid for – the stripping for the superbid, I am talking of $49.5 million, I guess you spent about $30.8 million so far in the first half. So how does that reconcile again, because you’ve just talked about maybe some of the higher strip in the second half?

Benoit Desormeaux

We are still – if you do the calculation adding – we’ve been pre-stripping and stripping, you will be close to the guidance of 12 to 1. It is really – so this also is still 12 to 1. So the weight has been accounted for. We have a bit more pre-stripping in the first half of the year and lower strip ratio.

Cosmos Chiu – CIBC World Markets

Okay. So the first half is going to be lower pre-stripping and then higher strip ratio – so I guess there were impacts some of the operating costs latter half of 2013.

Benoit Desormeaux

Yeah, as we said the cash cost per ton will get a bit higher, close to $40 a ton.

Cosmos Chiu – CIBC World Markets

In terms of exploration, Benoit, again looking at the full year budgets, you’ve budgeted about $22 million for the full year. You spent about $17 million so far. So are you within budget, like are you only expecting to spend about $5 million on the back half of 2013, even including --

Benoit Desormeaux

Yeah, we are still within budget. It was expected like that because of course there was less of infills running to do in the Siou Sector and we didn’t want to bring that – we tend to have the reserves update in September. So we knew that, that it would not be spent even in the year. We did a bit of exploration in the first part of the year but very few. And in the third quarter, as it’s the rainy season, it’s not that easy to do exploration. So we will have more work on exploration starting back in September. So we are still expecting to be in our budget, or very close.

Cosmos Chiu – CIBC World Markets

And in terms of your earnings for the quarter, Benoit, did you classify the Samira Hill operations as the discontinued operations or does it really matter? Does it make a difference if you did it?

Benoit Desormeaux

No, we haven’t. It’s still as an ongoing operation in our book.

Cosmos Chiu – CIBC World Markets

Okay, despite the fact that you’ve sold it or –

Benoit Desormeaux

Yeah it’s because it’s not sold yet. Because of the conditions attached to the deal we have to wait a bit to really change the accounting of the Samira asset.

Cosmos Chiu – CIBC World Markets

And in terms of looking at the grade at Mana in Q2, how do you think that’s going to change in Q3 and Q4, maybe if you could give us a sense in terms of how it’s going to move up in the back half of 2013?

Benoit Desormeaux

So we are expecting to be within the guidance we have announced. We said it would be 212. So in the coming two quarters, we are expecting grade to be between 2.05 and 2.10. So therefore being on the guidance. Last quarter should be a bit higher and of course it’s going to increase as we said and of course, as we are expecting to see it coming somewhere in ’14.

Operator

Our next question is from the line of Leily Omoumi from Scotia Bank.

Leily Omoumi – Scotia Bank

Thank you and I joined the call a little late. So apologies if this was already answered. But for the second half of the year, what is the operating strip ratio that we are looking at? Is it the 5 to 1, out of the 12 to 1 in total that we should be putting in the operating strip ratio?

Benoit Desormeaux

It’s going to be back probably to something like that 5, 6 or 7 and as I said earlier, we will still be within our total strip of 12 to 1, whether it’s going to be accounted for in CapEx or OpEx, will be within the 12. But you should expect the strip ratio to get higher as we have announced the guidance of 5 to 1 for the year. So expected to get even a big higher.

Leily Omoumi – Scotia Bank

I guess, with Kiniero, can you give us a little bit more detail on how you are kind of winding things down in the second half of the year, obviously the guidance is not being maintained but should we essentially put zero for Q3, Q4 or some production in the second half?

Benoit Desormeaux

Being in your place, I would be conservative and put zero and we just don’t want people to have expectations. Today it’s still running and we said we would keep our operations running at generating cash flow and if it’s no longer the case, of course, we will proceed with the care and maintenance. But we don’t have a [mixedbag] that we will do it.

Operator

Our next question is from the line of Don Blyth from Paradigm Capital.

Don Blyth – Paradigm Capital

Hi there, most of my questions have already been asked but can you give any sense of on the Samira potential sale, can you give any indications of how that is going so far? I guess the big thing would be -- other than due diligence would be that Middle Island being able to raise its funds, any sense of how that’s going?

Benoit Desormeaux

So far it’s really difficult to comment on a process that will end somewhere at the end of September. But so far it’s going according to plan. We don’t see anything for now that would prevent it.

Don Blyth – Paradigm Capital

And the discussions with the government or going well in terms of the transfer of the rolling stock, you don’t anticipate that being a major hurdle?

Benoit Desormeaux

No, and again it’s difficult to comment because we are in that process. It’s still two months before closing but so far it’s going according to plan. So we cannot really give more information on the process.

Operator

We have no further questions at this time. I will be turning the call back to you for your closing remarks.

Robert LaValliere

Thank you, France. Once again I would like to take this opportunity to remind listeners that Semafo second quarter MD&A and other financial statements are available on our website and on the SEDAR website. The audio webcast of this conference call will also be available for replay on our website for a period of 30 days. Our third quarter financial and operating results are currently scheduled for publication are on around November 5, 2013. And so thank you very much and have a nice day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation. And kindly ask that you please disconnect your lines. Have a great day everyone.

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