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San Gold Corporation (SGRCF.PK

Q2 2013 Earnings Call

August 13, 2013, 11:00 am ET

Executives

Tim Friesen - Communications Director

Ian Berzins - President, Chief Executive Officer and Chief Operating Officer

Gestur Kristjansson - Chief Financial Officer

Analysts

Operator

Good morning. My name is Melanie and I will be your conference operator today. At this time, I would like to welcome everyone to San Gold Corporation's 2013 second 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, Operator. Welcome to San Gold's 2013 second quarter results conference call. Today's presenters are Ian Berzins, President and CEO and Chief Operating Officer, Gestur Kristjansson, CFO. Michael Michaud, San Gold's Vice President, Exploration is unable to join us today.

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 and 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 the company's management discussion and analysis dated August 12, 2013.

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

Ian Berzins

Good morning everyone and welcome to San Gold's 2013 second quarter conference call. On our last conference call on May 10, I committed to shareholders and analysts that San Gold would take a new approach to growth and profitability by focusing on grade as a key metric and implementing a strategic review of all spending including operating, capital, exploration and corporate overheads.

And this is my first full quarter as President and CEO, I am pleased to report that we have taken a number of aggressive steps to facilitate overall improved performance and fiscal restraint. While the price of gold and our share price have continued to languish during this recent quarter, I am confident that the steps we have taken and the further steps we intend to take will place us in a much better position as we enter the second half of this fiscal year.

During the second quarter, we were able to increase grade by 22% over last quarter to 5.05 grams per ton. This was accomplished by deferring the mining of some lower grade material and implementing a program to segregate lower grade materials of separate stockpile and surface. We have delayed mining of some material in Hinge and brought Rice Lake Ore back on stream earlier than originally planned. We also successfully developed out the 007 zone on 26 level in Rice Lake and expect to see the benefit of this new zone during 2013.

Compared with the same quarter last year, the company reduced its total cash operating costs by CAD 2.7 million, capital expenditures by CAD 3.9 million and general and administrative expenses by CAD 2.6 million while maintaining production levels. The company is operating the property now with approximately 15% less employees and we took over all of the primary development in Hinge and 007 from the mining contractor in June. In terms of planned capital spending, we have cancelled the development of the midshaft loading pocket at 16 level in A-Shaft and reduced property, plant and equipment spending for all noncritical projects.

During the quarter, the company completed the installations of new blocking in the A-Shaft and we have deferred the planned installation of guide skips and ropes until 2014. Lateral development of 16 level by the mining contractor remains a top priority and we plan to advance out underneath the down dip extension of the Hinge mine by the end of this year.

This is a good start, as the operating, capital expenditure initiatives were only implemented midway through the quarter. We expect to see further improvements in these categories as the year progresses. Additionally, we have already completed CAD 10.4 million of our CAD 16 million exploration flow-through commitment for this year.

We have recently identified a number of prospective drilling targets near existing infrastructure. We will continue to pursue these targets with the remaining flow-through commitments. However pending a significant new discovery that can be brought online in short order, exploration spending will be reduced through the remainder of this year and we anticipate a substantial reduction in surface exploration in 2014.

Financially, the company contributed income from operations of CAD 3.4 million and cash contribution from operations before changes in non-cash working capital of CAD 5 million and recognized a quarterly total and comprehensive loss of CAD 3.6 million despite poor gold prices. We have done a good job this quarter in curtailing our spending and increasing our gold production.

Cash cost per ounce sold was reduced to CAD 783 per ounce in the quarter, compared with CAD 1,113 in the first quarter and CAD 1,004 in the second quarter of last year. With our first half cash cost now reduced to CAD 919 per ounce, we remain on track to produce between 75,000 and 90,000 ounces of gold this year with full year cash cost of between CAD 800 and CAD 900 per ounce.

With significant reductions to our operating, capital development and PP&E spending requirements already in place, we expect the contribution from operations to continue to grow through the remainder of the year. This positions us well in terms of our first priority, which is achieving free cash flows. We are not there yet but we are making excellent progress and I remain optimistic that this objective will be achieved by year-end or early in 2014.

I will now take a few minutes to review the company's second quarter operating activities. Following that, Gestur Kristjansson will discuss the financials. In terms of operation, I first want to commend our employees and contractors for their continued commitment to safe production. We once again finished the quarter with no lost time accidents and have now completed 520 days without a lost time accident.

We finished the quarter with approximately 420 employees and 100 contractors supporting the project, which is approximately 100 fewer than at the start of the year. We continue to focus on training and developing capacity from local communities in order to fill vacancies where attrition takes place.

We produced 22,526 ounces of gold in the second quarter of 2013 at a mill grade of 5.05 grams per ton. This is slightly higher than our press release of July 11, press release of 22,476 due to a positive refining adjustment. This is a significant improvement over the previous two quarters where we averaged approximately 4.15 grams per ton.

The company mined a record 173,350 tons at an average mining rate of 1,905 tons per day. The company is primarily reliant on the mechanized cut and fill and longhole mining as the principle mining methods but also began a trial during the quarter utilizing alamac longhole mining in the L13 zone.

We milled the 162,344 tons of ore at an average milling rate of 1,784 tons per day. Surface stockpiles increased from approximately 4,200 tons at the start of the quarter to approximately 15,000 tons at the end of the quarter.

Mill recovery was 94%, a 2% improvement over last quarter which was partly due to the reconfiguration of the flotation circuit from parallel to series and due to an increase in the grade. We continued to make good progress on extending the Rice Lake mine infrastructure into the Hinge and 007 deposits from 16 and 26 levels. Development work on 16 level using a contractor will remain a priority for the balance of the year. On 26 level, we were able drift out to and cross cut the 007 zone. This new zone is being referred to as the 710 vein. This puts us in a position to do some bulk sampling of this vein and complete further diamond drilling this year.

I would be happy to answer questions on the operation section during the Q&A portion of the call. I will now ask Gestur to provide a review of the financial results. Gestur?

Gestur Kristjansson

Thanks, Ian. Good morning, everyone. I will start by highlighting a couple of points. First, as Ian mentioned, operations provided a cash contribution before changes in non-cash working capital of CAD 5 million. We did produce 4,285 more ounces of gold compared with the same quarter last year, however the benefit was offset by a reductions of CAD 213 in the realized price per ounce of gold sold.

As a result, a large portion of the contribution from operations was generated by the company's ability to reduce its operating expenses. In addition to these reduced operating expenses, we have reduced corporate overhead costs and capital expenditures. Combined, these initiatives have substantially improved our cash position and our bottomline forecasts.

I will now discuss the balance sheet, the income statement and the cash flow statement for the quarter and all amounts here are presented in Canadian dollars. Turning to the balance sheet. We ended the quarter with current assets of CAD 44.8 million and a working capital surplus of CAD 20.9 million. During the quarter, the company invested CAD 12.9 million on the capitalization of development of mineral properties and CAD 4.1 million in property, plant and equipment.

Current liabilities are reduced by approximately CAD 9.8 million since December while long-term liabilities rose by CAD 37.2 million. Both are largely the result of an unsecured debenture financing undertaken in the first quarter of this year.

Our flow-through share premium is down to CAD 2.1 million from CAD 5.5 million at year-end as we fulfilled our flow-through commitments. We expect these commitments to be fully defeated before year-end and we would expect a very significant reduction in our go forward exploration spending after that time.

Moving on to the income statement. San Gold reports revenue of CAD 30.4 million compared with CAD 31.6 million in the same quarter last year. The decrease in revenue results from an 11% increase in the ounces of gold sold which was offset by a 13% reduction in the realized price per ounce sold. We realized CAD 1,394 per ounce sold in the second quarter.

Income from operations was CAD 3.4 million, a 41% increase compared with income from operations of CAD 2.4 million in the second quarter of 2012, mostly attributable to operating cost reductions. Cash costs per ounce was for CAD 783 per ounce of gold sold compared with cash costs of CAD 1,004 in the second quarter last year.

If you recall, that the company suffered a mill interruption in June 2012, that contributed to some of lower volumes and higher costs. Nonetheless, we are heartened by the improvements from the prior quarter and the recent changes. The company recognized CAD 7.8 million in depletion expense which is consistent with the CAD 7.8 million recognized in the second quarter of 2012. The expense stayed constant because of an increase in the ounces of gold sold was offset by the overall increase in the measured and indicated resource updated in February of this year which reduced the calculated amount of depletion expense per ounce.

General and administrative expenses were CAD 1.5 million, compared with CAD 4.1 million in the second quarter of 2012. The decrease is due to a 40% reduction in corporate overhead, and a 97% decrease in the share-based compensation expense, which is the result of the current moratorium on options combined with the cancellation of options that had been granted to former employees.

After exploration, general, administrative and other net expenses including the recognition of CAD 1.9 million of income tax recovery on flow-through shares, total and comprehensive loss for the quarter was CAD 3.6 million or CAD 0.011 cents per share compared to a net loss of CAD 7.8 million or CAD 0.024 cents per share in the same period of 2012.

Moving on to the cash flows. Cash flow generated by operating activities before changes in non-cash working capital was CAD 5.1 million or CAD 0.015 cents per share during the quarter, which compares with the contribution of CAD 5.7 million or CAD 0.017 cents per share in the second quarter of 2012. Capital spending during the quarter was focused on improving key infrastructure primarily within the 007 deposit and on extending the 16 and 26 levels of the Rice Lake mine in order to accelerate access to the down dip extensions of these deposits.

The company's marketable securities increased by CAD 19.8 million as proceeds were used to fund working capital and development. The base of this spend is expected to reduce significantly consistent with Mr. Berzins' comments earlier.

That concludes my review of financial statements. If there is any further questions, I am happy to answer them during the Q&A. With that, I turn the call back over to Ian.

Ian Berzins

Thanks, Gestur. As Mike Michaud, our VP, Exploration is unable to join us today, I will now provide a brief summary of our exploration activities during the quarter. Drilling focused primarily on targets adjacent to existing near surface mine infrastructure at the 007, Hinge and Rice Lake mines as well as at the SG1 mine and in and around the L13 zone.

In addition to the production drilling completed in these regions the company also intersected a new gold structure during the quarter in the immediate hanging wall of the 710 lens of the 007 deposit. Initial results included an intersection returning 22.5 grams per ton of gold over 4.2 meters. Surface exploration drilling also commenced in a number of new offset targets identified during the quarter within the mineral lease as part of an ongoing comprehensive structural analysis and geologic modeling exercise

The company anticipates releasing an updated geologic model along with results from this program during the third quarter. In total the company completed 74,000 meters of drilling during the quarter with four surface and four underground drill rigs in operation. Since the end of the second quarter, the company has reduced the number of drills just to two on surface and two in the underground.

We expect to maintain this level of activity until year-end. In the new year, underground drills to remain in operation and surface drilling will be further curtailed. In July, San Gold announced that it acquired a 100% interest in the 114 mineral claims from Wildcat Exploration Ltd. representing approximately 17,450 hectares of land in the Rice Lake gold belt.

The previous option plan has been terminated in favor of this improved agreement in which San Gold will retain the full value of all previous work completed and reduce work expenditures by approximately CAD 2.5 million over the next two years. The company is also encouraged by recent positive drilling results that are 50% owned Tully project near Timmins, Ontario. The operator, SGX resources recently announced results from the east of the main deposit including 17.6 meters of 11.1 grams per ton gold at depths of less than 250 meters below surface.

We are very encouraged by the size and the nature of the gold zone that is emerging at this property. The Tully deposit now extends 600 meters along strike and remains open in all directions in close proximity to milling capacity within the Timmins gold camp.

That concludes the formal exploration summary. Once again, I would like to emphasize that we are in a period of transition. We have made some difficult decisions during the second quarter. We are now just beginning to see the positive results from these decisions. Although we remain optimistic that gold prices will improve, we will continue to operate conservatively and with the understanding that prices could drop further.

We are continuing to look at all costs, not just focusing on cash costs. We understand we must live within our means. I expect mining and milling rates will remain stable and grade will continue at Q2 levels in the third quarter and we are maintaining our guidance to produce between 75,000 and 90,000 ounces with full-year cash costs between CAD 800 and CAD 900 per ounce.

At this time, I like to ask the operator to open up the lines for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions registered at this time. I would like to turn the meeting back over to Mr. Berzins.

Ian Berzins

Thank you, operator. I would like once again to thank everyone for joining us on the call today to review the results. Thank you and have a great day.

Operator

Thank you. 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 e-mail at info1@sangold.ca. This concludes today's conference call. You may now disconnect.

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