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Executives

Catalin Chiloflischi - Director, Corporate Communications

Lenic Rodriguez - President and Chief Executive Officer

Salvador Huerta - Chief Financial Officer

Analysts

Randy Hildebrandt - PI Financial

John Waters - Big Bend Gazette

Mark Mihaljevic - BMO Capital Markets

Christos Doulis - Stonecap Securities

Frank Vogel - Baader Bank

Aurcana Corporation (OTCQX:AUNFF) Q2 2013 Earnings Conference Call August 30, 2013 1:00 PM ET

Operator

All participants please standby, your conference call is ready to begin. Good morning ladies and gentlemen. Welcome to Aurcana Corporation Second Quarter 2013 Webcast and Conference Call for Friday August 30, 2013. Please be advised that this conference call is being recorded.

I would now like to turn the meeting over to Mr. Catalin Chiloflischi, Corporate Communications Director, Aurcana Corporation, who will introduce today’s speakers. Please go ahead Mr. Chiloflischi.

Catalin Chiloflischi

Welcome everyone to Aurcana’s second quarter and update conference call. And thank you very much for taking the time to be with us today. Today’s conference call will be presented by Mr. Lenic Rodriguez, President and CEO of Aurcana Corporation who will be providing investors with an overview of Aurcana second quarter results as well as an update on La Negra and Shafter. After this presentation we will follow with questions.

For those of you who have joined us today on the webcast, we have included a number of slides to support today's discussion. Please note if you would like to ask live questions after the presentation, you would have to dial into the teleconference. Questions asked on the webcast online will be responded individually after the event. We are going to try and answer all questions today, however, anyone who does not have their questions answered, should contact us by email or telephone at anytime after the teleconference.

As a reminder, in today’s call, we will be making forward-looking statements and will be discussing forward-looking information that involves unique risks concerning the business operations and financial performance of our Aurcana Corporation. Please refer to the webcast slides for a complete forward-looking statement disclosure.

With that, I’d like now to turn the floor over to Mr. Lenic Rodriguez. Please go ahead Mr. Rodriguez.

Lenic Rodriguez

Hello everyone and welcome to our call today. I would like to provide you with an overview of the second quarter results as well as an update on our operations.

I’m pleased to say that once again, Aurcana was able to increase its second quarter silver equivalent production from La Negra by 38% over the first quarter in 2013. La Negra produced over 800,000 silver equivalent ounces during the second quarter and 1.4 million ounces for the first six months.

During the second quarter, the operation in Mexico achieved yet another record achieving a new mill capacity of 3000 tons per day and processing 48% more oil than the first quarter.

Despite the expanded mill capacity, we have mined 73% more oil than one year ago to a total volume of 250,000 tons mined during the second quarter. By processing lighter volumes, the cash cost per mill ton was reduced to $30.84 and a total cash cost per silver ounce net of by-product was $7.79. Maintaining a low cash cost is an important strategic advantage for Aurcana.

Total revenues for the quarter was $11.3 million down $2.4 million from one year ago. This was mainly due to lower silver prices, lower silver base process as more new feed was derived from the development of new areas and higher inventories at quarter end.

Total earnings from mining operations were $2.6 million and the net income was $300,000. As the mine development continued, the average scale of silver mine at La Negra in the second quarter was lower as production was in part realized from development headings. However, La Negra now has developed the equivalent of two years of additional production.

Going forward, planning is now focused on increasing silver grades by developing and mining higher grades in the mineralized zones. Planning includes the purchase of a raise boring machine to construct several ore several ore passes connecting the upper reaches of the mine that have higher silver grades with the main ore haulage on the 2000 meter level.

The raise boring machine as an investment of over $3 million and is expected to be commissioned in the first quarter of 2014. A new capacity silver grade for copper concentrate production has also been ordered and delivered and is expected by the end of third quarter.

A new mineral estimate report in La Negra has been initiated and completion is expected in the early 2014. The new report will include all the new drilling completed at La Negra since the last technical report was completed in 2012. In order to reduce cost and improve efficiencies at La Negra, the company postponing this into non-critical areas and focus additional efforts in mining higher silver grade zones.

Before moving on to Shafter, let me provide you with an update on the Red Kite financing. I’m pleased to say that we are working with the Red Kite mine finance and the settlement of the definitive loan documentation for a three year loan facility of $50 million and an Off-take Agreement for the silver produced at the Shafter silver mine. The transaction is now expected to complete in early September and we will provide available information on financing.

The Shafter mine is making additional capital improvements in order to ensure that the process will achieve capacity of 1500 tone per day. The estimated total CapEx required to achieve target capacity of 1500 tons per day at Shafter is approximately $18.5 million, of which a total of approximately $5.5 million has already been expended by the end of the second quarter.

We are anticipating that the balance of the $13 million will be funded from the Red Kite financing that is currently being finalized. Subject to successful completion of the financing, we expect that all the construction and upgrade work will be completed during early 2014.

In 2013 target silver output of Shafter mine was constrained by bottlenecks in the processing plant pending the delivery, installation and commissioning of key pieces of equipment. All proceeds generated from silver sales during the second quarter were credited to capital costs.

On August 15, a second new tailings filter press was delivered to Shafter. This replaced the second of three used low-capacity tailings filter presses that were contributing to operational delays and reduced recovery rates. Together with the new filter press installed in May 2013, Shafter should reach a capacity of 1,200 tons per day. A third filter press will be ordered with expected delivery by year’s end. This press will bring the Shafter circuit up to the design capacity of 1,500 tons per day.

Additionally new larger precipitate filter presses and furnaces, together with a larger drying oven and retorts have been ordered and are expected to be commissioned in October. This equipment should result in a significant improvement in the silver recovery and the quality of doré bars produced on site.

A higher degree of automation and better process controls are to be installed in the process facility. This activity began in May 2013 and will continue until projected completion in early 2014.

SGS Metcon conducted metallurgical testing in order to investigate the benefits of a flotation circuit at the Shafter mill. The results indicated that a flotation circuit will help achieve recoveries of up to 80% of the high grade silver contained in sulphide minerals at Shafter that otherwise would not be recoverable in the leach circuit. This cost is included in Shafter’s total capital requirements.

The first group of locally trained miners has graduated and began working at Shafter in late July 2013 alongside experienced miners. The initiative was greeted with good local support and initiative was to build a stable work force locally at Shafter. This mining course will be offered several times a year and is being coordinated with the local Presidio school system.

An updated mineral reserve estimate for the Shafter Mine is in progress and is expected to be completed in the fourth quarter. We feel the progress made to-date subject to completion of Red Kite financing with Shafter plant will run at a rate of approximately 600 tons per day during the third quarter and will achieve its design target of 1,500 tons per day during early 2014.

In closing, I would like to affirm that with the improvement at Shafter now underway and increased efficiency at La Negra the company remains well-positioned for growth. Thank you for your support and confidence in Aurcana Corporation.

We will now love to open the floor for questions. But before we begin, please keep in mind that Mr. Sal Huerta, our CFO is also in the room with us today and is available to answer any financial related questions. Operator?

Question-and-Answer Session

Thank you, Mr. Rodriguez. Questions now will be taken from the telephone lines. (Operator Instructions) The first question is from Randy Hildebrandt with PI Financial. Your line is now open. Please go ahead.

Randy Hildebrandt - PI Financial

Hi, Lenic, Randy here, thanks for taking the call. I might have missed it. But I have two questions here, in 2014 when does – what time of the year does management expect to complete all the construction?

Lenic Rodriguez

Our estimate is really for the first quarter of 2014.

Randy Hildebrandt - PI Financial

Okay, perfect. Okay. Second question is in regards to the November 29th warrants that are out, I know June ones got extended, since these are not going to -- they are not looking to be in money here now because there is some misguidance in 2013, will you be looking to extend those possibly once you get close to the target?

Lenic Rodriguez

We will think about it. I think there is possibility that will happen.

Randy Hildebrandt - PI Financial

Okay. I think a number of people maybe buying them. But people who are buying them thinking that there was going to be a better production in 2013. So I think that would be looking to be a good way to approach it, we extend that, okay. Okay, great. Thank you.

Lenic Rodriguez

Welcome Randy.

Operator

Thank you. The next question is from John Waters of Big Bend Gazette. Please go ahead.

John Waters - Big Bend Gazette

Lenic, good morning. I’m asking you a question about the press release regarding the Shafter mine, the press release reads (offer feeds) generated from silver cells during Q2 2003 were credited to capital cost, can you tell us exactly what the dollar amount of those cells were?

Lenic Rodriguez

The production is still small but worth about $1 million.

John Waters - Big Bend Gazette

Great, thank you.

Lenic Rodriguez

You are welcome.

Operator

Thank you. The next question is from (Danny Dean). Your line is now open. Please go ahead.

Unidentified Analyst

Yes, thank you. My question is regarding the application for listing on the TSX, that’s something that’s been discussed for, well, I think over 2 years now. And the story has changed along the way but can you please provide an update on where that sat-in and most importantly when you expect that to happen?

Lenic Rodriguez

Well, we are already working on that, decision has been made to move to TSX. We are in the process of fulfilling all the requirements of the TSX needs and it is our intension probably to do it as soon as possible. It can be done this year and will be done this year.

Operator

Thank you. The next question is from (Andre Bodre). Please go ahead.

Unidentified Analyst

I’m going to differ my question was also regarding the expiry of the warrants in the November. So Mr. Rodriguez, you are saying that’s something that you are seriously taking a look at in terms of an extension?

Lenic Rodriguez

That is correct.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. The next question is from Scott (inaudible) with BMO Capital Markets. Your line is now open. Please go ahead.

Unidentified Analyst

Hello there, thank you for taking my question. What’s holding up the financing with Red Kite?

Lenic Rodriguez

Well, let me tell you that -- one of the delays in core financing has been dealing with dozens. We have had sequential types of due diligence people that have been on holidays, et cetera. But, we are now in the final stages of completing the negotiation of that due diligence information as well as final legal documentation. So we are very close to finalizing that that’s all.

Unidentified Analyst

So, you think it’s going to close this month?

Lenic Rodriguez

This month ends tomorrow, but --

Unidentified Analyst

All right, okay. So, next week or eminently?

Lenic Rodriguez

Well, I don’t see that I’m in a position to give you a date right now. That is eminent.

Unidentified Analyst

Okay. And how much is this delay in financing held up development at Shafter?

Lenic Rodriguez

Pardon me.

Unidentified Analyst

How much is this delay in the financing held up development in Shafter, how much time do you think you lost because of this?

Lenic Rodriguez

Oh, the delay in finances? Well, we were trying to close this since June third week. So we have about 2 months in that financing.

Unidentified Analyst

Thank you.

Operator

Thank you. The next question is from Mark Mihaljevic with BMO Capital Markets. Please go ahead.

Mark Mihaljevic - BMO Capital Markets

Hi, I’m going to receive it, thanks for taking my question. So, most of mine have been answered. A quick one, you are looking to get into some higher grades at La Negra, can you give some guidance on that so when do you think you will be able to get there and how high do you think you can get?

Lenic Rodriguez

Well, it’s not a real guidance. I will tell you that the higher grade silver areas and the (inaudible) from the 2400 level down, okay, its higher grade and then the smaller (inaudible) that they are so significant that we are buying this raise boring machine that’s close to $4 million of investment for us. We look at it very carefully, it’s going to offer help with development with the mine that keeps on growing. So that’s something that we will be able to achieve in early 2014 as soon as machine is delivered.

Mark Mihaljevic - BMO Capital Markets

Okay. Thanks. And can you give a sense of what your current capital spend at Shafter is with the decline – the decline suspended now?

Lenic Rodriguez

No, we don’t have that number handy at this point in time.

Mark Mihaljevic - BMO Capital Markets

Okay. That’s all. Thank you.

Operator

Thank you. The next question is from Christos with Stonecap Securities. Please go ahead.

Christos Doulis - Stonecap Securities

Hi, Lenic. Some more quick questions here, just -- you talked about having $13ish million of development left to go at Shafter or CapEx left to go. As you noticed that $23.1 million spent to-date, so I’m just curious here, do you have a mine development platform budget as well, I mean or there, I am assuming a large portion of that $23.1 million is capitalized operating cost. Do you have an estimate for what kind of magnitude, additional capital operating cost you might capitalize by year end?

Lenic Rodriguez

Well, I have always said but we don’t believe that we have answered to that fair question, would you please call back later on, so I can give you the numbers for you.

Christos Doulis - Stonecap Securities

Okay.

Lenic Rodriguez

We have about $13 million reduction in capital expenditures for Shafter and the numbers from the -- the rest of the numbers we will have to dig them up for you.

Christos Doulis - Stonecap Securities

Okay. So suffice to say that although its called $13 million left to spend for PP&E, there might be a fair chunk of development capital spent for mine development in the remainder of the year, is that an accurate statement?

Lenic Rodriguez

Well, we hired some contractors to help us with the mine development and these were restrictive to chamber. So, yes, I don’t have the number with me. But, we are using that from mine development and that’s part of the first question.

Christos Doulis - Stonecap Securities

Okay. And clearly greater La Negra down a little bit to 60 from 70, expected to pick back up, any kind of forward-looking guidance for, I mean, I expected to get back to north of 70 in 2014. But, I’m just curious if you have any thoughts on where it might kind of before the second half of the year?

Lenic Rodriguez

Yes. It will start coming from – those are higher grades, there is some specific volumes that we are targeting and recently we have started only – slight increasing in grades. So we are – we are going back already. Although its not the factor.

Christos Doulis - Stonecap Securities

You think the grade might get back to the 70 gram level in this half?

Lenic Rodriguez

In this half, no, but in early 2014.

Christos Doulis - Stonecap Securities

Okay. And finally, now you have Shafter operating for a while, any commentary on your effective recovery that you have been experiencing to-date there, I know you are going to continue to optimize and improve them and as you said, to-date what kind of experience you have been having on the recovery side?

Lenic Rodriguez

Well, the recovery – calculation of recovery is a product three different numbers. And those numbers value depending on the – and while you are on the circuit, so in some areas we will have – they are the numbers, we need equipment to be able to increase those recoveries and that equipment is being delivered in the third quarter of this year. But currently, we have around 40 something percent in the covers.

Christos Doulis - Stonecap Securities

Okay. Any commentary on the grade, you have been able to deliver on La Negra and Shafter to-date?

Lenic Rodriguez

Well, the grade has been improving as we go deeper in the mines. Today, I think we are about 4 to 5 ounces per ton.

Christos Doulis - Stonecap Securities

Thank you very much Lenic.

Lenic Rodriguez

Welcome, Chris.

Operator

Thank you. (Operator Instructions) And the next question is a follow-up question from (Danny Dean). Your line is open. Please go ahead.

Unidentified Analyst

Yes. Thank you. If I can just preface my question, I have been a loyal shareholder in the company for over three years and have weathered like others have weathered through a lot of ups and downs and challenges along the way. So, I guess that probably reflects where I’m coming from in terms of some of my frustration. But, at the end of the day, I’m not trading this company. I’m looking at this as a investment for my retirement and so its quite disconcerting when actually the share price sitting where its at especially with the – place earlier this year that was partly intended to attract interest from the company and strengthen the share price.

So, as I said, my comment is probably frustration and what exactly is going on from the standpoint of restoring confidence in the company because I continue to hear interviews on BBN and elsewhere where some heavy hitters are saying, we have some concerns about the – what’s going on at the two mines. And now there seems to be I think a perception that there is a problem at Houston and that is not under control.

So what’s your read on how you are being perceived by the investment community and then what are you planning to do to restore confidence in the company?

Lenic Rodriguez

Well, Danny, I have frustration, I have been a loyal shareholder in this company since I -- (inaudible) mine to the company over six years. I’m the largest private shareholder in the company. I got to (inaudible) positions. So, I’m in your team.

Unfortunately, we cannot control everything that happens. And the way that we are planning on covering the trust from the market really, the way that we have done in the past proving that we can really perform and put this mine into operation, we have had a bad hiccup in the past or a number of technical resources that have been while the process is being sold. And those -- that production will be one that should regain some of the confidence in the company and two, once this transaction closes you will see $50 million in proceeds coming into organic.

Operator

Thank you. The next question is also a follow-up question from Mr. John Waters. Your line is now open. Please go ahead.

John Waters - Big Bend Gazette

Lenic in the MD&A, there is a reference to some contract work being suspended to bring the mine down another 1500 feet. Can you give us an update on when that may resume and has there been any other suspension of work at Shafter?

Lenic Rodriguez

Excuse me, can you repeat the question, I was being distracted a little bit.

John Waters - Big Bend Gazette

Yes. In the MD&A there is a reference to some contract labor that was schedule to bring the mine down another 1500 feet being suspended, can you give us an update on when they will be resuming and has there been any other suspension of work at Shafter?

Lenic Rodriguez

That’s the only suspension that we have had. And we will schedule to start that work in early September.

John Waters - Big Bend Gazette

Okay. Thank you.

Operator

Thank you. The next question is from Frank Vogel with Baader Bank. Please go ahead.

Frank Vogel - Baader Bank

Hi, Lenic. Its Frank speaking. Listen, regarding the financing with Red Kite, is there any plan B, if that fails probably anytime of equity or what is the plan here?

Lenic Rodriguez

Well, look we have a number offers from different institutions that want to participate and the first Aurcana, its goal and its nice. So, I do not expect these to fail. But, we have some options available to us.

Frank Vogel - Baader Bank

Okay. Even equity?

Lenic Rodriguez

No. Equities – one of the options are – of course, but we feel that we are going to have do it.

Frank Vogel - Baader Bank

Okay. Can you tell us anything about conditions regarding this loan or is it not public yet?

Lenic Rodriguez

It’s not public yet. That is much better than what the market is expecting.

Frank Vogel - Baader Bank

Okay.

Lenic Rodriguez

Okay.

Frank Vogel - Baader Bank

Good. Thank you.

Operator

Thank you. (Operator Instructions) There are no further questions registered at this time. However, the company would like to remind everyone that unanswered question should be addressed by email or telephone at the contact information provided. This concludes today’s conference call. Please disconnect your lines at this time. We thank you for your participation.

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