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Executives

Tim Friesen - IR

Gestur Kristjansson - CEO

Mandeep Rai - CFO

Michael Michaud - VP, Exploration

Analyst

San Gold Corporation (OTCQX:SGRCF) Q4 2013 Earnings Conference Call March 21, 2014 11:00 AM ET

Operator

Good morning. My name is Wayne, and I will be your conference operator today. At this time, I would like to welcome everyone to San Gold Corporation's 2013 Annual and Fourth Quarter Financial and Operating Results Conference Call. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) Mr. Tim Friesen, Investor Relations, you may begin your conference.

Tim Friesen

Thank you, operator. Welcome to San Gold's 2013 results conference call. Today's presenters are Gestur Kristjansson, Chief Executive Officer; Mandeep Rai, CFO; and Michael Michaud, Vice President, Exploration.

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 include all statements that are not 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 March 20, 2014.

With that, I'd like to hand the call over to San Gold's CEO Gestur Kristjansson.

Gestur Kristjansson

Thanks Tim. Good morning, everyone, and welcome to San Gold's 2013 annual and fourth-quarter conference call. As you may be aware I assumed the role of acting CEO earlier this week. I worked closely with Ian for many years in San Gold. He has contributed a great deal to this organization and his presence will be missed.

Having said that, we also have a very deep and good team; my senses have embraced a sense of urgency in our review of operations and I am honored and grateful to be part of it. The board has formed a technical committee and has a consultant on-site who is working closely with management as we plan our next move. As a win (Ph) counter, I bring a slightly different lens to the process. I also want to recognize our shareholders, debenture holders and other stakeholders and their support of the project.

We recently added liquidity on a very seriously and decisively looking at our current mandate to move this Corporation towards profitability. Over the past number of years we have accomplished a lot. We have identified some of Manitoba’s largest gold deposits and we have constructed extensive binding of this structure during a difficult mining market. This past year we made significant strides towards improving your cost structure and completed key development objectives towards integrating our mines significantly reducing our burn rate, while continuing to improve our overall capacity for mining and processing ore.

We have also made excellent progress on the continuing development of an exploration model that is predictive of gold mineralization. This plays into one of our key strategic advantages of having a dominant land position in our Greenstone Belt. We have already announced a number of our very high-grade result based on this work in the zones adjacent to our 26 level infrastructure. However, we did not achieve free cash flows in 2013. This was due in part to realized gold prices that were 15% lower than the previous year, but was also because of grades were 15% below our target.

My task is now to stand on the shoulders of those before and make this company profitable. With the help of the boards technical committee we are currently undertaking a detailed analysis of our Rice Lake Corporations to determine the most suitable business gains for moving forward. As I said before we made excellent progress over the past year and in light of recent improvements in the gold price and our very good leverage to that, I’m confident that our goals are within reach.

Overall, we reduced our capital investment last year by about $21 million or 27% compared to that that was originally planned. We started the year with the capital development target of $59 million. We spend proximately 47.9 representing a 19% reduction to the original plan. For full-year budget for planned property and equipment was $19 million. We spend closer to $9 million, about a 50% reduction.

We are also very encouraged by the regional structural analysis carried out over the last year. In addition to the very high-rate results obtained near 26 level, the analysis has provided us with comprehensive data that indicates a concentration of gold mineralization tends to be high as to our known gold-bearing shear zones, cross cut [indiscernible] rock structure. I understand, as to me that we now have identified high potential targets within close proximity to existing infrastructure. Based on the past history of this mine these targets could very well provide us multiple new ore zones in the near term with minimal new investment in drilling and development.

Currently there are three underground drilling stations in operation focused on these underground targets with another drill being added next week. This gives us the concrete data to plan our attack. Other earlier stage exploration activities have been cut back significantly. Surface drilling has been suspended. We also successfully renegotiated a number of agreements in 2013 with previous joint-venture partners, including Cougar Minerals, Wildcat Exploration and Canadian Arrow Mines. Combined these decisions have significantly reduced our cash commitments related to the exploration while keeping our dominant position and the upside potential of these agreements intact.

During the year the company recognized a non-cash impairment charge of $83.1 million. Write-downs are never are welcome events. We are not alone in this pain and many of our peers has have to do the same the precipitating event has ultimately the market capitalization that force a scrutiny on the management estimates inherence in the carrying values. The changes in gold price assumptions had precipitated this impairment; emphasize the difficulties based by our sector over the past couple of years. Also, it’s important to note that this does not impact our core goal of moving towards cash positive operations. The company did generate $2 million cash flow from the operations in 2013 with the cash contribution from operations of $5.6 million before changes in non-cash working capital.

Bottom line, the company recognized the total and comprehensive loss of $111.3 million for the year or $28.2 million before the impairment charge. Cash cost did decrease in the -- did increase in the year to $947 per ounce so as a result of the reduced number of ounces which is primarily a function of the aforementioned reduced grade and underscores the need to revisit the business case for this project to ensure operating costs are better match with production results. A lot has made at the gold price but ultimately the sensitivity to grade as a more significant metric.

To the San we have formed the technical committee as I mentioned to evaluate all aspects of the Rice Lake operations. I reemphasize that we have a strong operations team in place and production is continuing as previously planned. Any changes to the company’s production, cash cost and capital expenditure guidance resulting from the review will be disclosed when they are confirmed. The intent of this review is to build on the efficiencies achieved in 2013 and construct a business case to ensure a clear path to profitability.

With that I’ll ask Mandeep Rai, who has been our Controller for the past three years and our new acting CFO to provide a review of the financial results. Mandeep?

Mandeep Rai

Thanks Gestur. Good morning everyone. I’ll start by highlighting a couple of points. First, as Gestur mentioned, the company recognize the non-cash impairment charge of $83.1 million at the end of the year, resulting in a net loss of $111.3 million for the year. We have reduced our capital spend on minimal properties and property, plant and equipment this year by $20.9 million compared to 2012 and we are planning additional reductions to our capital spend in 2014.

The company generated $5.6 million in cash flow from operations before changes in non-cash working capital in part due to the efficiency initiatives implemented at the start of the second quarter. Combined these initiatives have served to conserve our cash position and contribute to our bottom line. The company completed a $50 million convertible debenture financing in March of 2013 and the private placement for proceeds of $4 million. The company also received $2.7 million in capital equipment lease and term loan financing and made the first $2 million installment of our convertible debenture interest payment. The company ended the year with $8.9 million in cash and short term investments. Subsequent to year end, the company closed the first $23.75 million tranche of a $65 million financing with Jet Capital. This placement strengthens the company’s balance sheet and provides financial flexibility to advance capital projects.

I’ll now discuss the balance sheet, the income statements and the cash flow statement for the year. All amounts presented here are in Canadian dollars. Starting with the balance sheet, we ended the year with churn assets of $30.1 million and working capital surplus of $17.3 million. During the year the company invested $48 million on capital developments of mineral properties and $9 million in property plant and equipment. Current liabilities have been reduced by approximately $13 million since December while long term liabilities rose by $40.2 million from the unsecured debenture financing undertaken during the first quarter of 2013. During the year the company completed its flow through exploration commitment and expects exploration activities to decrease significantly in subsequent years.

Moving on to the income statement, San Gold reported revenues of $106.3 million on the sale of 75,233 ounces at an average realized price per ounce of $1,412 per ounce. This marks the 25% decrease over revenues of $142.1 million recognized in 2012. The decrease in revenue as a result of 50% decrease in the average realized gold price and a 12% decrease in a number of ounces sold compared to the prior year. During the year the company recognized the non-cash impairment charge of $83.1 million resulting in a net loss of $111.3 million for the year. Excluding the impairment, the net loss was $28.2 million for the year. The reduction in the carrying value of the company’s assets reflects changes in market conditions and lower gold prices.

Loss from operations for the year was $83.2 million representing a significant reduction relative to income from operations of $17.9 million in the same period of last year. Excluding the non-cash impairment charge of $83.1 million, operating loss was $0.1 million for the year. The changes in the income resulted primarily from reductions in gold revenue, increased interest expense associated with the convertible debentures and the recognition of the non-cash impairment charge. These changes were partially offset by a $13.2 million decrease in non-cash depletion and amortization, a $3.8 million decrease in share-based compensation expense, and a $5.0 million decrease in the equity loss from an associate company. Overall, the Company achieved its full year operating cost guidance of between $900 and $950 per ounce of gold sold. Cash cost around for $947 per ounce of gold sold compared with cash cost of $886 in the prior year.

The company did manage to reduce overall cash operating expenditures by $4.7 million during the year, however this was offset by the lower number of gold ounces sold in 2013. The company recognized $26.6 million in depletion expense, a 36% decrease compared to 41.2 million recognized in 2012. The decrease resulted primarily from the decrease in ounces of gold sold and a lower per ounce depletion charge as a result of reduced mine development capital expenditures and increased reserve and resource case used in calculating the expense. The per ounce depletion charge is expected to decrease further given the reduced carrying value of mineral properties and the anticipated reductions to capital expenditures and expected upgrades to the company’s resources and reserves to higher confident categories.

General and administrative expenses were $11.4 million compared with $13.6 million in 2012. The decrease was primarily the result of a reduction in senior management positions and associated travel requirements as well as a reduction in share-based compensation expense as a result of no stock options being granted in 2013. After exploration, general and administrative and other net expenses including the recognition of the non-cash impairment charge, company recognized a net loss of $111.3 million for the year. Moving on to the cash flow statement. Cash flow generated by operating activities before changes in non-cash working capital was $5.6 million or $1.06 per share compared with a contribution of $42.1 million or $0.13 per share in 2012.

After changes in non-cash working capital, operating activities added $2 million or $0.06 per share in 2013 compared with a contribution of $51.1 million or $15.07 per share in 2012. That concludes my review of the financial statements, if anyone has any further questions I will be happy to answer them during the Q&A session. With that I will turn the call back over to Gestur. Gestur.

Gestur Kristjansson

Thanks, Mandeep. I will now ask Michael Michaud, San Gold’s Vice President of Exploration to provide a brief operations update and then overview of our exploration activities.

Michael Michaud

Thanks Gestur. First, I want to comment on employees and contractors for their continued commitment to safe production. We produced 75,218 ounces of gold in 2013 which is consistent with our 2013 guidance at an average grade of 4.32 grams per ton gold. The company mined approximately 629000 tons of ore at a record average mine rate of 1724 tons per day. We milled approximately 641,000 tons of ore again at a record average milling rate of 1758 tons per day. Mill recovery was 93%. Mining operations are continuing in the Rice Lake, Hinge and 007 mines and we continue to make good progress on extending the Rice Lake mine infrastructure into the Hinge and 007 deposits from 16 and 26 levels. Once this important development is completed, this will greatly improve our mining efficiency with reduced surface rev access at 007 and the Hinge mine to utilizing shaft access at Rice Lake. Additionally, this 16 and 26 level development will provide us much needed drilling platforms for exploration drilling and provide detailed information in a timely manner for mine metal section at mine. On 16 level, we have already advanced out under the extension of the Hinge mine and drilling is progressing. We are continuing to advance the 16 level eastwards towards a 007 deposit.

On 26 level, we are currently mining at the newly discovered 7-10 and 7-11 zones. In terms of exploration, the company completed approximately 28000 meters of drilling in 2013 with a combination of surface and underground drill rigs. The drilling was designed to better define the Rice Lake, 007, Hinge mines as you discover new zones having to incrementally add feet to Rice Lake mill in the near term. Both objectives were achieved as mineral reserves increased by approximately 60% year-over-year and exploration drilling discovered several new zones along the Shoreline Basalt and in of the Rice Lake mine. As part of the company’s exploration efforts, a comprehensive structural analysis was completed to refine the geological model.

Surface drilling resulted in the discovery of four new zones of full mineralization along with Shoreline Basalt most notably drilled ore JH 1306 returns 7 grams over 10.1 meters within 61, 63 zone and AB 1301 returned 12.4 grams per ton over a 4.3 meters in the newly discovered scale zone. Drilling is planned to explore these new areas from underground locations. Meanwhile underground exploration resulted in the discovery of the 7-10 and 1-11 zones at the eastern extent of the gold mineralization on 26 level at the Rice Lake mine. Of significance this gold mineralization occurs within the previous unknown basic unit that is similar to immediate hanging wall of the original San Antonio mining unit as already priced over 1.5 million ounces of gold. Initial results were announced on November 4th and include drill hole 614-13-01 that returned 45.3 grams per ton over 6.1 meters and drill hole 614-13-09, that returned 14.7 grams per ton gold over 4.1 meters.

Continued drilling of the 710 and 711 zones have identified an area of gold mineralization that carry over strike length now in access of 400 meters. This is very significant for several reasons. First, this new zone remains open so it has the potential to grow. Second, the zone is adjacent to the current working and is presently being integrated into the short term mine land and third it has opened up an area where additional basic units may exist by house of potentials of most additional gold mineralization.

Plan for 2014 includes continued definition drilling at the Hinge mine particularly the 008 zone and L10 zones as well as the newly discovered 6163 zone all of which will be completed from the recently developed 16 level of the Rice lake mine. In addition, drilling from the 26 level of the Rice lake mine will remain a priority to better define the 710, 711 zones and to comfort the large inferred mineral resource to measured and indicated resources and subsequently to mineral resources.

Now that our flow-through exploration commitments have been completed the company has deferred surface exploration program that includes the exploration of it. Gestur?

Gestur Kristjansson

Thanks a log Mike. We’re currently at the tail end of the development project that was initiated in 2010 after making some of the most significant gold discoveries in Manitoba. At times, this process has been difficult and it always seems to take twice as long and cost twice as much.

The transformation that has taken place for our Rice Lake mining complex is truly impressive and I believe we are now nearing the tipping point where we’ll finally be able to stand on our own. I’m honored by the opportunity to lead our company at this critical time and then eager to continue working closely with the board and management on this next phase in the evaluation of the Rice Lake mining complex.

With that I thank you for your time and it concludes our formal presentation and I turn it over to the operator if there is any question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) There are no questions registered at this time. I would like to return the meeting to Mr. Friesen.

Tim Friesen

Thank you, operator. I’d like to once again thank everyone for joining us today to review these results. Thanks, and have a great day.

Operator

Thank you. That concludes today’s conference call. For more information, please visit San Gold's website at www.sangold.ca or contact Tim Friesen, Investor Relations, 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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