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Executives

Tim Friesen – Investor Relations

Gestur Kristjansson – Chief Executive Officer

Mandeep Rai – Chief Financial Officer

Michael Michaud – Vice President-Exploration

Analysts

Derek Macpherson – M Partners, Inc.

Ryan Hanley – Mackie Research Capital Corp.

San Gold Corporation (OTCQX:SGRCF) Q1 2014 Earnings Conference Call May 13, 2014 11:00 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 2014 First Quarter Financial and Operating Results Conference Call. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Tim Friesen, you may begin your conference.

Tim Friesen

Thank you, operator. Welcome to San Gold’s 2014 first quarter results conference call. Today’s presenters are Gestur Kristjansson, Chief Executive Officer; Mandeep Rai, CFO; 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 May 12, 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 2014 first quarter conference call. Recently we’ve been trading at around $0.16. I guess depending on your perspective that’s either disappointment or an opportunity. For those that recognize the size and nature of the deposit and the tools that we have in place to harvest these reserves it’s an opportunity.

Many of the challenges we face today can be traced back to 2010, when we completed an equity financing at around $4 to raise $80 million. At the time gold equity markets were buoyant and we and many others were focused mainly on increases to top line revenue. This puts the focus on increasing our gold production capacity and increasing tons with less emphasis on margin and return.

We used our investment dollars to invest heavily in mobile equipments, improve services such as power supply and air compression. We rapidly expanded our underground infrastructure. We build top quality maintenance facilities and developed the tools and the people required to maximize the mine’s annual output.

I do not believe our share price reflects the current value of our asset. Instead, I think it reflects our inability since 2010, to minus deposit profitability to end each quarter, each year with more money than we started with. I believe we’re finally putting the pieces together as we speak to correct this. I know we’ve been down this road before, but the level and depth of change underway today have a completely different scale than at any point in our company’s short history.

A large part of this change has come from the drive and determination of Greg Gibson. Mr. Gibson joined our Board last fall and he’s now leading our Board’s technical review committee. Mr. Gibson has an extensive network across our industry and he’s brought in many people to look at our operations with fresh eyes. For the past six weeks, we have put everything on the table. We’ve reviewed the mine plan in detail, we’ve reviewed our milling, we’ve reviewed the suitability of our fleet and our maintenance team to the deposit that we have in front of us. The costs are open for scrutiny. We’ve let no stone unturned.

We expect the result of this review to result in somewhat less tons – somewhat less ounces, but at significantly less costs. When we completed the $80 million equity financing there was significant pressure on the company to increase production from approximately 40,000 ounces upwards to 85,000 ounces with goals above that. We used the money to tool up in anticipation of higher production levels and we have worked hard ever since to try and achieve those goals.

While we have not formally revised our guidance, it’s become abundantly clear that a large portion of our cash burn has been consistently tied to pursuing the last 15% of our production. Pushing the mine to feed a hungry mill has proved extremely expensive, both in terms of cash costs and in terms of capital investment in underground development and mobile equipment among other things.

We have already eliminated our most capital intensive working areas from the mine plan. We’re reducing the size of our working areas and expect to introduce a small amount of conventional mining into the mix later this year. We will be somewhat de-emphasizing mechanized cut and fill and we’ll be moving to higher portion of long-hole with some shrinkage.

We still have older mine in previously developed regions at the bottom of the Hinge and 007 ramps. We’ll continue to mine the regions that have already been developed. However, these ramps have been pushed hard for the past few years and need some time for drilling and planning before making additional capital investment.

We expect grade will improve in latter part of the years. We shift focus to the higher grades 710, 711 region and began adding incremental ounces from select shrinkage and panel stopes in various other regions. 710 and 711 are in our second quarter plan.

We made significant changes in our management upside. We’ve brought in Mike Kernick as our new Mine General Manager and Todd Fayram as our new Mill Manager. Mike Kernick has 30 years of mining experience. He has worked as a general mine manager in gold and nickel mines in Canada. Most recently he’s Manager of Kerr Mines and General Manager of Northern Gold, Auriga Gold and Mine Superintendent at Lake Shore Gold. Mr. Kernick is in the process of transitioning our mining equipment to function within smaller working areas, this will reduce the tonnage be moved as we develop access to the new working areas, will also reduce dilution and improve our grade.

Todd Fayram is a metallurgical engineer with 25 years of mining experience. Mr. Fayram has extensive experience in designing and improving milling processes and has carried out detailed assessments of Lake Shore, mineral rich Montana Tunnels, Elkhorn Goldfields, Minefinders, American Bonanza and Battle Mountain among others. Mr. Fayram has taken a close look at our milling operations and he is confident we have an opportunity to improve recoveries with a small amount of low cost changes to some of our milling process.

We’re also expecting to improve our cash position somewhat by monetizing excess and unused warehouse inventory accumulated over the past few years of high growth. On a similar note, we’re reviewing ways to improve our purchasing processes and supply chain to reduce inventory levels going forward that will allow us to better manage our working capital.

I’m heartened to see solutions are at hand. The decisions we are making are both difficult and necessary for us as we move forward as a profitable producer generating free cash flows in the current gold price environment.

At this point, I’d like to recognize our shareholders and our debt holders. This project has attracted significant investment over the years and our investors need to hear that we have a very deep team at San Gold and we’ve embraced a companywide sense of urgency and moving towards profitability. I also want to thank the employees who are embracing the changes with a positive attitude.

I’ll now take a moment to provide a summary of our quarterly production metrics. The Company produced 12,083 ounces of gold during the quarter. The Company milled 119,996 tons of ore at an average grade of 3.7 grams per ton of ore. The Company achieved a quarterly mill throughput at a rate of 1,333 tons per day mined at a quarterly rate of approximately 1,376 tons per day.

During the quarter, the Company was in the process of transitioning from mechanical cut and fill to long-hole mining as the Company’s primary mining method and the implementation of new grade control initiatives. So it’s partially responsible for deduction in tons mined and milled, compared to the fourth quarter of 2013. Cash cost per ounce increased to $1,226 per ounce of gold sold, compared with cash cost of $1,113 in the same period of last year. Cash cost per ton were reduced slightly to $106 compared to the $110 in the same period of last year.

Overall, we spent $11.9 million on capital investment in the first quarter, comparing to $18.9 million last year, marking 37% reduction as a result of some of the efficiency measures we’ve implemented. Of this amount, spending on property, plant, and equipment was reduced to $650,000 during the first quarter, compared to $3.3 million last year. The remaining $11.3 million was spent on development infrastructure, including completion of a ventilation raise from 16 Level into the Hinge district.

Now that the vent raise is complete and capital development on the Hinge and 007 ramps have been suspended, we expect capital cost to be significantly reduced through the remainder of the year.

We are continuing to pursue targets identified as a result of the regional structure analysis carried out over the past year. This analysis confirmed with our recent drilling indicates that the gold mineralization mine from the historic SAM unit may well be replicated within the recently discovered 710 and 711 zones located only 100 meters north of the SAM unit and the Rice Lake mine infrastructure. Given this new potential, drilling and development work is being focused in this area on the 26 Level of the mine.

Since our last conference call, we’ve added a fourth drill underground to better define this gold horizon in support of our mine planning efforts and also to test additional targets having some more potential. By increasing the underground drilling rate and reducing our mining rate, we will increase the amount of detailed mine planning available ahead of the mining operations. This will allow us to be more selective in the regions we go into and at the methods we use in working area, decisions which are critical for further reducing our overall operating cost structure.

I’ll now ask Mandeep Rai, our CFO, to provide a review of the financial results, Mandeep?

Mandeep Rai

Thanks Gestur. Good morning, everyone. I would like to start by highlighting that we have reduced exploration expenses by $4.6 million, and general and administrative expenses by $2.2 million compared to the prior year period. Additionally, we have reduced our capital spend on mineral properties and property plant and equipment by $7 million compared to the first quarter of 2013, and we’re planning additional reductions to our capital spend for the remainder of 2014.

Overall, the cost saving initiatives started in 2013, have started to take form and the Company anticipates further reduction in cost going forward. During the quarter Company closed the $23.8 million senior secured debt financing, this provides the Company with much improved liquidity.

I’ll now review the balance sheet income statements and payment of cash flows for the quarter, all amounts presented here are in Canadian dollars. Starting with the balance sheet, we ended the quarter with current assets of $34.5 million and a working capital surplus of $24.3 million.

The Company ended the quarter with $16.1 million in cash and short-term investments. As Gestur mentioned already the Company invested $11.3 million on the development of mineral properties and $0.6 million in property plant and equipment.

Current liabilities of $10.2 million were reduced slightly from $12.9 million while long-term liabilities rose by $19.6 million. The increase in long-term liabilities was due to the secured debenture financing under taken during the first quarter of the year.

Moving on to the income statements. Sangold reported revenues of $14.9 million compared with revenues of $24.3 million in the first quarter of 2013. The Company sold 10,375 ounces of gold, compared with 15,353 ounces of gold in the prior year period. The Company realized price of $1,440 per ounce of gold sold compared to $1,584 in same quarter of the prior year.

The decrease in gold revenue in the first quarter is the result of 32% decrease in the number of ounces sold, and a 9% decrease in the average realized gold price. Loss from operations was $2.8 million, compared to a loss from operations of $0.04 million last year. The increase in loss from operations was primarily due to reduced gold production and gold sales in the first quarter. The increase in loss from operations was partially offset by $2.5 million decrease in non-cash depletion expense.

General and administrative expenses were $3.2 million compared with $5.4 million in the first quarter of 2013. The decrease in general and administrative expenses is due to $0.6 million reduction in share-based compensation expense and due to the fact that the Company had incurred $2.5 million in corporate reorganization cost in the first quarter of 2013. There have also been reductions in senior management headcount and salaries compared to the prior year period.

Exploration expenses have decreased by $4.6 million as the Company did not undertake any surface exploration during the quarter. After exploration G&A and other net expenses total and comprehensive loss was $7.7 million or $0.02 per share compared with the total and comprehensive loss of $9.7 million or $0.03 per share in the first quarter of 2013.

Moving on to the statement of cash flows, cash flows used by operating activities before changes in non-cash working capital was $5.6 million or $0.015 per share compared with the use of $2.2 million or $0.07 per share in 2013.

After changes in non-cash working capital, operating activities use $5.2 million or $1.04 per share compared with the use of $6.5 million or $1.09 per share in the same quarter of last year.

Capital spending in the first quarter was focused on improving key infrastructure. Development activities continue to focus on developing access to new areas for ore production and exploration purposes. The Company is continuing its critical review of all planned capital development spending for the year and may elect or defer to cancel previously scheduled projects.

That concludes my review of the financial statements, if anyone has any further questions, I would 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 Mike Michaud, San Gold’s Vice President of Exploration to provide an overview of our exploration activities. Mike?

Michael Michaud

Thanks Gestur. During the first quarter of 2014, the Company completed approximately 13,700 meters of drilling from underground locations. The Company has deferred all surface drilling now that our flow through exploration commitments have been completed.

However, even though that total amount of drilling completed in Q1 is only a fraction of drilling completed a year ago, the current drilling is conservatively more focused to explore for and delineate gold mineralization nearby any infrastructure that can be developed in the relative short-term. This includes drilling on the recently established 16 level development to test the down-dip extension of the Hinge zone, and on the 26th level of Rice Lake mine where drilling is further exploring the 710 and 711 zones that were discovered last year in the immediate hanging wall of the Rice Lake mine.

As Gestur mentioned 2014 will mark another significant step forward in the evolution of the Rice Lake complex as the Company establishes operational access on 16 level and completes the integration of the Rice Lake and Hinge 007 mines. This development has provided definition drilling access to define the down-dip extension of the Hinge mine particularly adjacent L10 and 08 zones. But it’s also supporting the continued exploration of nearby targets discovered last year including the 6163 and L13 extension zones.

We are pleased to report that the results from this initial drilling are encouraging and the information is currently being used to update the mineral resources in short-term mine plans. In the latter part of the year, it is expected that the 16 level development will be completed beneath the 007 zone further to the east and allow drilling to commence in this area.

At the Rice Lake mine, drilling from 26 level continues to return excellent results from the 710, 711 zones. These zones were discovered last year when the Company commenced an underground exploration drilling program to test for gold mineralization in the immediate hanging wall of the SAM unit where limited drilling in the past has returned a number of significant isolated intercepts. Initial drilling returned robust grade including 45 grams per ton gold over six meters and 14.7 grams per ton gold for 4.1 meters.

Continued drilling has now extended to some of gold mineralization core strength by in excess of 400 meters and down-dip up to 300 meters. Of significance 710 and 711 zones are composed of quartz veins that are similar to the 16 and 38 type veins of the adjacent Rice Lake mine and may represent a parallel system of gold mineralization. This is very significant for several reasons.

First, this new zone remains open long straight to the northeast and up in down-dip. So it has the potential to grow. Second, the zone is located in the immediate hanging wall of the Rice Lake mine from 24 to 30 level and therefore can be readily integrated into the short-term mine plan. And third this discovery indicates a strong potential future exploration to identify additional, sub-parallel, competent mafic units in the hanging wall and footwall regions of the gold mineralization. We’re only just starting to understand significance of this new mine horizon and the potential positive impact on the near future and longer-term impact on the Rice Lake mine. We’re continuing our exploration development work in this exciting area and expect to release positive results going forward. That concludes the exploration summary. Gestur?

Gestur Kristjansson

Thanks Mike. I guess my message today is really simple. We believe strongly in the potential of the Rice Lake project. We also understand that there are problems and we’ve made extensive changes over the past six weeks to get operations back on track. We put in new mine plan in place that would likely result in few ounces.

Those incremental ounces, however are most expensive ounces and their removal will significantly improve our financial performance going forward. The shift loss will take pressure off our operation and reduce our cash burn immediately en route to positive cash flows. We believe the results of our performance over the past few quarters are already factored into share price and we’re confident that the improvements we’re making will be viewed positively as we start to deliver on this plan.

In summary, the asset is built, the gold is there, and we’re working through our growing plans. That concludes our formal presentation. Thank you for your attention and we’ll do our best, if there is any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question comes from the line of Derek Macpherson from M Partners. Please go ahead.

Derek Macpherson – M Partners, Inc.

Good morning guys.

Gestur Kristjansson

Hi, Dereck.

Derek Macpherson – M Partners, Inc.

So, just quickly talking about bringing the 710 and 711 zones into the mine plan in Q2, can you remind us again what you expect sort of the head grade fall quite from there and then what percentage of the production that’s going to be?

Gestur Kristjansson

Sure. So, I think 0.25 to 0.35. Mike maybe you can add some.

Michael Michaud

This is a zone that we’ve drilled off and we’ve benched across a couple of times. The first bench did return approximately 0.25 ounces per tonne across the bench now that was capped at one ounce, uncapped was about just over 0.3 ounces per tonne. So it was a very significant zone. We are and have established a better drilling platform and we’re drilling currently above the 710 zone and the results have been very good certainly as extended the zone. And like I said, it’s very significant because it’s very close to 26 level development.

And it’s a zone that now we’ve delineated for over 400 meters. So it’s really a zone that is going to be quite to have a positive impact going forward here. And in the second quarter, we’ve going to slowly be bringing this zone more into production.

Gestur Kristjansson

It’s in this parallel mafic structure what we’ve call the drilling Bissett unit and then the predictability of finding the mineralization of mafic zones. So we’ve strong evidence that those extend up to 24 and pretty good evident it goes to 16 and to 30. So it’s really – it’s a big part of our sort of medium to near-term plan.

Derek Macpherson – M Partners, Inc.

Okay, and then, just sort of what percentage I mean obviously, (indiscernible) energy developed, but what percentage do you expect sort – of the production profile do you expect going forward from there?

Gestur Kristjansson

We’re still working on that plan, but I would say it’s probably going to be close to at least in the next quarter maybe a 25% to 30% of total tonnage, ore production per gold production and probably ideally be about a third of gold production.

Derek Macpherson – M Partners, Inc.

Okay. Only with a higher grade it should make up a bigger portion of the gold produce rate?

Gestur Kristjansson

Absolutely.

Derek Macpherson – M Partners, Inc.

All right, that’s all for me guys, thanks.

Gestur Kristjansson

Thank you.

Operator

Thank you. (Operator Instructions) There are no further questions at this time, I would like to turn the call back over to you, Mr. Kristjansson.

Gestur Kristjansson

Thank you, very much.

Operator

I do apologize, yes, we do have a question, Ryan Hanley from Mackie Research. Please go ahead.

Ryan Hanley – Mackie Research Capital Corp.

Hey, good morning guys.

Gestur Kristjansson

Hi, Ryan.

Ryan Hanley – Mackie Research Capital Corp.

I just had a quick question for you. Given that you’ve got the ongoing review, do you have, I guess some more updated number in mind for what your sustaining capital would be on an ongoing annual basis?

Gestur Kristjansson

We are canceling in, this is sort of a caveat in and there is still a bit of work in process, I really kind of purposefully stepped away from guidance. But having said that I mean, our thumbnail right now is probably on the magnitude, just under $20 million, so it kind of gives an all-in at around sort of 1250 mark, so kind of $1 million of free cash after it’s all said and done, but, stay tuned on that but, I don’t really – we want to kind of be sure that we got it right before we go with guidance – before we get behind our guidance.

Ryan Hanley – Mackie Research Capital Corp.

Okay, perfect. And just the other follow-up, I had to that would be, some of your expansion stuff you had going on this year, I think there is some work on the tailing financial area, all that kind of stuff. Do you have a rough idea or – do you have a plan to spend on all of that?

Gestur Kristjansson

The tailings is probably is just under $2 million left to spend on the enhancement of tailings that’s kind of well in process. So that’s happening and should be completed in mid-summer. Other capital is really focused on 16 and 26 levels. So there is sort of our super highways to get at the extensions of Hinge and 007, and then get that well over to the shaft where we are trending you the guys in the next weeks, which will increase our haulage speed from about 800 feet per minute to 1,200 feet per minute. So that ore has been kind of get to surface and ultimately to the mill. Those are the main – the main focuses of our capital development.

And then the other one is comparing the fleet that we have, so we got 120 feet pieces of mobile equipment and it’s comparing those pieces to the mine method and the new plant. Are they the right pieces should we be rejigging that a little bit. But I think that’s more of a trade-off than a buy, I think we’ve got ample assets in fact probably access assets in that department. It’s more about just getting the ones that are the right ones for this job.

Ryan Hanley – Mackie Research Capital Corp.

Okay, so we have about $2 million for tailings and so what would all the rehab work on 60 and 26 of a tender look like as well as all the other one-time development. Thanks.

Gestur Kristjansson

I gave you an all in number there, maybe we can talk offline I don’t have super good…

Ryan Hanley – Mackie Research Capital Corp.

Yes, no that’s fine.

Gestur Kristjansson

Yes.

Ryan Hanley – Mackie Research Capital Corp.

Okay, I think that’s it for me. Thanks.

Gestur Kristjansson

Okay.

Operator

Thank you. And now I’ll turn the call back over to you Mr. Kristjansson.

Gestur Kristjansson

Well, thank you, very much operator. I would like once again to thank everyone for joining us today and we’re doing these results. Thanks very much and have a good day.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.

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