dated October 12th

Analyst : Paolo Lostritto

HIGHLIGHTS

Record Q3 production misses our expectations on lower grades.
SGR reported Q3 production of 27.1k oz at a grade of 5.21 g/t. This
compares to our estimate of 30.2k oz at a grade of 5.75 g/t. Based on
lower grade we have marginally increased our Q3 cost estimates from
US$794/oz to US$803/oz. Lower grade appears to be a result of a delay
in reaching higher grade stoping blocks. We believe grades are set to
return to the 5.5-6.0 g/t level this quarter.

Now that the majority of the stockpile has been used, slower
mining rates may persist. In Q3 SGR was able to use their excess mill
capacity to process stockpiles generated during the Q2 mill outage.
Mining rates were only 1,600 tons-per-day and we anticipate lower rates
in the near-term as the focus remains on development. We now model
1,600 tons-per-day in Q4, 1,800 tons-per-day in 2013 and 2014, with the
2,400 ton-per-day mark not being reached until 2015. This may be on
the conservative side as underground infrastructure and development
work could bear fruit sooner than our estimated timeline.

2012 production guidance maintained; we model just below
guidance on account of the lower throughput. SGR continues to
guide for 95-105k oz in 2012; however, we currently model 89.5k oz at
US$825/oz (was 99.5k oz at US$794/oz). While management is guiding
for higher grades in Q4, we have taken a more conservative stance at
this time. Given the focus on development in 2013, we have trimmed our
2013 production estimates to 98.2k oz at US$670/oz (was 121.1k oz at
US$664/oz). Management is currently working on next year’s budget so
we will adjust our model as we get additional data.

We reiterate our Outperform rating; trimming target to $2.50 (was
$2.85) to reflect our curtailed view of production ramp up in 2013.
Based on spot inputs, San Gold shares are trading at a 57% discount to
our estimated 5% NAVPS of Cdn$2.30 (Exhibit 8). Catalysts include: 1)
improved operating costs H2 2012 and 2) ongoing drill results.