Sector Perform; Target: $3.50, up from $3.40

Light At The End Of The Tunnel

On May 13, San Gold provided its Q1/2011 results. Operating numbers had already been released on April 5, but we are re-stating them here along with financial results. Highlights include:

• production of 14,690 ozs Au at cash costs of $862/oz.;
• tonnes mined of 102,000 or 1,133 tpd;
• tonnes milled of 82,792 or 920 tpd;
• cost per tonne of $146 vs $175/tonne during 2010;
• head grade of 7.1 gpt Au vs 4.8 gpt au in Q4/2010. A drastic improvement of 48%;
• cash generated from operations of $3.2 million;
• net loss of $0.02 per share; and
• maintaining 2011 production forecast of 80,000 ozs Au and exiting the year at $650/oz cash costs.

We also note that on April 27, San Gold announced that it had completed installation of the new crusher in early April and that for the first full week of production (April 15 to 21), the crusher processed an average of 1,513 tpd.

We are impressed with the speed at which San Gold has been able to reduce costs at the RLMC and believe that the installation of the new crusher will allow the company to achieve its goals of increasing throughput to ultimately produce 25,000 ozs Au in Q4/2011 and 81,000 ozs Au for all of 2011.

Valuation

We continue to value San Gold based on a 75/25 blend of 1.6x NAV and 13x 2011 CFPS. We have lowered our 2011 cost forecast for the RLMC from $829/oz to $756/oz, but are maintaining our 81,000 oz Au production estimate. Our 2011 CFPS estimate has increased from $0.13 to $0.15 resulting in a slight increase in our target price.

Conclusion

We have long maintained that improved operating metrics at the RLMC are key to relieving the pressure on San Gold’s shares.

We are maintaining our Sector Perform rating and increasing our target price to $3.50 from $3.40.