Superior Gold Inc.

Thank you and good morning everyone. Welcome to Superior Gold's quarterly conference call, on which we will be discussing our second quarter 2019 results.

Before we get started as a reminder I would like to ask everyone to refer to Slide 2 of our presentation which is posted on our website to view our cautionary language regarding forward looking statements. Our Chief Financial Officer Paul Olmstead is going to start the call by discussing our financial results for the quarter.

I will now turn the call over to Paul.

Thank you, Chris. During the second quarter we generated revenue of 31.6 million from the sale of 23,937 ounces of gold, a decrease of 2 million compared to the second quarter of 2018 on the sale of 25,797 ounces.

More gold revenues resulted from 1860 fewer ounces being sold, which was partially offset by an increase in the realized gold price to $1320 per ounce from 1303 per ounce. The reduction in ounces sold was due to fewer ounces being produced as a result of the lower grade ore milled from the contribution from the Hermes open pit which was offset in part by an increase in the total tons milled for the quarter.

Cost of sales were 32.7 million for the quarter, an increase of 2.2 million compared to the same period in 2018. Cost of sales were higher, predominantly due to higher payroll and maintenance cost that more than offset a reduction in mining costs at Hermes following a temporary stoppage.

The higher payroll and maintenance costs accounted for approximately 75% of the increase in cost the result of additional personnel hired in the fourth quarter of 2018 to address underground operational limitations and the company's focus on improving underground fleet performance. Higher tons milled also resulted in increased cyanide and power costs from the processing side.

Finally, the increase was also partly due result of the variance in the change in inventories. Compared to the second quarter of last year general administrative expenses decreased due to lower payroll costs as a result of the finalization in 2019 accruals for 2018 short-term incentive compensation in which no short-term incentives were awarded to executives in 2018.

Adjusted net loss for the quarter amounted to 1.9 million, or $0.02 per share compared to adjusted net income of $654,000 or $0.01 per share in the same quarter of 2018 resulting primarily from the operating loss of 2.3 million partially offset by an income tax recovery of [indiscernible]. The company ended the quarter with a strong cash position of 17.3 million and no long-term debt.

At the end of the second quarter, the company's current assets totaled 34.9 million and current liabilities amounted to 29.6 for a net working capital balance of 5.3 million. The majority of the current assets pertain to cash and cash equivalent of 17.3 million and inventories of 15.2 million.

The movement from our working capital balance of 6.7 million at the end of 2018 was mainly the result of capital expenditures in support of the underground mine and the adoption of IFRS 16 leases, which resulted in the recognition of current lease liabilities being recognized for contracts previously classified as operating leases. With our commitment on improving the underground stope grade at Plutonic underground operations, we expect our ability to generate free cash flow to continue to improve as we also take advantage of the strong Australian dollar gold price environment to build progressively stronger balance sheet in 2019.

I will now turn the call back to Chris to continue with the rest of the presentation.

Thank you Paul. The focus of this quarter continued to be on improving operational and financial performance relative to 2019 end and in particular relative to the fourth quarter of 2018.

Consequently, we are pleased with the measures we put in place continuing to have a positive impact on both our operating and financial results. We produced 23,000 ounces and 43,000 ounces of gold, which represents a $0.16 increase over the fourth quarter of 2018 and we sold 23,937 ounces of gold at an average realized gold price of US$ 1320 per ounce representing a 24% increase sold in the fourth quarter of 2018.

All in sustaining costs of 1293 per ounce represents a decrease of 18% compared to the fourth quarter 2018. Since we acquired the Plutonic gold operations in October 2016, we have achieved cumulative production of 239,000 ounces of gold.

This is a significant achievement and is a testament to both the company's commitment to the Plutonic gold operations and the strength of the mineralized system at the Plutonic gold mine. During the quarter we achieved a record realized gold price of US$ 1320 per ounce and the Australian gold price continued to reach all time highs.

This trend has continued in the third quarter where the Australian gold price has reached all time high of Australian 2220 an ounce in August and this is expected as Paul said to have a positive impact on our financial results in the coming quarter. Operational improvements seen in the first quarter continued into the second quarter and we're pleased that our underground stope grade, development grade and mill grade increased by 33%, 10% and 20% respectively relative to the fourth quarter of 2018 as they focus on mining worth reserve grade, minimizing dilution and improving equipment availability collectively resulted in a 16% increase in production.

As a result, our all in sustaining cost decreased by 18% relative to the fourth quarter of 2018. It's all about grade.

As I've mentioned in the past grade particularly the underground stope grade is the key driver of operating and financial performance. During the quarter our stope grade averaged 3.36 grams of gold per ton which is the highest level we've seen at the underground operations since 2017.

However, compared to the previous quarter all in sustaining costs increased as we incurred the necessary additional spending in order to get ahead on underground development and improved equipment availability. These additional measures which are key to ensuring our future success added approximately US$120 per ounce to all in sustaining cost.

The graphic on Slide 10 or was it 9 continues to illustrate that our annual production rate and per unit costs are highly leveraged to stope grade, where each 1 gram per ton increase in stope grade, increases our annual production by more than 15,000 ounces of gold and decreases our all in sustaining cost by approximately $200 per ounce. In terms of guidance while we work on establishing a new life of mine plan as the Plutonic gold operations we are willing to sacrifice short term results to ensure long term success.

Consequently production for the full year 2019 will be near the low end of our current guidance with costs waiting to exceed current guidance as we allocate the necessary funds to areas required to ensure long term profitability. This includes development work required and further requirements in ore body modeling and equipment availability.

We anticipate that we'll be releasing our third quarter 2019 production results in October and new life of mine plan at the Plutonic gold operations during the second half of 2019. With that we conclude the presentation portion of the call.

Operator, you can now open the line for questions.

Phil Ker from PI Financial here. Thanks for hosting the call today Chris.

Obviously just addressing the costs during the quarter you're moving forward. Is this primarily a function of just maintenance costs, or what can we attribute the breakdown of the higher than expected cost to moving forward here?

Maintenance cost is part of it, cause we had a substantial amount of catch up work to do to get ourselves in the position where we're able to manage the equipment availability to much higher levels. That's still an ongoing effort, I mean at same point we would have put it all behind us but we're still willing to put in what we need.

It's personnel and we need to make sure we've got enough people. We're doing the life of mine plan, so we're making sure we got the ore body understood the best we can.

So I think a focus in this quarter will be working on bringing them down but in the short term they're going to be elevated again because we have to do what we got to do to ensure long-term success rather than short-term hit or fix.

And so this, you know, the higher amount of personnel in maintenance we can expect this over two quarters, a year or?

The plan is not a year, really we're positioning ourselves for next year and as we consistently having guided we hope to be able to show you the turnaround where we want it towards the end of the year. So that would be the plan.

And then just with respect to the sustaining capital, is this for development into new stopes or?

That's really showing sufficient backup inventory of stopes is available or they're developed so that we as in any underground mine you get surprises good and bad and if you haven't got the operational flexibility to deal with the bad ones, you know hits your operational bottom line and that was one of our problems we didn't have that inventory. So we've been spending the money to develop it.

And so how many stopes would be in your cycle now versus how many stopes you know you've received being excess capital being outlaid.

Well the number of stopes in the cycle won't change, it's really just putting what would be standard underground, it's like three months inventory of developed stopes, so you've always got that in front of you. So like the number of stopes in the cycle hasn't really changed and it varies in accordance to the size of them, but you know we're probably typically looking at something like 30, 25-30 on that one.

Okay, I guess then leading into them, my question regarding how do we go about starting to increase the tonnage output coming from underground if we’re not looking to increase the number of stopes in the cycle, what's going to be done about the tonnage.

Well I think the first step is operating at the tonnage we have been, with the best possible grade. Once we've done that and we're doing that consistently and generate maximizing free cash then you begin to look at the questionable can we mine it at a greater rate?

I think it'd be, you want to kind of turn it around with minimum variables. So we start trying to increase the production at the same time we're trying to you know optimize the grade.

We may end up trying to shoot ourselves in the foot because we're trying to do too many things at once, so that's the first. If we, cause basically get to back to what we did in 2017 which was the same underground tonnage rate we're doing now but at a better grade we generated substantial free cash.

So that's the first job is to do that and like I say once we're there then we'll look at if there's a possibility to increase production rate.

And based on that comparison to 2017 how does that ratio of tons coming from development ore versus stope ore compare from then to now.

It's about the same. It's about the same.

Okay, so with the increasing stope grade occurring over the past two quarters here, is that something that we can continue to expect or do we expect near term pull back in the stope grade or is the elevated cut off grades helping mitigate any pullback in that.

I think as I said the plan would be by the end of the year to see us mining stope grades that are pushing near to reserve grade, between now and then we may have periods where as we get in the mine plan developed for the long term we might see you know the occasional drop in stope grade but overall the trend still is up and I believe I'm correct in saying that the stope grade in July was above the average grade in the second quarter.

Okay, that's it from me. Thanks guys.

Thanks Phil.

Chris, you've probably known about the higher costs for months now, you keep whipping the shareholders around and or new buyers of a stock, like, when you put out a press release, that's your grades are moving-up, why don't you take that as an opportunity to forewarn people that your costs were also going up, just to address issues. Like I just keep seeing everything with all the time, whether it was on the way down with a lower production or grades now on the way up, means you should be honest with everyone, as you can be all the time?

Well, excuse me -- we try to provide as transparent as you can, in a timely fashion all the information. So, sometimes we don't get the cost of a fully developed process or such that we can release it.

But I mean, we really release this information at the same time, we've always done it on a quarterly basis. So I'm not quite sure of doing on a monthly basis, which generally isn't that helpful.

No it's not. But, on the one hand, the gold prices are moving up, you look like you're getting your act in order, the stock moves up, people get interested, then they get pissed off, because the costs were up at the same time, which you probably knew about okay I'm just talking about tracking a normalized level as opposed to whipping people in and out of the stock.

I haven't changed my attitude, I still own all my stock, okay, but I just watched the goings on here and I tell you you're doing a bad job on information releasing. But yes, you got to improve there.

Okay, we'll take that on board and duly noted, so I appreciate that.

Chris, you mentioned you're going to have the new life of mine plan as we know coming up in the second half of this year. At that point, will that's still include some type of open pit component?

It probably will, I mean, it's really a question of where that level of planning is at the time and we realize that people want to see the life of mine plan for underground so it's, it's going to be purely a function of the state of the information when we put it out. So if we have the underground ready to go and we're still finishing up the out pit we will probably put the out pit out afterwards.

But again, we're currently pulling our information together.

So should we be modeling or there will be open pit mining in 2020?

Well, that still is the plan. I mean, the granularity on it.

So we need to provide so that's how I would guide you so that's still our intention.

Okay, and just briefly, you talked about maybe more focusing on Plutonic East. Has that changed at all or just because today's press release mentioned, looked like you guys are having a harder look at Hermes and Hermes South.

We looked at it all, but I think in terms of other pit source the next year, the best likely sources are Plutonic East and other of the past producing pits that are only Plutonic mine site. So that hasn't changed.

Okay, thanks.

Hi Chris. Can you give me an estimate of going forward what your cost figure that would be per tons milled, for underground tons?

The milling cost has been pretty consistent about 21 Australian per ton, regardless of where it comes from.

Okay, and can you add mining and administration to that as well?

Yeah mining underground 70, Paul's whispering something, it's easier if he just told you.

Yeah, I think the range typically is around $70 to $100 underground depending on how much development we do in any particular period.

That’s all Australian dollar.

And what is the administration estimate as well?

That’s typically in around $5 Australian market.

Okay, can you, 25 for processing is that right?

21.

Sorry, 21. Okay perfect, and you expect that to remain stable for the foreseeable future?

In fact, yeah I mean those costs, unit costs have been pretty stable since we took it over. So that is not really the issue, the issue is on grade, that’s the driver for cost.

Okay, thank you.

Good morning gentlemen. Actually while I’ve noticed three things that caught my eye gold buying the position in the stock also Northern Star putting the Chief Geological Officer as a director.

The third thing that caught my eye was, in the latest presentation that was in the May presentation too, yellow highlighted exploration holes at a new place called Heights. Could you explain that one to me please?

Well Heights is a historic area where there was a sort of out in the middle of, was a hole, so, isolated hole and it’s an area we’re currently reviewing but, it was not one an enormous historic hole which I believe we showed the technical presentation and that is probably what you’re referring to. But we haven’t released any more information on that one at this moment, but it’s part of our target in process.

Those, those two yellow high level grades, you did those?

No, those were done by Barrick.

Okay, have you done any drilling there yourself?

No, we have not followed those.

Okay another totally different subject, is it a unionized workforce?

No.

What’s the turnover rate on your personnel, roughly do you know?

Actually, I don’t know on a percentage. It’s actually it's in line with what you see in the rest of Western Australia and one of the features in Australia, you see that, people do tend to move around from operation to operation there's I think they get a better deal somewhere else they may go, but we actually tend to get back, a lot of people who leave us.

So, I don’t have a specific number for you, but it’s not out of line with the rest of the industry.

Okay, do you hedge anything at all?

No.

Okay, also what else was there? Can't think of anything else, okay that’s fine.

Thank you.

I appreciate it, thank you very much.

Since there are no further questions, I would like to thank everyone for joining us today. And we appreciate your honesty and forefront nature of your questions and suggestions that we have taken on board.

And in summary, we’re pleased with the progress we’ve made in the first half of the year, the measures we put in place have begun to positively impact both our operating and financial results. Focus in the second half of the year will continue to be in investing capital in the mining operations to ensure long term success at Plutonic.

Thank you again for joining us on the call today and have a good day.