san gold corporation (tsxv: sgr) bulk sampling program ... · san gold corporation (tsx.v: sgr) -...

Investment Analysis for Intelligent Investors

Siddharth Rajeev, B.Tech, MBAAnalyst

Vincent Weber, BScResearch Associate

Kevin Liu, BBA, BScResearch Associate

August 30, 2009

2009 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

San Gold Corporation (TSXV: SGR) –Bulk Sampling Program Validated High Grade Gold at theHinge Zone

Sector/Industry: Mining www.sangoldcorp.com

Market Data (as of August 28, 2009)Current Price $3.14Fair Value $1.83 (↑)Rating* HOLD (↓)Risk* 4 (Spec)52 Week Range $0.57–$3.18Shares O/S 259.05 mmMarket Cap $808.70 mmCurrent Yield N/AP/E N/AP/B 8.71YoY Return 89.2%YoY TSXV -39.4%

*see back of report for rating and risk definitions

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Investment Highlights

Exploration drilling has identified another new zone of highgrade mineralization approximately 0.5 km east of the HingeZone.

The bulk sampling program at the Hinge Zone produced 5,502gold oz from 10,871 tons of ore during Q2 2009, with an averagegrade of about 0.53 oz/ton.

The bulk sampling program recorded operating costs of $184/ozgold recovered.

We anticipate the Hinge Zone will host upwards of 460,000ounces of gold above the 400 meter level.

Achieving production of 800 tpd, which we had anticipatedwould happen by the end of 2008, has been delayed due to anincreased focus on development of the all important Hinge Zone.SGR is currently operating at 600 tonnes/day. The company plansto bring its mill to 900 tonnes/day by the end of 2009.

We have raised our fair value estimate from $1.48 per share, to$1.83 per share. Although we continue to believe that the newlydiscovered Hinge and Cohiba zones represent great resourceupside, the company’s shares are currently trading significantly above our fair value estimate. Therefore, we downgrade ourrating of the company from BUY to HOLD.

Key Financial Data (FYE - December 31)(C$) 2005 2006 2007 2008 2009E 2010ERevenues - 768,771 4,422,817 8,700,375 46,935,058 112,747,852Net Income (5,386,529) (18,445,817) (29,936,722) (33,357,909) (16,604,306) 23,801,282EPS (0.07) (0.18) (0.19) (0.15) (0.06) 0.09Cash + Marketable Securities 3,610,766 13,048,010 40,237,429 20,109,887 11,631,574 21,007,433Working Capital (513,289) 12,309,769 27,200,792 27,918,369 33,142,061 52,721,810Total Assets 36,945,480 114,333,003 212,961,930 214,465,730 238,766,077 260,325,765Total Debt 2,525,443 16,237,846 13,097,938 9,226,846 9,759,415 9,581,629

San Gold Corp. initiated production in late August 2006 on their Rice Lake Gold Mine in Rice Lake, Manitoba. Theircontinued exploration program has added another new high grade mineralized zone on the property. San Gold is currentlytransitioning from mine development to production, and plans to reach production of 900 tpd by the end of 2009.

San Gold Corporation (TSX.V: SGR) - Update



High GradeGold Validatedat Hinge Zone

Exploration and Development

Since our previous report, the company has had continued exploration success at the HingeZone defining six lenses of high grade mineralization lying in two planes. To date, three ofthe lenses have been accessed and developed by a decline to the 100 m (350 foot) level, asshown in the graph below. Particularly, in Q2 2009, the company completed a bulk samplingprogram, which validated the high grade gold at the Hinge Zone. The program was segmentedinto stope (or production mining) and development segments. The stope mining processed2,738 tons ore with an average gold grade of 21.7 g/tonne or 0.63 oz/ton, with the main #1lens stope grade at 26.3 g/tonne or 0.77 oz/ton. SGR also processed 9,024 tons developmentore with grades averaging 16.9 g/tonne or 0.49 oz/ton, with main lens #1 development grade at21.2 g/tonne or 0.62 oz/ton. Overall, the company was able to recover 5,502 ounces of goldfrom 10,871 tons of ore from the hinge zone during Q2 2009, with an average grade of about0.53 oz/ton. Note the company expects that the majority of future ore will come from stopemining as the Hinge mine achieves a steady state of production.

Source: San Gold Corporation

In addition to the high grades, we were also pleased to see that the Hinge Zone has shownexcellent economics so far. The bulk sample program operating costs averaged $78/ton($59/ton for mining and $19/ton for milling), with total operating cost averaging $184/oz goldrecovered. The following summarizes other highlights of the bulk sampling program:

High Recovery Rate–The mill recovery rate was 96% for the bulk sample program.

Throughput - The Hinge Zone ore are clean, dry and free of gangue minerals. These excellentgold liberating qualities have led to an increase in mill throughput to a maximum of 80 tons




Cohiba Zone

gold liberating qualities have led to an increase in mill throughput to a maximum of 80 tonsper hour at the end of June 2009. The average throughput is 50 tons per hour for the entirebulk sampling program.

Development Capital - The company has spent a total of $6.5 million at Hinge, withdevelopment footage of 8,000 ft at the end of June 2009.

FRC Resource EstimateAn NI 43-101 compliant resource estimate is currently underway and is expected in the fall ofthis year. Our in-house estimation is presented below.

Background information: Thus far, the first plane (“plane one”) of mineralized lenses has been drill tested to a depth of 400 meters while the second plane (“plane two”) has been tested to 200 meters. Management states that the average grades are approximately 0.55 oz/t inplane one and 0.4 oz/t in plane two. Both planes have been identified over a 250 meter strikelength with plane one averaging approximately three meters in width. In order to beconservative, we are using an average width of one meter for plane two. Specific gravity isestimated at 2.75 tonnes/m3.

Plane One:400 m x 250 m x 3 m = 300,000 m3

300,000 m3 x 2.75 = 825,000 tonnes825,000 tonnes x 0.55 oz/t (18.8 g/t) = 498,646 ounces

Plane Two:400 m x 250 m x 1 m = 100,000 m3

100,000 m3 x 2.75 = 275,000 tonnes275,000 tonnes x 0.4 oz/t (13.7 g/t) = 121,125 ounces

Based on the early stage of exploration above, and below the 100 meter level decline, wehave discounted our estimate by 25%, believing the company can define a resource ofapproximately 465,000 ounces (619,771 ounces x 0.75, rounded to nearest thousand)above the 400 meter level.

Using a new structural model, as opposed to the chemical model used in the past, the companyhas successfully identified two new significant zones of mineralization over the past year anda half, the Hinge Zone, and most recently, the Cohiba zone (Appendix A shows the location ofthe two zones relative to the location of the Rice Lake mine). The structural model is based onidentifying hinge axes which bisect folds and provide a path of least resistance for fluid flow,resulting in environments for concentrated mineral deposition.

Figure 1 below depicts a basic version of the new structural model. Notice the location of theHinge Zone on an axis pathway. The multiple target pathways, and recent success in findingmineralization along them, indicates the significant potential remaining on San Gold’s property.




Figure 1: Theoretical structural model used by San Gold in generating new drill targets. (Source: San GoldCorporation)

The new Cohiba Zone, discovered in June of this year, is located approximately 0.5 km to theeast of the Hinge Zone and hosts similar high grade mineralization. Drill hole LM-09-22intersected 2.1 meters grading 25.4 g/t gold and drill hole LM-09-14 intersected 2.0 metersgrading 21.4 g/t gold. Both intercepts are within 100 meters of surface.

Figure 2 shows the location of the Cohiba Zone in relation to the Hinge Zone and decline.The company intends on testing the area between the Cohiba and Hinge Zones to determine ifthere is a link in mineralization. It would be very positive for mining development if thecompany is able to connect the two zones.




ProductionUpdate andOutlook

Figure 2: Cohiba Zone location approximately 500 meters from underground development at the Hinge Zone.(Source: San Gold Corporation)

Achieving production of 800 tpd, which we had anticipated would happen by the end of 2008,has been delayed due to an increased focus on development of the all important Hinge Zone.Ramp up production is currently around 600 tpd with ore coming from the Rice Lake mine.The original plan to reach full scale 1,200 tpd production by the end of 2009, has been scaledback to a goal of 900 tpd, with 600 tpd coming from the Rice lake mine, and 300 tpd comingfrom the Hinge Zone.

We believe this is a satisfactory goal as the long term benefit of fully developing the Hingezone for production outweighs any short term perceived losses in production. We also feelthat the higher grade ore running through the mill will offset the lower tonnage and result insufficient ounces being produced. Management has stated near term production goals of: anannualized production rate of 60,000 ounces of gold by the end of 2009; 110,000 ounces ofgold in 2010, and 200,000 ounces of gold in 2011.

Grades and CostsWith high grade ore from the Hinge Zone, management states that the current grade runningthrough the mill is 0.15 to 0.2 oz/t with recoveries of 90%, and a cost of around $600/oz (note:costs during production ramp up are typically higher than can be expected during commercialoperation, thus, we expect this figure to decrease). In the long term, the company isanticipating a sub $200/oz production cost from the Hinge zone, as indicated by the recently




Financials

completed bulk sampling program. Combined with full scale production from the Rice Lakemine, the anticipated cost per ounce is around $350/oz.

Mill CapacityThe current capacity of the mill is 1,200 tpd. The company anticipates it will upgrade the millto 1,800 tpd in 2011, which can be done simply by increasing the crushing capacity.

Current StatusThe company is continuing its exploration at the Hinge Zone, Cohiba zone, other areas in thehanging wall volcanics, and underground at the operating Rice Lake Mine with 8 drills.

Recent drill results from the ongoing underground definition and exploration at the Rice LakeMine extended the high grade 98 vein, and added a new discovery above the 26th level. Drillhole #28-09-15, which extended the 98 vein to the west, assayed 44 g/t (2.3 oz/ton) over 5.9meters (intersected width, true width has not yet been determined).

Revenue Forecast: In FY2008 (12 months ended December 2008), the company reportedrevenues of $8.70 million, from sales of 8,728 oz of gold, compared with our forecast of $9.70million from sales of 10,574 oz of gold. Revenues were below expectations due to lower thanexpected production as the company focused on the development of the Hinge Zone (asdiscussed earlier in the report). For the first 6 months of FY2009, SGR reported revenues of$7.24 million from sales of 6,606 oz of gold, compared to $3.39 million from sales of 3,770 ozof gold in the same period last year. In Q2 2009, SGR posted revenues of $3.54 million fromsales of 3,307 oz of gold, compared to $2.53 million from sales of 2,778 oz in Q2 2008.

Based on our discussion with management, since production at Hinge was not consideredcommercial production in Q2 2009, cash received on sales of the 5,502 oz gold produced fromthe bulk sample program at Hinge (in the amount of $5.89 million) were not recognized asrevenues. Instead it was recorded as a reduction to the capitalized value of the Hinge mineralproperty. Management told us that commercial production at Hinge will commence in Q32009, and sales of gold production from Hinge will be recorded as revenues starting Q3. Inaddition, we were pleased to see that the average recovered grade at the Rice Lake mineimproved significantly to 0.233 oz/ton, up from 0.111 oz/ton in Q1 2009, and 0.088 oz/tonin 2008, which, according to management, was a result of the mine transforming fromdevelopment stage to stable operating stage. We expect the average grade at Rice Lake tostay at similar levels for the rest of 2009. This, combined with higher grade ore from theHinge Zone, is expected to generate an average grade of 0.35 oz/ton for SGR’s operations for the balance of 2009, according to the company.

Overall, due to a lower production outlook, partially offset by higher grades, we have loweredour revenue forecast to $46.94 million from sales of 44,964 oz of gold, down from previous$65.91 million based on sales of 63,684 oz of gold. In 2010, we expect the company toachieve 1,200 tonnes/d by the end of the first quarter, and forecast revenues of $112.75million from sales of 117,141 oz of gold.

Operating Costs: SGR incurred high operating costs of $29.39 million (or $2,859/oz gold




recovered) and $16.05 million (or over $1,000/oz gold recovered based on our estimation) in2008, and the first 6 months of 2009, respectively. However, high operating costs wereexpected (we had forecasted operating costs of $30.21 million in 2008). As discussed in ourprevious report, the ore milled so far was primarily from development materials with lowergrade than what is estimated for the Rice Lake mine (contained grade of 0.119 oz/ gold in2008, versus 0.27 oz/gold according to the NI 43-101 compliant resource estimate). Hence, wecontinue to believe these costs do not represent the true operating costs once a stable operationis achieved. In fact, as discussed above, the average recovered grade at the Rice Lake mine hasimproved significantly in Q2 2009. With the addition of material from the Hinge Zone,management informed us that current operating costs already improved to around $600/oz. Inthe longer term and as mentioned earlier, the company is anticipating operating costs of below$200/oz in the Hinge zone, which with full scale production from the Rice Lake mine, totaloperating costs are expected to be around $350/oz.

Royalty Expenses: The company sold production royalties in 2005, 2006, and 2007. This hasresulted in royalty obligations on the company’s balance sheet. The proceeds of the sale have been invested and carried as promissory notes on the company’s balance sheet. Based on our discussion with management, the royalty agreements are designed to capitalize on San Gold’s tax pools, whereby the buyer of the production royalties receives a tax shelter. Managementinformed us that the agreements are designed to allow the interest earned from the promissorynote to pay off the expected royalty payments. Note that we do not have details on how theroyalty agreements are exactly structured. However, at this time, we have assumed the interestfrom the promissory note will be able to offset future royalty expenses in our valuationmodels.

EPS Slightly Exceeds Expectations: In 2008, the company had a net loss of $33.36 million(EPS: -$0.15), compared to our previous forecast of $38.95 million (EPS: -$0.16). Earningsexceeded our expectations due to lower than expected expenses (other than operating costs).Give the changes discussed earlier, our revised EPS forecast is a net loss of $16.60 million(EPS: -$0.06) in 2009, compared to net income of $10.44 million (EPS: $0.04) in ourprevious report. In 2010, we forecast net income of $23.80 million (EPS: $0.09).

Cash Flows, Capital Structure and Liquidity: The company had negative cash flows of$19.75 million from operations, and invested $13.18 million in property, plant and equipmentand its mineral projects during the first 6 months of 2009. During Q2, the company also raiseda notable $36.87 million through the exercises of 15.15 million warrants at $2.00, and 4.38million warrants at $1.5. As of June 30, 2009, the company had $31.15 million in cash andmarketable securities. Based on our model, we estimate the new financing will be sufficient tofund the company’s operating and investing activities for the balance of 2009, based on our total capital expenditure forecast of $20.67 million for the year (According to our discussionwith management, the company expects lower capital expenditures for the balance of 2009).The following table shows the company’s liquidity position at the end of Q2 2009.




Valuation

(in C$) 2005 2006 2007 2008 2009 (6 mo)Current Ratio 0.90 2.96 2.13 5.32 4.81Working Capital (513,289) 12,309,769 27,200,792 27,918,369 45,253,120Debt/ Assets 6.8% 14.2% 6.2% 4.3% 4.3%Total Debt 2,525,443 16,237,846 13,097,938 9,226,846 10,151,657

Stock options and Warrants: At the end of June 2009, the company had 16.02 million stockoptions outstanding, with a weighted average exercise price of $1.06. We estimate thecompany currently does not have warrants outstanding.

Our revised valuation on the company is $1.83 per share, compared to $1.48 per share in ourprevious report.

Valuation Summary $/ShareDCF $1.61Comparables $1.40Cash Flow Multiples $2.48

Average $1.83

Our DCF valuation of the company increased to $430.47 million or $1.61 per share, comparedto $246.74 million or $1.03 per share, primarily due to adding our resource estimate for theHinge Zone, the company’s improved working capital, and the reduction of our long term tax rate from 35% to 29%. We also slightly raised our short-term gold price forecasts toUS$950/oz for the second half of 2009, US$875/oz in 2010, and US$750/oz in 2011. We havemaintained our long-term forecast (2012+) of US$600/oz.

Resource Estimate (in tons) 7,799,578Wt. Avg. Grade (ozpt) 0.30Remaining Recovered Metal (in oz) 2,263,846Recovery 96%Operating Costs (C$/oz) - 2011+ $90Capital Costs $14,363,516Remaining Mine Life 11Discount rate 10%Net Asset Value $401,787,385Working Capital $38,185,577LT Debt 9,502,130Net Fair Value $430,470,832No. of Shares (diluted) 268,162,072NAV per Share $1.61

DCF Valuation - Summary

Sensitivity: The following table shows the sensitivity of our DCF model to our long term goldprice forecast (our forecast is US$600/oz).




Conclusions &Rating

Gold Price DCF Value/Share (C$)$500 $1.31$600 $1.61$700 $1.90$800 $2.20$900 $2.50

$1,000 $2.80

Our revised cash flow multiple and comparable analysis values the company at $2.48 pershare and $1.40 per share, compared to $1.66 per share and $1.29 per share, in our previousreport, respectively. Note we have not valued SGR with our real option model since thecompany is already in production.

Average Net Cash Flow / Year $60,392,786Shares (diluted) 268,162,072Net Annual Cash Flow Per Share $0.23Remaining Mine Life 11Value per Share $2.48

Cash Flow Multiple Analysis

Company RIC CRJ SGR ARZ KGIShare Price (C$) 3.76 0.78 2.42 4.27 8.83Shares (mm) 26.11 111.47 268.16 158.83 58.56Market Cap (C$ mm) 98.19 86.94 648.95 678.18 517.12Cash (C$ mm) 27.44 0.00 31.15 88.47 25.44Debt (C$ mm) - 9.13 10.15 22.29 -Enterprise Value (C$ mm) 70.7 96.1 628.0 612.0 491.7Resources (mm oz) 1.28 0.69 2.37 4.65 3.16EV / Total Resources (C$/oz) $55.2 $140.0 $264.9 $131.7 $155.8

Average $149.5

Fair value per share (diluted) $1.40

Relative Valuation

Although we continue to believe that the newly discovered Hinge and Cohiba zones representgreat resource upside, the company’s shares are currently trading significantly above our fair value estimate. Therefore, we downgrade our rating of the company from BUY to HOLD, butincrease our fair value from $1.48 per share to $1.83 per share. At this time, we suggestexisting investors hold the shares in light of the company’s upside potential from resource exploration as well as operational improvements.

We think the market is currently valuing the company well above our fair value estimate dueto the following: First, it believes SGR can increase its resource significantly. Although wealso feel the company can increase its resources, at this point, we have taken a conservative




Risks

approach, and have valued the company purely based on the current NI43-101 compliantresources, and our own estimates based on drilling results released so far (which are yet to beincorporated in the NI43-101 resource estimate). Second, gold price expectations in themarket are likely higher than ours.

Like other producing companies, the value of the company depends heavily on goldprices.

The success of further development, exploration, and expansion is a significant factor inSan Gold’s success.

The company is subject to delay in its planned increase in production.

Since the company is yet to achieve profitability, we continue to rate the company aRISK of 4 (Speculative).




Appendix A

Source: San Gold Corporation




Appendix B

Consolidated Statement of Operations & Deficit(in C$)

2007 2008 2009E 2010E

Revenues 4,422,817 8,700,375 46,935,058 112,747,852Operating Costs 18,462,510 29,391,331 37,976,542 52,713,281

Gross Margin (14,039,693) (20,690,956) 8,958,517 60,034,570

Direct Exploration Expenses 6,583,386 6,197,117 5,458,696 5,827,907General & Administrative Expenses 6,745,136 5,447,894 7,050,088 7,261,591Share based Compensation 1,376,210 3,538,004 3,644,144 3,753,468EBITDA (28,744,425) (35,873,971) (7,194,412) 43,191,605

Depletion of Mineral Properties 914,747 1,397,875 6,857,513 17,571,094Amortization - Property, Plant & Equipment 2,158,455 2,194,744 1,805,475 1,948,003EBIT (31,817,627) (39,466,590) (15,857,399) 23,672,508

Indemnification Fee 84,229 255,153 255,153 255,153Accretion - Convertible Debentures (570,198) (237,947) (159,226) (159,226)Deferred Financing Costs (585,716) (249,222) (200,116) (200,116)Interest and Bank Charges (1,823,809) (892,422) (1,014,953) (1,073,536)Accretion - Asset Retirement Obligation (124,832) (137,584) (151,636) (151,636)Mineral Exploration Assistance ProgramProject Management FeeRoyalty Expenses (4,212,859) (7,870,798) (8,434,658) (7,659,380)Interest Income 6,524,490 8,633,251 8,958,529 9,117,515

Future Income Tax Recovery 2,589,600 6,608,250Income Tax -Net Income (29,936,722) (33,357,909) (16,604,306) 23,801,282Earning (Loss) per common share (0.19) (0.15) (0.06) 0.09




Consolidated Balance Sheet(in C$) 2007 2008 2009E 2010E

Current AssetsCash 6,628,673 10,444,590 1,966,277 11,342,136Marketable Securities 33,608,756 9,665,297 9,665,297 9,665,297Accounts Receivable 2,193,518 1,387,986 4,118,197 4,496,715Supply Inventory 968,956 802,695 2,158,637 2,782,090Gold in Process 4,135,900 4,659,558 9,502,135 13,471,172Prepaid Expenses 272,702 373,116 1,226,683 1,341,087Restricted accrued interest 3,513,275 7,040,514 18,036,068 27,153,584Total Current Assets 51,321,780 34,373,756 46,673,296 70,252,081

Property, Plant & Equipment 9,555,848 12,036,498 12,986,687 13,538,684Mineral Properties 36,912,653 49,977,707 61,028,325 58,457,231Collateral Deposits 450,000 187,466 187,466 187,466Deferred Financing Costs - - - -Mining Claims and Options 852,649 1,367,629 1,367,629 1,367,629Promissory Notes 113,869,000 116,522,674 116,522,674 116,522,674Total Assets 212,961,930 214,465,730 238,766,077 260,325,765

Current LiabilitiesAccounts Payable & Accrued Liabilities 4,777,732 4,086,131 5,279,690 7,328,466Cheques OutstandingBank IndebtednessCurrent portion of LT debt 353,063 662,498 337,012 198,918Deferred Revenues 2,482,659 255,152 255,152 255,152Convertible Debentures 12,294,675 - - -Current portion of royalty obligations 4,212,859 1,451,606 7,659,380 9,747,735Deferred InterestTotal Current Liabilities 24,120,988 6,455,387 13,531,235 17,530,271

Asset retirement obligation 1,347,138 1,484,722 1,333,086 1,181,450Convertible Debentures - 7,869,746 9,064,813 9,224,039LT Debt 450,200 694,602 357,590 158,672Deferred Revenues 1,646,261 1,391,109 1,135,957Royalty Obligation 113,868,153 123,092,100 115,432,720 105,684,985Total Liabilities 139,786,479 141,242,818 141,110,552 134,915,374

Shareholders' EquityShare capital 143,170,923 183,158,793 220,351,451 220,351,451Contributed Surplus 10,314,471 11,075,514 14,919,774 18,873,359Deficit (80,309,943) (121,011,395) (137,615,701) (113,814,418)

73,175,451 73,222,912 97,655,524 125,410,391

Total S.E & Liabilities 212,961,930 214,465,730 238,766,077 260,325,765




Consolidate Statement of Cash Flows(in C$) 2007 2008 2009E 2010E

Operating ActivitiesNet Income (29,936,722) (33,357,909) (16,604,306) 23,801,282

Items not affecting cashAccretion - convertible debentures 570,198 237,947 159,226 159,226Accretion - asset retirement obligation 124,832 137,584 (151,636) (151,636)Amortization - deferred financing costs 585,716 249,222 200,116 200,116Amortization - property, plant and equipment 2,158,455 2,194,744 1,805,475 1,948,003Depletion 914,747 1,397,875 6,857,513 17,571,094Share based compensation 1,376,210 3,538,004 3,644,144 3,753,468Share based payments 2,269,518 1,080,475Adjustment from accounting policy adoption (1,861) (162,895)Fair market value adjustment to marketableDeferred revenues realized (84,229) (581,246) (255,152) (255,152)Future Income Tax Recovery (2,589,600) (6,608,250) - -Adjustments 8,223Non-cash financing charges

Net change in non-cash working capital (1,366,686) 200,433 (19,584,293) (12,154,151)(25,979,422) (31,665,793) (23,928,913) 34,872,251

Investing ActivitiesPurchase of Property, Plant and Equipment (4,836,164) (3,766,725) (2,755,664) (2,500,000)Change in Marketable Securities (32,769,563) 24,106,354 - -Investments in Mineral Properties (9,582,225) (14,462,929) (17,908,130) (15,000,000)Investment in Promissory Note (55,000,000)Purchase of Mining Claims and Options (180,180)Amalgamation CostsGold recovered during commissioning

(102,187,952) 5,696,520 (20,663,794) (17,500,000)

Financing ActivitiesShares issued 71,315,698 29,388,871 37,192,658 -Proceeds from capital leaseProceeds from royalty obligation 55,000,000 - (1,451,606) (7,659,380)Proceeds from debentures 2,530,000 1,035,841 -Convertible debt issue costs (534,187) -Share issue costs (4,107,487) (1,236,440) -LT debt 377,158 (363,054) (662,498) (337,012)Collateral Deposit

122,585,369 29,785,190 36,114,395 (7,996,392)

Change in Cash (5,582,005) 3,815,917 (8,478,313) 9,375,859

Cash, beginning of the period 12,210,678 6,628,673 10,444,590 1,966,277

Cash, end of the period 6,628,673 10,444,590 1,966,277 11,342,136




Fundamental Research Corp. Equity Rating Scale:

Fundamental Research Corp. Equity Rating Scale:Buy–Annual expected rate of return exceeds 12% or the expected return is commensurate with riskHold–Annual expected rate of return is between 5% and 12%Sell–Annual expected rate of return is below 5% or the expected return is not commensurate with riskSuspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events.

Fundamental Research Corp. Risk Rating Scale:1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure isconservative with little or no debt.

2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitiveto systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cashflows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt.

3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitiveto economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, andcoverage ratios are sufficient.

4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in aturnaround situation. These companies should be considered speculative.

5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.These stocks are considered highly speculative.

Disclaimers and DisclosureThe opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subjectcompany. Fees of less than $30,000 have been paid by SGR to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takessteps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of ProfessionalConduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release ofliability for negative reports are protected contractually. To further ensure independence, SGR has agreed to a minimum coverage term including four updates.Coverage can not be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report thenmade available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings andare available at www.investars.com.

The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (13%), SELL (3%), SUSPEND (16%).To subscribe for real-time access to research, visit http://www.researchfrc.com/subscription.htm for subscription options.

This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks anduncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but arenot limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services;competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed inthe Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By makingthese forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions orchanges after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequentupdates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter.Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THISINFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORTASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYSTALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOURUNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION INYOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being acomplete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently preparedunless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is availableupon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit,including citing Fundamental Research Corp and/or the analyst, when quoting information from this report.

Fundamental Research Corp is registered with the British Columbia Securities Commission as a Securities Adviser which is not in any way an endorsement from theBCSC. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any personor entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

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