ARGONAUT GOLD INC. MANAGEMENT S DISCUSSION & ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2017

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1 ARGONAUT GOLD INC. MANAGEMENT S DISCUSSION & ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2017 The following Management s Discussion and Analysis ( MD&A ) of Argonaut Gold Inc. (the Company or Argonaut ) and its subsidiaries has been prepared as at February 22, All dollar amounts are expressed in United States ( US ) dollars unless otherwise stated (CA$ represents Canadian dollars). This MD&A should be read in conjunction with the Company s audited consolidated financial statements and notes thereto for the year ended The financial statements were prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). Additional information relating to the Company, including its Annual Information Form, is available under the Company s profile on the SEDAR website at This MD&A contains forward looking information as further described in the Cautionary Statement at the end of this MD&A. Reference to the risk factors described in the Cautionary Statement and to the other cautionary language under the heading Technical Information and Qualified Person at the end of this MD&A is advised. FOURTH QUARTER AND ANNUAL FINANCIAL HIGHLIGHTS 1 Revenue of $39.5 million in the fourth quarter of 2017 (fourth quarter of $35.3 million). Revenue of $155.1 million in 2017 ( $144.8 million). Sales of 29,912 ounces of gold in the fourth quarter of 2017 (fourth quarter of ,891 ounces of gold). Sales of 120,041 ounces of gold in 2017 ( ,853 ounces of gold). Net income of $5.2 million or $0.03 per basic share in the fourth quarter of 2017 (fourth quarter of $0.5 million or $0.00 per basic share). Net income of $23.9 million or $0.14 per basic share in 2017 ( $4.3 million or $0.03 per basic share). Adjusted net income of $6.4 million or $0.04 per basic share in the fourth quarter of 2017 (fourth quarter of $5.7 million or $0.04 per basic share). See Non-IFRS Measures section. Adjusted net income of $14.9 million or $0.09 per basic share in 2017 ( $14.5 million or $0.09 per basic share). Cash flows from operating activities before changes in non-cash operating working capital and other items was $11.7 million in the fourth quarter of 2017 (fourth quarter of $8.5 million). Cash flows from operating activities before changes in non-cash operating working capital and other items was $45.9 million in 2017 ( $35.0 million). Production of 34,987 gold equivalent ounces ( GEO or GEOs ) (based on a silver to gold ratio of 70:1) in the fourth quarter of 2017 (fourth quarter of ,384 GEOs (based on a silver to gold ratio of 65:1)). Production of 126,704 GEOs (based on a silver to gold ratio of 70:1) in 2017, including pre-commercial production from San Agustin of 2,932 GEOs 1 ( ,097 GEOs (based on a silver to gold ratio of 65:1)). Cash cost per gold ounce sold of $755 in the fourth quarter of 2017 (fourth quarter of $746). See Non- IFRS Measures section. Cash cost per gold ounce sold of $787 in 2017 ( $795). All-in sustaining cost per gold ounce sold of $897 in the fourth quarter of 2017 (fourth quarter of $894). See Non-IFRS Measures section. All-in sustaining cost per gold ounce sold of $922 in 2017 ( $938). Cash and cash equivalents was $14.1 million as at 2017 ( $42.1 million). During the fourth quarter of 2017, $8.0 million was drawn on the Revolving Facility, reducing the undrawn amount to $22.0 million as at Debt was $8.0 million as at 2017 (December 31, $0.9 million). 1 San Agustin produced 2,932 GEOs prior to announcement that commercial production had been achieved effective October 1, These GEOs are excluded from the revenue, sales, net income, adjusted net income, cash flows from operations, cash cost and all-in sustaining cost numbers presented in this section. 1

2 2017 AND RECENT COMPANY HIGHLIGHTS Corporate Acquisition of the San Juan mineral concession adjacent to the El Castillo mine, increasing the mineral concession footprint from 200 hectares to 620 hectares. Acquisition of the Cerro del Gallo project in Guanajuato, Mexico. Successful CA$45.0 million equity financing, including the over-allotment option, primarily allocated toward the acquisition of the San Juan mineral concession at El Castillo and subsequent infill drill program. Received nationally awarded Environmental Socially Responsible Company recognition at both El Castillo and La Colorada for the fifth consecutive year. Entered into zero cost collar Mexican peso ( MXN ) to US dollar ( USD ) contracts for $30.0 million with weighted average downside protection of 17.9 MXN:1 USD and participation up to 22.5 MXN:1 USD from January 2018 to December Increased corporate revolving credit facility from $30.0 million to $50.0 million with an accordion feature providing for total availability of up to $75.0 million (see Events After the Reporting Period section of this MD&A). El Castillo Operated with safety results significantly better than industry standards. Production of 59,000 gold ounces in 2017, a decrease of only 5% from 2016 despite a 37% year-over-year reduction in crushing capacity due to the relocation of the West crusher to San Agustin in the month of March. Completed an approximate 25,000 metre infill drill campaign on the acquired mineral concession adjacent to El Castillo mine. Increased Measured and Indicated Mineral Resources during the first six months of 2017 by approximately 55% net of depletion (see press release dated September 21, 2017). Initiated design improvements in the CR2 crusher to increase crushing capacity from approximately 5,000 tonnes per day to 14,000 tonnes per day. Began construction of the Victoria leach pad. San Agustin Project constructed with an initial capital investment of approximately $31 million, which is 28% under budget from the initial capital estimate of $43 million. Achieved first gold pour on September 18, Achieved commercial production effective October 1, Completed construction with zero lost time incidents. La Colorada Operated the entire year without a lost time injury. Compania Minera Pitalla S.A. de C.V., Argonaut s wholly owned subsidiary that owns its La Colorada mine, was awarded distinction at the highest level for their accomplishments as an Environmentally and Socially Responsible company in the small to medium size category. Invested in stripping the El Creston pit, the next pit to be mined in the life-of-mine plan. Completed construction of the Northeast Phase 3 leach pad and initiated construction on Phase 2. Magino Completed feasibility study ( FS ). Advanced Environmental Assessment ( EA ) process. Signed Collaborative Agreement with the Red Sky Métis Independent Nation and Community Benefits Agreement with Missanabie Cree First Nation. Continued to consult with and work towards agreements with other Indigenous communities. 2

3 DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS Argonaut is a Canadian public company listed on the Toronto Stock Exchange ( TSX ) and engaged in gold mining, mine development and mineral exploration activities at gold-bearing mineral properties in North America. As at the date of this MD&A, the Company owns the producing El Castillo and San Agustin mines (which together form the El Castillo mining complex) in the State of Durango, Mexico, the producing La Colorada mine in the State of Sonora, Mexico, the advanced exploration stage San Antonio project in the State of Baja California Sur, Mexico, the advanced exploration stage Cerro del Gallo project in the State of Guanajuato, Mexico, the advanced exploration stage Magino property in the Province of Ontario, Canada and several other exploration stage projects, all of which are located in North America. The Company commenced construction of the San Agustin project in 2016 and declared commercial production effective as of October 1, PROPERTY ACQUISITIONS On November 24, 2017, the Company completed the acquisition of the Cerro del Gallo project through the purchase of all the issued and outstanding shares of San Anton Resource Corporation, a wholly-owned subsidiary of Primero Mining Corp. ( Primero ) for total consideration of $15.2 million. Cash of $15.0 million was paid to Primero on closing. The transaction was accounted for as an asset acquisition. The purchase price has been allocated to the assets acquired and liabilities assumed based upon estimated fair values at the date of acquisition. On February 23, 2017, the Company acquired the San Juan mineral concession adjacent to the El Castillo mine from a wholly-owned subsidiary of Fresnillo plc ("El Aguila") pursuant to a purchase and sale agreement dated February 23, 2017 between El Aguila and Minera Real del Oro S.A. de C.V. ( MRO ), a wholly-owned subsidiary of Argonaut, for total consideration of $25.5 million. Cash of $13.0 million, plus 16% value added tax ( VAT ), was paid at the execution of the agreement. Additionally, deferred cash consideration of $13.0 million, plus 16% VAT, was paid on December 15, At the date of acquisition, an amount of $12.5 million was included in the purchase price, representing the estimated net present value of the deferred cash consideration. Accretion of the deferred cash consideration from date of acquisition to December 15, 2017 is included in finance expenses. The transaction has been accounted for as an asset acquisition. The purchase price has been allocated to mineral properties based upon the estimated fair value of the assets acquired at the date of acquisition. For more information, please read note 5 of our consolidated financial statements for the year ended SELECTED ANNUAL INFORMATION The following table sets forth selected annual financial information extracted from the Company s audited financial statements, which have been prepared in accordance with IFRS, for the years noted: Revenue ($000s) $ 155,089 $ 144,780 $ 158,588 Net income (loss) ($000s) $ 23,852 $ 4,331 $ (202,713) Earnings (loss) per share - basic and diluted $ 0.14 $ 0.03 $ (1.31) Total assets ($000s) $ 689,860 $ 609,900 $ 578,266 Long-term liabilities ($000s) $ 33,223 $ 29,500 $ 17,532 Dividends declared per share Nil Nil Nil 3

4 SUMMARY OF QUARTERLY RESULTS The following table sets forth selected unaudited quarterly financial information for each of the eight most recent quarters: 2017 Q Q Q Q Q Q Q Q1 Revenue ($000s) $ 39,454 $ 28,678 $ 42,501 $ 44,456 $ 35,326 $ 35,015 $ 39,135 $ 35,304 Reversal of inventory write down ($000s) $ - $ - $ - $ - $ - $ - $ - $ 3,551 Net income (loss) ($000s) $ 5,187 $ 440 $ 6,201 $ 12,024 $ 533 $ 221 $ (673) $ 4,250 Earnings (loss) per share - basic $ 0.03 $ 0.00 $ 0.04 $ 0.07 $ 0.00 $ 0.00 $ (0.00) $ 0.03 Earnings (loss) per share - diluted $ 0.03 $ 0.00 $ 0.03 $ 0.07 $ 0.00 $ 0.00 $ (0.00) $ 0.03 Gold ounces sold 29,912 22,206 32,961 34,962 28,891 25,429 30,355 29,178 Average realized gold price per ounce $ 1,276 $ 1,270 $ 1,260 $ 1,228 $ 1,186 $ 1,344 $ 1,258 $ 1,181 Cash cost per gold ounce sold (1) $ 755 $ 893 $ 785 $ 751 $ 746 $ 896 $ 794 $ 757 (1) See Non-IFRS Measures section. Quarterly results are predominantly influenced by the number of ounces of gold sold, the realized price per ounce of gold sold, the cash cost per ounce of gold sold (see Non-IFRS Measures section) and any unusual matters. The ounces sold and cash cost in the third quarter are generally negatively impacted by the rainy season, which decreases throughput and results in higher per unit costs. The quarterly year-over-year increase in revenue for the fourth quarter of 2017 was primarily due to a higher gold price ($2.6 million) and an increase in gold ounces sold ($1.3 million). In the first quarter of 2016, a non-cash impairment reversal of $3.6 million was recognized related to the net realizable value of work-in-process inventory at the El Castillo mine, as a result of an increase in the price of gold as at March 31, The increase in net income in the first and second quarters of 2017 was principally due to the increase in gold ounces sold, foreign exchange gains and a decrease in income tax expense due primarily to the foreign exchange effects of the strengthening Mexican peso on the calculation of deferred taxes. The quarterly year-over-year increase in net income for the fourth quarter of 2017 was principally related to a decrease in income tax expense driven by the recognition of a deferred tax asset related to the net operating losses ( NOLs ) from prior years of its subsidiary, MRO, which were not previously recognized as the utilization of the NOLs became probable with the declaration of commercial production at the San Agustin mine effective October 1,

5 DISCUSSION OF OPERATIONS Year ended Expressed in $000s Revenue $ 39,454 $ 35,326 $ 155,089 $ 144,780 Cost of sales Production costs 23,883 22,610 98,765 94,237 Depreciation, depletion and amortization 7,379 5,691 25,027 23,492 Reversal of inventory write down (3,551) Total cost of sales 31,262 28, , ,178 Gross profit 8,192 7,025 31,297 30,602 Exploration expenses General and administrative expenses 2,880 2,904 11,667 10,594 Other operating expenses Profit from operations 4,433 4,012 18,414 19,535 Finance income Finance expenses (331) (200) (1,334) (592) Gains (losses) on foreign exchange derivatives (576) - 1,994 - Other income (expense) (1,165) (1,137) 1,791 (4,764) Income before income taxes 2,367 2,732 21,018 14,374 Current income tax expense (recovery) (625) 524 1,180 2,554 Deferred income tax expense (recovery) (2,195) 1,675 (4,014) 7,489 Net income for the period $ 5,187 $ 533 $ 23,852 $ 4,331 For the three months ended 2017, as compared to the three months ended 2016 Revenue for the three months ended 2017 was $39.5 million, an increase from $35.3 million for the three months ended During the fourth quarter of 2017, gold ounces sold totaled 29,912 at an average realized price per ounce of $1,276 (compared to 28,891 gold ounces sold at an average price per ounce of $1,186 during the same period of 2016). Production costs for the fourth quarter of 2017 were $23.9 million, an increase from $22.6 million in the fourth quarter of 2016 primarily due to the increase in gold ounces sold. Cash cost per gold ounce sold (see Non-IFRS Measures section) was $755 in the fourth quarter of 2017, comparable to $746 in the same period of Depreciation, depletion and amortization ( DD&A ) expense included in cost of sales for the fourth quarter of 2017 totaled $7.4 million, an increase from $5.7 million in the fourth quarter of 2016, due to the increase in the average DD&A expense per ounce in work-in-process inventory. As a result of the non-cash impairment loss on non-current assets recorded during the year ended 2015, the average DD&A in work-in-process inventory decreased throughout During 2017, the average DD&A in work-in-process inventory began increasing as the effect of the non-cash impairment loss on average DD&A lessened. General and administrative expenses for the fourth quarters of 2017 and 2016 were $2.9 million. Losses on foreign exchange derivatives for the fourth quarter of 2017 were $0.6 million, compared to nil in the fourth quarter of 2016, primarily due to unrealized losses on the Company s outstanding zero-cost collar contracts on the Mexican peso (see Financial Instruments and Risks - Foreign exchange derivative contracts section of this MD&A). Other expense for the fourth quarter of 2017 was $1.2 million, comparable to $1.1 million in the fourth quarter of

6 Income tax recovery for the fourth quarter of 2017 was $2.8 million compared to income tax expense of $2.2 million in the same period of The change is primarily due to the recognition of a deferred tax asset related to the NOLs from prior years of its subsidiary, MRO, which were not previously recognized as the utilization of the NOLs became probable with the declaration of commercial production at the San Agustin mine effective October 1, Net income for the fourth quarter of 2017 was $5.2 million or $0.03 per basic share, an increase from $0.5 million or $0.00 per share for the fourth quarter of For the year ended 2017, as compared to the year ended 2016 Revenue for the year ended 2017 was $155.1 million, an increase from $144.8 million for the year ended Gold ounces sold totaled 120,041 at an average realized price per ounce of $1,257 (compared to 113,853 gold ounces sold at an average price per ounce of $1,239 for 2016). Gold ounces sold increased in 2017 primarily due to the commencement of commercial production at the San Agustin mine effective October 1, Production costs for the year ended 2017 were $98.8 million, an increase from $94.2 million in 2016, primarily due to the increase in gold ounces sold. Cash cost per gold ounce sold (see Non-IFRS Measures section) was $787 for the year ended 2017, comparable to $795 in the same period of DD&A expense included in cost of sales for the year ended 2017, totaled $25.0 million, an increase from $23.5 million for the year ended 2016, due to an increase in ounces sold, as many of the mining assets are amortized on a unit-of-production basis. Additionally, included in cost of sales for 2016 is a non-cash impairment reversal of $3.6 million related to the net realizable value of work-in-process inventory at the El Castillo mine, as a result of an increase in the price of gold during General and administrative expenses for year ended 2017 were $11.7 million, an increase from $10.6 million for the year ended 2016, primarily due to employee transition costs. Finance expenses for the year ended 2017 were $1.3 million, an increase from $0.6 million for the year ended 2016, primarily due to accretion on deferred cash consideration related to the acquisition of the San Juan mineral concession adjacent to the El Castillo mine (see Property Acquisitions section of this MD&A). Gains on foreign exchange derivatives during the year ended 2017 were $2.0 million, compared to nil for the year ended 2016, primarily due to realized gains on the Company s zero-cost collar contracts on the Mexican peso (see Financial Instruments and Risks - Foreign exchange derivative contracts section of this MD&A). Other income for the year ended 2017 was $1.8 million, an increase from other expense of $4.8 million in 2016, primarily due to differences in foreign currency translation effects. Income tax recovery for the year ended 2017 was $2.8 million compared to income tax expense of $10.0 million in the same period of The change is primarily due to the foreign exchange effects of the strengthening Mexican peso on the calculation of deferred taxes during 2017, compared to the weakening Mexican peso during 2016 and the recognition of a deferred tax asset related to the NOLs from prior years of its subsidiary, MRO, which were not previously recognized as the utilization of the NOLs became probable with the declaration of commercial production at the San Agustin mine effective October 1, Net income for the year ended 2017 was $23.9 million or $0.14 per basic share, an increase from $4.3 million or $0.03 per share for the year ended The Company provided updated full-year guidance in August of 2017 of between 122,000 to 130,000 GEOs of production at a cash cost per gold ounce sold in the range of $725 to $775 (see Non-IFRS Measures section), with total capital spending of approximately $104 million. In 2017, the Company produced 126,704 GEOs at a cash cost per gold ounce sold of $787 (see Non-IFRS Measures section) with total capital spending of $109.7 million. La Colorada was expected to produce between 47,000 and 50,000 GEOs and exceeded expectations with production of 53,286 GEOs. El Castillo was expected to produce between 55,000 and 60,000 GEOs and met the upper end of expectations with production of 59,540 GEOs. The Company had anticipated combined pre-commercial and 6

7 commercial production of approximately 20,000 GEOs at its recently commissioned San Agustin mine. However, San Agustin experienced a slower than anticipated ramp up, primarily relating to slower than anticipated solution flow rates to the leach pad due to a scaling issue that clogged pumps and drip hoses. The Company has since modified its anti-scaling chemicals to respond to water chemistry, has switched from drip hoses to sprinklers and has continued to ramp up to planned flow rates since December During 2017, San Agustin produced 13,878 GEOs, including 2,932 pre-commercial production GEOs. Consolidated cash cost per gold ounce sold slightly exceeded expectations due to lower production from the San Agustin mine. The total capital spending during 2017 includes the acquisition of mineral properties, plant and equipment of $13.5 million related to the Cerro del Gallo project (see Property Acquisitions section of this MD&A), which was not considered in the guidance update provided earlier in the year. Excluding capital spending on the Cerro del Gallo project, there was a positive variance of $7.8 million in capital spending during 2017 primarily attributable to San Agustin construction being completed 28% under budget. El Castillo Mining Complex Operating Statistics for the El Castillo Mine Year ended Tonnes ore (000s) 1,940 2,993 8,140 11,139 Tonnes waste (000s) 1,961 4,276 10,407 16,450 Tonnes mined (000s) 3,901 7,269 18,547 27,589 Waste/ore ratio Tonnes ore direct to leach pads (000s) Tonnes crushed (000s) 1,894 1,568 7,395 5,705 Tonnes overland conveyor (000s) 0 1, ,157 Gold grade to leach pads (grams per tonne) Contained gold ounces to leach pads 23,109 35,236 95, ,333 Gold ounces produced 8,551 16,632 59,000 62,235 Gold ounces sold 8,707 13,156 62,194 57,741 Silver ounces sold 10,946 7,456 37,820 34,489 Cash cost per gold ounce sold (see Non-IFRS Measures section) $ 1,015 $ 877 $ 918 $ 884 During the fourth quarter of 2017, El Castillo mined 3.9 million tonnes including 1.9 million tonnes of ore from the El Castillo pit. At El Castillo, the East and CR2 facilities crushed and loaded 1.9 million tonnes during the quarter, which resulted in an estimated 23,109 gold ounces to the leach pads. El Castillo produced 8,551 gold ounces during the fourth quarter of Increased crusher throughput, primarily from the CR2 crusher, with similar grades allowed for the placement of ounces on the pad that were only 30% less than the fourth quarter of 2016 in spite of crushing capacity having been reduced by about 45% for the quarter due to the relocation of the West crusher to San Agustin in the month of March. El Castillo sold 8,707 gold ounces during the fourth quarter of 2017 at a cash cost per gold ounce sold of $1,015 (see Non-IFRS Measures section), compared to 13,156 gold ounces sold at a cash cost per gold ounce sold of $877 for the fourth quarter of Recoveries during the fourth quarter of 2017 were lower than realized in the fourth quarter of 2016; therefore, gold production was below the reduced expectation associated with reduced crusher throughput, which led to increased cash cost per ounce gold ounce sold (see Non-IFRS measures section) during the fourth quarter of During the year ended 2017, El Castillo mined 18.5 million tonnes including 8.1 million tonnes of ore from the El Castillo pit. The East and CR2 facilities crushed and loaded 7.4 million tonnes and the West facility conveyed and loaded 0.8 million tonnes during the year, which resulted in an estimated 95,705 gold ounces to the leach pads. El Castillo produced 59,000 gold ounces during the year ended For the year ended 2017, gold ounces produced were down only 5% from the prior year in spite of annual crushing capacity having been reduced by 37%, partially offset by a 6% increase in grade processed and better than planned throughput at the CR2 crusher. El Castillo sold 62,194 gold ounces during the year ended 2017 at a cash cost per gold ounce sold of $918 (see Non-IFRS Measures section), compared to 57,741 gold ounces sold at a cash cost per gold ounce sold of $884 for the year ended The increase in cash cost per gold ounce sold over the comparable period of 2016 is primarily due to a decrease in gold ounces to the leach pads in 2017 due to the 7

8 reduced crushing capacity. Capital expenditures associated with the El Castillo mine during the fourth quarter and year ended 2017 were $2.4 million and $35.3 million, respectively, primarily related to the acquisition of the San Juan mineral concession adjacent to the El Castillo mine (see Property Acquisitions section of this MD&A), the exploration work performed on the concession subsequent to the acquisition and capitalized stripping. In addition to the above capital expenditures, during the fourth quarter and year ended 2017, there were $0.8 million and $3.1 million, respectively, in capital expenditures by another subsidiary of the Company that is primarily related to mining equipment currently being used at the El Castillo mining complex. Also included in the El Castillo mining complex, and in addition to those capital expenditures referenced above, were capital expenditures at the San Agustin mine during the fourth quarter and year ended 2017 of $2.4 million and $27.8 million, respectively, primarily related to the acquisition, construction and installation of the crushing and conveying circuit, leach circuit and carbon plant, and other construction-related activities. During the fourth quarter and year ended 2016, the Company incurred capital expenditures related to the San Agustin project of $5.8 million and $7.7 million, respectively, of which $2.7 million and $4.6 million, respectively, related to exploration and development activities and $3.1 million related to the construction of the San Agustin project, which commenced in late The San Agustin mine represents the next leg of the Company s growth. The Company envisions the San Agustin deposit to be a significant contributor within the El Castillo mining complex. The project is located approximately 10 kilometres from the El Castillo mine and shares infrastructure. The San Agustin mine was constructed for the initial capital investment of $31 million, which was 28% under budget from the initial capital estimate of $43 million. During the second quarter of 2017, the Company commenced mining at San Agustin in accordance with the planned construction and start-up period. During the third quarter, the Company began commissioning and ramp-up of the project. The first gold pour was achieved on September 18, 2017 and commercial production was achieved effective October 1, The operating statistics for the San Agustin mine post commercial production are as follows: Period from declaration of Operating Statistics for the San Agustin Mine commercial production on October 1, 2017 to 2017 Tonnes mineralized material mined (000s) 939 Tonnes waste mined (000s) 404 Total tonnes mined (000s) 1,343 Waste/mineralized material ratio 0.43 Tonnes mineralized material crushed (000s) 1,004 Gold grade to leach pads (grams per tonne) 0.50 Contained gold ounces to leach pads 15,967 Gold ounces produced 10,302 Gold ounces sold 8,309 Silver ounces produced 45,100 Silver ounces sold 32,626 GEOs produced (70:1 ratio) 10,946 GEOs sold (70:1 ratio) 8,775 Cash cost per gold ounce sold (see Non-IFRS Measures section) $ 385 During the period from declaration of commercial production on October 1, 2017 to 2017, San Agustin mined 1.3 million tonnes including 0.9 million tonnes of mineralized material. During the same period, San Agustin loaded 1.0 million tonnes on the leach pads, which resulted in an estimated 15,967 contained gold ounces to the leach pads. San Agustin produced 10,302 gold ounces and 45,100 silver ounces or 10,946 GEOs post achievement of commercial production. San Agustin sold 8,309 gold ounces during the period from declaration of commercial 8

9 production on October 1, 2017 to 2017 at a cash cost per gold ounce sold of $385 (see Non-IFRS Measures section). The ramp up of mining and processing rates went as planned during the pre-commercial production commissioning of the operation during the month of September. During the period from declaration of commercial production on October 1, 2017 to 2017, a longer than anticipated ramp up of solution flow rates to the leach pads impacted production rates due to a scaling issue that clogged the pumps and drip hoses, limiting solution flow to the leach pads. The Company has since modified its anti-scaling chemicals to respond to water chemistry, has switched from drip hoses to wobblers and has continued to ramp up to planned flow rates since December While solution flow rates were temporarily reduced, mining and crushing rates were also slowed and were restored to planned levels by the end of La Colorada Mine Operating Statistics Year ended Tonnes mineralized material mined (000s) 1,109 1,062 4,492 4,477 Tonnes waste mined (000s) 4,409 4,440 18,864 15,935 Total tonnes mined (000s) 5,518 5,502 23,356 20,412 Waste/mineralized material ratio Tonnes rehandled (000s) Tonnes mineralized material direct to leach pads (000s) Tonnes mineralized material crushed (000s) 1,134 1,071 4,490 4,598 Gold grade to leach pads (grams per tonne) Contained gold ounces to leach pads 18,430 26,273 84,050 89,654 Gold ounces produced 14,779 16,706 50,796 56,492 Gold ounces sold 12,896 15,735 49,538 56,112 Silver ounces produced 38,861 60, , ,503 Silver ounces sold 34,404 55, , ,473 GEOs produced ( :1 ratio; :1 ratio) 15,334 17,637 53,286 59,331 GEOs sold ( :1 ratio; :1 ratio) 13,387 16,594 52,045 58,904 Cash cost per gold ounce sold (see Non-IFRS M easures section) $ 817 $ 636 $ 691 $ 704 During the fourth quarter of 2017, La Colorada mined 5.5 million tonnes containing 1.1 million tonnes of mineralized material. La Colorada loaded 1.2 million tonnes on the leach pads during the quarter, which resulted in an estimated 18,430 contained gold ounces to the leach pads. La Colorada produced 14,779 gold ounces and 38,861 silver ounces during the fourth quarter of 2017 or 15,334 GEOs. Lower grades, along with less run-of-mine material hauled directly to the leach pads during the fourth quarter of 2017, resulted in a decrease in gold ounces produced in the fourth quarter compared to La Colorada sold 12,896 gold ounces in the fourth quarter of 2017 at a cash cost per gold ounce sold of $817 (see Non-IFRS Measures section), compared to 15,735 gold ounces sold at a cash cost per gold ounce sold of $636 for the fourth quarter of The increase in cash cost per gold ounce sold over the comparable period of 2016 is primarily due to a decrease in gold ounces to the leach pads in the fourth quarter of 2017 as a result of lower grades and less mineralized material direct to leach pads as discussed above. During the year ended 2017, La Colorada mined 23.4 million tonnes containing 4.5 million tonnes of mineralized material. The increase in waste tonnes mined from the comparable period of 2016 is primarily due to the commencement of the stripping of the El Creston pit in the fourth quarter of La Colorada loaded 4.9 million tonnes on the leach pads during the year, which resulted in an estimated 84,050 contained gold ounces to the leach pads. La Colorada produced 50,796 gold ounces and 174,330 silver ounces during the year ended 2017 or 53,286 GEOs. For the year ended 2017, excluding run-of-mine material hauled directly to the leach pads, tonnes of mineralized material crushed and grades related to the types of mineralized material mined were both down 2% from 2016, which when combined, led to a 10% reduction in GEOs produced year-over-year. La Colorada 9

10 sold 49,538 gold ounces for the year ended 2017 at a cash cost per gold ounce sold of $691 (see Non- IFRS Measures section), compared to 56,112 gold ounces sold at a cash cost per gold ounce sold of $704 for the year ended Capital expenditures at La Colorada during the fourth quarter and year ended 2017 were $3.5 million and $18.8 million, respectively, primarily for capitalized stripping and leach pad construction. San Antonio, Magino and Cerro del Gallo Projects Capital expenditures for the San Antonio project were as follows: Year ended Expressed in $ millions Camp costs, land costs and other $ 0.1 $ 0.2 $ 0.8 $ 0.9 Technical studies and personnel costs $ 0.2 $ 0.4 $ 1.4 $ 1.5 During the fourth quarter of 2016, the Mexican Environmental Authority ( SEMARNAT ) denied the Environmental Impact Assessment (Manifiesto de Impacto Ambiental or MIA ) for the Company s San Antonio project, citing a request for additional information. The Company is evaluating its alternatives including legal and other. Capital expenditures for the Magino project were as follows: Year ended Expressed in $ millions Assays and geochemistry $ - $ 0.3 $ 0.1 $ 0.4 Camp costs, land costs and other Technical studies and personnel costs Drilling and geology $ 1.1 $ 3.4 $ 7.5 $ 6.9 In the fourth quarter of 2017, the Company filed an FS technical report pursuant to National Instrument Standards of Disclosure of Mineral Projects ( NI ) for its Magino project. A 10,000 tonne per day processing facility was selected for the FS in order to significantly reduce the initial capital requirement. This differs from the 30,000 tonne per day project presented in the January 2016 pre-feasibility study and provides the Company with a scalable project, which it can fund on a stand-alone basis, if a decision is made to proceed with the project. The project is designed to allow future expansion should economics warrant such a decision. A 30,000 tonne per day scenario was also evaluated and is summarized in the Other Relevant Data section of the FS. In 2017, the Canadian Environmental Assessment Agency completed its conformity review of the previously submitted Environmental Impact Statement and held Indigenous and public sessions as part of the EA process. Also during 2017, the Company executed a Collaborative Agreement with the Red Sky Métis Independent Nation and Community Benefits Agreement with Missanabie Cree First Nation. In October 2013, the Company signed a surface and mining rights exchange agreement with Richmont Mines Inc. Pursuant to this agreement, as amended, Argonaut will expand its surface and mining rights associated with its Magino project. During the year ended 2017, the Company received the conditional consents and approvals required from certain persons or governmental bodies. On November 24, 2017, the Company completed the acquisition of the Cerro del Gallo project (see Property Acquisitions section of this MD&A) and has started assessing the project for 2018 work plans. Argonaut continues to work towards permitting these projects and has engaged the community, regulators and various agencies toward defining projects within the jurisdictional guidelines that will be acceptable to all parties. 10

11 LIQUIDITY AND CAPITAL RESOURCES The Company s cash and cash equivalents balance as at 2017 was $14.1 million, as compared to $42.1 million as at 2016 and $37.5 million as at September 30, In April 2016, the Company signed a credit agreement with a syndicate of Canadian banks for a revolving credit facility ( Revolving Facility ) for an aggregate amount of $30.0 million with a three year term. The Revolving Facility bears interest at the London Inter-bank Offered Rate ( LIBOR ) plus 2.25% to 3.25% on drawn amounts and 0.51% to 0.73% on undrawn amounts, based on the Company s consolidated leverage ratio, as defined in the agreement. During the fourth quarter of 2017, $8.0 million was drawn down on the Revolving Facility, reducing the undrawn amount to $22.0 million as at The Company s debt balance as at 2017 was $8.0 million, as compared to $0.9 million as at 2016 and nil as at September 30, The Revolving Facility is secured by all of the Company s assets and is subject to covenants that require the Company to maintain certain net tangible worth and ratios for leverage and interest coverage. As at 2017, the Company was in compliance with these covenants. Cash Flows Year ended Expressed in $000s Operating activities Cash flows from operating activities before changes in non-cash operating working capital and other items $ 11,711 $ 8,539 $ 45,869 $ 35,035 Changes in non-cash operating working capital and other items (10,161) (1,075) (7,049) (1,571) Net cash provided by operating activities 1,550 7,464 38,820 33,464 Investing activities Expenditures on mineral properties, plant and equipment (5,580) (14,633) (70,215) (38,089) Cash consideration paid on property acquisitions (27,943) - (40,943) - Decrease in restricted cash - - 1,628 - Other Net cash used in investing activities (32,929) (14,633) (108,881) (37,324) Financing activities Proceeds from issuance of common shares, net of share issuance costs 5-32,046 3,245 Repayment of debt - (623) (916) (3,080) Proceeds from debt 8,000-8,000 - Proceeds from settlement of derivatives 381-2,546 - Other (60) (63) (398) (812) Net cash provided by (used in) financing activities 8,326 (686) 41,278 (647) Effects of exchange rate changes on cash and cash equivalents (343) (458) Decrease in cash and cash equivalents (23,396) (8,313) (28,038) (3,783) Cash and cash equivalents, beginning of period 37,456 50,411 42,098 45,881 Cash and cash equivalents, end of period $ 14,060 $ 42,098 $ 14,060 $ 42,098 For the three months ended 2017, as compared to the three months ended 2016 During the fourth quarter of 2017, cash decreased by $23.4 million due primarily to $27.9 million of cash consideration paid on property acquisitions (see Property Acquisitions section of this MD&A) and $5.6 million of capital expenditures incurred, partially offset by $8.3 million from financing activities and $1.6 million of cash flows from operations, as compared to the fourth quarter of 2016 in which cash decreased by $8.3 million due primarily to $14.6 million of capital expenditures incurred, partially offset by $7.5 million of cash flows from operations. Cash provided by operating activities totaled $1.6 million in the fourth quarter of 2017, as compared to $7.5 million in the fourth quarter of The decrease in cash provided by operations is primarily due to the increase in work-inprocess inventory in the fourth quarter of 2017 related to the commencement of commercial production at the San Agustin mine. 11

12 Cash used in investing activities totaled $32.9 million in the fourth quarter of 2017, versus $14.6 million in the fourth quarter of The cash used in investing activities in the fourth quarter of 2017 primarily relates to $14.9 million of cash consideration paid for the acquisition of the Cerro del Gallo project (see Property Acquisitions section of this MD&A), $13.0 million of deferred cash consideration paid for the acquisition of the San Juan mineral concession adjacent to the El Castillo mine (see Property Acquisitions section of this MD&A) and $3.5 million for deferred stripping at the El Castillo and La Colorada mines. The cash used in investing activities in the fourth quarter of 2016 relates to capital expenditures primarily for deferred stripping at the El Castillo and La Colorada mines, construction at the San Agustin project and exploration expenses related to the Magino project. Cash provided by financing activities totaled $8.3 million in the fourth quarter of 2017, as compared to cash used in financing activities of $0.7 million in the fourth quarter of During the fourth quarter of 2017, the Company received proceeds from debt of $8.0 million related to the drawdown of the Revolving Facility. During the fourth quarter of 2016, the Company made debt payments of $0.6 million on the leased mining equipment fleet. The debt on the leased mining equipment fleet matured in April For the year ended 2017, as compared to the year ended 2016 During 2017, cash decreased by $28.0 million due primarily to $70.2 million of capital expenditures incurred and $40.9 million of cash consideration paid on property acquisitions (see Property Acquisitions section of this MD&A), partially offset by $38.8 million of cash flows from operations and $41.3 million of cash flows provided by financing activities, as compared to 2016 in which cash decreased by $3.8 million, due primarily to $38.1 million of capital expenditures incurred, offset by $33.5 million of cash flows from operations. Cash provided by operating activities totaled $38.8 million during 2017, as compared to $33.5 million in The increase in cash provided by operations is primarily related to the increase in gold ounces sold during 2017 as compared to Cash used in investing activities totaled $108.9 million in 2017, versus $37.3 million in The cash used in investing activities during 2017 relates to capital expenditures including $27.3 million for construction costs related to the San Agustin project, $26.0 million cash consideration paid for the acquisition of the San Juan mineral concession adjacent to the El Castillo mine (see Property Acquisitions section of this MD&A), $18.7 million for deferred stripping at the El Castillo and La Colorada mines, $14.9 million cash consideration paid for the acquisition of the Cerro del Gallo project (see Property Acquisitions section of this MD&A) and other capital or exploration activities on the Company s operating, development and exploration properties. Investing activities during 2016 includes $38.1 million in capital expenditures related to deferred stripping at the El Castillo and La Colorada mines, leach pad construction and crushing and conveying circuit improvements at the La Colorada mine and expenses related to the Magino and San Agustin projects. Cash provided by financing activities totaled $41.3 million in 2017, as compared to cash used in financing activities of $0.6 million in During 2017, the Company received proceeds, net of share issuance costs, of $32.0 million primarily from the issuance of common shares, proceeds from debt of $8.0 million related to the drawdown of the Revolving Facility and proceeds from the settlement of derivatives of $2.5 million. During 2017 and 2016, the Company made debt payments of $0.9 million and $3.1 million, respectively, on the leased mining equipment fleet. The debt on the leased mining equipment fleet matured in April During 2016, the Company received $3.2 million from the issuance of flow-through common shares to fund exploration expenditures at the Magino project. Total assets increased to $689.9 million as at 2017, as compared to $609.9 million as at 2016, principally due to an increase in mineral properties, plant and equipment, partially offset by a decrease in cash and cash equivalents. Total liabilities increased to $57.4 million as at 2017, as compared to $52.7 million as at 2016, primarily due to the $8.0 million drawdown on the Revolving Facility in Total shareholders equity increased to $632.4 million as at 2017, as compared to $557.2 million as at 2016, primarily as a result of the issuance of common shares for net proceeds of $32.0 million, net income of $23.9 million and foreign currency effects of $16.9 million. 12

13 Liquidity Outlook In 2018, the Company plans to produce between 165,000 and 180,000 GEOs (based on the three-year historical average silver to gold ratio of 70:1). Cash cost per gold ounce sold (see Non-IFRS measures section) in 2018 is expected to be between $700 and $800. All-in sustaining cost per gold ounce sold (see Non-IFRS measures section) in 2018 is expected to be between $850 and $950. The Company plans to invest $50 million to $55 million on capital expenditures and exploration initiatives in Major capital expenditures in 2018 are expected to include $26 million to $28 million at the El Castillo mining complex, $17 million to $18 million at La Colorada and $7 million to $9 million on Magino, San Antonio, Cerro del Gallo and other. The following table summarizes the Company s payments for commitments and contractual obligations as at 2017: Expressed in $000s Thereafter Total Operating lease obligations $ 43 $ 2 $ - $ - $ - $ - $ 45 Land agreement obligations (1)(3) 1,928 1,972 1,190 1,135 1,199 10,806 18,230 Purchase obligations (2)(3) 12, ,905 Other debt - 8, ,000 Reclamation provision ,880 10,880 $ 14,097 $ 10,753 $ 1,190 $ 1,135 $ 1,199 $ 21,686 $ 50,060 (1) The Company has entered into agreements for surface and access rights to land associated with operating mines, development projects and exploration projects. (2) The Company has entered into commitments for supplies totaling $12,905. (3) Certain commitments may contain cancellation clauses, however the Company discloses its commitments based on management s intent to fulfill the contracts. The Company s cash and cash equivalents balance, the cash expected to be generated from the operation of the El Castillo and San Agustin mines (El Castillo mining complex) and the La Colorada mine during 2018 and undrawn amounts on the Company s Amended Revolving Facility (see Events After the Reporting Period section of this MD&A) are anticipated to be sufficient to meet obligations and the planned investing and operating activities of the Company for the next 12 months. If required, the Company anticipates it can raise cash from proceeds from sale of shares or proceeds from sale of mineral properties to meet its cash requirements. The Company s results are highly dependent on the price of gold and future changes in the price of gold will therefore impact performance. Readers are encouraged to read the Cautionary Statement section of this MD&A and the Risk Factors contained in the Company s 2016 Annual Information Form, which is available on SEDAR at The profitability and operating cash flow of Argonaut are affected by various factors, including the amount of gold produced at the mines, the market price of gold, operating costs, interest rates, regulatory and environmental compliance, the level of exploration activity and capital expenditures, general and administrative costs and other discretionary costs and activities. Argonaut is also exposed to fluctuations in currency exchange rates, interest rates, regulatory, licensing and political risks and varying levels of taxation that can impact profitability and cash flow. Argonaut seeks to manage the risks associated with its business operations; however, many of the factors affecting these risks are beyond the Company s control. The Company s financial performance, including its profitability and cash flow from operations, is tied to the price of gold and cost of inputs to its gold production. The price of gold itself is the greatest factor in profitability and cash flow from operations and should be expected to continue to be impacted by market factors. The price of gold is volatile and subject to price movements which can take place over short periods of time and are affected by multiple macroeconomic and industry factors that are beyond the control of the Company. Some of the major recent factors influencing the price of gold include currency exchange rates, the relative value of the US dollar, supply and demand for gold and more general economic results and projections such as interest rate and inflation projections and assumptions. 13

14 Commodity prices in general continue to see volatility. Volatility in the price of gold may impact the Company s revenue, while volatility in the price of other commodities, such as oil, may have an impact on the Company s operating costs and capital expenditure deployment. CONTINGENCIES Various tax and legal matters are outstanding from time to time. Judgments and assumptions regarding these matters are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations. In the event that management s estimate of the future resolution of these matters changes, the Company will recognize the effects of these changes in the consolidated financial statements on the date such changes occur. EVENTS AFTER THE REPORTING PERIOD In February 2018, the Company entered into an amended and restated credit agreement (the Amended Revolving Facility or ARF ) for an aggregate amount of $50.0 million, representing a $20.0 million increase from the principal amount of $30.0 million under its existing Revolving Facility. The ARF encompasses an extension of maturity through March 31, 2021 and a $25.0 million accordion feature, providing for total availability of up to $75.0 million. The ARF is subject to eight commitment reductions of $3.1 million per quarter, plus the ratable amount of any incremental commitment derived from the accordion, with reductions to commence on June 30, 2019 and extend through maturity. FINANCIAL INSTRUMENTS AND RISKS Overview The Company s activities expose it to risks, including financial and operational risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks related to financial instruments to which the Company is exposed are credit risk, foreign exchange risk, liquidity risk and interest rate risk. The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework and reviews the Company s policies on an ongoing basis. Readers are encouraged to read and consider the Cautionary Statement section of this MD&A and the Risk Factors described in the Company s Annual Information Form for the year ended The risk factors could materially impact future operating results of the Company and cause events to differ materially from those described in forward-looking information of the Company. Credit risk Credit risk arises from the non-performance by counterparties of contractual financial obligations. The Company maintains substantially all of its cash with major financial institutions. Deposits held with these institutions may exceed the amount of insurance provided on such deposits. The Company manages credit risk for trade and other receivables through established credit monitoring activities. To reduce credit risk, the Company regularly reviews the collectability of its amounts receivable and establishes an allowance based on its best estimate of potentially uncollectible amounts. The Company currently transacts with highly rated counterparties for the sale of gold. Management believes that the credit risk concentration with respect to these financial instruments is remote. Foreign exchange risk Because the Company operates on an international basis, foreign exchange risk exposures arise from transactions and balances denominated in foreign currencies. The Company s foreign exchange risk arises primarily with respect to the Canadian dollar and the Mexican peso. The Company s cash flows from Mexican operations are exposed to foreign exchange risk as commodity sales are denominated in US dollars and the majority of operating expenses and capital expenditures are denominated in Mexican pesos and US dollars. Administrative transactions and exploration expenditures associated with the Magino project are primarily denominated in Canadian dollars. The Company is exposed to foreign exchange risk through the following financial instruments denominated in currencies other than the US dollar as of December 31: 14