ARGONAUT GOLD INC. MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014

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1 ARGONAUT GOLD INC. MANAGEMENT S DISCUSSION & ANALYSIS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 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 November 3, All dollar amounts are expressed in United States dollars unless otherwise stated (CA$ represents Canadian dollars). This MD&A should be read in conjunction with the Company s unaudited interim condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, The financial statements were prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board and as applicable to interim financial statements. 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 at the end of this MD&A is advised. THIRD QUARTER AND RECENT HIGHLIGHTS FINANCIAL HIGHLIGHTS: Revenues of $37.3 million in the third quarter. Sales of 29,410 ounces of gold in the third quarter (20,527 at El Castillo; 8,883 at La Colorada). Cash flow from operating activities before changes in non-cash operating working capital and other items was $8.7 million in the third quarter. Production of 32,122 gold equivalent ounces ( GEO or GEOs ) (based on a silver to gold ratio of 55:1). Cash cost per gold ounce sold of $786 (see Non-IFRS Measures section). Cash and cash equivalents was $44.6 million at September 30, COMPANY HIGHLIGHTS: El Castillo GEO production of 22,980 ounces consisting of 22,807 gold ounces and 9,541 silver ounces. Production for the third quarter was affected by the rainy season which caused dilution of solution grades. A record 44,031 gold ounces were loaded on the leach pads, equating to 27,214 projected recoverable gold ounces. 1 Solution grades have steadily increased in October as a result of drier weather, which is expected to contribute to production improvements during the fourth quarter. Mining: o 7,714,185 total tonnes mined in the quarter, an 18% improvement year over year. o The gold grade of 0.34 grams per tonne ("g/t") loaded to the leach pad was a 9% improvement over the previous quarter and slightly better than the mine plan. o Strip ratio decreased to 0.9:1 for the quarter, consistent with the mine plan expectations. o Oxidized ore mined in the quarter was 89% of the total ore mined. Processing: Operation of the east and west crushing and conveying systems continued to improve with approximately 1.5 million tonnes moved on both circuits individually. Construction: West side leach pad cell 3b construction was finalized. La Colorada GEO production of 9,142 ounces, consisting of 8,870 gold ounces and 14,958 silver ounces. A record 21,195 gold ounces and 250,322 silver ounces were loaded to the leach pad; equating to 25,746 GEOs loaded to the pad. This represents a 35% increase in GEOs loaded to the pad versus the previous quarter. 1 Expected recovery rates: Run-of-mine (ROM) oxide 50%, crushed oxide 70%, ROM transition 40%, crushed transition 60%, crushed sulphides argillic 30%, crushed sulphides silicic 17%. 1

2 Crushing/Processing: o Another quarterly record was set with 1,067,946 tonnes placed on the leach pad, a 21% improvement over the previous quarter and a 94% improvement year over year. o During September, a record of over 13,700 tonnes of crushed ore per day was loaded to the pad, exceeding the anticipated 12,000 tonnes per day. o During October, the Company has seen a steady improvement in the grade of the solution from the pad yielding production of more than 150 gold ounces per day. The strip ratio of 4.6:1 was in line with the previous quarter and expectations. Magino New targets for future exploration have been identified on ground related to the recently finalized agreement with Richmont Mines Inc. ( Richmont ). Permitting documentation and studies continue to advance on the project; permit applications are expected to be submitted around the end of San Antonio The Company continues to pursue activities to move forward a project that is mutually beneficial to all stakeholders by engaging in dialogue with the local communities, local and federal agencies, as well as reviewing its legal options. San Agustin Phase II drill program of approximately 13,000 metres to be positioned on 200 metre spacing has begun. The area defined for exploration at San Agustin follows the trend of mineralization for upwards of two kilometres from east to west and is approximately 0.5 kilometres wide from north to south. The Company released a National Instrument ( NI ) Technical Report on the current mineral resource on October 3, 2014 that resulted in an indicated resource of nearly 845 thousand gold ounces and 28 million silver ounces or 1.3 million GEOs (based on a silver to gold ratio of 65:1) contained in 82.2 million tonnes of material at a grade of 0.32 g/t gold and 10.7 g/t silver and anticipates issuing a Preliminary Economic Assessment by year-end. Metallurgical test work being conducted internally by Argonaut has been completed. Initial results from external tests completed at Kappes, Cassiday & Associates ( KCA ) were reported previously in the Press Release dated August 22, The results of the remaining tests were reported previously in the Press Release dated October 15, These additional tests were conducted at Argonaut s El Castillo mine metallurgical testing facilities under the guidance of KCA with two duplicate column tests conducted by KCA in their facilities in Reno, Nevada (refer to October 15, 2014 Press Release). Summary Table of San Agustin Test Results provided by KCA Crush Size, millimetre ("mm"), 100% Passing Average Results of Test Work Previously Reported in Press Release Dated August 22, 2014 (1) Average Results of Test Work Previously Reported in Press Release Dated October 15, 2014 (2) Overall Average of All Argonaut Test Work (3) Gold ("Au") Silver ("Ag") Au Ag Au Ag ROM 56% 11% 56% 11% 50 65% 16% 66% 17% 65% 16% % 24% 72% 28% 71% 26% Note (1) - See Argonaut San Agustin Press Release dated August 22, 2014 for previously reported test work results. Note (2) - See Argonaut Production Press Release dated October 15, 2014 for previously reported test work results. Note (3) - Overall average is weighted by the number of tests in each group. 2

3 DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS Argonaut is a 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 the Americas. As at the date of this MD&A, the Company owns the producing El Castillo mine in the State of Durango, Mexico, the producing La Colorada mine in the State of Sonora, Mexico, the advanced exploration stage San Antonio property in the State of Baja California Sur, Mexico, the advanced exploration stage Magino property in the Province of Ontario, Canada, the exploration stage San Agustin property located 10 kilometres from the El Castillo mine in the State of Durango, Mexico, and several other exploration stage projects, all of which are located in North America. SUMMARY OF QUARTERLY RESULTS The following table sets forth selected unaudited quarterly financial information prepared in accordance with IFRS for each of the eight most recent quarters: 2014 Q Q Q Q Q Q Q Q4 Revenue ($000s) $37,310 $40,943 $39,054 $34,604 $42,447 $44,930 $43,080 $52,347 Net income (loss) ($000s) $(1,823) $2,022 $2,816 $(14,674) $6,577 $6,494 $11,615 $19,070 Income (loss) per share basic $(0.01) $0.01 $0.02 $(0.10) $0.04 $0.04 $0.08 $0.19 Income (loss) per share diluted $(0.01) $0.01 $0.02 $(0.10) $0.04 $0.04 $0.08 $0.18 Gold ounces sold 29,410 30,822 28,639 26,918 30,792 31,756 25,441 29,502 Average realized gold price per ounce $1,251 $1,296 $1,304 $1,248 $1,331 $1,388 $1,622 $1,698 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 quarterly year-over-year decrease in revenue for the third quarter of 2014 was primarily due to a decrease in gold ounces sold and a lower gold price. The quarterly year-over-year decrease in net income was due principally to a lower average realized gold price per ounce sold, an increase in cash cost per gold ounce sold (see Non-IFRS Measures section) and an increase in deferred tax expense due primarily to the foreign exchange effects of the weakening Mexican peso on the calculation of deferred taxes. The decrease in net income for the fourth quarter of 2013 was due primarily to a deferred tax charge of $16.8 million related to the enactment of tax reform legislation in Mexico. 3

4 DISCUSSION OF OPERATIONS Unaudited and expressed in $000s Three months ended September 30, Nine months ended September 30, Revenue $ 37,310 $ 42,447 $ 117,307 $ 130,457 Cost of sales Production costs 23,644 22,378 70,566 60,561 Depreciation, depletion and amortization 9,299 7,366 26,998 19,384 Total cost of sales 32,943 29,744 97,564 79,945 Gross profit 4,367 12,703 19,743 50,512 Exploration expenses General and administrative expenses 3,334 2,615 9,264 9,343 Write-off of exploration properties ,421 Profit from operations 755 8,815 9,863 38,862 Finance income ,137 Finance expenses (326) (471) (1,462) (1,086) Other income (expense) (275) 226 (157) (1,084) (550) 129 (1,287) (1,033) Income before income taxes 205 8,944 8,576 37,829 Income tax expense 2,028 2,367 5,561 13,143 Net income (loss) for the period $ (1,823) $ 6,577 $ 3,015 $ 24,686 For the three months ended September 30, 2014, as compared to the three months ended September 30, 2013 Revenue for the three months ended September 30, 2014 was $37.3 million, a decrease from $42.4 million during the three months ended September 30, During the third quarter of 2014, gold ounces sold totaled 29,410 at an average realized price per ounce of $1,251 (compared to 30,792 gold ounces sold at an average price per ounce of $1,331 during the same period of 2013). Production costs for the third quarter of 2014 were $23.6 million, an increase from $22.4 million in the third quarter of Cash cost per gold ounce sold (see Non-IFRS Measures section) increased to $786 in the third quarter of 2014 from $680 in the same period of 2013, principally due to a decrease in the average gold grade of material to the leach pad at El Castillo, an increase in mine operating costs, as capitalized stripping decreased at La Colorada, and a decrease in silver sales. Depreciation, depletion and amortization expense included in cost of sales for the third quarter of 2014 totaled $9.3 million, an increase from $7.4 million in the third quarter of 2013, due to the increase in mineral properties, plant and equipment cost during General and administrative expenses for the third quarter of 2014 were $3.3 million, an increase from $2.6 million in the same period of 2013, primarily due to an increase in professional services associated with the collection of value added tax ( VAT ) in Mexico. Income tax expense decreased to $2.0 million during the third quarter of 2014 from $2.4 million in the same period of 2013, primarily due to lower taxable income, offset by the foreign exchange effects of the weakening Mexican peso on the calculation of deferred taxes, which increased deferred tax expense. Net loss for the third quarter of 2014 was $1.8 million or $0.01 per basic share, a decrease from net income of $6.6 million or $0.04 per basic share for the third quarter of

5 For the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013 Revenue for the nine months ended September 30, 2014 was $117.3 million, a decrease from $130.5 million during the nine months ended September 30, Gold ounces sold totaled 88,871 at an average realized price per ounce of $1,284 (compared to 87,989 gold ounces sold at an average price per ounce of $1,436 during the same period of 2013). Production costs for the nine months ended September 30, 2014 were $70.6 million, an increase from $60.6 million in the comparative period of Cash cost per gold ounce sold (see Non-IFRS Measures section) increased to $758 in the first nine months of 2014 from $642 in the same period of 2013, principally due to a decrease in the average gold grade of material to the leach pad at El Castillo, an increase in mine operating costs, as capitalized stripping decreased at La Colorada, and a decrease in silver sales. Depreciation, depletion and amortization expense included in cost of sales for the nine months ended September 30, 2014, totaled $27.0 million, an increase from $19.4 million for the nine months ended September 30, 2013 due to increased ounces sold, as many of the mining assets are amortized on a unit-of-production basis, and the increase in mineral properties, plant and equipment cost in 2013, including the purchase of mining contractor equipment during General and administrative expenses for the nine months ended September 30, 2014 and 2013 were $9.3 million. Income tax expense decreased to $5.6 million during the first nine months of 2014 from $13.1 million in the same period of 2013, primarily due to lower taxable income, offset by the foreign exchange effects of the weakening Mexican peso on the calculation of deferred taxes, which increased deferred tax expense. Net income for the nine months ended September 30, 2014 was $3.0 million or $0.02 per basic share, a decrease from $24.7 million or $0.17 per basic share for the nine months ended September 30, El Castillo Mine Operating Statistics Three months ended September 30, Nine months ended September 30, Tonnes ore 4,059,371 3,406,404 11,491,893 9,856,864 Tonnes waste 3,654,814 3,135,526 12,342,516 9,566,716 Tonnes mined 7,714,185 6,541,930 23,834,409 19,423,580 Waste/ore ratio Tonnes ore direct to leach pad 1,063,123 1,867,519 2,569,096 5,307,049 Tonnes crushed East 1,498,878 1,318,150 4,611,816 4,314,517 Tonnes West - overland conveyor 1,497, ,736 4,310, ,736 Gold grade to leach pad (grams per tonne) Gold ounces to leach pad 44,031 39, , ,312 Gold ounces produced 22,807 22,756 64,824 73,957 Gold ounces sold 20,527 25,840 63,725 72,054 Silver ounces sold 9,541 17,923 37,752 35,550 Cash cost per gold ounce sold (see Non-IFRS Measures section) $824 $697 $789 $696 During the third quarter of 2014, El Castillo mined 7,714,185 tonnes including 4,059,371 ore tonnes. El Castillo crushed 1,498,878 tonnes, conveyed 1,497,370 tonnes and placed 1,063,123 tonnes directly to leach pads in the quarter, which resulted in 44,031 total gold ounces to the leach pad. El Castillo produced 22,807 gold ounces during the third quarter of El Castillo sold 20,527 gold ounces during the third quarter of 2014 at a cash cost per gold ounce sold of $824 (see Non-IFRS Measures section). 5

6 During the nine months ended September 30, 2014, El Castillo mined 23,834,409 tonnes including 11,491,893 ore tonnes. El Castillo crushed 4,611,816 tonnes, conveyed 4,310,980 tonnes and placed 2,569,096 tonnes directly to leach pads during the nine months, which resulted in 121,307 total gold ounces to the leach pad. El Castillo produced 64,824 gold ounces during the nine months ended September 30, El Castillo sold 63,725 gold ounces during the first nine months of 2014 at a cash cost per gold ounce sold of $789 (see Non-IFRS Measures section). Capital expenditures on El Castillo during the three and nine months ended September 30, 2014 were $1.7 million and $8.3 million, respectively, primarily for capitalized stripping and leach pad construction. In addition to the above capital expenditures, during the three and nine months ended September 30, 2014, there were $2.1 million and $7.2 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 mine site. Also included in the El Castillo segment, and in addition to those capital expenditures above, were capital expenditures during the three and nine months ended September 30, 2014 of $1.1 million and $3.9 million, respectively, related to San Agustin exploration drilling and the purchase of certain additional claims. La Colorada Mine Operating Statistics Three months ended September 30, Nine months ended September 30, Tonnes ore 756, ,662 2,016,914 1,313,081 Tonnes waste mined 3,485,609 2,885,104 10,673,569 10,485,389 Total tonnes mined 4,242,559 3,299,766 12,690,483 11,798,470 Waste/ore ratio Gold grade mined (grams per tonne) Tonnes rehandled 300, , , ,722 Tonnes moved 4,543,495 3,417,488 13,306,882 11,916,192 Tonnes to leach pad including rehandled ore 1,067, ,296 2,582,953 1,435,034 Gold grade to leach pad (grams per tonne) Gold ounces to leach pad 21,195 5,571 47,658 13,509 Gold ounces produced 8,870 4,234 24,853 15,527 Gold ounces sold 8,883 4,952 25,146 15,935 Silver ounces produced 14,958 31, , ,914 Silver ounces sold 18,313 50, , ,951 GEOs produced (55:1 ratio) 9,142 4,811 26,885 17,744 GEOs sold (55:1 ratio) 9,217 5,878 27,394 18,353 Cash cost per gold ounce sold (see Non-IFRS Measures section) $698 $591 $680 $397 During the third quarter of 2014, La Colorada mined 4,242,559 tonnes containing 756,950 ore tonnes. The waste to ore ratio during the third quarter of 2014 was La Colorada loaded 1,067,946 tonnes to the leach pads during the quarter including rehandled ore and from the mine, which contained an estimated 21,195 ounces of gold. La Colorada produced 8,870 gold ounces and 14,958 silver ounces during the third quarter of La Colorada sold 8,883 gold ounces in the third quarter of 2014 at a cash cost per gold ounce sold of $698 (see Non-IFRS Measures section). The cash cost per gold ounce sold increase over the comparable period of 2013 is due to a decrease in silver sales and the transition from overburden stripping in 2013 to normal capitalized stripping in

7 During the nine months ended September 30, 2014, La Colorada mined 12,690,483 tonnes containing 2,016,914 ore tonnes. The waste to ore ratio during the first nine months of 2014 was La Colorada loaded 2,582,953 tonnes to the leach pads during the nine months including rehandled ore and from the mine, which contained an estimated 47,658 ounces of gold. La Colorada produced 24,853 gold ounces and 111,761 silver ounces during the first nine months of La Colorada sold 25,146 gold ounces in the nine months ended September 30, 2014 at a cash cost per gold ounce sold of $680 (see Non-IFRS Measures section). The cash cost per gold ounce sold increase over the comparable period of 2013 is due to a decrease in silver sales and the transition from overburden stripping in 2013 to normal capitalized stripping in Capital expenditures on La Colorada during the three and nine months ended September 30, 2014 were $4.1 million and $11.3 million, respectively, primarily for capitalized stripping and crusher upgrades. San Antonio and Magino Projects Capital expenditures for the San Antonio project during the three and nine months ended September 30, 2014 were $0.7 million and $1.6 million, respectively, primarily for capitalized engineering, permitting and support expenses. The Company continues to pursue approvals for its San Antonio project. As previously disclosed, on August 2, 2012 the Secretary for Environment and Natural Resources denied the authorization for a Medio Impacto Ambiental ( MIA ) for the Company's San Antonio project due to municipal zoning incompatibility over a portion of the site. In response, the Company appealed the determination in connection with its MIA before Mexican Federal Court. The Company s appeal regarding the MIA authorization was denied by the Mexican Federal Court on April 10, The Company has appealed the decision of the Mexican Federal Court and is also working with the local municipality to seek an amendment to the zoning plan which will allow the project to move forward. The Company believes that the project continues to have strong community support. Capital expenditures for the Magino project during the three and nine months ended September 30, 2014 were $1.8 million and $5.1 million, respectively, primarily for capitalized engineering, permitting and support expenses. The project description report was submitted in the second quarter and baseline studies are substantially complete. Additionally, the Environmental Impact Statement is expected to be submitted by year end. 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. LIQUIDITY AND CAPITAL RESOURCES The Company s cash and cash equivalents balance as at September 30, 2014 was $44.6 million, as compared to $81.1 million as at December 31, 2013 and $52.7 million as at June 30, Additionally, the Company had restricted cash of $1.8 million as at September 30, 2014 related to the surface and mining rights exchange agreement signed with Richmont in October The closing of this arrangement is conditional upon receiving consents and approvals required from certain persons or governmental bodies. Cash Flows For the three months ended September 30, 2014, as compared to the three months ended September 30, 2013 During the third quarter of 2014, cash decreased by $8.1 million, as compared to the third quarter of 2013 in which cash decreased by $14.5 million, due primarily to lower capital spending, offset by lower cash flow from operations. Cash provided by operating activities totaled $6.5 million in the third quarter of 2014, as compared to $12.7 million generated in the third quarter of Cash from operations before changes in non-cash operating working capital and other items in the third quarter of 2014 was $8.7 million, as compared to $16.3 million generated in the third quarter of The decrease in cash provided by operations is primarily related to higher cash cost per gold ounce sold (see Non-IFRS Measures section), lower average realized gold price per ounce and lower gold ounces sold. Cash used in investing activities totaled $11.8 million in the third quarter of 2014, versus $27.1 million used in the 7

8 third quarter of The cash used in investing activities in the third quarter of 2014 includes capital expenditures of $12.1 million primarily related to the El Castillo and La Colorada mines. Investing activities during the third quarter of 2013 consisted primarily of capital expenditures of $27.5 million principally related to the El Castillo mine, La Colorada mine and Magino project. Cash used by financing activities totaled $1.4 million in the third quarter of 2014, as compared to $2.5 million used in the third quarter of During the third quarter of 2014, the Company made debt and interest payments of $1.3 million and $0.1 million, respectively, on the leased mining fleet. During the third quarter of 2013, the Company made debt and interest payments of $2.1 million and $0.4 million, respectively. For the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013 During the nine months ending September 30, 2014, cash decreased by $36.5 million as compared to the first nine months of 2013 in which cash decreased by $65.6 million, due primarily to lower capital spending, offset by lower cash flow from operations. Cash provided by operating activities totaled $19.8 million for the nine months ending September 30, 2014, as compared to $25.6 million for the nine months ending September 30, Cash from operations before changes in non-cash operating working capital and other items in the nine months ending September 30, 2014 was $35.2 million, as compared to $52.4 million generated in the first nine months of The decrease in cash provided by operations is primarily related to the decrease in average realized gold price per ounce sold in the first nine months of 2014 as compared to the first nine months of Cash used in investing activities totaled $48.4 million for the nine months ending September 30, 2014, versus $81.8 million used in the nine months ending September 30, The cash used in investing activities during the first nine months of 2014 consists primarily of capital expenditures of $38.7 million principally related to deferred stripping at the El Castillo and La Colorada mines and the payment of deferred cash consideration of $10.0 million in connection with the acquisition of the San Agustin project. Investing activities during the first nine months of 2013 consisted primarily of capital expenditures of $77.8 million principally related to the El Castillo mine, La Colorada mine and Magino project and cash payments of $5.3 million related to the acquisition of businesses. Cash used in financing activities totaled $5.3 million in the nine months ending September 30, 2014, as compared to $5.0 million used in the nine months ending September 30, During the first nine months of 2014, the Company made debt and interest payments of $10.6 million and $0.5 million, respectively, partially offset by $5.7 million proceeds from short-term debt refinanced. During the first nine months of 2013, the Company made debt and interest payments of $4.8 million and $0.9 million, respectively, partially offset by $0.8 million received for the exercise of options. Total assets decreased to $918.4 million as at September 30, 2014, as compared to $942.5 million as at December 31, 2013, principally due to the decrease in cash and cash equivalents and depreciation, depletion and foreign currency effects on mineral properties, plant and equipment, partially offset by an increase in inventories and capital expenditures on mineral properties, plant and equipment. Total liabilities decreased to $105.4 million as at September 30, 2014, as compared to $117.7 million as at December 31, 2013, primarily as a result of the payment of deferred cash consideration in connection with the acquisition of the San Agustin project. Liquidity Outlook Seasonal rains during the third quarter of 2014 caused dilution of the leaching solutions, thereby reducing the recovered ounces. Due to these seasonal effects, the Company is adjusting full year production guidance to between 130,000 and 135,000 GEOs (based on a silver to gold ratio of 55:1), from previous guidance which was at the lower end of the range of 135,000 to 150,000 GEOs. Cash cost per ounce of gold sold (see non-ifrs measures section) in 2014 is expected to be between $740 and $760 per ounce. The Company plans on investing a total of $45 million on capital expenditures and exploration initiatives in Major capital expenditures in 2014 are expected to include approximately $16 million at El Castillo (including mining service company expenditures and capitalized stripping of $6 million), $14 million at La Colorada (predominately capitalized stripping of $11 million), $2 million at San Antonio, $1 million at San Agustin and $6 8

9 million at Magino. Exploration expenditures in 2014 are expected to amount to approximately $6 million. In the first nine months of 2014, the Company refinanced certain finance lease obligations for heavy mining equipment, paying a net $0.5 million. This refinancing resulted in a decrease in the interest rate on the secured assets from 10.4% to 5.7%. As at September 30, 2014, the refinanced debt has future minimum lease payments of $5.7 million, interest of $0.5 million and present value of minimum lease payments of $5.2 million. In the first nine months of 2014, the Company paid $10.0 million in deferred cash consideration, plus 16% VAT, in connection with the acquisition of the San Agustin project on December 30, Additional deferred cash consideration of $20.0 million, plus 16% VAT, will be paid during the second quarter of The Company s cash and cash equivalents balance and the cash expected to be generated from the operation of the El Castillo and La Colorada mines during 2014 and 2015 are anticipated to be sufficient to meet debt repayments, deferred consideration payable and the planned development and operating activities of the Company for the next 12 months. If required, the Company anticipates it can raise cash from debt financing or proceeds from sale of shares 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 Risk Factors contained in the Company s 2013 Annual Information Form. 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 subject to volatile 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. Commodity prices in general continue to see volatility as economies around the world continue their cautious recovery from the economic difficulties experienced over the last several years. 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. In October 2013, the Company signed a surface and mining rights exchange agreement with Richmont. Pursuant to this agreement, as amended, Argonaut will expand its surface and mining rights associated with its Magino project. The terms of this agreement provide for a CA$2 million payment from Argonaut to Richmont that has been made and is included in restricted cash. The closing of this transaction is conditional upon receiving consents and approvals required from certain persons or governmental bodies. 9

10 FINANCIAL INSTRUMENTS Marketable securities are recorded at fair value. The carrying amounts of cash and cash equivalents, restricted cash, receivables, and accounts payable and accrued liabilities are considered to be reasonable approximations of their fair values due to the short-term nature of these instruments. At September 30, 2014 and December 31, 2013, the carrying amount of deferred cash consideration is considered to be a reasonable approximation of its fair value as there have been no significant changes in market interest rates since acquisition. At September 30, 2014, the carrying amount of debt is considered to be a reasonable approximation of its fair value as there have been no significant changes in market interest rates since inception of the debt. At December 31, 2013, carrying amount of debt was less than fair value by $0.6 million. OUTSTANDING SHARE DATA As at September 30, 2014, the Company had 154,446,434 common shares and 3,186,839 stock options issued and outstanding each entitling the holder to acquire one common share. During the three and nine months ended September 30, 2014, the Company granted nil and 497,828 stock options, respectively, under the amended and restated 2010 share incentive plan. During the three and nine months ended September 30, 2014, the Company also granted nil and 287,496 restricted shares, respectively, under the amended and restated 2010 share incentive plan. During the three and nine months ended September 30, 2014, 12,505 and 29,899 stock options, respectively, were exercised and 27,321 and 94,393 stock options, respectively, were forfeited. As of November 3, 2014, the Company had 154,446,434 common shares and 3,184,356 stock options issued and outstanding. The Company s shares trade on the TSX under the symbol AR. CRITICAL ACCOUNTING ESTIMATES The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may vary from those estimates due to inherent uncertainty or other factors. The Company regularly reviews its estimates. Revisions to estimates and the resulting effects on the carrying amounts of the assets and liabilities are accounted for prospectively. Key sources of estimation uncertainty that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below. Fair value of assets and liabilities acquired through an acquisition Judgment and estimates are used to determine the fair value of the assets and liabilities acquired resulting from an acquisition. In the determination of the fair value of the assets and liabilities, management makes certain judgments and estimates regarding mineral reserves, mineral resources, exploration potential, capital expenditures, commodity prices, operating costs, economic lives, reclamation costs and discount rates, among others. It may take time to obtain the information necessary to measure their fair values. In the case of a business combination, changes to the provisional measurements of assets and liabilities acquired may be retrospectively adjusted when new information is obtained until the final values are determined. Work-in-process inventory / Production costs The Company s management makes estimates of the amount of recoverable ounces in work-in-process inventory which is used in the determination of the cost of goods sold during the period. Changes in these estimates can result in a change in carrying amount of inventories and mine operating costs of future periods. The Company monitors the recovery of gold ounces from the leach pad and may refine its estimate based on these results. Assumptions used in inventory valuation include tonnes mined, rock density, grams of gold per tonne, recovery rate, assays of ore tonnes, solutions and gold on carbon, among others. At September 30, 2014, the carrying amount of work-in-process inventories was $73.1 million (December 31, $49.3 million). 10

11 Mineral properties The cost of acquiring, exploring and developing mineral properties and the cost to increase future output by providing access to additional mineral reserves or resources, are deferred. After a mine commences production, these costs are amortized over the proven and probable mineral reserves to which they relate if available; otherwise, the Company will use its best estimate based on measured and indicated mineral resources. The determination of mineral reserves and resources is complex and requires the use of estimates and assumptions related to geological sampling and modeling, future commodity prices and costs to extract and process the ore. The mineral reserves are used in estimating the value of the mineral property and in the determination of recoverable ounces which is further used in depletion and depreciation calculations. At September 30, 2014, the carrying amount of mineral properties, including exploration and evaluation assets, was $650.6 million (December 31, $662.1 million). Impairment of non-current assets At each reporting date, the Company reviews its non-current assets to determine whether there are any indications of impairment. Calculating the estimated recoverable amount of the cash generating units for non-current asset impairment tests requires management to make estimates and assumptions with respect to estimated recoverable reserves, resources, estimated future commodity prices, the expected future operating and capital costs and discount rates. Changes in any of the assumptions or estimates used in determining the recoverable amount could impact the impairment analysis. Deferred income taxes The determination of income tax expense and deferred income tax involves judgment and estimates as to the future taxable earnings, expected timing of reversals of deferred tax assets and liabilities, and interpretation of laws in the countries in which the Company operates. The Company is subject to assessments by tax authorities who may interpret the tax law differently. Changes in these estimates may materially affect the final amount of deferred income taxes or the timing of tax payments. Reclamation and remediation provisions Reclamation and remediation provisions represent the present value of estimated future costs for the reclamation of the Company s mines and properties. These estimates include assumptions as to the cost of services, timing of the reclamation work to be performed, inflation rates, exchange rates and interest rates. The actual cost to reclaim a mine may vary from the estimated amounts because there are uncertainties in factors used to estimate the cost and potential changes in regulations or laws governing the reclamation of a mine. Management periodically reviews the reclamation requirements and adjusts the liability as new information becomes available and will assess the impact of new regulations and laws as they are enacted. At September 30, 2014, the carrying amount of the Company s provision for reclamation and remediation cost obligations was $7.4 million (December 31, $7.2 million). 11

12 RECENT ACCOUNTING PRONOUNCEMENTS In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers ( IFRS 15 ), which establishes principles to address the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The required adoption date for IFRS 15 is the annual period beginning on or after January 1, 2017, with early adoption permitted. Management is currently assessing the impact of adopting IFRS 15 on our consolidated financial statements. DISCLOSURE CONTROLS AND PROCEDURES The Canadian Securities Administrators have issued National Instrument Certification of Disclosure in Issuers Annual and Interim Filings ( National Instrument ) which requires public companies in Canada to submit annual and interim certificates relating to the design and effectiveness of the disclosure controls and procedures that are in use at the company. The Company s disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported on a timely basis to senior management, including the Company s Chief Executive Officer and Chief Financial Officer, to enable this information to be reviewed and discussed so that appropriate decisions can be made regarding the timely public disclosure of the information. INTERNAL CONTROL OVER FINANCIAL REPORTING National Instrument also requires public companies in Canada to submit interim and annual certificates relating to the design of internal control over financial reporting ( ICFR ) and an annual certificate that includes evaluating the effectiveness of ICFR. The Company s ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Management is responsible for establishing and maintaining ICFR. The Company has continued to use the 1992 Commission of Sponsoring Organizations of the Treadway Commission (COSO) framework as the basis for designing its ICFR. Due to its inherent limitations, ICFR may not prevent or detect misstatements on a timely basis as such systems can only be designed to provide reasonable as opposed to absolute assurance. Also, projections of any evaluation of the effectiveness of ICFR to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Changes to Internal Control over Financial Reporting National Instrument also requires public companies in Canada to disclose in their MD&A any change in ICFR during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, ICFR. There were no changes in ICFR during the three months ended September 30, 2014 that materially affected or are reasonably likely to materially affect the Company s ICFR. 12

13 NON-IFRS MEASURES The Company has included a non-ifrs measure for Cash cost per gold ounce sold in this MD&A to supplement its financial statements which are presented in accordance with IFRS. The Company believes that this measure provides investors with an improved ability to evaluate the performance of the Company by providing control of production costs and trends in cash costs of the Company. Management also uses this measure to monitor internal performance. Non-IFRS measures do not have any standardized meaning prescribed under IFRS. Therefore they may not be comparable to similar measures employed by other companies. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The following table provides a reconciliation of cost of sales per the financial statements to cash cost per gold ounce sold: El Castillo Three months ended September Nine months ended September 30, 30, Production costs (1) ($000s) $17,096 $18,373 $50,996 $50,957 Less silver sales ($000s) $181 $375 $748 $832 Net cost of sales ($000s) $16,915 $17,998 $50,248 $50,125 Gold ounces sold 20,527 25,840 63,725 72,054 Cash cost per gold ounce sold $824 $697 $789 $696 La Colorada Three months ended September Nine months ended September 30, 30, Production costs (1) ($000s) $6,548 $4,005 $19,570 $9,604 Less silver sales ($000s) $344 $1,077 $2,473 $3,280 Net cost of sales ($000s) $6,204 $2,928 $17,097 $6,324 Gold ounces sold 8,883 4,952 25,146 15,935 Cash cost per gold ounce sold $698 $591 $680 $397 All Mines Three months ended September 30, Nine months ended September 30, Production costs (1) ($000s) $23,644 $22,378 $70,566 $60,561 Less silver sales ($000s) $525 $1,452 $3,221 $4,112 Net cost of sales ($000s) $23,119 $20,926 $67,345 $56,449 Gold ounces sold 29,410 30,792 88,871 87,989 Cash cost per gold ounce sold $786 $680 $758 $642 (1) Excludes depreciation, depletion and amortization. 13

14 CAUTIONARY STATEMENT Readers of this MD&A are encouraged to read the Risk Factors as more fully described in the Company s filings with the Canadian Securities Administrators, including its Annual Information Form for the year ended December 31, 2013, available on SEDAR at Important risk factors to consider, among others, are Commodity Price Volatility Uncertainty in the Estimation of Mineral Reserves and Mineral Resources Uncertainty of Exploration and Development The Company May Not Achieve its Production Estimates Environmental Risks and Hazards Permitting Risk This MD&A includes certain forward-looking information within the meaning of applicable Canadian securities legislation. All statements, other than statements of historical facts, included in this MD&A that address activities, events, or developments that the Company expects or anticipates will or may occur in the future, including such things as future business strategy, competitive strengths, goals, expansion and growth of the Company s businesses, operations, plans and other such matters are forward-looking information. When used in this MD&A, the words estimate, plan, anticipate, expect, intend, believe and similar expressions are intended to identify forward-looking information. This information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information. Examples of such forward-looking information include statements pertaining to, without limitation, the future price of gold, the estimation of the mineral reserves and resources, the realization of mineral reserve and resource estimates, the timing and amount of estimated future production at the El Castillo and La Colorada mines, costs of production (including cash cost per ounce of gold sold), expected capital expenditures, costs and timing of development of new deposits, success of exploration activities, permitting requirements, currency fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks and hazards, title disputes or claims and limitations on insurance coverage. Although the Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated, or intended. There can be no assurance that such information will prove to be accurate as actual results may differ materially from those anticipated. Many factors are beyond the Company s ability to predict or control. Readers of this MD&A are cautioned not to put undue reliance on forward-looking information due to its inherent uncertainty. Argonaut disclaims any intent or obligation to update any forward-looking information, whether as a result of new information, future events or results or otherwise. This forward-looking information should not be relied upon as representing management s views as of any date subsequent to the date of this MD&A. 14

15 Technical Information and Qualified Person The technical information contained in this document has been prepared under the supervision of, and has been reviewed and approved by, Mr. Thomas H. Burkhart, Argonaut's Vice President of Exploration, a qualified person as defined by NI For further information on the Company s properties please see the reports as listed below on the Company s website or on El Castillo Mine NI Technical Report on Resources and Reserves, Argonaut Gold Inc., El Castillo Mine, Durango State, Mexico dated February 24, 2011 La Colorada Mine NI Preliminary Economic Assessment La Colorada Project, Sonora, Mexico dated December 30, 2011 Magino Gold Project NI Technical Report and Mineral Resource Estimate on the Magino Gold Project, Wawa, Ontario, Canada dated January 30, 2014 San Agustin Project NI Technical Report and Mineral Resource Estimate on the San Agustin Gold Project, Durango, Mexico dated October 3, 2014 San Antonio Gold NI Technical Report and Mineral Resource Estimate on the San Antonio Gold Project Project, Baja California Sur, Mexico dated October 10,