Management Discussion & Analysis for the three month and six month periods ended November 30, 2014

Transcription

1 Management Discussion & Analysis for the three month and six month periods ended November 30, 2014 Prepared as at January 14, 2015

2 Management s discussion and analysis ( MD&A ) provides a discussion of Orosur Mining Inc. ( Orosur or the Company ) financial and operating results for the quarter ended November 30, 2014 with comparisons to previous quarters. This MD&A accompanies, and should be read in conjunction with, the unaudited condensed interim consolidated financial statements and selected explanatory notes of the Company for the three and six months ended November 30, All amounts are expressed in thousands of US, unless otherwise indicated. The reader should also refer to the audited consolidated financial statements and MD&A for the year ended May 31, 2014, both of which are available on SEDAR at The Company s unaudited condensed interim consolidated financial statements and the financial data presented in this document have been prepared in accordance with International Financial Reporting Standards (IFRS). This MD&A is effective as of January 14, DESCRIPTION OF BUSINESS In Uruguay, the Company operates the San Gregorio gold operation, the only producing gold mine in the country, in the northern Department of Rivera. It has been exploring in Uruguay since 1996 and acquired the San Gregorio operation in October Currently, the Company is operating the Arenal Deeps underground mine and other open pits in the San Gregorio district. The Company also has strategic land holdings throughout Uruguay and has active near mine and regional exploration programmes focused on increasing gold reserves. In Chile, the Company owns the Pantanillo property, located in the Maricunga Belt, and has defined its initial NI resource statement, with a medium term objective to develop a second producing asset. The Company also has an active exploration programme on the Anillo property, optioned from CODELCO (Chile s national mining company), and located close to Antofagasta, in Region II, Northern Chile. An extension of the farm in contract period (until 2020) has been obtained during this quarter. Orosur also acquired the Talca exploration asset located close to La Serena, north of Santiago in Chile. The Company is focused on growth through its own exploration programs as well as evaluating and acquiring mining assets that have the potential to deliver resources to the Company to be brought into production in a short to medium term. The Company also develops other available mineral opportunities in its portfolio, other than gold, through joint ventures and farm-out agreements. On July 10, 2014, the Company completed the acquisition of Waymar Resources Ltd. (Waymar). All of Waymar s mining titles are fully owned by Minera Anza S.A., a subsidiary of Waymar. Waymar s Anza gold project is located in the Middle Cauca Belt in Antioquía, Colombia and includes Buritica, Titiribi, Marmato and La Colosa. 2

3 2. HIGHLIGHTS Orosur Mining Inc. Financial and operational highlights for the quarter ended November 30, 2014 include: 3 Production for second quarter was 12,854 ounces of gold, in line with both the Company s mine plan and previously stated guidance, compared to 14,829 produced in same period last year. 31,680 ounces were produced for the first half compared to 29,421 in the corresponding first half of previous year. The ounces of the quarter were produced at a cash operating cost of US 984 per ounce (Q2 13/14: US 761). Cash operating cost for the first half of the year was US 962 per ounce (Q2 13/14: US 758). All-In- Sustaining costs were US1,258/oz (Q2 13/14: US866/oz) as the Company maintains its planned exploration and investment programmes. During the quarter, 319,244 tonnes of ore were processed at a gold grade of 1.34 grams per tonne (g/t) with recovery averaging per cent. This compares to 218,790 tonnes at a gold grade of 2.34 g/t with recovery averaging per cent for the same period last year. The increase in tonnes of ore processed was offset by a lower ore grade processed during the quarter and a lower recovery. The revenue for the quarter was 17.4 million compared to 20.4 million in the corresponding quarter of the prior year. The decrease is mainly due to lower ounces of gold sold (Q2 14/15: 17,239; Q2 13/14: 20,044). The average realized gold prices were 1,212 in the current quarter and 1,306 per ounce in the same quarter last year. The loss before tax for the quarter was 2.4 million compared to a profit of 2.7 million in the same quarter last year. Net loss after tax for the quarter was 1.2 million compared with a net profit of 3.5 million in the same quarter of 2013/14. For the half year, net loss before tax was 3.1 million compared to a profit of 4.6 million in the corresponding half of 2013/14. Net loss after tax for the quarter was 2.5 million compared with a net profit 2.5 million in the same quarter of 2013/14.This was mainly due to lower revenue. Cash flow from operations before working capital investment for the quarter was 0.8 million compared to 7.3 million in the same quarter of 2013/14 (4.4 million and 13.6 million for the first half of the year respectively). The Company invested 2.3 million in capital and 1.1 million in exploration for the quarter compared to 1.7 million and 1.5 million respectively in Q2 13/14. The company s cash balance at November 30, 2014 was 6.8 million compared to 10.8 million at May 31, 2014, with net working capital (current assets less current liabilities including cash) of 6.7 million (May 2014: 10.5 million). The Company has US 3.0 million of committed but unutilized lines of credit with Banco Santander available at November 30, The company s debt balance at November 30, 2014 was 3.2 million compared to 4.9 million at May 31, As of November 30, 2014 the Company has paid 6 installments of the lease credit facility with Banco Santander (Uruguay) S.A (0.6 million), one installment of the Line of Credit Facility with HSBC Bank (1.4 million), and the amount of the loan agreement between Waymar and Continental Gold Limited (0.5 million). The Company is following the contracted schedule of lease repayments with HSBC and Banco Santander and expects to almost entirely repay these facilities and be practically debt free by May 31, On July 10, 2014, the Company completed the acquisition of Waymar Resources Ltd. ( Waymar ) (the Transaction ). Under the Transaction, the Company issued 18,466,938 common shares ( Orosur Shares ) in exchange for 49,245,170 common shares of Waymar ( Waymar Shares ), whereby shareholders of Waymar exchanged each outstanding Waymar Share for of an Orosur Share. As of July 9, 2014, this

4 Orosur Mining Inc. was equivalent to C0.116 per Waymar Share, based on the trading price of Orosur Shares of C0.31. In connection with the Transaction, the Company s wholly owned subsidiary, B.C. Ltd. In connection with the Transaction, 49,245,170 Waymar Shares were cancelled and 2 shares (representing all of the issued and outstanding shares) of the transaction entity also called Waymar Resources Ltd. were issued to the Company. Additionally, 1,500,000 Waymar share options were converted to 562,500 Orosur share options and 1,200,000 Waymar share purchase warrants to Continental Gold Limited were converted to 450,000 Orosur share purchase warrants. During the quarter, Orosur extended the terms of its farm-in with Corporación Nacional del Cobre de Chile ( Codelco ) until January 2020, with an option to extend for an additional two years. Orosur also entered into a non-binding letter of intent to option up to 40% of its interest in the Anillo project in Chile to Asset Chile Exploración Minera Fondo de Inversión Privado for non-dilutive funding of up to US3.5 million Explorations programs conducted in the San Gregorio district of Uruguay included approximately 5,640 metres of drilling while continued pre-development work focused on the main known extension of the San Gregorio deposit. As part of this program, two drill holes tested an area east of the Ombú pit and west of the San Gregorio deposit. The encouraging results included 15.7 metres at 2.97 g/t Au and 5.1 metres at 4.7 g/t Au. Underground drilling at Arenal Deeps yielded high-grade gold intercepts and generated new targets that indicate potentially significant extensions of the deposit. The best results were 6 m at 9.79 g/t Au, 11.2 m at 5.30 g/t Au and 16.3 m at 4.5 g/t Au. 3. OUTLOOK AND STRATEGY The Company maintains its forecast production guidance for FY 2015 between 50,000 to 55,000 ounces of gold at operating cash costs of between US850 to US950 per ounce. As in the past, variations in production and unit costs will occur quarter on quarter as the mine plan draws ore from several Arenal stopes with different grades, positions and sizes, changing the level of access required as well as the addition of ore from several open pits at varying grades and stages of stripping. Orosur continues to focus on cost reduction initiatives, cash optimization and operational excellence. 4. OVERVIEW OF FINANCIAL RESULTS 4.1 Selected financial information During the three and six month periods ended November 30, 2014, the Company reported a loss after taxes of 1.2 million (or 0.01 per share) and 2.5 million (or 0.03 per share) respectively, compared to a profit of 3.5 million and 2.5 million (or 0.05 and 0.03 per share) for the same periods of the previous year. Contribution margin from the San Gregorio operation for the three and six month periods ended November 30, 2014 was 1.7 million and 6.2 million respectively compared to 8.6 million and 15.9 million for the same periods in the previous year. 4

5 The decreased was mainly due to a lower production during the quarter. Table 1 shows the profit breakdown and contribution margin composition. Table 2 below shows the main movements in the balances of current and non-current assets and liabilities, financial outstanding liabilities and shareholder s equity as at November 30, 2014 compared to May 31, 2014 and Table 1 Profit after taxes Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Reference Revenue 17,404 20,375 33,930 43, Cost of sales (except depreciation) (15,715) (11,743) (27,717) (27,347) 4.4 Contribution margin 1,689 8,632 6,213 15,973 Mine site depreciation (3,210) (4,451) (7,682) (8,746) 4.5 Gross loss (profit) (1,521) 4,181 (1,469) 7,227 Exploration expenses and write off (4) (374) (33) (890) 5.3 Corporate expenses (993) (901) (1,875) (1,732) 4.6 Other net gains (losses) (115) (198) Loss (profit) before income taxes (2,403) 2,708 (3,113) 4,626 Income tax 1, (2,125) 4.7 Loss (profit) after taxes (1,244) 3,537 (2,524) 2,501 Basic earnings per share (0.01) 0.05 (0.03)

6 Table 2 Assets and liabilities selected information Orosur Mining Inc. As of November 30, 2014 As of May 31, 2014 As of May 31, s 000 s 000 s Total non -current assets 84,810 79,278 84,644 Total current assets 24,575 28,410 25,124 Total assets 109, , ,768 Total liabilities 23,858 24,708 31,808 Total financial liabilities 3,192 4,939 8,995 Total non-current financial liabilities ,823 Total shareholders equity 85,527 82,980 77, Sales Total sales of gold for the quarter were 17.2 million with 14,229 ounces of gold sold at an average price of 1,212 per ounce. This compares to 20.0 million for the same quarter of the previous year with 15,347 ounces of gold sold at an average price of 1,306 per ounce. For the six month period ended November 30, 2014, a total of 33.6 million corresponding to 26,804 ounces of gold at an average price of 1,254 per ounce were sold, compared to 42.7 million or 32,496 ounces of gold at an average gold price of 1,314 for the same period of the previous year. 6

7 Table 3 - Sales composition Q2 14/ s Oz per oz Gold 17,239 14,229 1,212 Silver 164 9, Total Sales 17,404 Q2 13/ s Gold 20,044 15,347 1,306 Silver , Total Sales 20,375 Year to date 14/15 Gold 33,614 26,804 1,254 Silver , Total Sales 33,930 Year to date 13/14 Gold 42,703 32,496 1,314 Silver , Total Sales 43, Production statistics Key production statistics are shown in Table 4. During the quarter, 1,270,646 tonnes were mined (Q2 13/14 247,053 tonnes), including 955,806 tonnes of waste (Q2 13/14 87,161) and 314,840 tonnes of ore (Q2 13/14 159,892) with an average grade of 1.38 g/t (Q2 13/ g/t), to provide a final strip ratio for the quarter of 3.04 tonnes of waste to 1 tonne of ore (Q2 13/ ). During the six month period ended November 30, 2014, 2,519,717 tonnes were mined (13/14 1,277,392 tonnes), including 1,986,804 tonnes of waste (13/14 922,161) and 532,913 tonnes of ore (13/14 355,231) with an average grade of 1.62 g/t (13/ g/t), to provide a final strip ratio for the period of 3.73 tonnes of waste to 1 tonne of ore (13/14 2.6). Approximately 45% of the ore mined during the current period came from Arenal Deeps underground operation, and the rest from several small pits. The Company expects this figure to average between 70-75% in the second half of fiscal Due in large part to the implementation of pillarless mining in the Arenal stopes, the Company maintains a specific mining sequence to safely and optimally operate the mine, which has, as planned, resulted in varying grade and volume figures over the fiscal year to date. 7

8 Table 4 Key production statistics Q2 Q2 YTD YTD 14/15 13/14 14/15 13/14 Waste tons (000 s) , Ore tons (000 s) Total mined tons (000 s) 1, ,520 1,277 Grade mined Grams / tons Au Strip ratio Waste / Ore Ore processed tons (000 s) Grade processed tons (000 s) Recovery % Gold produced Ounces 12,854 14,829 26,538 31,680 During the quarter 319,244 tonnes of ore (Q2 13/14 218,790) were fed into the plant at an average grade of 1.34 g/t (Q2 13/ g/t) to produce 12,854 ounces of gold (Q2 13/14 14,829) with a metallurgical recovery of 93.7% (Q2 13/ %). On a year to date basis 578,650 tonnes of ore (YTD 13/14 442,841) were processed at an average grade of 1.55 g/t (YTD 13/ g/t) with a metallurgical recovery of 93.4% (YTD 13/ %). Quarterly production statistics are provided in table 5 below. Table 5 - Quarterly production statistics Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Ore processed (tonnes) 361, , , , , , , ,244 Grade processed (g/t Au) Recovery (%) Gold produced (ounces) 18,401 17,170 16,851 14,829 13,218 15,319 13,684 12, Production costs Total operating costs (excluding depreciation) were 15.7 million for the quarter equivalent to cash operating cost per ounce of 984 compared to 11.7 million for cash operating cost per ounce of 761 for the corresponding quarter of the previous year. On a year to date basis, total operating costs (excluding depreciation) were 27.7 million or cash operating cost per ounce of 962 compared to 27.3 million or cash operating cost per ounce of 758 for the corresponding period of the previous year. Table 6 provides the reconciliation of cost of sales as stated in the Company s financial statements to cash cost per ounce. Cash cost per ounce is a non-gaap measure which is explained in reference 12 of this MD&A document. 8

9 Table 6 - Reconciliation of Operating costs to cash cost per ounce Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Cost of sales as per financial statements 18,925 16,194 35,399 36,093 Depreciation (3,210) (4,451) (7,682) (8,746) Operating expenses excluding depreciation 15,715 11,743 27,717 27,347 Movement in non-ore inventories (2,109) 149 (538) (794) Silver credit. (127) (331) (331) (617) Other adjustments - (170) - (808) Total cash costs (A) 13,479 11,391 26,848 25,129 Other adjustments (79) Production taxes (754) (107) (1,480) (1,108) Total cash costs before taxes (B) 12,646 11,284 25,522 24,021 Gold production in ounces (C) 12,854 14,829 26,538 31,680 Total cash costs per ounce (A)/(C) 1, , Cash operating cost per ounce (B)/(C) Depreciation The total depreciation for the quarter was 3.2 million compared to 4.5 million in the corresponding quarter of the previous year and 7.7 million compared to 8.7 million when comparing the six month period. Depreciation includes straight line depreciation of fixed assets at the mine site and for the corporate and exploration segment of operation, depreciation of tangible development, depreciation of exploration and evaluation costs associated to pits under commercial production based on contained ounces of gold in ore mined, and the depreciation of the environmental costs for rehabilitation that are recognized over the life of the mine. Mine site depreciation of fixed assets include the depreciation of heavy equipment and major spare parts, plant facilities, tailings dam facilities and other mining site infrastructure. Tangible development depreciation includes depreciation of prestripping activities to access ore bodies and depreciation of the ramp and access to the reserves of the underground operation. Exploration and evaluation depreciation includes the depreciation of previously capitalized expenditure incurred to discover and outline pit reserves and resources. Table 7 provides a breakdown of depreciation by concept. 9

10 Table 7 - Depreciation composition Q2 Q2 YTD YTD 14/15 13/14 14/15 13/14 Tangible fixed assets 1,203 2,121 2,994 3,806 Tangible underground development costs 1,163 2,084 2,617 4,469 Environmental rehabilitation provision Arenal deeps exploration and evaluation costs Other exploration and evaluation costs , Total depreciation 3,210 4,451 7,682 8,746 Exploration equipment depreciation (32) (12) (69) (24) Corporate facilities depreciation (3) (9) (7) (18) Mine site depreciation 3,175 4,431 7,605 8,705 The Company added 40,000 Au oz to reserves in Arenal project of fiscal 2014, which resulted in lower depreciation expense in Arenal Deeps, 1.2 million for this quarter compared to 2.1 million for same period last year and 2.6 million compare to 4.5 million on an YTD basis. Other exploration and evaluation costs relate to capitalized costs associated with the discovery of and resource definition for satellite pits. Depreciation is calculated for these assets using the units of production method based on the estimated proven and probable reserve of each pit. As a consequence, depreciation may vary significantly from quarter to quarter, and with respect to the previous year, according to which pit is under production in such period and how much gold is produced. This quarter, all the depreciation is due to Vaca Muerta and Picaflor open pits. 4.6 Corporate expenses and other gains and expenses Corporate expenses and other gains and expenses include corporate overhead costs, stock based compensation expense, finance income, foreign exchange gains and losses, gains and losses from the sale of assets, depreciation of corporate fixed assets and other miscellaneous items. A breakdown of such revenues and expenses are shown in Table 8. 10

11 Table 8 - Corporate expenses and other gains and expenses Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Corporate overheads ,794 1,618 Corporate depreciation Management stock based compensation Total corporate expenses ,875 1,732 Foreign exchange (gain) loss (25) (13) Net finance cost 56 (1) Other gains (200) (86) (388) (126) Total other net (gains) losses (115) 198 (264) (21) Corporate overheads include corporate administration expenses in Canada, Uruguay and Chile, holding structure costs, listing and regulatory expenses, director s fees, executive remuneration and costs related to corporate work to develop the business. Executive salaries and benefits related to site work are shown under cost of sales. Interest expense included in net finance costs includes the accrued interest derived from the credit line facility with HSBC Bank and the lease credit facility with Santander Bank to purchase the new fleet. 4.7 Income tax Table 9 - Current and deferred income tax composition Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Current income tax expense Adjustment in respect of prior years 4 (47) 4 (47) Deferred income tax provision (recovery) (1,163) (792) (593) 2,162 Income tax expense (recovery) (1,159) (828) (589) 2,126 Income tax expense for the quarter showed a recovery of 1.2 million compared to a recovery of 0.8 million for the corresponding quarter of the previous year. On a year to date basis the current six month period shows a 0.6 million recovery compared to a 2.1 million charge for the last year. The Company s only profitable jurisdiction is Uruguay and the Company gets taxed on its only producing asset, the San Gregorio operations. 11

12 The statutory income tax rate of Uruguay is 25%. A detail of current and deferred income tax is shown in Table 9. The deferred income tax provision (recovery) relates to property, plant and equipment and development costs tax assets, as well as the fiscal losses. Both of them represent future income tax deductions denominated in Uruguayan pesos that are revaluated by Uruguayan inflation for fiscal purposes. As a result, they are subject to the appreciation or devaluation of the Uruguayan peso (UY) against the US dollar (US). Table10 shows the composition of the main components of the deferred tax assets. Table 10 - Deferred tax assets composition As of November 30, 2014 As of May 31, 2014 Property, plant and equipment and development costs 3,456 3,948 Fiscal Losses 2, Other net assets Deferred income tax asset 6,063 5,470 12

13 5. FINANCIAL POSITION Orosur Mining Inc. 5.1 Cash and other liquid resources Table 11 - Cash movement Ref. Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Cash flow from operations before working capital investment 818 7,280 4,361 13,954 Working capital release (investment) (81) 500 (1,289) Site capital expenditure 5.3 (2,302) (1,674) (4,925) (4,132) Sale of fixed assets Exploration investment 5.3 (1,100) (1,491) (2,198) (3,004) Funding 5.4 (2,210) (1,680) (2,508) (1,985) Cash increase (decrease) (4,610) 2,354 (4,003) 3,184 Cash flow from operations includes the results from the San Gregorio operation less the cost of general and corporate expenses, exploration expenditure that is not capitalized, finance interest and income taxes. At November 30, 2014, Orosur had cash resources of 6.8 million compared to 10.8 million at May 31, Cash decreased by 4.0 million during the quarter. Table 11 shows the main cash movements. 5.2 Working capital items As shown in Table 11, there was a release of working capital of 0.2 million in the quarter compared to an investment of 0.1 million for the same period in previous year, resulting in net cash inflows from operations of 1 million and 7.2 million after working capital movements. Table 12 shows a detail of investment in working capital. During the current quarter, the Company increased its medium and low grade ore stockpile by 0.6 million. Low grade ore stockpile for potential future processing is carried at zero value. High and medium ore stockpile are valued at the lower of average cost or net realizable value. Supplier s (net of prepayments) increased cash inflow is mainly due to the timing in the cancellation of salaries and labour benefits obligations and specific commercial liabilities with major suppliers. During the current quarter, the Company paid the outstanding mining royalty obligations of 1.3 million which accrued during the period April 2014 September

14 Tax credits variations are due to the timing in receiving VAT refunds granted by the Uruguayan Government and its final application. Table 12 Working capital Q2 14/15 Q2 13/14 YTD 14/15 YTD 13/14 Cash flow from operations before working capital investment 818 7,280 4,361 13,594 Warehouse inventories (118) 853 (789) 432 Stockpile (561) 166 (147) 444 Other production inventories 1, Trade payables and other accrued liabilities (1,125) (741) 650 (3,271) Tax credits and other debtors 170 (488) Total working capital investment 184 (81) 500 (1,289) Cash flow from operations after working capital investment 1,002 7,199 4,861 12,305 14

15 5.3 Capital expenditure Capital expenditure on property, plant and equipment and mineral properties, net of fixed assets sales, was 2.3 million for the quarter compared to 1.7 million for the corresponding quarter of the previous year, and 4.9 million compared to 4.1 million for the six month period ended November 30, 2014 and 2013 respectively. During the six month period, the Company sold three trucks from its fleet. The sales price (0.6 million) was equal to their net book value as a result of a previous impairment of 0.6 million which was recognized at May 31, 2014 to reflect their recoverable value. On a year to date basis, cash exploration expenditures were 1.1 million compared to 1.5 million for the same period of the previous year. The expenditures were incurred in the Uruguay Isla Cristalina (where San Gregorio operations are located), in other Uruguayan sites besides the Isla Cristalina, in Chile and in Colombia. As a result of the transaction with Waymar, the Company acquired 6.5 million of exploration projects in Colombia. Exploration and evaluation investment incurred in the Uruguay, Chile and Colombia is shown in Table 13 below. Table 13 Exploration investment by area Project Area Uruguay Chile Colombia Total Opening balance, May 31, ,566 30,248-35,813 Cash expenditure 1, ,198 Waymar acquisition exploration projects - - 6,491 6,491 Write off / Expenses (16) (17) - (33) Final balance, November 30, ,182 30,797 6,491 44, Funding During Q1 14/15, the Company had acquired seven small vehicles that were financed with a lease credit facility with Banco Santander (Uruguay) S.A. for a total amount of 0.3 million. As of November 30, 2014 the Company has paid one installment of the loan with HSBC (1.4 million) and 6 installments of the lease credit facility with Banco Santander (0.6). 15

16 As part of the acquisition of Waymar, the Company assumed a 500,000 loan payable to Continental Gold Limited ( Continental ) which was repaid on September 1, In conjunction with issuing the loan to Waymar, Continental holds 450,000 Orosur warrants (converted from 1,200,000 former Waymar warrants) exercisable at Cdn0.333 per Orosur share until March 3, During the quarter, the Board of Directors determined that the current performance share awards scheme was not an effective remuneration scheme and as it was agreed with the holders of the awards that the outstanding performance share awards would be terminated on October 3, It was unlikely that the Performance share awards would achieve the specific vesting conditions. No dividends were paid during the quarters and six months period ended November 30, 2014 and Financial instruments The composition and measurement of the Company s financial instruments, and the Company s action to manage different types of financial risks are discussed in Note 17 of the audited consolidated financial statements for the year ended May 31, Contractual obligations and commitments The Company s contractual obligations and commitments are as follows: Table 16 Financial maturity dates Total Less than 1 Year 1-2 Years 2-3 years HSBC debt 1,375 1, Santander loan for mobile fleet 1,817 1, Total 3,192 2, Commitments derived from exploration farm-outs and acquisition agreements are disclosed in Note 8 of the audited financial statements for the year ended May 31, 2014 and Note 7 of the financial statements for the three and six month periods ended November 30, Commitments for environmental rehabilitation are disclosed in note 10 of the audited financial statements for the year ended May 31, The Company, as normal practice, performs restoration work prior to the closure date and in accordance with the Uruguayan Environmental Agency. Such liabilities are recorded as liabilities of the Company. Uruguayan mining and environmental legislation requires environmental obligations to be supported by guarantees. As a result, a rehabilitation guarantee letter of credit of 2.3 million have been provided by HSBC Bank (Uruguay) S.A and an environmental guarantee for 5.0 million have been provided by AIG, a Uruguayan local insurance company. 16

17 5.7 Outstanding share data The Company has an authorized capital of unlimited number of common shares of no par value. As of January 14, 2015, the Company has a total of 96,635,081 issued shares outstanding. It has additionally 1,839,167 unexercised vested stock options to acquire common shares of the Company. 17

18 6. QUARTERLY RESULTS Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 feb-13 may-13 aug-13 nov-13 feb-14 may-14 aug-14 nov-14 Gold sold (ounces) 17,915 16,839 17,149 15,347 13,149 15,429 12,576 14,229 Average sales price (/oz) 1,653 1,547 1,321 1,306 1,254 1,309 1,302 1,212 Cash cost before taxes (/oz) 999 1, Total cash cost (/oz) 1,075 1, ,049 Sales 30,033 25,349 22,945 20,375 16,741 20,309 16,526 17,404 Cost of sales (excluding depreciation) (19,668) (21,324) (15,604) (11,743) (12,214) (14,606) (12,002) (15,715) Mine site depreciation (5,141) (7,721) (4,295) (4,451) (3,793) (6,199) (4,472) (3,210) Cost of sales (24,809) (29,045) (19,899) (16,194) (16,007) (20,805) (16,474) (18,925) Gross profit/(loss) 5,224 (3,696) 3,046 4, (496) 52 (1,521) Corporate expenses (925) (1,778) (831) (901) (1,147) (619) (882) (993) Exploration expenses and write off (180) (3,686) (516) (374) (318) 963 (29) (4) Impairment of assets - (14,057) (557) - - Obsolescence provision (22) - - Other net gain (losses) (266) (198) 815 (317) Income (loss) before taxes 3,853 (23,031) 1,918 2, (1,048) (710) (2,403) Income tax recovery (loss) (359) 1,211 (2,954) 829 (99) 3,685 (570) 1,159 Net income (loss) for the period 3,494 (21,820) (1,036) 3,537 (15) 2,637 (1,280) (1,244) Basic earnings (loss) per share 0.05 (0.29) (0.01) 0.05 (0.00) 0.03 (0.02) (0.01) Diluted earnings (loss) per share 0.05 (0.29) (0.01) 0.05 (0.00) 0.03 (0.02) (0.01) Cash flow from operations after working capital investment 8,007 9, ,199 2,828 6,968 3,859 1,002 Cash from (used for) financing (52) (305) (305) (1,680) (305) (1,564) (298) (2,210) Cash invested (6,544) (8,749) (3,971) (3,165) (2,083) (4,690) (3,721) (3,402) Cash on hand 5,156 5,633 6,463 8,817 9,257 10,818 11,425 6,815 Total assets 128, , , , , , , ,385

19 Shareholders equity 99,688 77,960 76,971 80,555 80,677 82,980 87,209 85,527 19

20 7. RELATED PARTY TRANSACTIONS The Company owns 100% of all of its subsidiaries. Figures contained in this MD&A include the accounts of Orosur and its subsidiaries and all inter-company transactions have been eliminated on consolidations. Note 10 of the unaudited interim consolidated financial statements for the period ended November 30, 2014 discloses the Company s list of subsidiaries. 8. RISKS AND UNCERTAINTIES The Company s net earnings in the near-term are affected principally by its mining operations and, in the longer term, will be affected primarily by the success or failure of its exploration and development activities. The Board recognizes that the exploration and development of natural resources is a speculative activity that involves a large numbers of uncertainties, and a degree of financial risk. Accordingly, the Board considers the risks to which the Company is exposed as part of its regular operations, and keeps these under review. The principal risks are considered to be those set out below. Sensitivity to commodity prices and foreign exchange rates The Company s revenues, net earnings and cash flow from operations are affected materially by changes in the price of gold. Gold has historically been subject to large price fluctuations, and is affected by factors which are unpredictable, including international economic and political conditions, speculative activities, the relative exchange rate of the US dollar with other currencies, inflation, global and regional levels of supply and demand and the gold inventory levels maintained by producers and others. The Company s gold sales are priced in US dollars while its operating costs are predominantly incurred in US dollars, Canadian dollars, and Chilean and Uruguayan pesos. The Company has financial exposure to foreign exchange fluctuations in the Uruguayan and Chilean peso and the Canadian dollar relative to the US dollar. Key Personnel Risks Recruiting and retaining qualified personnel is critical to the Company s success. The number of skilled mining and exploration professionals in Uruguay is limited and competition for such persons is intense in the global mining industry. As the Company s business activity continues to grow, it will be required to hire additional personnel and retain the services of key personnel. The Company believes that it will be successful in attracting and retaining qualified personnel. Exploration, Mining and Operational Risks The Company s longer term strategy depends to a certain extent on its ability to find commercial quantities of minerals within Uruguay, and to obtain and retain appropriate access to these minerals. The Board cannot guarantee that it will be able to identify appropriate properties, or negotiate acquisitions, on favorable terms. The Company currently has one producing asset, the San Gregorio project. As more of its projects mature, the Board expects that more projects will develop into producing assets. In common with all mining operations, there is uncertainty, and therefore risk, associated with operating parameters and costs. Whilst costs can be budgeted with a reasonable degree of confidence, operating parameters can be difficult to predict and are often affected by factors outside the Company s control. In addition, other risks, including cuts in electricity supply, fuel supply shortages, industrial accidents, technical failures, labour disputes and environmental hazards are also beyond the Group s control.

21 The nature of resource and reserve quantification studies means that there can be no guarantee that estimates of quantities and grades of minerals will be available to extract. The figures for reserves and resources estimates are determined in accordance with National Instrument , issued by the Canadian Securities Administrators. This National Instrument lays out the standards of disclosure for mineral projects including rules relating to the determination of mineral reserves and resources The exploration for and development of mineral deposits involves significant risks that even a combination of careful evaluation, experience and knowledge may not eliminate or adequately mitigate. While the discovery of an ore body may result in substantial rewards, few properties that are explored are ultimately developed into producing mines. There is no assurance that commercial quantities of ore will be discovered on any of Orosur s exploration properties. There is no assurance that, even if commercial quantities of ore are discovered, a mineral property will be brought into commercial production. In addition, assuming discovery of a commercial ore-body, depending on the type of mining operation involved, several years can elapse from the initial phase of drilling until commercial operations are commenced The Company s business activities are also affected to varying degrees by government regulations respecting, among other things, tax, royalties, utilities service supply, mining legislation and environmental legislation changes. Title Risks Individual titles expire from time to time and the Company manages the process of retaining its rights by reapplication or conversion to other forms of title relevant to each stage of development. The process of reapplication involves some risk however, as released titles must fall open before they can be re-applied for. There can be no guarantee that the State in the jurisdictions in which the Company operates will continue to grant or respect mining titles, and that the titles of the properties will not be challenged or negated for political or legal reasons. Liquidity Risk Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company regularly evaluates its cash position to ensure preservation and security of capital as well as maintenance of liquidity. The Company manages liquidity risk by proactively forecasting its liquidity requirements with available funds and anticipated cash flows, by maintaining adequate reserves and banking facilities and by matching the maturity profiles of financial assets and liabilities. In April 2014, the Company finalized the construction of the ramp at Arenal Deeps and, as a result, does not have the same strong cash requirements this year as it had in the previous two years. However, the Company maintains a strong investment and exploration program to extend its mine life. The Company is therefore interested in maintaining that program, but a significant proportion of it is discretionary, which provides more flexibility than in previous years. The Company is utilizing its cash flow from Arenal and open pit operations to fund its exploration programs this year. 21

22 Political and Economic Risks Political conditions in the countries where the Company operates are stable. Changes may however occur in political, fiscal and legal system that might affect the ownership or operation of the Group s interests, including inter alia, changes in exchange control regulations, expropriation of mining rights, changes of government and in legislative and regulatory regimes. The Uruguayan Government is considering a project for a new law regulating big mining projects. According to the current discussion and drafts presented, Orosur might qualify as a big project. That would imply Orosur would be subject to additional taxation in cases of extraordinary high profits. 9. CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS The preparation of the Company s financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. By definition, estimates and assumptions seldom equal actual results and have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities, and to the amounts of revenues and expenses presented in these financial statements. The areas which require management to make significant judgments, estimates and assumptions are discussed below: i) Economic lives of mining assets and recoverable value Reserves: The economic lives of the Company s mining operation and development assets is based upon the individual mine s mineral reserves. The Company s resources and reserves are calculated in accordance with mining standards and in compliance with National Instrument Standards of disclosure for Mineral projects ( NI ). The information relating to the geological data on the size, depth and shape of the ore body requires complex geological judgments to interpret the data. The Company reviews and re-evaluates the estimated future discounted net cash flows of its mines and development properties on a regular basis, to ensure that they exceed the carrying value for each property. These calculations rely on the estimated reserves and/or resources, estimated future commodity price and production cost. ii) Inventory: Expenditure incurred and depreciation of assets as a result of mining and processing activities is deferred and accumulated as the cost of ore in stockpiles, gold in circuit and finished metals inventories, on units based on estimated volumes and grades as a result of assays and other sampling tests. These deferred amounts are carried at the lower of average cost or net realizable value. Write downs of such inventories are reported as a component of current period costs and are influenced by the prevailing and long-term metal prices, prevailing costs for production inputs, realized ore grades and production schedules. iii) Environmental rehabilitation provisions: The fair value of the liability is determined based on the net present value of estimated future costs estimated by management based on feasibility and engineering studies on a site by site basis. While care was taken to estimate the retirement obligations, these amounts are estimates of expenditures that are not due until future years; The Company assesses its provision on an annual basis or when new material information becomes available. 22

23 iv) Share based compensation: The Company uses the fair value method to account for stock-based employee compensation plans. The calculation of this benefit relies on estimates of the anticipated life of the option and the volatility of the Company s share price; v) Deferred income tax assets and liabilities: Significant judgment is required in determining the worldwide provision for income taxes. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences may impact the carrying amount of deferred income taxes; vi) Exploration and evaluation expenditure: The recoverability of amounts shown for capitalized exploration and evaluation costs is dependent upon the discovery of economically recoverable reserves. 10. DISCLOSURE CONTROLS AND PROCEEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company's President and Chief Executive Officer ( CEO ) and Chief Financial Officer ( CFO ) on a timely basis so that appropriate decisions can be made regarding public disclosure. The Company s system of disclosure controls and procedures includes, but is not limited to, our Continuous Disclosure Policy Procedure, our Code of Business Conduct and Ethics, our Insider Trading Policy and Share Trading Code and Price Sensitive Information Policy, our Whistleblower Policy, Release of Public Information Policy and the effective functioning of the Audit Committee and Board of Directors. As at the end of the period covered by this MD&A, management of the Company, with the participation of the President and CEO and the CFO, does not expect that the Company s Disclosure Controls will prevent or detect all error and all fraud. The inherent limitations in all control systems are such that they can provide only reasonable, not absolute, assurance that all control issues and instances of fraud and error, if any, within the Company have been detected. As at the end of the period covered by this MD&A, management of the Company, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company's disclosure controls and procedures as required by Canadian securities laws. Based on that evaluation, the President and CEO and the CFO have concluded that, as of the end of the period covered by this management's discussion and analysis, the disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the Company's annual filings and interim filings (as such terms are defined under Multilateral Instrument Certification of Disclosure in Issuers' Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Corporation, including the President and CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls over Financial Reporting 23

24 Multilateral Instrument also requires CEOs and CFOs to certify that they are responsible for establishing and maintaining internal controls over financial reporting ( ICFR ), as defined therein, for the Company, that the ICFR have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS, and that the Company has disclosed any changes in its ICFR during its most recent interim period that has materially affected, or is reasonably likely to materially affect its financial reporting. As discussed above, the inherent limitations in all controls systems are such that they can provide only reasonable, not absolute, assurance that all controls issues and instances of fraud or error, if any, within the Company have been detected. Therefore, no matter how well designed, ICFR has inherent limitations and can provide only reasonable assurance with respect to financial statement preparation and may not prevent and detect all misstatements. During the period covered by this MD&A, the Company s senior management, including CEO and CFO, evaluated the existence and design of the Company s ICFR and confirm there were no changes to the ICFR that have occurred during the quarter which materially affected, or are reasonably likely to materially affect, the Company s ICFR. 11. NON GAAP MEASURES Cash flow from operations and cash cost per ounce are not measures that have any standardized meaning prescribed by IFRS and are considered non GAAP measures. Therefore these measures may not be comparable to similar measures presented by other issuers. These measures have been presented in this MD&A as additional information regarding the Company s financial performance and financial position. Cash flow from operations is calculated by adding back non-cash items to net earnings. Contribution margin has been calculated by deducting operating expenses from sales. Operating expenses include movements in inventories but exclude operating amortization and depletion. Cash cost per ounce are determined according to the Gold Institute Standard and consist of site costs for all mining, processing, administration, royalties, refining charges, silver credits and inventory adjustments relating to metal production. Capital expenditure, depletion and amortization, corporate costs and financing costs are not included. Cash costs per ounce are total cash costs divided by gold ounces produced. 12. FORWARD LOOKING STATEMENTS Certain information contained in this Management Discussion and Analysis constitutes forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and forward looking information under applicable Canadian Securities Legislation. Such forward-looking statements or information, included but not limited to those with respect to prices for gold, estimated future production, estimated costs of production, the Company s hedging policy involve 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 statements or information. Important factors that could cause actual results to differ materially from those in the forward looking statements contained herein include among others, gold price, weather, exploration results, development and mining activities, geotechnical assumptions, environmental approvals and the availability of technical personnel. 24