Primero Mining’s lofty ambitions

DENVER, COLO. —Iamgold’s (IMGT, IMGT, IAG-N) former chief executive, Joseph Conway, has a new focus with Primero Mining (P-T). While the company has only been up and running as a public company for a just over a month, if Conway has anywhere near the success he had with Iamgold, Primero shareholders could be in for a wild ride.

As the head of Iamgold, Conway was part of the team that turned a joint-venture company with a market cap of roughly $50 million into a leading intermediate gold producer worth roughly $6 billion.

That kind of success helped get Primero off to a rich start. The company’s shares came on to the secondary market in early August at a price of $5.25. In Toronto at press-time, the shares were trading at $5.85 for a market cap of $512 million.

While that may seem lofty for a new company to the board, part of Primero’s success in holding that value has to do with coming to the market as an already established gold producer.

The company’s San Dimas gold-silver project, which sits 125 km northeast of Mazatlan in western Mexico, is on track to produce 90,000 to 95,000 oz. gold this year along with 4.5 million oz. silver at gold equivalent cash costs of between US$500 and US$530 per oz.

Speaking at the Denver Gold Forum in late-September, Conway argued that those kinds of numbers actually make Primero undervalued and he pulled up an assortment of charts on his presentation to further the point.

Chief among them was a chart showing cash flow multiples. It showed Primero at the undervalued end of the spectrum as it is currently trading at a price that is 6.4 times its cash flows. A company like Iamgold, for instance trades at nearly 15 times its cash flows while Yamana Gold (YRI-T, AUY-N) trades at nearly 30 times.

Landing a cash flow generating mine, however, didn’t come cheaply.

Primero bought the mine from Goldcorp (G-T, GG-N) for $500 million earlier in the year. While clearly not just any junior could bear such up-front costs, Conway told the Denver audience that the purchase was part of the company’s strategy of using cash flows from a producing mine to build other assets going forward.

And he wasn’t shy about the company’s ambition to make more acquisitions in Latin America in the coming years, as it seeks to transform itself into a leading mid-tier gold producer.

But before it does, it will first have to get every dollar it can out of San Dimas if the large investment is to be justified.

To do that, Primero is in the midst of an optimization plan that will see $26 million spent on capex this year alone.

The mill at the site currently has capacity of 2,100 tonnes per day and while Conway says there is expansion potential there, the company will first focus on getting above the 1,900 tonnes per day it is currently milling.

Once milling reaches capacity, the plan will be to bring capacity up to the same level as the leach pad which can currently handle 2,500 tonnes per day.

Details of such expansions will be part of a technical review due out by the end of this year.

Some of the key tweaks already made to the mine have been a new tailings pumping system, tunnels connecting to key mineralized zones — the Central Block and Sinaloa Graben — and the building of a hydro plant that has 7.3 megawatts of capacity at an average cost of just 1.5¢ per kilowatt/hr.

The hydro plant has brought big savings to the mine, as power from the grid costs 11¢ per kw/hr. Currently, Primero is able to meet 76% of the project’s energy demand from the hydro plant, which translates into $5 million of savings per year.

Conway said Primero is looking to build a second stage to the plant next year that would provide another 7 megawatts of power.

Such infrastructure build-up is being done to get the most out of the mine’s reserves of 5.6 million tonnes grading 4.8 grams gold and 339 grams silver for 861,630 oz. gold and 60.9 million oz. silver.

San Dimas has another 15.2 million tonnes of inferred resource grading 3.3 grams gold and 317 grams silver for 1.6 million oz. gold and 154.6 million oz. silver.

But mining isn’t the only thing for investors to ponder at San Dimas.

The company recently released an exploration out of its planned 38,000 metres and $13.5-million drill program.

With some 100 known high-grade gold-silver epithermal vein deposits throughout the San Dimas district, the company believes the exploration upside at the site is significant.

That belief has been borne out by new high-grade discoveries at Sinaloa Graben.

Whi le product ion is currently coming from the Central Block, with reserves growing at Sinaloa Graben, that could soon change.

A total indicated resource of about 27,000 oz. gold and 2 million oz. silver, at an average grade of 5.9 grams gold per tonne and 444 grams silver per tonne was estimated within Sinaloa Graben at year end 2009.

But exploration drilling results this year have added reserves of 36,000 oz. gold at 5.1 grams gold and 2.5 million oz. silver at 348 grams silver.

Drifting has also been successful at adding reserves of 47,000 oz. gold at 7.2 grams gold and 2.8 million oz. silver at 439 grams silver.