[Update] Brigus turns a corner

Brigus Gold (BRD-T, BRD-X) says it is “just going to keep on improving” to reach a steady annual production rate of 100,000 oz. gold by year end at the Black Fox gold mine in Timmins, Ont.  

Although the turnaround at the mine has taken longer than expected, with gold production in the second half of 2011 missing market expectations due to a slower ramp up of the mine’s underground portion and ore dilution, Brigus’ president and CEO Wade Dawe said in an April letter to shareholders: “Our confidence in the Black Fox mine, the quality of the orebody and the exploration potential has never been higher.”

The Halifax-based producer is now starting to see noticeable results, after making a handful of changes to management, equipment and mining processes at Black Fox late last year.

In particular, the company named a new chief geologist, hired a whole new geology team, and recruited a new chief engineer as well as a mine manager, says Jennifer Nicholson, the company’s executive vice-president.

She adds she’ll “certainly credit the mine manager with a lot of the turnaround” which resulted in lower ore dilution and higher underground production.

These actions pumped up the company’s first-quarter performance, ameliorating the headaches experienced in the second half of 2011.

For the first quarter, Brigus produced 16,922 oz. gold – almost double the output from the comparable period – hitting the high end of its guidance of 15,000-17,000 oz.

The higher yield lowered cash costs to US$858 per oz., a 22% reduction from a year ago, and 11% less than what Brigus had expected.

Brigus earned US$5.5 million, or US3¢ per share, on a revenue of US$25.8 million, compared with last year’s US$4.3 million, or US2¢ per share, on a revenue of US$13.6 million.

The junior — formed through the 2010 merger of Linear Gold and Apollo Gold — sold 16,033 oz., about 60% more gold ounces than a year ago.

The Black Fox mill processed 180,965 tonnes at a head grade of 3.04 grams gold, with recoveries of 96%.

Average grade for the open pit was 2.29 grams gold, and 5.28 grams gold for the underground – surpassing the last quarter of 2011’s underground grade by 95%.

In April, the East Coast-based miner generated 7,088 oz. gold from 62,452 oz. averaging 3.66 grams.

Thrilled with the production growth, the company says the current run rate should allow Brigus to hit the upper end of its second quarter target of 18,000 to 21,000 oz.

“We are very pleased with our progress this year at the mine,” Nicholson comments. “We have an excellent team and everything is going very well. So we are just going to keep improving.”

In the coming months, Brigus will continue to ramp up underground, reaching an estimated 800 tonnes per day in the third quarter by adding six to eight mining stopes to the existing 27 stopes. These extra stopes should boost flexibility and allow active mining of 10-12 stopes.

Meanwhile, the mill enhancement that started last July should wrap up during the second half of this year and grow processing capacity by 5-10%, reaching up to 2,200 tonnes per day.

By September, Brigus anticipates completing an updated resource estimate for the new Grey Fox mine – previously known as the 147 and Contact zones – and a scoping study for the new mine, which is 3.5 km southeast of Black Fox.

Grey Fox’s initial resource, released last December, added more than 50% to the gold count at the Black Fox complex.

Brigus says it will focus on bulking up its gold reserves and resources through “targeted, systematic exploration.”

On the reserve end, it is driving an exploration drift from the deepest portion of its east ramp at Black Fox. In June, miners should start exploration drilling from underground stations to enhance reserves and lengthened the mine’s life.

Currently, the mine hosts gold reserves of 840,000 oz., Brigus has another 1.02 million oz. in reserves at the Goldfields project in Uranium City, Sask.

The company will wait until Black Fox achieves an output rate of 25,000 oz. a quarter, before making a production decision at Goldfields.

Brigus is targeting 2012 output at Black Fox of 77,000 to 85,000 oz.

Cash costs are slated to fall within US$775 and US$825 per oz., declining to about US$700 per oz. by year end.

Brigus ended the first quarter with US$34 million in cash thanks to the closing of a US$15-million bought deal financing in March, where Brigus sold 15.8 million shares priced at 95¢ apiece, and the sale leaseback of certain Black Fox mill assets, where it scooped another US$15 million.  

While the cash on hand and increasing cash flow from operations should take care of operating needs for year, the company would require another round of financings to buy back 6% of the gold stream it sold to Sandstorm Gold (SSL-V).

In September 2010, Sandstorm signed up to receive 12% of the Black Fox mine’s gold production for an upfront payment of US$56.3 million and an ongoing payment of US$500 per oz. Brigus has an option to repurchase 6% of the stream by outlaying US$36.6 million, which it plans to exercise before the options expires in December.

“We will buy back one percent of the royalty by using proceeds [of US$6 million] from a note that was on our books that we just recently sold,” says Nicholson.

Brigus acquired the note from Calais Resources as a consideration after it sold a non-core asset in 2010. The company has already received US$1.2 million last year from Calais, and early this May agreed to sell the outstanding Calais notes to New West Capital for US$6 million.

To buy the remaining 5%, Nicholson says, “We are looking at various options of low-cost non-dilutive financings to cover that.”

The junior closed May 16 in Toronto at 74¢, within a 52-week range of 69¢-$1.89.

Haywood Securities has a price target of $2 and “sector outperform” rating on Brigus.