Primero impresses at San Dimas

VANCOUVER — Just over a year ago Primero Mining (TSX: P; NYSE: PPP) president and CEO Joseph Conway confidently outlined a newly minted optimization plan at the company’s San Dimas underground silver-gold mine along the Durango-Sinaloa state border in Mexico. At the time Primero was trading near a three-year low at $2.38 per share, and questions were asked as to whether the former Goldcorp (TSX: G; NYSE: GG) asset had the legs to underpin an emerging mid-tier producer.

Fast-forward to the second quarter of 2013, and the questions now involve exactly how high Primero can propel itself at San Dimas, where the company continues to set production records at operating costs that remain competitive relative to a peer group grappling with lower gold prices and inflationary pressures.

“As we’re all aware, over the last six or seven months in particular we’ve had a dramatic amount of volatility in terms of the gold price,” Conway commented during a conference call, citing a fall from US$1,700 per oz. to start the year to around US$1,300 per oz. at press time. “We’ve been focusing on continuing to improve on our operations, particularly at San Dimas, and I think you’re starting to see the results of that optimization program we started in earnest last year.”

Primero registered a 16% year-on-year increase in quarterly production at San Dimas over the past three months, as the company cranked out 39,100 oz. gold equivalent at all-in sustaining cash costs of US$659 per oz. — including 26,900 oz. gold and 1.46 million oz. silver. The increase in gold equivalent production was driven by a 15% year-on-year jump in quarterly throughput to 202,000 tonnes, with Primero exceeding nameplate capacity at its mill during the period.

As a result Primero has increased its annual production guidance to between 125,000 and 135,000 equivalent oz. gold, which represents a 21% jump compared to 2012. The company now expects its gold production to be in the range of 95,000 and 105,000 oz., and has revised its silver production to between 5.6 million to 6 million oz. Cost guidance remains unchanged at between US$620 to $640 per equivalent oz. gold.

The company is finishing off a US$16.5-million mill upgrade at San Dimas that will see the mine operating at 2,500 tonnes per day by early 2014. According to Conway the mill construction was 60% complete at the end of June, and there is the possibility of a further upgrade to 3,000 tonnes per day, which the company estimates it could achieve for less than US$5 million. Further expansion at San Dimas will hinge on ongoing exploration results, though Primero expects to make a decision on a second mill upgrade by October.

Revenues during the second quarter were US$52.5 million after the company sold 25,700 oz. gold at an average realized price of US$1,398 per oz., and 1.42 million oz. silver at US$11.66 per oz.

The company registered adjusted net income of US$17 million or 16¢ per share during the quarter, while earnings per share totalled 13¢, which beat out a consensus analyst estimate at 11¢ per share.

“We see Primero as an opportunity. You have a low-cost production base with growth that is well funded. In many cases we look at our cash and cash flow as offering opportunities to fund additional growth, perhaps through other projects,” Conway said, referencing US$130 million in cash the company reported at the end of June.

“We also see a significant amount of exploration potential at San Dimas. If you look at our market valuation in terms of the scale of the company and our balance sheet, as well as our cash flow capabilities that are all funded, we see a pretty attractive multiple,” he added.

Despite consistent operations at San Dimas, Primero has not been immune to the capital expenditure cuts now rampant across the industry. In late July the company announced it was slashing the annual budget at its newly-acquired Cerro Del Gallo 70–30 joint venture with Goldcorp — located in the state of Guanajuato in central Mexico — by around 75% to US$15 million. Primero expects to spend US$60 million in exploration and development at San Dimas in 2013.

Primero’s shares jumped 11%, or 50¢ over the two trading days, following news of its second-quarter results en route to a $5 close at press time. The company maintains 115 million shares outstanding for a $577-million market capitalization.

“In this type of environment where there is a great deal of uncertainty around the commodity price you need a discipline business approach. What we envision in regards to our company is measured growth, cost management and responsible mining in low-risk jurisdictions,” Conway said.