Primero misses Q3 expectations on impairment charge

Primero Mining’s (TSX: P; NYSE: PPP) quarterly earnings took a hit after it wrote down the goodwill value of the acquisition of Brigus Gold.

Primero reported a net loss of US$105.9 million, or US5¢ per share, including a non-cash impairment charge of US$99 million related to the Brigus transaction, which closed in March.

When Primero launched the Brigus bid last December, its shares traded at $5.22 before climbing to $7.50 when the deal closed, or a value appreciation of $100 million.

“Based on our operating and commodity price assumptions when we did the acquisition, we were certainly prepared to pay what we put on the table … based on what we know … we can’t support that. And we elected to take the impairment,” Primero’s CEO Joseph Conway said on a conference call. 

Adjusted earnings totalled US$300,000, or US$0 per share, down from US$11 million, or US3¢ a share, a year ago. Analysts on average had expected adjusted earnings of US1¢ per share.

BMO analyst Brian Quast, who had anticipated higher earnings, notes Primero missed expectations due to a weaker performance at the San Dimas gold-silver mine in Mexico and higher depreciation, as well as higher general and administrative expenses.

Quarterly production came in at nearly 60,000 equivalent oz. gold, with San Dimas contributing 60% of those ounces, and the rest coming from the recently acquired Black Fox open-pit and underground mine in Ontario. All-in sustaining costs were US$1,154 per oz.

San Dimas produced 37,385 gold equivalent oz., 11% less than a year ago due to declining grades and recoveries, as well as power interruptions. This contributed to a 22% year-over-year spike in all-in sustaining costs of US$919 per oz.

Earlier this year, the company finished expanding the San Dimas mine and mill to 2,500 tonnes per day, and recently approved a second expansion to bring throughput to 3,000 tonnes per day. Once complete, San Dimas could produce well over 200,000 gold equivalent oz. by 2016, Conway says.

Black Fox delivered 22,288 oz., or 30% more than in the second quarter. While total cash costs decreased, all-in sustaining costs were higher at US$1,202 per oz., due to more production and Primero’s cost-optimization programs.

Acknowledging that costs at Black Fox are above the spot price for gold, Conway says it is a transition year for the asset, with Primero developing the undercapitalized underground portion of the mine. He expects Black Fox to become profitable in the next 12 to 18 months.

BMO’s Quast argues that the “progress at the Black Fox underground is moving at a snail’s pace.” The company mined 21,000 tonnes of ore — half of what it did in the second quarter — as it focused on development. Quast has lowered his underground mining estimates for the next three quarters, but expects Black Fox to reach its 1,000-tonne-per-day target in late 2015.

In September Primero trimmed its full-year 2014 guidance to between 220,000 and 240,000 equivalent oz. gold. It expects all-in sustaining costs to come in at US$1,175 to US$1,225 per oz. gold. 

Primero president and COO Renaud Adams left the company in mid-October to become president and CEO of Eastern Canada-focused gold miner Richmont Mines (TSX: RIC; NYSE-MKT: RIC), effective mid-November. He has previously worked in senior positions with Iamgold, Cambior and Breakwater Resources. Adams will replace interim Richmont president and CEO Elaine Ellingham.

As part of its cost-savings initiatives, Primero recently shut down its Vancouver office. (Its head office remains in Toronto.) It intends to lower capital expenditures at the Black Fox mine in 2015.

Quast has cut his target price to $6.25 from $8, but has an “outperform” rating. 

Shares closed at $4.11, down 55% from their 52-week high of $9.05 in July. Primero ended September with US$22 million in cash and equivalents.