BMO sees ‘better times ahead’ for Primero Mining

VANCOUVER — Primero Mining (TSX: P; NYSE: PPP) is a favoured mid-tier gold producer amongst analysts, and it isn’t hard to see why after a strong second quarter, marked by competitive operating costs and signs of operational improvement across its mines. The company has engineered a turnaround at its Black Fox underground gold mine in Ontario, and its mill expansion at its San Dimas gold-silver mine in Mexico is ahead of schedule and below budget.

In the second quarter Primero produced 62,490 equivalent oz. gold, tabled  US$67.4-million in revenue, and had operating cash flow before changes in working capital of US$22.6 million. Black Fox chipped in 18,362 oz. gold, while San Dimas accounted for 36,500 oz. gold and 2.15 million oz. silver.

The company is transitioning Black Fox from away from a lower-grade open-pit mine to a higher-grade underground operation. Primero reported that its underground ramp-up achieved 700-tonne-per-day average throughput in July, and it expects to reach a 1,000-tonne-per-day production rate by the end of the third quarter. Black Fox total cash costs during the quarter dropped 24% year-on-year to US$762 per oz., while production was up 27% compared to the first quarter.

“In our mind the turnaround at Black Fox is certainly becoming evident, and we’re quite pleased with it. We expect even stronger performances from [the mine] during the third and fourth quarters in terms of production and grade, and we continue to have confidence that’s going to happen,” CEO Joseph Conway said during a conference call.

“I think you’re seeing the reason why we’re excited about Canada, and that reason is the potential at Black Fox. We certainly see [the mine] demonstrating its potential as a turnaround and as an exploration project with depth potential,” he added.

And drilling is paying off at Black Fox. Primero reported in July that exploration had expanded the Deep Central Zone (DCZ), which shows mineralization is continuous between current production levels, and at least 800 metres below surface. 

The company is delineating mineralization between the current 560-metre production levels — which has an average grade of 6 grams gold per tonne — and the DCZ, where average grades are 8.5 grams gold.

Primero is expanding mineralization at its Grey Fox satellite target, which sits 4 km southeast of the Black Fox facility. Exploration further expanded the Contact zone and Grey Fox South areas of the Grey Fox property.

Results confirm that the previously identified Whiskey Jack zone is the continuation of the Contact zone to the north, which increases Contact’s length by 200 metres.

Recent highlights from drilling at Grey Fox include 6 metres grading 18.8 grams gold from 39 metres deep in hole 14-975; and 39 metres of 3.3 grams gold from 172 metres deep in hole 15-1011.

Conway said the company is “quite certain that Grey Fox will play a role in operations by 2017,” and noted that 66,000 metres of drilling are scheduled at the target this year. Primero is conducting a scoping study on integrating the deposits into its mine plan, and speculates that Grey Fox could chip in up to 40,000 “low-cost” ounces annually to operations, assuming no mill expansion moving forward.

Meanwhile, Primero reported that a 3,000-tonne-per-day mill expansion at San Dimas is ahead of schedule and US$8.7 million below an estimated budget of US$26.4 million. Quarterly gold production was up 11% year-on-year, while total cash costs declined from US$672 per oz. to US$654 per oz.

The increase in gold and silver production mainly came from 17% higher throughput compared to the same period in 2014. The company saw a jump in all-in sustaining costs at San Dimas from US$626 per oz. to US$822 per oz. Primero also experienced a delay in silver deliveries due to permit complications.

On Aug. 6 the company reported the relevant import-export registries had been reinstated by the Mexican government, and that it had begun selling 2 million oz. in inventoried silver. Around 1.2 million oz. silver are due to Silver Wheaton (TSX: SLW; NYSE: SLW) under a streaming agreement at San Dimas.

“San Dimas has been our driver for the past five years, and we’re pleased that we’ve been able to keep costs essentially flat over that period of time in an industry where costs have gone up dramatically,” Conway commented. “We expect our reserves and resources to grow in Mexico because the exploration expenditures that we made in the first half have already replaced what we expect … during the entire year. We see San Dimas as poised for more ounces at a lower cost in the future.”

BMO Capital Markets analyst Brian Quast noted that Primero’s earnings “handily beat consensus estimates,” while keeping an “outperform” rating and a $6-per-share price target. Gold production at Black Fox beat BMO’s estimates of 15,300 oz., with Quast calling the performance a “solid quarter” indicating “better times ahead.”

Meanwhile, Scotiabank analysts noted in the Aug. 4 Daily Mining Scoop that Primero is one of only seven gold producers it covers that could bring “full costs below the US$1,000 per oz. level.” Scotiabank quantifies the “full cost” metric as all-in sustaining costs plus interest on debt, development capital and dividend payments.

The other six producers that clear the hurdle are Goldcorp (TSX: G, NYSE: GG), Randgold Resources (NASDAQ: GOLD; LSE: RRS), Agnico Eagle Mines (TSX: AEM; NYSE: AEM), Tahoe Resources (TSX: THO; NYSE-MKT: TAHO), Detour Gold (TSX: DGC; US-OTC: DRGDF) and Claude Resources (TSX: CRJ; US-OTC: CLGRF).

Primero shares have traded within a 52-week range of $3.17 to $8.70. They jumped 11% after the Mexican permit resolution, en route to a $3.54-per-share close at press time. Primero had US$40 million in cash and US$75 million in an undrawn line of credit after the second quarter. There are 162 million shares outstanding for a $574-million market capitalization.