Primero aims to turn around Black Fox

Primero Mining (TSX: P; NYSE: PPP) is adopting the turnaround strategy it used at its San Dimas underground gold–silver mine in Mexico to its recently acquired Black Fox gold mine near Timmins, Ont., where it aims for another success story. 

Primero acquired a 100% interest in the San Dimas mine in 2010, and over the years has transformed the struggling 1,500-tonne-per-day operation into a bustling 2,500-tonne-per-day mine.

“The challenge with San Dimas when we bought it was its lack of underground development, so there weren’t enough physical faces available to get ore from for the mill,” Joseph Conway, the company’s president and CEO, says in an interview.

“And really what we did over a two-and-half-year period, let’s say, was put capital back into the mine to make sure we had enough working faces to fill the mill. We’ve done that, and in fact, we’ve expanded the mine — and possibly we will do a further expansion.”

With the San Dimas mine — which is on the border of Durango and Sinaloa states — humming along nicely, Conway says Primero will work on transforming the Black Fox mine that it took on in March by acquiring Brigus Gold for $220 million.

“It’s coming back to the idea of recognizing that there weren’t sufficient funds available for the previous owners to reinvest into the Black Fox mine,” he says. “We have a fairly strong balance sheet that we’ll use to put the money back into the mine for long-term development and ensure we have enough working faces to fill that mill.” (Primero has a US$111-million cash balance.) 

Because the previous operator couldn’t quite afford to carry out underground development at Black Fox, it fed the Black Fox mill lower-grade ore from the open pit — cutting production and increasing costs — which has lowered ­Primero’s 2014 guidance. The company intends to produce 70,000 to 80,000 oz. from Black Fox this year, below what analysts expected, at higher all-in sustaining costs of US$1,300 to US$1,400 per oz.

Conway explains that the underground throughput at Black Fox fell from 1,000 tonnes per day in the third quarter of 2013 to less than half of that in the first quarter of 2014. But he says throughput should return to normal levels with the company’s planned investment and development work.

The company is looking to reinvest money in the near-term and acquire enough working faces by year-end to reach 1,000 tonnes daily underground. The underground ore should average 5.8 grams gold per tonne. 

Meanwhile, Primero expects the Black Fox pit will deliver 1,200 tonnes per day at 3 grams gold and another 200 daily tonnes at 1 gram gold, bringing the combined underground and open-pit throughput to 2,400 tonnes per day.

As part of its turnaround plan, Primero anticipates spending US$31.2 million at Black Fox this year to complete underground development and open-pit stripping. It has allocated another US$16.8 million on 2014 exploration drilling at the Black Fox complex, which includes the Black Fox mine, mill and adjacent Grey Fox and Pike River exploration properties.

It has earmarked $7.7 million of its exploration budget to drill 55,700 metres at the Black Fox mine, with the remaining $9.1 million wrapping up 76,400 metres on the Grey Fox property and surrounding areas.

Most of the drilling at Black Fox this year will expand the mineralization laterally and at depth. The depth potential at Black Fox, Conway says, is “particularly interesting” given the underground deposit has only been defined to a 500-metre depth, while other deposits in the Timmins camp extend further down.

“The long-term story is the depth potential. Definitely in that camp the deposits generally go down a lot deeper . . . an average 1,500 metres or more. So we’ve certainly got some opportunities and things to look at over the next ­several years,” he says.

Conway notes that two deep holes drilled last year returned superb grades, including 18.09 grams gold over 37.8 metres and 40.71 grams over 26.7 metres, which Primero will follow up. It will have a better sense of the depth potential at Black Fox by year-end. 

At the Grey Fox property — located 4 km southeast — Primero is set to complete a preliminary economic assessment by mid-year, followed by a feasibility study by year-end. The deposit hosts an indicated gold resource of 500,000 oz. grading 3.7 grams, and could become another source of ore for the Black Fox mill. 

Meanwhile in Mexico, Primero is considering expanding the 2,500-tonne-per-day mill near its flagship San Dimas mine to 3,000 tonnes a day. The expansion is relatively inexpensive, Conway says, explaining it is more a question of whether the company will have enough working faces to feed the mill over the long term. A decision should be out by July. 

Conway says there is a lot of exploration opportunity at San Dimas, adding that the company is looking to expand the mine’s production to boost its cash flow.

It aims to spend US$38.3 million in capital expenditures at the mine this year, bringing its total 2014 capital spending to US$80 million. It will also invest another US$15.7 million on exploration at San Dimas to complete 80,000 metres, which puts its estimated exploration budget at US$35 million.

While most of the budget will go towards San Dimas and the Black Fox complex, Primero plans to spend US$2.5 million to complete 10,000 metres at its Cerro del Gallo gold–silver–copper development project in Mexico’s Guanajuato state. A construction decision for the project is due later this year, contingent on Cerro del Gallo — first envisioned as an open-pit heap-leach operation — generating a 15% internal rate of return at a US$1,100 per oz. gold price, Conway says. He notes that the 2012 feasibility study used a gold price of US$1,341 per oz.

This year Primero is targeting production of 225,000 to 245,000 equivalent oz. gold, with 155,000 to 165,000 equivalent oz. gold coming from San Dimas and 70,000 to 80,000 oz. gold from the Black Fox mine. Total 2014 cash costs are estimated at US$650 to US$700 per oz. gold. All-in sustaining costs are US$1,100 to US$1,200 per oz.

Next year, Conway says the combined all-in sustaining costs should drop to US$1,100 to US$1,150 per oz. gold, as the underground throughput at Black Fox returns to 1,000 tonnes per day. Once it does, Black Fox should produce 120,000 oz. gold a year, starting in 2015.

“We are confident that we can get Black Fox back to 120,000 oz.,” he says. “We are quite comfortable with that.”

Canaccord Genuity analyst Rahul Paul says that “in our opinion, the turnaround at San Dimas has been remarkable — we see a similar opportunity with the Black Fox complex. Management’s proven track record with San Dimas should increase investor confidence in the team’s ability to unlock value from the Black Fox complex,” he wrote in an April 3 note. Paul has a “buy” rating and a $10.50 target on the stock.

Primero closed April 7 at $7.34 per share within a 52-week trading range of $4.26 to $9.04.