Primero extends veins at San Dimas

While challenging market conditions have forced many companies to trim exploration programs this year, Primero Mining Corp. (P-T, PPP-N), which held US$141.2 million in cash as of Mar. 31, plans to spend $15 million on diamond drilling at its San Dimas mine in Mexico.

Of its 74,000-metre drill program, it plans to devote 34,000 metres to exploration drilling and 40,000 metres to delineation drilling, in addition to 3,800 metres of exploration drifting. The company is targeting mineralization close to existing infrastructure along the central corridor at San Dimas and, based on early results, says it may even decide to expand its exploration drill program in the third quarter.

So far, Primero has completed 33,400 metres of its drill program, which was aimed at testing the extension of the Victoria vein into the adjacent ore block (the West Block), its extension at depth, and the extension of the Alexa vein to the west and into the adjacent Sinaloa Graben Block.

The results have been encouraging, chief executive Joseph Conway said in prepared remarks. Recent drilling demonstrates that the Victoria vein, which the company discovered last year, does in fact extend into the adjacent West Block, and that the Alexa vein, also discovered in 2012, continues west.

The Alexa and Victoria veins were both discovered during the first half of 2012 in the Sinaloa Graben Block. Subsequent delineation drilling resulted in 105,000 ounces of gold and 5.6 million ounces of silver being included in the company’s year-end mineral reserve. And because the Victoria vein is close to infrastructure, the company included it in its 2013 mine plan.

Conway said the latest drilling suggests that the two veins will be important contributors to the ore that the company expects to mine from the Sinaloa Graben over the next few years, and that the Victoria vein is one of the new veins that the company is opening up with long-hole mining, which he says allows Primero to improve productivity.

Highlights from the drilling to date include 37.4 grams gold per tonne and 2,180 grams silver per tonne over an estimated true width of 4.4 metres in the Victoria vein (hole VIC13_256) and 32.8 grams gold and 2,485 grams silver over an estimated true width of 1 metre in the Alex vein (hole AL13_056).

“The average results of the highlighted intercepts reported were 15.2 grams gold and 892 grams silver over 2.6 metres,” Brian Quast of BMO Nesbitt Burns in Toronto writes in a research note. “This compares favourably to the current reserve grades of 4.5 grams gold and 267 grams silver.”

While Quast acknowledges that “almost as many holes had insignificant results (as the highlights reported and the widths of most intercepts were generally quite thin),” he also maintains that the findings indicate “potential for increased grade at San Dimas, and access to the veins has already been developed, which will allow inclusion into the near-term mine plan.”

Quast has a price target on the stock of $8.50 per share, while Robert Chang of Cantor Fitzgerald in Toronto has a target price of $8.40. At presstime in Toronto, Primero was trading at $5.42 per share within a 52-week range of $2.43-7.89. The company has about 97 million shares outstanding.

Primero identified the Alexa vein within two faults, the Sinaloa fault to the East and a smaller fault to the West. Surface drilling intercepted the western extension of the Alexa vein beyond the smaller western fault. Drilling about 125 metres south of the Alexa vein, just west of the Sinaloa fault, intercepted the western extension of the Victoria vein. The Sinaloa fault is a normal major fault that divides the Sinaloa Graben from the West Block.

Development of the Sinaloa Graben tunnel, running north-south, gave Primero drilling access to the Alexa and Victoria veins. These veins are at a similar orientation to the prolific Roberta and Robertita vein systems that have produced about 460,000 ounces of gold at an average grade of 9.1 grams gold per tonne in the adjacent Central Block.

Earlier this month, the company reported net earnings of US$17.3 million or US$0.18 per share and adjusted net earnings of US$9.4 million or US$0.10 per share for the first quarter ended Mar. 31. Operating cash flow came in at US$19.3 million or US$0.20 per share.

During the quarter the company also met its goal of reaching the mill’s throughput capacity of 2,150 tonnes per day. (It plans to increase that to 2,500 tonnes per day by the end of the fourth quarter of this year.) Production in the first three months of the year reached 24,190 ounces of gold and 1.37 million ounces of silver—the highest quarterly gold and silver production since the company acquired the San Dimas mine.

Total cash costs on a gold equivalent and by-product basis were US$719 and US$589 per ounce, respectively, compared with US$674 and US$532 per ounce in the first quarter of 2012. Primero says the higher operating costs were mainly due to higher labour costs related to the introduction of long-hole mining, and that they were partially offset by a 7% increase in gold equivalent ounces produced.

Revenues in the first quarter came in at US$46.3 million, up from US$44 million reported in the same quarter of 2012.

San Dimas has indicated resources of 3.75 million tonnes grading 6.5 grams gold and 389 grams silver and inferred resources of 6.14 million tonnes of 3.9 grams gold and 327 grams silver.