Cash-rich miner Primero Mining (TSX: P; NYSE: PPP) is steaming ahead on the back off a strong third-quarter and a healthy cash position to support its near-term growth plans in Mexico.
The Toronto-based precious metals producer’s main assets are both os Mexico: the development-stage Cerro del Gallo gold-silver-copper project in Guanajuato; and the San Dimas gold-silver mine on the border between the Mexican states of Durango and Sinaloa.
Primero recently struck a deal to increase its stake in Cerro del Gallo to 100% by buying the remaining 30.8% interest from Goldcorp (TSX: G; NYSE: GG) for an upfront consideration of US$8 million, followed by contingent payments, including: US$8 million when the heap-leach operation hits commercial production in its first phase, and US$5 million if the gold price returns to US$1,500 per oz. for a consecutive 30 days, within five years of the transaction closing.
Cerro del Gallo, partially acquired in May 2013, is Primero’s only development project and could boost the company’s near-term output by 95,000 equivalent oz. gold per year. The first phase of the project is anticipated to heap leach 4.5 million tonnes per year for seven years. But the mine’s life could expand beyond that, said Joseph Conway, Primero’s CEO, on a conference call discussing the third-quarter results.
Primero has budgeted US$15 million for Cerro del Gallo this year for engineering and metallurgical studies, as well as exploration and condemnation drilling, with an aim to make a construction decision by year-end.
It is investing another US$15 million at the San Dimas mine to drill 89,000 metres by year-end. Conway says Primero is on track to expand the mill capacity to 2,500 tonnes per day in early 2014, and remains “very confident” that it will push capacity to 3,000 tonnes per day, if it is able to develop “sufficient new mining faces.”
Supporting the growth plan is the company’s decent cash balance of US$125.7 million at the end of September. Primero’s management believes this is enough to build the Cerro del Gallo project if its board approves construction, and fully fund San Dimas’ mill expansion.
To provide further financial flexibility, Primero is working on securing a US$75-million credit facility in the fourth quarter.
One highlight of the third-quarter was production climbing 64% from a year ago to nearly 42,000 equivalent oz. gold. That breaks down to a record 31,791 oz. gold and 1.62 million oz. silver. The boost came largely from the mining of high-grade pillars, but Primero doesn’t expect those pillars to contribute as much to the fourth quarter’s output.
Total cash costs improved year-over-year by 26% to US$516 per equivalent oz. gold, with all-in sustaining costs of US$974 per oz. This boosted revenue by 40% to US$53.8 million, as gold and silver sales jumped 77% and 50% to 30,261 oz. gold and 1.58 million oz. silver, offsetting the lower metal prices. The average realized price for gold and silver were US$1,338 per oz. and US$8.42 per oz.
Net income was US$10.1 million below last year’s US$11.6 million, partially due to “foreign-exchange changes on deferred tax balances.” But after removing such one-time items, adjusted earnings per share were US9¢, beating the US5¢ consensus. Operating cash flow before working capital changes grew 36% to US$20.9 million.
Topping off the operational quarter was the company’s move to increase its 2013 production target for the second time this year. It is now guiding production of 135,000 to 140,000 equivalent oz. gold, up from 125,000 to 135,000 oz. earlier due to higher expected throughout and grades at San Dimas. Total cash costs for 2013 are forecast to come in the lower end of the US$620 to US$620 per equivalent oz. gold guidance.
Cantor Fitzgerald analyst Rob Chang recommends a “buy” on the stock, and has bumped up his target by 8% to $6.96 per share.
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