Primero eyes more production, lower costs in 2015

Primero Mining (TSX: P; NYSE: PPP) forecasts better prospects in 2015 after a troublesome 2014, when it recorded an 89% drop in adjusted profit, despite meeting its full-year production guidance.

The headline loss for 2014 was US$224.4 million, or US$1.48 per share, including US$209 million in impairment charges. Those charges include the previously announced US$99 million goodwill writedown related to the Brigus Gold transaction last March, plus fourth-quarter writedowns of US$75 million for the Black Fox gold mine in Ontario and US$35 million for the on-hold Cerro del Gallo project in Mexico.

Excluding those charges, adjusted earnings were US$5.4 million, or US4¢ per share, down 89% from the US36¢ per share earned in 2013.

“While the writedown of Cerro del Gallo should not come as a surprise to investors given the project was deferred [in 2014], the impairment of the Black Fox asset may be viewed as a modest negative,” CIBC analyst Jeff Killeen notes.

Primero indicated in its fourth-quarter operating results on Jan. 20 that it intends to mine out the Black Fox pit sooner than expected in September 2015. But, Primero’s CEO Joseph Conway says the company believes in Black Fox’s underground potential, which was part of the reason it picked up the asset from Brigus, along with the nearby Grey Fox project.

“Notwithstanding the writedown, the thesis of why we bought this asset still remains very much intact,” Conway said on a Feb. 12 conference call. “We’ve demonstrated to ourselves and the marketplace that the depth potential here exists at least down to the 700-metre level, or 200 metres below our current infrastructure.”

During 2015, Primero will build up the long-hole stope inventory at Black Fox, finalize the mill and tailings optimization, and conduct more infill drilling, as well as test the potential at depth, Conway says.

Meanwhile, the miner expects to feed the mill with ore from stockpiles and the underground mine. Mining rates should average 1,000 tonnes a day in the second half of the year.

Primero is guiding 2015 production at Black Fox of 75,000 to 85,000 oz. gold at all-in sustaining costs of US$1,075 to US$1,125 per oz. Since its acquisition, the mine has produced 63,900 oz. gold at all-in costs of US$1,428 per oz.

To help with the asset turnaround, Primero recently appointed Ernie Mast as its president and chief operating officer, and Wendy Kaufman as chief financial officer in 2014.

The junior has boosted its liquidity position to US$134 million by completing a US$75-million convertible debenture financing. The proceeds from that financing will fund capital spending at Black Fox and repay Primero’s US$75-million revolving credit facility, Killeen notes.

But Black Fox is only half of Primero’s production story, with the San Dimas gold-silver mine in Mexico being the better half. Primero finished expanding the San Dimas mine and mill to 2,500 tonnes per day in late 2014, and intends to increase throughput to 3,000 tonnes per day by 2016.

“By the time we get into 2016 this mine will be producing well over 215,000 oz. on an equivalent basis, and we expect to see our costs drop by at least [US]$50 per oz.,” Conway says.

San Dimas is set to produce 175,000 to 185,000 equivalent oz. gold in 2015 at all-in sustaining costs of US$840 to US$890 per oz. gold. Last year the mine churned out 161,200 equivalent oz. gold at all-in costs of US$826 per oz.

Combined, production from Primero’s two mines should increase by up to 20% over 2014, to between 250,000 and 270,000 equivalent oz. gold. All-in sustaining costs should fall between US$1,000 and US$1,100, reflecting up to a US$200 per oz. decrease from a year ago.

“We certainly had our share of issues in 2014, but I’m pleased and proud to be associated with this group of people, who have all put in a strong effort to make sure that this company succeeds in the future as well as in 2015,” Conway said.