Sunday, 27 August 2017

Primero Mining: from heaven to hell

Primero Mining slid to the last but one position in the Canadian Gold Pulse database in terms of return since inclusion. Remarkably, this miner used to be one of the better performers in 2014, when the miner bear market had slashed mining stock valuations across the board.

A first long term graph gives a good idea of where Primero Mining came from:

Primero Mining over a long time frame. Quote in CAD on the TSX
The database was initiated using closing prices on Nov 19, 2010, when Primero quoted at CAD 5.65. That was close to the end of the junior bull market as mining stocks started sliding into 2011, despite gold rallying. Though Primero went down with the herd, its situation reversed after the San Dimas mine in Mexico and the Black Fox Mine in Canada were starting operations. As Primero peaked near CAD 9, it was one of the top performers in the database. Yet the gold miner bear market continued unabated and much of the gains vaporized again. At the December 2015 gold miner bottom, Primero quoted below CAD 4. In retrospect this was a selling opportunity. Primero was not rewarded as precious metals rallied into 2016 and the subsequent autumn gold slide brought the stock price back near CAD 1.

Primero mining over a 12 months time frame. Quote in CAD on TSX.
More of the same in 2017 as Primero didn't follow as miners firmed in January, with only a minor last excursion above CAD 1 in February. Ever since Primero slid into penny stock territory.

Operational issues

Primero mining has two operating mines: Black fox in Ontario, Canada and San Dimas in Mexico.
Working through lower grade ore pushed up mining costs at Black Fox during 2016. Successfully identifying the higher grade underground ore didn't bring any relief as investments over time would be necessary before these resources could be reached. Mining costs were successfully reduced at Black Fox early this year, while focussing on the deep central zone.

Nevertheless, Primero reported all-in-sustaining costs (AISC) over 2016 of a non viable $1326 for both mining sites combined.

If a bought deal (capital raising at CAD 2.35, with warrants issued) in June 2016 had not brought in CAD 51.75 M, Primero would have faced cash shortage earlier on.

Whereas Black Fox turned cash flow positive in 2017 at San Dimas mining was suspended mid February due to a strike. It took to April 13 for operations to resume. This really isn"t what you need when mining is only marginally viable and improvement plans with the vital cost reductions take time.

Sale of Black Fox Mine

On Aug 10, a sale agreement was signed with Mc Ewen Mining for the Canadian operations at the Black Fox mine and the associated assets located near Timmins, Ontario. The proceeds will be used to reduce outstanding debt.

Though Black Fox is the smaller of both operating mines (both in terms of production volume and reserves), it's currently the one which is cash-flow positive.

The stock price was slashed in half upon the news, especially since Primero needed to report a significant 2nd quarter loss at San Dimas, with throughput and grade only improving towards the end of the quarter.  The 2 month strike more or less ruined the first half year result.

Delisting from NYSE

By the end of 2016, Primero received a warning from the NYSE that its share price didn't meet listing requirements any longer. As the situation only aggravated, Primero got delisted on Aug 14, after which the stock price on TSX nosedived once more.

Is there still any perspective?

At CAD 0.13, Primero now is down 97.7% from its reference entry level in the Canadian Gold Miner Pulse database. The apparent Price to Book value ratio looks dirt cheap, however that is treacherous. Book value is calculated when annual accounts are published. There is no quarterly update. The impairment loss at the sale of Black Fox was considerable. Though the debt burden is alleviated, it is all but gone.  The current cash on balance more or less corresponds to three times the last published quarterly loss from continuing operations. A quick turnaround is necessary for Primero to survive.
Primero has a contract with Wheaton Precious Metals for the sale of half the silver produced at San Dimas. While this is not advantageous for Primero, it also involves WPM, which needs operations at San Dimas to continue to assure its streaming revenue.
It needs not end badly, yet I can't help thinking of Great Basin Gold and Allied Nevada...


Eventually, Primero Mining - with its remaining San Dimas mine - has been acquired by First Majestic for $320M. Both parties agreed to the deal in Jan 2018 and it got approved by shareholders of both companies. Primero shareholders obtained C$ 0.30 worth in First Majestic stock.
The Primero stock was delisted in May 2018.

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