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TABLE OF CONTENTS Sep 8 - 14, 2014 Volume 100 Number 30 - 0 comments

Primero to expand San Dimas

Q2 earnings disappoint, despite record revenue

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Primero Mining (TSX: P; PPP: NYSE) has green-lighted an expansion of its San Dimas gold–silver mine in Durango, Mexico, a move that will increase production by 25% at a cost of only $26.4 million.

The mill expansion will begin in early 2015 and should be complete in the second quarter of 2016. It is expected to boost production to 215,000 equivalent oz. gold — 25% above 2014 levels.

The $26.4-million capital investment (which includes a 30% contingency) will expand mill capacity to 3,000 tonnes per day from 2,500 tonnes. Primero pegs the investment’s internal rate of return at 78% after taxes, assuming a US$1,300 per oz. gold price and US$22 per oz. silver price.

Primero acquired San Dimas as a 1,500-tonne-per-day operation in 2010, and has opted for a staged expansion approach, finishing its latest expansion to 2,500 tonnes per day in the first quarter.

The company owns two producing mines — San Dimas and the recently acquired Black Fox gold mine in Ontario.

In its second-quarter results, released the same day as the San Dimas expansion news, Primero delivered record production and revenue numbers from San Dimas.

Overall production (with San Dimas accounting for the lion’s share at 46,248 equivalent oz. gold) increased to 63,414 equivalent oz. gold from 39,089 oz. in the comparable period of 2013.

However, the company missed analysts’ earnings expectations of 5¢ per share, posting adjusted earnings of US$1.1 million, or 1¢ per share, on revenue of US$79.7 million.

In the same quarter of last year, Primero recorded adjusted earnings of US$17 million, or 16¢ per share, on revenue of US$52.5 million.

Rob Chang, a mining analyst at Cantor Fitzgerald, says the positive expansion news more than outweighs the company’s weaker earnings.

“While the second-quarter 2014 earnings miss was disappointing, it was not driven by operational issues,” he wrote in a note to clients, adding that the cause was higher general and administrative expenses, driven by share-based payment expenses and depreciation and amortization expenses.

“More importantly, the decision to proceed with the expansion of the San Dimas mine to 3,000 tonnes per day is positive in our view, as it increases gold-equivalent production by 25% over 2014 forecasted levels and provides additional spot-market exposure to silver at a cost that management expects to be around US$530 per equivalent oz. gold.”

Silver production at San Dimas is subject to a silver-streaming agreement with Silver Wheaton (TSX: SLW; NYSE: SLW). Until July, the stream allowed Silver Wheaton to buy 3.5 million oz. silver at US$4.08 per oz., as well as half of any further production. In August, those numbers went up: Silver Wheaton is now entitled to buy 6 million oz. of San Dimas silver at US$4.20 per oz., as well as 50% of any further silver production.

Increased production above the amount allotted to Silver Wheaton will mean more San Dimas silver can be sold at the spot price, reducing the silver stream’s impact. Primero anticipates that post-expansion, it will sell 2 million oz. silver a year at the spot price, up from 1.5 million oz.

The company’s most recent expansion at San Dimas is already paying off. Production in the second quarter at San Dimas rose by 18% to 46,248 equivalent oz. gold from the year-earlier period, even though the mill saw a planned nine-day shutdown in order to upgrade capacity at the company’s hydro power plant.

The mine also performed well on the cost front, with all-in sustaining costs at US$626 per oz., up from US$588 per oz. in last year’s second quarter.

Black Fox

Primero completed the acquisition of Brigus Gold for its Black Fox open-pit and underground operation in March. Since then, the company has been trying to make up for a period of underinvestment in underground development to improve the mine’s performance.

There was some improvement at Black Fox during the second quarter, with production up 29% to 17,166 oz. gold and cash costs down 29% from the year’s first quarter.

“We have begun the process of investing in and optimizing the operation and are encouraged by the 29% increase in gold production this quarter over last quarter, although the grades mined were below expectations, and the current low level of long-hole mining needs to be addressed,” Primero president and CEO Joseph Conway said in a release. “We understand what needs to be achieved and look forward to continuing to deliver improving results from Black Fox throughout the year.”

All-in sustaining costs at the mine grew to US$1,771 per oz. in the second quarter, up from US$1,154 per oz. in last year’s second quarter due to lower production and higher sustaining capital costs.

Grades during the quarter were below those in the mine plan, so Primero is reviewing its near-time mine plan. Also adding to costs, the strip ratio at the open pit averaged 9 to 1 for the quarter, resulting in US$271 per oz. of capitalized waste being included in all-in sustaining costs. However, Primero expects the strip ratio to decline to its life-of-mine average of 5 to 1 in the year’s second half.

The company expects its investments in Black Fox to pay off by year-end, with a return to higher production levels.

In late July, Primero announced it is delaying a construction decision at its Cerro del Gallo project in Guanajuato, Mexico, to early 2015 so that it can finish metallurgical work and drilling.

Primero acquired a 69.2% interest in the project when it took over Cerro Resources in May 2013. The project has proven and probable reserves of 32.2 million tonnes grading 0.7 gram gold per tonne, 15 grams silver and 0.08% copper. The open-pittable joint venture with Goldcorp (TSX: G; NYSE: GG) is envisaged as initially a heap-leach operation that would process oxide material, followed by construction of a carbon-in-leach plant to process fresh ore.

On the San Dimas and earnings news, Cantor Fitzgerald’s Chang raised his target price for Primero to $9.65 from $9.35.

Primero shares closed down 3.5% on the news at $8.22. The company has 159.9 million shares outstanding, and traded in a 52-week range of $4.53 to $9.05.

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Primero Mining's San Dimas gold-silver mine in Durango, Mexico, where the company plans to increase production by 25%. Credit: Primero Mining
Primero Mining's San Dimas gold-silver mine in Durango,...
Primero Mining's San Dimas gold-silver mine in Durango, Mexico, where the company plans to increase production by 25%. Credit: Primero Mining
Primero Mining's San Dimas gold-silver mine in Durango,...
Primero Mining's San Dimas gold-silver mine in Durango, Mexico, where the company plans to increase production by 25%. Credit: Primero Mining
Primero Mining's San Dimas gold-silver mine in Durango,...
Primero Mining's San Dimas gold-silver mine in Durango, Mexico, where the company plans to increase production by 25%. Credit: Primero Mining
Primero Mining's San Dimas gold-silver mine in Durango,...

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