Primero's Ludicrous Valuation
For goodness sake, the company has $107.2m in cash and equivalents!!! The market cap is $276m, or $170m adjusted for cash. The carried value of the mine itself is $485.6 million, similar to the $500m they paid Goldcorp for it in a properly valued transaction that sees GG retaining a major equity stake in Primero. So even without considering any of the company's ridiculous exploration upside, the company's bare-bones book value stands about 2.2X the current share price ... or approaching $7 per share.
Primero Mining Corp. ("Primero" or the "Company") today reported financial and operational results for the third quarter ended September 30, 2011. The Company produced 27,450 gold equivalent ounces(1)at a total cash cost(2)of $641 per gold equivalent ounce leading to record net earnings of $35.1 million ($0.40 per share) and operating cash flows before working capital changes(3)of $50.5 million ($0.57 per share).
"Continued strong gold and silver prices in the third quarter resulted in record cash margins of $1,027 per ounce, generating significant growth in earnings and cash flows," stated Joseph F. Conway, President and Chief Executive Officer. "Primero has begun to improve the operating performance of the San Dimas mine. The optimization and expansion of the mine is well underway, but not complete. With the hiring of a C.O.O. we expect further operational improvements in 2012. We will continue to reinvest part of our cash flow to expand production and increase reserves."
Third Quarter 2011 Highlights:
-- Record Revenue - revenue increased to $46.1 million on strong gold and
-- Record Earnings & Cash Flow - net income increased to $35.1 million
($0.40 per share), with adjusted net income(4)of $5.7 million ($0.06 per
share), and operating cash flows before working capital changes
increased to $50.5 million ($0.57 per share);
-- Steady Production - production of 27,450 gold equivalent ounces at total
cash costs of $641 per gold equivalent ounce, or $222 per gold ounce on
a by-product basis;
-- Further Spot Silver Sales(5) - 251,160 ounces of silver sold at an
average spot price of $39.03;
Subsequent to Third Quarter:
-- Advance Tax Ruling Application - seeking advanced ruling on paying tax
on realized revenues;
-- Early Repayment of 50% of Convertible Note - reduced convertible debt to
Record Revenue, Earnings and Cash Flow
Revenue was $46.1 million in the third quarter 2011 as a result of selling 19,660 ounces of gold at an average price of $1,668 per ounce, and 1.11 million ounces of silver at an average realized price of $12.00 per ounce. Upon the acquisition of the San Dimas Mine, the Company assumed an obligation to sell silver at below market prices(5). In the third quarter 2011, the Company sold 856,660 ounces of silver at fixed prices and 251,160 ounces of silver at an average spot price of $39.03 per ounce. Revenue in the third quarter 2010 (following the acquisition of the San Dimas mine on August 6) was $18.9 million, derived from selling 11,840 ounces of gold at an average price of $1,257 per ounce and 0.98 million ounces of silver, all at a fixed price of $4.04 per ounce.
Third quarter operating cash flow before working capital changes increased to $50.5 million ($0.57 per share), up from cash outflows of $27 thousand, in the third quarter 2010.
The Company earned net income of $35.1 million ($0.40 per share) in the third quarter 2011, compared with a net loss of $35.6 million ($0.68 per share) in the third quarter 2010. Adjusted net income for the third quarter 2011 was a record $5.7 million ($0.06 per share), compared to an adjusted net loss of $12.2 million ($0.23 per share) in the third quarter 2010. Adjusted net income in 2011 mainly excludes the break fee received on termination of the Northgate arrangement agreement, net of transaction costs, and a reduction in income taxes due to a one-time foreign exchange loss on an intercompany loan.
For the nine months ending September 30, 2011 revenue was $120.9 million as a result of selling 59,000 ounces of gold at an average price of $1,524 per ounce, and 3.52 million ounces of silver at an average realized price of $8.81 per ounce. Revenue in the nine months ended September 30, 2010, during which Primero owned the San Dimas mine for 55 days, was $18.9 million.
Operating cash flow before working capital changes for the first nine months of 2011 was $64.5 million ($0.73 per share), up from outflows of $2.4 million ($0.12 per share) in the first nine months of 2010.
For the nine months ending September 30, 2011 the Company earned net income of $31.1 million ($0.35 per share), compared with a net loss of $38.4 million ($1.92 per share) in the same period in 2010. Adjusted net income for the nine months ended September 30, 2011 was $2.0 million ($0.02 per share), compared to an adjusted net loss of $13.2 million ($0.66 per share) for the same period in 2010. Non-cash share-based payment expense of $6.6 million ($0.07 per share) and $7.1 million ($0.36 per share), has not been excluded in calculating adjusted net income (loss) for the nine months ending September 30, 2011 and 2010, respectively.
Throughput Remains Strong
The Company produced 19,500 ounces of gold and 1.10 million ounces of silver, or 27,450 gold equivalent ounces in the third quarter 2011. Gold and silver production were 6% and 9% higher, respectively, than the third quarter 2010, due to a 28% increase in throughput, partially offset by lower grades (17% lower for gold and 14% lower for silver). Average throughput was 2,033 tonnes per day in the third quarter 2011 compared with 1,586 tonnes per day in the third quarter 2010. The increase in throughput was partly the result of processing stockpiled ore and was also designed to compensate for the lower grades in the main production stopes. Throughout 2011, most of the production has come from the deep Central Block area where grades in the Roberta and Robertita veins were below expectations. The Company has reviewed the historical mine planning and exploration procedures at San Dimas and identified areas of improvement, including increased delineation drilling, that it believes will lead to better grade control and the attainment of more consistent production targets in the future.
Total cash costs on a gold equivalent basis in the third quarter 2011 were $641 per ounce compared with $653 per ounce in the third quarter 2010. The impact of selling a portion of silver production at spot prices increased gold equivalent ounces by 26% in the third quarter 2011, however, this was offset by a 24% increase in cash production costs. On a by-product basis, the benefit of silver spot sales reduced total cash costs to $222 per gold ounce in the third quarter 2011 from $552 per gold ounce in the third quarter 2010. Total cash costs on a gold equivalent basis and by-product basis were 9% and 17%, respectively, higher in the third quarter 2011 than the second quarter 2011, due mainly to the impact of the millworkers strike, which decreased operating costs in the second quarter.
Silver Sales at Spot Continued
The Company's silver purchase agreement allows it to sell 50% of the annual silver production above 3.5 million ounces at spot prices. This 3.5 million ounce threshold was achieved during the second quarter and the Company continued to sell 50% of silver production at spot prices in the third quarter 2011, until the agreement anniversary date of August 5. The Company sold 251,160 ounces of silver at an average spot price of $39.03 per ounce in the third quarter, resulting in the Company selling a total of 511,750 ounces of silver at an average spot price of $36.77 per ounce in 2011.
On August 5, 2011, the the annual threshold was re-set at 3.5 million ounces for the next 12 month period. In the third quarter 2011, 856,660 ounces of silver were delivered to a subsidiary of Silver Wheaton Corp.(5)("Silver Wheaton") under the silver purchase agreement.
Silver sales under the silver purchase agreement realize approximately $4 per ounce; however, the Company's provision for income taxes prior to and including the third quarter 2011 was based on sales at market prices (see Advance Tax Ruling Application section following). As part of its ongoing tax mitigation strategy, in September 2011 the Company purchased call options on 1,489,400 ounces of silver at a strike price of US$49 on 30% of silver production expected to be sold under its silver purchase agreement over the period from October 1, 2011 to September 30, 2012. By covering 30% of expected sales under the silver purchase agreement, these call options were designed to offset the incremental income tax that would be payable by the Company if spot prices exceed the strike price. The Company recorded a net loss of $2.3 million on these derivative contracts in the third quarter.
Balance Sheet Remains Strong
Cash and cash equivalents were $107.2 million at September 30, 2011 compared to $63.6 million at June 30, 2011. Capital expenditures during the third quarter 2011 totaled $6.8 million compared to $2.2 million in the third quarter 2010 and were spent mainly on underground development and exploration.
On July 4, 2011, the Company received a refund of $80.6 million of value added tax ("VAT") which was paid to the Mexican government as part of the San Dimas acquisition in 2010. The Company funded the VAT payment with $10.6 million of cash and a $70 million term credit facility. Interest on the refund and foreign exchange gains due to the strengthening of the Mexican peso against the US dollar since the August 2010 acquisition date increased the refund to $87.2 million. Concurrent with the receipt of the VAT, the Company repaid all outstanding principal and interest on the term credit facility amounting to $70.1 million, resulting in an increase of $17.1 million in cash resources.
On August 29, 2011, the Company was paid a termination fee of Cdn$25 million following the termination of an arrangement agreement with Northgate Minerals Corporation ("Northgate"). The Company entered into the definitive arrangement agreement to combine its business with Northgate on July 12, 2011. The Company incurred transaction costs of approximately $7 million in respect of the proposed business combination with Northgate.
On October 19, 2011, the Company prepaid 50% or $30 million of the $60 million convertible note held by Goldcorp Inc. due on August 6, 2012. This repayment is not expected to have an impact on the Company's development plans. The convertible note was issued as part of the San Dimas mine acquisition in August 2010. Since then the Company has generated positive cash flow and built a strong financial position. The Company currently plans to repay the remaining $30 million before maturity from cash, cash flow or a planned credit facility.
Advance Tax Ruling Application; Q4 Financial Statements Expected to Reflect Taxes on Realized Revenue
On October 17, 2011, the Company filed a formal application to the Mexican tax authorities for an advance ruling on the Company's restructuring plan that, if successful, would result in paying income taxes in Mexico based on revenue from actual realized prices rather than spot prices for silver.
From the fourth quarter 2011 onwards, the Company's Mexican subsidiary intends to record revenue under the silver purchase agreement at the fixed price realized and record income taxes on the same basis. Throughout the advance tax ruling process, the Company intends to identify the potential tax as a contingent liability which will be described in the notes to its financial statements, and plans to retain access to sufficient cash to satisfy that contingent liability in the event of an unfavourable ruling.
In May 2011 the Company's Mexican subsidiary re-filed its 2010 tax return to claim a deduction for 100% of the value of its mineral concessions. This strategy, if accepted, would result in a deferral rather than a reduction of taxes. Based on the advice of its advisors, the Company elected to suspend the accelerated depreciation tax initiative during the advance tax ruling process. As a result of the suspension of this initiative, and the advance tax ruling submission, the subsidiary re-filed its 2010 tax return in September 2011 reflecting amortization of the mineral concessions over approximately 20 years and revenue under the silver purchase agreement at the fixed price. The Company reserves the right to institute the accelerated depreciation filing in the future.
2011 Production Guidance
The Company announced in September that as a result of a month long strike and lower than anticipated gold grades mined it was revising its operating outlook for 2011.
As of September 8, 2011 Original Outlook 2011 Revised Outlook 2011
Gold equivalent production(i) 110,000-120,000 100,000-110,000
(gold equivalent ounces)
Gold production 90,000-100,000 80,000-85,000
Silver spot sales by Primero(ii) 500,000-750,000 500,000-525,000
Silver production 4,500,000-5,000,000 4,500,000-5,000,000
Total cash costs(i) $550 - $570 $610 - $630
(per gold equivalent ounce)
Total cash costs(i) - by-product $350 - $370 $340 - $360
(per gold ounce)
(i) Material assumptions used to forecast revised 2011 production guidance
were updated: an average gold price of $1,575 per ounce; an average
spot silver price of $40 per ounce; and foreign exchange rates of 1.05
Canadian dollars and 13 Mexican pesos to the US dollar. Material
assumptions used to forecast original 2011 production guidance
included: an average gold price of $1,400 per ounce; an average silver
price of $6.63 per ounce, as according to the silver purchase agreement
the first 3.5 million ounces and 50% of the excess of silver are sold
at $4.04 per ounce and the balance is sold at spot, which was assumed
to be $24 per ounce; and foreign exchange rates of 1.05 Canadian
dollars and 13 Mexican pesos to the US dollar.
(ii) The Company sold 511,752 ounces of silver at spot prices before the
threshold on the silver purchase agreement was re-set on August 6,