Turnaround stories can be tough to time to a tee, but the truly great ones make you happy to wait.
I am delighted to await what I consider an inevitable breakout for shares of Brigus Gold (AMEX: BRD ) . Naturally, when I selected Brigus as one of my top 10 picks for 2011, I did not expect the market to take so long to account for the spate of value-generating developments under way at the company's flagship Black Fox mining and exploration complex.
But great turnaround stories are not forged overnight. Although here I stand with a CAPS stock selection that has underperformed the underwhelming S&P 500 by nearly 20% since I initiated the call on Dec. 10, 2010, in my real-life portfolio I have seized the opportunity to meaningfully increase my investment stake and lower my overall cost-basis. In fact, during what has proven to be a surprisingly weak year for the precious-metal miners at large, this opinionated Fool has reveled in the opportunity to increase stakes in similarly forlorn mining stocks like Primero Mining (NYSE: PPP ) , Great Panther Silver (AMEX: GPL ) , and future gold producer Thompson Creek Metals (NYSE: TC ) . The precious metal aficionados at Sprott Asset Management -- despite a particular emphasis upon silver miners like First Majestic Silver (NYSE: AG ) and Alexco Resource (AMEX: AXU ) -- have likewise retained an avid stakeholder interest in Brigus Gold throughout this turnaround process.
Status report on Brigus' ongoing transformation
Brigus Gold has seen the pace of its ongoing turnaround process hindered somewhat in 2011 by a shortage of qualified personnel in the region and a short-lived lag in the pace of underground development earlier in the year. When I visited the operation in June, I was impressed by the symphony of simultaneous underground development work orchestrated by an extremely capable conductor. Brigus COO Richard Allen is a former director of mining for none other than Barrick Gold (NYSE: ABX ) , the world's largest gold producer by a wide margin. The company recently added some key hires as well, with a new mine manager, four mine geologists, and a production coordinator. With nine mining stopes already active underground (with some still working through lower-grade "development ore") and an expanding mill operation that's hungry for more high-grade underground ore, I find myself rather astounded by the market's failure to anticipate the profitability that's baked into this golden cake.
Mind you, this is already a profitable operation even during this underground development push. Black Fox generated operating income of $2.86 million even as the processing of open-pit waste material and underground development ore caused a near-term plunge in average head grade to 2.9 grams per tonne. When the underground operation hits its stride in 2012, I expect rebounding gold grades, declining cash costs, and an enhanced mill throughput to combine for a powerful profitability surge.
The area in blue depicts underground mine workings as they existed under Apollo Gold before the merger that created Brigus Gold. The area in green shows the remarkable expansion of underground infrastructure since the mid-2010 merger, while the area in grey represents the long-term productive capacity of this high-grade orebody.
After listening to Brigus' third-quarter conference call, I still believe the company is on a very strong operational footing to achieve its initial targeted production rate of 25,000 ounces of gold per quarter beginning fairly early in 2012. But as a long-term investor, I am more firmly focused upon the company's subsequent growth spurt that could bring output to 200,000 ounces annually by around 2015. The Contact and 147 zones continue to prove their mettle as the next major springboards for expansion of the Black Fox operation, and recent assays featuring a wide 22.1-meter intercept of 7.78 g/t gold from the 147 Zone speak to the exciting prospectivity of these emerging gold deposits. I believe the mid-December release of an initial resource estimate for these high-priority discoveries could offer one of multiple looming catalysts for an overdue breakout in the shares.
Don't forget the core
Since I believe it's clear the market has fallen behind the curve with respect to Brigus Gold's ongoing turnaround story, I encourage Fools to stay one step ahead. That might involve initiating or increasing a stake before a true breakout move comes to the shares, but I would argue that also involves remaining informed of additional growth catalysts beyond the headline-grabbing Contact and 147 zones that will dominate near-term interest in the Brigus story. While the market takes its time digesting the significance of those zones, as well as the adjacent historical Gibson mine and related exploration upside, I encourage Fools to return their ahead-of-the-curve focus to the main orebody at Black Fox. As underground development progresses, so too will the company's capacity to test for further expansion of the deposit. The following image summarizes some of the deposit's more alluring exploration upside potential:
The areas in grey on the above image depict several key exploration targets, which will be rendered accessible by a pair of planned exploration drifts (the two yellow lines). I find the down-plunge extension at right the most exciting, particularly since a 2004 exploration hole intersected 20.85 gpt gold over nearly five meters within that target zone.
If you really want to get a head start on the market, take a close look at Brigus' recently released pre-feasibility report on the Goldfields project in northern Saskatchewan. The report estimates a net present value of $144.3 million and a capacity to support a 13-year mine life with an average of 100,000 annual ounces for the first seven years. The company remains singularly focused for now upon realizing that kind of output from Black Fox, but once that goal is achieved, look for this project to return to the fore as a meaningful component of Brigus' impressive pipeline for long-term production growth. To retain that singular focus, the company optioned off some non-core projects in Mexico and the Dominican Republic this year, but it's also worth noting that Brigus retained upside exposure to those projects within the structure of the options.
So what say you? Are you keen to wait patiently for this turnaround story to bear golden fruit? Please share your thoughts in the comments section below, and track my ongoing coverage of the company by adding Brigus and its peers to your watchlist using the links below.