Throughout most of the 250-plus years that Mexico's San Dimas gold and silver mine has been in production, the tools needed to precisely model the underground resource simply did not exist. Instead, mining activity principally followed the trajectory of the known epithermal veins as they wind and pinch their way through the host rock.
When you have shareholders to answer to, and modern exploration equipment at your disposal, the artisanal approach is clearly no longer viable. Prior operator Goldcorp (NYSE: GG ) brought its well-documented expertise to bear upon the operation, but conceded in 2010 that "the long history of continuous mining at San Dimas and the known occurrence of the mineral veins have overridden the need to prove up reserves for many years ahead."
In fact, during the years preceding the 2010 sale of the San Dimas mine to Primero Mining (NYSE: PPP ) , Goldcorp had a hard time predicting the mine's results because of a persistent disconnect between the geological model employed and the realized results on the ground. Back in 2008, I discussed how grade variability at San Dimas affected stream-holder Silver Wheaton's (NYSE: SLW ) haul. The mine was reliably profitable, just as it is today, but with a variability that challenged mine planning efforts.
Primero CEO Joseph Conway -- who was instrumental in building gold miner IAMGOLD (NYSE: IAG ) into a mid-tier powerhouse -- took the tough (but necessary) decision earlier this year to commission a new geological model for the San Dimas operation that would more predictably guide operations going forward. The stock, already somewhat impaired by some uncertainty surrounding the tax treatment of silver delivered to Silver Wheaton under a revised silver stream, suffered a second beating after that announcement that I believe has yielded one of the more compelling share valuations in the industry.
Guided by a new resource model that did -- at least temporarily -- substantially reduce the scale of 43-101-compliant resources, the company is now poised to approach its looming decision on an expansion of operations with far more reliable and conservative data. Furthermore, with 36% stakeholder Goldcorp still effectively on the hook for cumulative silver production well in excess of presently stated resources, I remain fully convinced that Primero retains the golden promise of meaningful, long-term organic resource growth with this newly honed operation at its core.
With a careful look at the financials, I can't see how investors will fail to see the value here. Primero's cash balance of $80 million is a healthy chunk of change for a company with a total market capitalization of $217 million! Primero produced cash flow of $80.2 million in 2011 and booked an adjusted net profit of $28.3 million on production of 102,220 gold-equivalent ounces. Co-product costs of $640 per ounce came in below the industry average, and the byproduct cost of $384 per ounce places the company among the industry's top cash-margin operators. Even after accounting for the retroactive tax accounting that presupposes a favorable outcome of a pending decision from Mexico's tax authorities, Primero is trading at less than eight times 2011 earnings. Fools who take the time to study and understand this company will, I am convinced, agree that it is brimming with golden promise.