A Gold Medal for Primero Mining

The Olympic tradition permits champions to claim their place in history by showing the world that they are simply the best at what they do. The gold mining world seems to have found its reigning champion, and Primero Mining (NYSE: PPP  ) will bring home the gold.

My top stock pick for gold in 2012 came through in the clutch with a terrific second quarter that earned net profit of $15 million ($0.17 per share) and record operating cash flow of $35.8 million ($0.41 per share). Following a difficult (but necessary) journey to reassess the resource base and mine plan at its San Dimas mine, Primero has emerged in the best condition of its young life, with $125.7 million in cash on hand and a rock-solid foundation for organic production growth. In fact, Primero's regrouping process has proceeded so well that the company increased its guidance for 2012 production by 10% to between 110,000 and 120,000 ounces.

The market has taken notice in a big way and driven Primero's shares sharply higher in recent weeks to crush the gold-mining competition and earn its spot on the golden podium. Last Sept. 26, I offered a two-part explanation for why I considered Primero Mining "The Greatest Gold Stock in the World," and I encourage Fools to review that series to get the full backstory behind Primero's medal-winning performance. The following chart highlights Primero's stunning outperformance of the gold-mining competition in the period since those articles appeared.

PPP Chart

PPP data by YCharts

Primero's 43% advance represents a dramatic anomaly within an industry that has suffered through a deep and painful correction. Primero outperformed the Market Vectors Gold Miners ETF (NYSE: GDX  ) , which is dominated by producers of far larger scale, by a very convincing 70%! Against its more relevant peers held within the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) , the disparity widens to 79%. Even Goldcorp (NYSE: GG  ) , my top pick among the majors, and (beginning Aug. 6) 41% stakeholder in Primero's shares, has underperformed Primero by 66% over the period.

Following this outstanding resurgence, I could see the shares running into a minor bout of near-term resistance before ultimately marching significantly higher still. Not only do I spot a touch of technical resistance on the chart, but the market may also remain in wait-and-see mode for a number of key forthcoming developments. Another key resource update is expected later this month, and then later in the third quarter Primero will render its decision on whether to expand the San Dimas mill to increase production capacity to 200,000 gold-equivalent ounces by about mid-2014. If the imminent resource update appears clearly supportive of a positive expansion decision, of course, the stock may break through resistance to enjoy additional upward momentum.

The biggest development to watch for, meanwhile, is the pending determination by Mexican tax authorities regarding whether the portion of Primero's silver production sold to Silver Wheaton (NYSE: SLW  ) under its silver stream agreement is taxed according to the spot price of silver or Primero's far-lower realized price. That determination, expected before the end of 2012, will unavoidably prove a very major catalyst in one direction or the other.

By making Primero Mining a core stock holding, I have placed my own wager upon a positive outcome. Likewise, I have selected the stock as a "top pick" within my Motley Fool CAPS portfolio. I look forward to witnessing the heights this stock can reach once that particular lead weight has been lifted from its shoulders. For ongoing coverage of this and other compelling picks among the miners of gold and silver, please bookmark my article list or follow me on Twitter.

Looking for more ideas? Download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Goldcorp, Primero Mining, and Silver Wheaton. The Motley Fool owns shares of Primero Mining. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (26)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2012, at 4:56 PM, SN3165 wrote:

    I own a bunch of shares but I am kicking myself for selling the 2015 warrants! Looking to get back into them on a pullback, if it happens.

  • Report this Comment On August 06, 2012, at 4:02 AM, lanceim59 wrote:

    If anyone is into small-cap high growth mining stocks, you should look into Woulfe Mining (TSX-V symbol: WOF or OTCQX symbol: WFEMF). Back in February 2012, Warren Buffet invested $80 million in Woulfe Mining which is one of the largest tungsten producers in the world! Tungsten is one of the hardest metals and is used for the tips of mining drills as well as jewelry. Woulfe Mining is projected to start production in the Sanddong Mine(one of the largest tungsten mine in the world) some time in 2013.

    http://www.moneymorning.com.au/20120613/why-warren-buffett-i...

  • Report this Comment On August 06, 2012, at 10:33 AM, XMFSinchiruna wrote:

    Wow, Primero blasted through that chart resistence near $3.50, setting up a very positive technical picture if the price can hold above that mark for a few days.

  • Report this Comment On August 06, 2012, at 12:41 PM, johnybottom wrote:

    Yep, I've enjoyed seeing this return to a reasonable valuation. With every news update I'm becoming more confident in Primero's management. If there's any significant pullback, I will add.

    I've followed a lot of your suggestions Sinchiruna, this is the one I'm most comfortable with by a long margin.

    My imagination tells me that management is preparing a solid acquisition which will take place if/when the tax ruling is decided. What are your thoughts on this Chris?

  • Report this Comment On August 06, 2012, at 1:37 PM, kurtdabear wrote:

    lanceim59: Don't know if you're a troll, a shill, or just getting your leg pulled by someone, but I'm willing to bet that Warren Buffett has never heard of WOF. He couldn't have loaned them $80 million because they only have current debt of $5 million. He couldn't have bought stock because the highest market cap on the company in the past 12 months was $120 million, which means he would own 2/3's of the company even buying at a multi-year high, which would make him an insider, and there aren't enough shares outside the float to cover that. Finally, WOF produces nothing. It has a 70% interest in an undeveloped tungsten project in S. Korea for which it is currently seeking to borrow development funds (from a S. Korean bank, not Warren).

  • Report this Comment On August 06, 2012, at 5:16 PM, bcvz wrote:

    @kurtabear..... I was also curious at lanceim59's comment.... The fact is, a company warren buffet owns, IMC International Metal Working, has made an agreement with the aforementioned company as a strategic investment.

    Of course every troll finds a way to spin this as Warren Buffet personally bought $80m stake in the company with his own money. I'm sure this represents a very small investment for IMC.

    Always do your own DD!!!

    Sinch,

    I enjoy your blogs, keep them coming.

  • Report this Comment On August 07, 2012, at 6:10 AM, Noneleft01 wrote:

    Kurtbear, bvcz:

    lanceim59 has been pasting that exact same post all over the place. It appears in articles on the Seeking Alpha website too. Ignore.

  • Report this Comment On August 23, 2012, at 8:55 AM, AirForceFool wrote:

    Anyone know of any historical data that may help us determine which way the Mexican government will go on the tax issue? Been long for a while now with shares... may add to the position, but would prefer to on weakness... I averaged up in physical silver up to $40... so trying to be more dilegent on reading the tea leaves... not that I don't think we'll see $50 silver in the not-to-distant future.

    Regards,

    Chris

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