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Gold and silver miner Primero drops the ball in Q1, but could there be value beneath the carnage?
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What: Shares of Primero Mining (PPP +0.00%), a small-cap gold and silver miner with resource properties in Canada and Mexico, shed as much as 22% of their value during Monday's trading session after providing a first-quarter production update and full-year guidance adjustment that Wall Street and investors clearly weren't digging.
So what: For the quarter, Primero announced preliminary production of 36,158 gold equivalent ounces, or GEO, including 22,901 GEO from its San Dimas mine in Mexico, and 13,257 GEO from its Canadian Black Fox mine. Combined, this 36,158 GEO of production is down 41% from the prior-year quarter and included a 40% drop-off in gold production and a 52% plunge in silver production. Average mill grade also dropped by 17% for gold and 21% for silver as salt in the wound.
Making matters worse, in an effort to improve safety at its San Dimas mine, new safety and procedure standards were implemented which adversely affected production and all-in sustaining costs (AISC). AISC for the quarter was $1,556, or 49% higher than it was in the year-ago quarter.
Looking ahead, Primero Mining sees full-year production at between 230,000 GEO and 250,000 GEO, and AISC ranging between $975 and $1,025 per ounce. Comparatively, when Primero reported its Q4 results and issued guidance back in February, it foresaw 260,000 GEO to 280,000 GEO for 2016, with AISC falling 10% to between $850 and $900 per ounce. In other words, shave about 30,000 GEO off full-year estimates, and AISC is now expected to be about the same as full-year 2015.
Now what: Just in case today's bad news wasn't enough of a kick in the pants for Primero's shareholders, it's also been contending with legal claims against its Mexican subsidiary, Primero Empresa Minera, since early February. Mexican authorities are seeking to nullify the Advanced Pricing Agreement (APA) issued in 2012 that governs how much of Primero's proceeds are taxed between 2010 and 2014. Primero believes itself to be in the right, but it's another potential gray cloud hanging over the company.
On the bright side (and yes, there really is a bright side), the prospect for Primero's underlying resources has been improving, with gold prices having their best quarter in a long time. Low-yield environments in numerous developed countries, as well as economic uncertainty and growing demand for physical gold from various central banks, could further assist physical gold's ascent.
Primero, despite its rough first quarter, is also generally known for modest improving production results, as well as keepings AISC below spot gold prices. Even though 2016 could prove to be a rough year in terms of comparisons for Primero, the proactive actions it's taking could result in some very easy-to-beat year-over-year comparisons come 2017.
The real wild card is the APA, which may not have a resolution for quite some time. Even then, I don't anticipate a negative ruling having a lasting impact on Primero's Mexican mining operations.
My suggestion? Primero's plunge could be an opportunity to consider dipping your toes into the water, but you'll need to understand that this is a multi-year hold if you do buy, and it's probably best-suited for mining investors that can stomach the volatility.