RE:NEWS- Primero Mining Reports Second Quarter 2016 Results Lurk & Learns : (Especially those who bot the recent warrant issue. )
Some Positives to Take Away as mining is NOT a "sure thing" as mining companies including/like Primero are subject to the vagaries of governments looking to balance their books with tax grabs, ground conditions (& attendant contingency rerouting) and grade due to paleo depositional environment and/or labour challanges.
Point being, after this recent correction, can we see any, "light at the end of this mining tunnel"?
Potential areas of upside/improvements include as highlighted.
CAVEAT EMPTOR is mandatory as MINING is an art based on minimal science. While an attempt is made to strike a balance (cost benefit) with the proactive aspects (e.g. exp drilling & drifting) many facets are reactive, as highlighted below. The challenge is the ability to successfully defeat these challenges; especially then San Dimas & Black Fox are impacted simultaenously. Diversification end up being called diworsefication when setbacks emerge at both camps at the same time. Primero Mining loses $19.43-million (U.S.) in Q2 2016
2016-08-04 08:03 AT - News Release
Mr. Ernest Mast reports
PRIMERO REPORTS SECOND QUARTER 2016 RESULTS
Primero Mining Corp. has released its operating and financial results for the second quarter ended June 30, 2016.
Highlights:
- Improved Q2 2016 operating results: Total production was 49,499 gold-equivalent ounces, comprising 28,978 ounces of gold and 1.6 million ounces of silver from San Dimas, and 15,172 ounces of gold from Black Fox, a 37-per-cent improvement over the 36,158 gold-equivalent ounces produced in the first quarter of 2016. Primero produced 62,490 gold-equivalent ounces in Q2 2015.
- Operating cash flows increased: The company realized a net loss of $19.4-million (12 cents per share) and adjusted net loss of $2.4-million (one cent per share) in Q2 2016. The company generated second quarter operating cash flow before working capital changes of $11.2-million (seven cents per share), notably increased over first quarter 2016 of negative $8.5-million.
- Black Fox achieved higher underground production rates: Underground production from the Black Fox mine averaged 636 tonnes per day in Q2 2016, a 50-per-cent improvement over the production levels in Q1 2016. The mine continues to make progress toward initial production from the Deep Central zone, with stope production expected from this new area before the end of third quarter 2016, slightly later than originally planned.
- Equity financing improved balance sheet flexibility: Primero ended Q2 2016 with $79.5-million of total liquidity, which includes $54.5-million in cash and $25.0-million available on its line of credit. The $40.0-million bought-deal financing, which closed on June 24, 2016, positively contributed to Primero's June 30, 2016, cash position.
- Production guidance for 2016 updated: Primero has reduced its 2016 production guidance to between 195,000 and 215,000 gold-equivalent ounces at total cash costs of between $775 and $825 per gold-equivalent ounce with all-in sustaining costs of between $1,200 and $1,250 per gold ounce. Production at San Dimas has been impacted by lower-than-planned grades, unexpected labour disruptions in July and a lower gold/silver ratio as a result of minimal expected silver spot sales. Production at Black Fox has been affected by delays in accessing high-grade mineralization from the Deep Central zone.
- Drilling to commence on new concession in San Dimas district: Initial orientation sampling has begun on the recently acquired Lechuguilla concession located close to San Dimas's southern boundary, with drilling to commence later this year.
- North American Free Trade Agreement (NAFTA) notice of intent: In order to protect its rights as a Canadian investor in Mexico under NAFTA, on June 2, 2016, the company issued a notice of intent to submit a claim to international arbitration against the government of Mexico, pursuant to Article 1119 of the NAFTA. Primero maintains it has the right to rely on its 2012 advance pricing agreement with the Mexican tax authority (SAT) which confirmed the appropriate price for sales of silver.
"We increased production levels in the second quarter and we are committed on continuing to bring both of our mines up to their optimal operating rates," stated Ernest Mast, president and chief executive officer. "San Dimas showed solid production improvements over Q1 2016, achieving average mining rates of 2,500 tonnes per day. But there is still much work to be done to optimize and refine the mining cycle, increase development rates, and maximize productivity and grades. We had labour disruptions during July that impacted July's production and delayed some development work. As a result we initiated a mine optimization plan focusing on technical and human resources issues. We are continuing to make progress at Black Fox in developing the Deep Central zone ahead of production expected in the third quarter, unfortunately we have experienced delays in early July due to poor ground conditions on the 660-metre level. In light of these challenges, the company has reduced its 2016 production guidance."
San Dimas operations improve; Black Fox achieves increased underground production rates
Primero produced a total of 49,499 gold-equivalent ounces in Q2 2016, which compare with 62,490 gold-equivalent ounces produced in Q2 2015, but represent a 37-per-cent increase compared with Q1 2016. Gold and silver production was 44,150 ounces and 1.6 million ounces, respectively, in Q2 2016 compared with 54,862 ounces and 2.15 million ounces in Q2 2015.
The company incurred consolidated total cash costs per gold-equivalent ounce of $851 for Q2 2016, compared with $653 for Q2 2015. All-in sustaining costs per ounce were $1,345 for Q2 2016, compared with $1,036 in Q2 2015.
San Dimas produced 34,327 gold-equivalent ounces (28,978 ounces of gold and 1.6 million ounces of silver) during the second quarter of 2016, a 50-per-cent increase over Q1 2016 and compared with 44,128 gold-equivalent ounces produced in Q2 2015. The decreased production year over year was mainly due to lower throughput rates and lower head grades due to the lack of availability of high-grade stopes mainly as a result of lower development in Q1 2016, and ventilation and mine services issues. The labour issues during July further impacted development and therefore deferred mining some high-grade areas to 2017.
San Dimas total cash costs on a gold-equivalent basis in the second quarter of 2016 were $843 per ounce, compared with $608 per ounce in Q2 2015. AISCs at San Dimas were $1,063 per ounce in the second quarter 2016, compared with $822 per ounce in the same period of 2015. The higher cash costs per ounce were mainly due to lower metals production and reduced silver credits realized in the second quarter of 2016. Higher unit costs were also related to an increase in the annual bonus paid to unionized employees. The impact of the increased union bonus was approximately $90 per ounce in the second quarter.
Black Fox produced 15,172 ounces of gold in the second quarter of 2016, a 14-per-cent increase over the 13,257 ounces produced in Q1 2016 and compared with 18,362 ounces in Q2 2015. In Q2 2016 the majority of production ounces came from the underground mine, whereas in Q2 2015 gold production was largely sourced from the open-pit mine. In the second quarter of 2016 the underground mine achieved increased production rates averaging 636 tonnes per day, representing a 50-per-cent improvement over Q1 2016 production levels. During July, 2016, a planned initial long-hole stope of the Deep Central zone was delayed due to poor ground conditions in a footwall development drift that required the development of an alternative route. An alternative route was implemented that has already mined 3,220 tonnes of development ore grading 9.8 g/t (cut at 30 g/t) confirming the existence of high-grade ore at the 660 level. As a result, initial stope production from the Deep Central zone is now expected to commence before the end of third quarter 2016.
Black Fox total cash costs per gold ounce were higher in Q2 2016 at $870 per ounce compared with $762 per ounce in Q2 2015 due to lower gold production. The Black Fox mine incurred AISCs per gold ounce of $1,362 in Q2 2016, compared with $1,071 in Q2 2015 as a result of increased capital spending on underground development in 2016 compared with 2015.
Primero generated $59.4-million of revenue in Q2 2016, 12 per cent lower than in Q2 2015 as a result selling 17 per cent less gold equivalent ounces despite a 6-per-cent-higher average realized gold price. In Q2 2016, the company sold 43,008 ounces of gold at an average realized price of $1,241 per ounce and 1.43 million ounces of silver at an average realized price of $4.24 per ounce. Revenue in Q2 2015 totalled $67.4-million from selling 52,975 ounces of gold at an average realized price of $1,171 per ounce and 1.26 million ounces of silver at an average realized price of $4.20 per ounce.
Silver produced at San Dimas is subject to a silver purchase agreement and as a result 1.43 million ounces of silver were sold to Silver Wheaton (Caymans) Ltd. at a fixed price of $4.24 per ounce during the quarter. As of June 30, 2016, the company has delivered 5.6 million ounces of silver under the San Dimas silver purchase agreement's six-million-ounce annual contract year threshold (which runs from Aug. 6 to the following Aug. 5), following which the company can begin selling 50 per cent of the silver produced at San Dimas at spot market prices until Aug. 5, 2016, when the annual threshold is reset. Primero expects minimal spot silver sales in 2016. Gold produced at Black Fox is subject to a gold purchase agreement, and, as a result, 1,131 ounces were sold to Sandstorm Gold Ltd. at a fixed price of $524 per ounce in Q2 2016.
The company incurred a net loss of $19.4-million (12 cents per share) in Q2 2016, compared with a net loss of $6.7-million (four cents per share) for the second quarter of 2015. Adjusted loss for Q2 2016 was $2.4-million (one cent per share) compared with adjusted net income of $1.1-million (one cent per share) in Q2 2015. Adjusted loss primarily excludes the impact of foreign exchange rate changes on deferred tax balances, costs specifically related to the NAFTA and APA claims, and the mark-to-market gain/loss on the convertible debenture and warrants.
Primero generated operating cash flow before working capital changes during Q2 2016 of $11.2-million (seven cents per share), compared with operating cash flow of $22.6-million (14 cents per share) in Q2 2015. Q2 2016 operating cash flow included $4.5-million in cash payments for income taxes in Mexico for 2016 tax instalments. Q2 2016 cash flows were also affected by lower production levels relative to Q2 2015.
Liquidity update
The company's total liquidity position at June 30, 2016, totalled $79.5-million, comprising $54.5-million in cash and $25.0-million available under its line of credit. During Q2 2016, Primero completed a $40.0-million ($51.8-million (Canadian)) bought-deal financing, which positively contributed to Primero's June 30, 2016, cash position.
Primero has $50-million drawn on its revolving credit facility that matures on May 23, 2017. The company expects to renew this facility, but in the event full repayment is required cash generated by operations may not be sufficient to repay amounts outstanding under the revolving credit facility in full at maturity. The company has a plan to improve production at San Dimas, and will focus on cost and capital reductions at both of its operations to increase cash flows, and is also evaluating the potential divestiture of assets and joint venture opportunities.
Production guidance update for 2016
Primero has reduced its 2016 production guidance to between 195,000 and 215,000 gold-equivalent ounces at total cash costs of between $775 and $825 per gold-equivalent ounce, with AISCs of between $1,200 and $1,250 per gold ounce. The company has also re-evaluated its capital budget, and, as a result, 2016 capital expenditures have been reduced to $73.7-million including $42.4-million at San Dimas and $29.0-million at Black Fox.
Production at San Dimas has been impacted by lower-than-planned grades, unexpected labour disruptions in July and a lower gold/silver ratio as a result of minimal expected silver spot sales. Labour disruptions in July were related to the local union seeking to increase short-term production bonuses and interrupted the mine's operation during discussions. The short-term production bonuses were agreed upon in late July. The labour disruption affected July production and development, and, as a result, select high-grade areas will not be mined in 2016 resulting in a production shortfall.
In view of these recent operational challenges at San Dimas the company initiated a mine optimization program, in conjunction with a third party. A seven-point action plan was developed to focus on technical improvements such as improving development rates and services, reducing dilution, decreasing operating costs, and improving labour productivity. The company expects to provide an update at the end of the quarter.
Production at Black Fox has been affected by timing delays in accessing high-grade mineralization from the Deep Central zone. Stope production from the Deep Central zone has been delayed by approximately one month, due to poor localized ground conditions experienced on the 660-metre level. The Black Fox team has successfully worked through this area, but the timing delay has pushed first stope production until September. Black Fox updated guidance includes additional capital costs to develop the Deep Central zone. Additional drilling and development will be undertaken to increase available stopes in the Deep Central zone.
Material assumptions used to forecast total cash costs for 2016 were based on the company's actual results to June 30, 2016, and include an estimated average gold price of $1,250 per ounce (based on actual gold prices received through Q2 2016 and $1,300 per ounce for the remainder of the year), silver market price of $20 per ounce, and foreign exchange rates of $1.30 (Canadian) and $18 Mexican pesos to the U.S. dollar for the remainder of 2016. Silver sold under the silver purchase agreement is expected to average $4.26 for the 2016 year.
Froome zone update
Primero continues to evaluate the potential of the Froome zone located approximately 800 metres west of the Black Fox mine. Following the announcement of positive drilling results in Q1 2016, Primero continued to delineate and expand the deposit and commenced an internal economic evaluation of the Froome zone. An initial mining plan has been developed, and preliminary engineering and geotechnical studies have begun with the focus on accessing the orebody via an underground drift from the Black Fox pit, expediting the permitting process and timeline to initial production. Optimizing studies will continue in Q3 2016 with the focus on reducing capital cost and derisking the project.
The company's regional exploration program will now focus on the discovery of Froome-like targets along the mineralized trend.
Mineralization potential identified on New Lechuguilla concession in San Dimas district
With the June, 2016, acquisition of a large new concession in the San Dimas district (Lechuguilla), Primero conducted a geological reconnaissance of identified geological windows. The large-scale Lechuguilla concession is not covered by the San Dimas silver purchase agreement and is a key focus of Primero's second half 2016 exploration program.
Initial geological reconnaissance conducted by Primero's geologists has obtained preliminary grab samples from the Causitas vein, located close to the main road between Durango and Tayoltita. Preliminary samples returned one gram per tonne gold and seven g/t silver, and 0.7 g/t gold and 98 g/t silver at surface, providing an indication of potential mineralization. The Causitas vein has been identified between one and five metres and has been traced over 200 metres of strike length. Based on these early results, Primero's geologists will begin a program of detailed vein mapping and channel sampling in order to identify drill targets.
Primero's geologists have also noted anomalous precious metals values in preliminary grab samples taken from the identified Sara Costanza and Cinibas veins.
Exploration sampling at Lechuguilla was conducted by Primero's exploration team. David Laudrum, PGeo, senior resource manager for Primero, has reviewed the technical exploration information in this news release as the qualified person for the purposes of National Instrument 43-101 for the company. All samples and analyses reported herein were performed in the ISO-certified independent laboratory SGS Servicios Minerales in Durango, Mexico, using fire assay with atomic absorption finish or gravimetric finish for values over 10 g/t gold.
Mexican tax update and NAFTA notice of intent
The company continues to vigorously defend its advance pricing agreement (APA) from the legal claim initiated by the Mexican tax authorities (SAT). The APA was obtained to confirm that the company should calculate taxes on silver sold from the San Dimas mine based on the price realized by the company. The legal claim initiated does not identify any different basis for paying taxes, nor have any tax reassessments been received from the SAT. The company continues to record its revenue from the sale of silver for purposes of Mexican tax accounting in a manner consistent with the APA on the basis that the applicable facts and laws have not changed. The company's legal and financial advisers continue to believe that the company has filed its tax returns compliant with applicable Mexican law.
In defending the APA, the company has filed procedural and substantive responses to the SAT-initiated legal claim. The procedural response is a challenge against the admission of the SAT's claim. The substantive response contains the company's response to the SAT's claim. While the resolution of the procedural challenge remains pending and the substantive matters are continuing, the Mexican District Court recently issued a final order mandating that no resolution may be issued in connection with the substantive matters until the procedural challenge against the admission of the SAT's claim is finally decided. As consideration of these matters continues in parallel, the company does not expect the order to delay the resolution of the substantive case.
The company believes that it is entitled to rely on the APA which is legally binding in respect of the company's 2010 through 2014 taxation years. The company obtained the ruling transparently and in good faith. Primero believes the APA should not be the subject of challenge by a government administration installed upon the change of government after the APA was duly issued. On June 2, 2016, the company notified the government of Mexico that the measures taken by its tax authority (the SAT) with the judicial proceeding seeking to nullify the APA, breached several provisions of Chapter 11 of the North American free trade agreement (NAFTA) because these measures are arbitrary, discriminatory, unfair and inequitable. As such, the company informed the government of Mexico that, absent amicable resolution within 90 days, it intends to commence international arbitration proceedings pursuant to Article 1119 of the NAFTA.
The company will continue to vigorously defend the validity of the APA and the correctness of its tax filing position.
Conference call and webcast details
The company's senior management will host a conference call today, Thursday, Aug. 4, 2016, at 10 a.m. ET to discuss second quarter 2016 operating and financial results.
Participants may join the call by dialling North America toll-free 1-888-789-9572 or 416-695-7806 for calls outside Canada and the United States, and entering the participant passcode 4770671.
A live and archived webcast of the conference call will also be available at the company's website under the news and events section.
A recorded playback of the second quarter 2016 results call will be available until Nov. 1, 2016, by dialling 1-800-408-3053 or 905-694-9451 and entering the call-back passcode 2048848.
This release should be read in conjunction with Primero's second quarter 2016 financial statements and mangement's discussion and analysis report on the company's website in the financial reports section under investors, or on SEDAR or EDGAR.
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DYODD - GLAP
Cheers
Stanley