Primero Train Wreck 101Resource Sector Digest: Primero Train Wreck 101 [
Time to Shut Down Primero - Shareholders Are Getting Nothing - Current Shares are Worthless]
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Primero Mining (PPP) https://seekingalpha.com/article/4098688-resource-sector-digest-primero-train-wreck-101 Summary
Primero Mining inching ever closer to the precipice.
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Resource Sector Digest.
(
Vol. 101 - August 14, 2017)
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Setting The Scene
Primero Mining (
PPP) managed to off-load the Black Fox mine just in time for Q2 earnings, but the measly $35M price tag did little to convince the market of the company's further prospects. At the time of writing, shares had sold off 45%, and Primero finds itself deeper in penny stock territory as opposed to near the coveted $1 mark required to maintain its Nasdaq listing.
Ex-Brigus shareholders must be chuckling at this latest turn of events, considering the price of C$220M Primero paid for Black Fox two and a half years ago. Primero is now selling the mine for 20% of this purchase price, and that's after investing heavily in exploration and development, and after booking the best quarter at the Black Fox mine since its acquisition.
But given the sorry state of Primero's balance sheet, it's still nice to have the cash in the treasury I hear some of the Primero Permabulls say. Well yes, but... is our reply. Firstly, and against intuition, the Black Fox sale does not improve the tight working capital position in any material way. Extrapolating from the June 30 balance sheet and assuming all of the $35M will be used to pay down the revolving credit facility, working capital will only increase marginally from $15.4M to $16.1M.
The mentioned revolver is probably the most pressing issue on Primero's agenda. The company has drawn down almost $66M on this facility, and even after counting the full proceeds from the Black Fox sale against this debt, there will still be $31M due in late November this year.
Free cash flow from the one remaining producing asset in the portfolio, the San Dimas mine in Mexico, appears elusive, however, as performance has been hampered by a myriad of operational problems, including safety issues, a strike lasting for the better part of Q2, and a nagging tax case. To quote the Q2 MD&A:
"While the strike action was resolved and operations resumed on April 22, 2017, to date the San Dimas mining operations have not generated positive cash flows. If operations do not ramp up according to the restart plan and workforce disruptions continue, the Company may not be able to generate sufficient cash flows and profitability from operations to enable it to refinance its outstanding obligation under the revolving credit facility on November 23, 2017." Even if we assume that workforce disruptions have been overcome for good (a generous assumption all in itself considering the recent relapse over bonus payments), the performance metrics quoted in the restart plan are already out of reach. Lack of investments in exploration and mine development appears to necessitate a throughput reduction from 2,700tpd to 1,800tpd and implies less metal production than planned, probably coupled with higher unit costs.
Quite clearly, cash flow from San Dimas will not suffice to repay the revolver when it comes due in just a few weeks. Especially not, if one accounts for payments under the silver stream owned by Wheaton Precious Metals (
WPM), the equivalent to a 39% royalty. Which brings us to the king pin in this wreckage. Wheaton Precious Metals not only owns the stream, it also guarantees the outstanding amount on the revolver. And, as such, the streamer has been and will be calling the shots.
Wheaton Precious Metals has already declared itself amenable to renegotiate the San Dimas silver stream, but Primero investors should not kid themselves: any changes to the streaming agreement will be implemented to serve Wheaton Precious Metals' obvious primary goal of preserving as much cash flow from the stream as possible.
As such the streamer will probably push for a sale of the San Dimas mine to a well-capitalized operator, who is willing to invest the estimated $30M necessary to ramp production back up to previous levels and maintain those levels for the foreseeable future. To note, Primero CEO Mr. Conway alluded to a San Dimas sale in the Q2 earnings call on several occasions.
The involved parties will have their work cut out, as San Dimas is not an easy sale by any means. Worker relation issues are well-documented, and the ongoing tax dispute with Mexican authorities regarding the silver deliveries to Wheaton Precious Metals also acts as a deterrent. In the end, the price Primero will be able to fetch for San Dimas will be determined by Wheaton Precious Metals' terms for a restructured stream, as any buyer will insist on such a restructure given Primero's example. To quote Mr. Conway from the Q&A session of that earnings call:
"The stream is a significant issue. Absent the stream the operation can make money. With the stream we don't see that." It will be in Wheaton Precious Metals' best interest to play ball and grant a stream reduction for the new owners in order to preserve long-time viability of operations; but on the other hand, there is no reason for the streamer to let Primero have more than the cash necessary to rid itself of the outstanding balance of the revolver (which the streamer currently guarantees).
Chances that Primero shareholders will see any benefit at all from a sale of the San Dimas mine are slim, in our opinion. Based on the above, we believe that proceeds will be just enough to do away with the current debt from the revolver, but not much beyond that. And, this will leave the remaining Primero entity with the tiny issue of the $75M in convertible debentures maturing in February 2020 and bearing 5.75% interest. That's a very heavy load to bear for a company whose only cash flow will come from the Mexican government in the form of VAT backlog, about $1M per week for the next 33 weeks.
The remaining portfolio is not worth much at all in our opinion, and near-term production is unlikely neither from Cerro Del Gallo nor from any of the other exploration properties. If Primero wants to continue as a going concern beyond a San Dimas sale, then the only way we see at this point will be via a substantial capital raise. If this can be accomplished, then it will be good news for debenture holders as presumably they will receive at least some benefit from such an initiative; but it will probably render current shareholders a negligible minority on the future registry.
Primero's ongoing demise has not come out of the blue at all and has in fact been quite foreseeable for a long time already. Hopefully, our calls for caution (e.g.
link,
link) on several bullish articles over the past year and a half have helped some readers save money because, yes indeed: fundamentals do matter after all.
And, on a concluding note, we point to McEwen Mining (
MUX), which is putting together a growing set of properties in the Timmins camp. The Black Fox acquisition adds a mill with excess capacity to this portfolio, and we are intrigued; but that's for another time.