Primero Mining has big plans for San Dimas

Before he stepped down a year ago as president and chief executive of Iamgold (IMG-T), Joseph Conway successfully transformed the company from a $50 million joint-venture player to a $6 billion leading intermediate gold producer. Now the mining industry veteran hopes to work that same magic at Primero Mining (P-V), formerly Mala Noche Resources.

Since taking on the top job at Primero in June 2010, Conway has completed the acquisition of the San Dimas mine in Mexico from Goldcorp (G-T, GG-N) and developed  a three-year plan to nearly double production by 2013 from the 100,500 gold-equivalent ounces the underground mine produced in 2010. (This year Primero expects San Dimas will produce between 110,000 and 120,000 gold-equivalent ounces, a 15% gain over 2010.)

The three-year plan also calls for lifting development spending by 50% and doubling exploration spending to about $12 million. This year alone exploration will involve   53,000 metres of diamond drilling and 3,800 metres of exploration drifting. Twelve drill rigs will be in operation, up from nine last year.

“The unique thing about San Dimas is that it’s been around for so long – it’s been operating for more than two centuries in one form or the other and the conversion of resources to reserves has been pretty incredible,” Conway explains in a telephone interview. “That’s one thing I always look at and the track record has been an almost 90% conversion over the last thirty years and that gives us confidence that we’ll be able to find more and that’s why we’re doubling our exploration budget.”

The drilling in 2011 will focus on the Sinaloa Graben; the Roberta, Robertita and Juileta veins in the Central Block; and the Arana Hanging Wall areas. San Dimas consists of five ore zones or blocks: San Antonio West, Sinaloa Graben, Central Block, Tayoltita and Arana Hanging Wall block.

Primero also plans to expand its Tayolita mill in 2012 from its current capacity of 2,100 tonnes per day to 2,500 tonnes per day at an estimated cost of $4.5 million. In the fourth quarter, mill throughput jumped by 15% over the previous quarter and averaged 1,830 tonnes per day.

On Jan. 27 Primero reported that gold and silver reserve growth has more than replaced production at San Dimas. As of Dec. 31 2010, proven and probable gold and silver reserves each rose 3%, net of production, to 886,000 oz. gold and 62.9 million oz. silver. (The largest portion of the increase in both gold and silver reserves came from the Sinaloa Graben exploration area, which the company believes will make up about 50% of the ore from the mine in five years’ time.) Meanwhile, inferred gold resources have jumped 23% over 2009 figures to 2 million oz. while inferred silver resources rose 16% to 179 million ounces.

Says Conway: “For an underground mine it has a good resource and reserve base and generates a fair bit of cash flow so I saw it as a great operation and we’re going to use the cash flow to build this company to something bigger than what it is today.”

Highlights from its 2010 drill program at Sinaloa Graben include a drift that returned 22.8 grams gold per tonne and 2,054 grams silver per tonne over 3.2 metres and 14 grams gold and 1,449 grams silver over 4.42 metres. Mineralization at Sinaloa Graben remains open to the west and at depth.

Conway is proud of Primero’s achievements in the short time since the company acquired San Dimas. “We’ve raised $285 million and closed the deal while still meeting our guidance, while increasing reserves, building up the corporate team, integrating the operation, making some high-grade discoveries, and announcing an expansion — all in five months.”

The San Dimas mine is about 125 km northeast of Mazatlan in Mexico on the border of Sinaloa and Durango states. The site can be reached by taking a 45-minute flight from Mazatlan or Durango, or by driving ten hours from the city of Durango.

Primero purchased San Dimas from GoldCorp for $216 million in cash, 31.15 million of its common shares, a $60 million 12-month convertible note with an interest rate of 3% and a $50 million 5-year promissory note with an interest rate of 6%.

“I liked the structure of this transaction,” Conway comments. “I have a lot of respect for Goldcorp, the way they run their business, and to have them as major shareholders and supporters is a very positive thing.”

Looking ahead Conway says Primero is looking at potential acquisitions and M&A, primarily in the Americas with a bias towards pro-mining jurisdictions in Latin America.

At presstime in Toronto Primero was trading at $4.12 per share. Over the last year it has traded between a low on March 18 2010 of $2.50 per share and a high on May 15 2010 of $8.30 per share. The company has about 87.7 million shares outstanding.