Primero focuses on improving safety at San Dimas

VANCOUVER — Primero Mining (TSX: P; NYSE: PPP) had a rather disappointing start to 2016, but the reason behind the notable drop in quarterly gold-silver production is actually commendable because it’s related to work-place safety. The company has had an “unacceptable” record at its San Dimas underground operation 125 km northeast of Mazatlán, Mexico, with five deaths reported at the site over the past five years.

The most recent incident occurred in mid-December when miner Enrique Ortiz lost his life during preparation for ground support installation in a cut-and-fill stope in the mine’s Central Block area. Primero has subsequently committed to what it labels “a transformational shift in attitude towards a safety culture committed to a workplace free of accidents.” Metallurgical engineer Ernest Mast was promoted as president and CEO in February, while former CEO Joseph Conway moved to the position of executive-vice chairman.

The San Dimas gold-silver operation 125 northwest of Mazatlán, Mexico. Credit: Primero Mining.

One of the main tenants behind Primero’s safety push is the concept that “no person should be advancing any face under unsupported ground.” In order to enforce the rule the company has retrofitted active areas of the mine with standards for ground support in accordance with Ontario mining regulations.

The step led to restricted access to “certain portions of the mine and provisions for new access points to specific areas, significantly impacting the first quarter mine plan.” Due to the more stringent focus on safety regulations for ground support, mining of certain high-grade stopes was deferred.

As a result Primero’s first quarter production fell around 41% year-on-year to 36,158 oz. gold equivalent. Total output at San Dimas was down around 51% to 22,901 oz. gold equivalent, while production at the Black Fox mine in Ontario was relatively flat at 13,257 oz. gold.

The Black Fox operation in Ontario and San Dimas mine in Mexico. Credit: Primero Mining.

Since access to certain areas of San Dimas has been restricted, Primero had to limit throughput at its mill to around 1,600 tonnes per day. The company reported that it had re-established throughput levels to around 2,500 tonnes per day in late April, and intends to return to its original plan of 3,000 tonnes per day by year end.

Following the first-quarter shortfall and safety revisions, Primero cut its annual guidance to between 230,000 and 250,000 gold equivalent oz., with all-in sustaining costs expected to range from US$975 to US$1,025 per oz. gold. The company had previously expected to crank out between 260,000 oz. and 280,000 oz. gold equivalent at all-in sustaining costs of roughly US$875 per oz.

The greater anchor on Primero’s stock price, however, is likely an outstanding legal claim filed by Mexican tax authorities. In early February the company reported it had received a notice from Mexico’s Servicio de Administración Tributaria (SAT) seeking to nullify an Advance Pricing Agreement (APA) issued in 2012, which essentially outlines the basis for paying taxes on realized silver prices for the years 2010 to 2014.

BMO Capital Markets analyst Brian Quast wrote at the time of the announcement that “if a new tax regime is imposed where Primero must pay tax based on the spot price of silver, not the realized price, we estimate that the incremental tax liability could be US$20 million to US$40 million per year, depending on the silver price at the time.”

Meanwhile, Canaccord Genuity analyst Rahul Paul agreed that the “main overhang” on Primero’s share price was the Mexican authorities move to nullify the 2012 APA ruling. Canaccord maintains a “hold” rating on the company along with a $2.64 per share price target.

“While the guidance revision is unfortunate, we highlight the fact that the production shortfall does not materially impact our longer term value for San Dimas as we still consider it a very strong and robust operation. However, we believe the market could respond negatively to the [first quarter] miss and guidance revision,” Paul concluded in an April 18 research note.

Primero has traded within a 52-week window of $1.93 and $5.51, and has lost nearly 40% since news of the Mexican tax issue en route to a $2.19 per share close at the time of writing. The company maintains 165 million shares outstanding for a $376 million press-time market capitalization.