Mr. Joseph Conway reports
PRIMERO REPORTS SECOND QUARTER 2017 RESULTS
Primero Mining Corp. has released its operating and financial results for the second quarter ended June 30, 2017, and provided an update on recent operating and corporate activities.
Highlights
- Q2 2017 production: Total production was 35,965 gold equivalent ounces, comprising 11,903 ounces of gold and 970,000 ounces of silver from San Dimas, and 20,731 ounces of gold from Black Fox, 27 per cent lower than the 49,499 gold equivalent ounces produced in Q2 2016. Consolidated Q2 2017 total cash costs were $852 per gold equivalent ounce, with consolidated all-in sustaining costs of $1,262 per gold ounce.
- San Dimas phased restart under way: San Dimas produced 15,234 gold equivalent ounces (11,903 ounces of gold and 970,000 ounces of silver) in Q2 2017. Production during the quarter was impacted by a strike related to the renegotiation of the collective bargaining agreement (CBA), with operations resuming on April 22, 2017. A phased restart of San Dimas operations has been initiated with overall performance in line with the restart plan during the quarter but slowing in recent weeks with continued labour disruption.
- Black Fox outperforms on higher-than-expected underground grade: Black Fox produced 20,731 ounces of gold in Q2 2017, compared with 15,172 ounces in Q2 2016. Underground mining was primarily focused on production from the Deep Central zone, with underground gold grades averaging 7.09 grams per tonne and a daily average mining rate of 747 tonnes per day of high-grade ore. All-in sustaining costs of $827 per ounce in Q2 2017 were significantly lower than the $1,362 per ounce realized in Q2 2016. The mine generated positive cash flows during the second quarter of 2017 and remains on track to achieve 2017 production guidance of between 50,000 and 60,000 ounces of gold.
- Financial results impacted by asset impairments: The company recognized a net loss of $300.4-million in Q2 2017 compared with a net loss of $19.4-million in Q2 2016. The net loss incurred in Q2 2017 includes a $285.0-million impairment of the company's assets. Adjusted net loss was $2.9-million (two cents per share) for Q2 2017, compared with adjusted net loss of $3.5-million (two cents per share) for Q2 2016. Primero generated operating cash flow before working capital changes during Q2 2017 of $8.4-million (four cents per share).
- Strategic review update: Primero announced today that it has entered into an agreement to sell its Black Fox mine and complex in Timmins, Ont., for $35-million. The company also continues to explore all alternatives to maximize stakeholder value related to its San Dimas mine in Mexico, including potential strategic investments, joint ventures, revision of the San Dimas silver purchase agreement (SPA) and a potential divestiture. At this time, there can be no certainty that these discussions will result in a resolution acceptable to all stakeholders.
"Although we saw an improvement in operations at Black Fox during the second quarter of 2017, the strike action at San Dimas early in the quarter followed by further labour disruptions have weighed on the company," said Joseph F. Conway, interim president and chief executive officer. "I am pleased that we will reduce our total outstanding debt with the sale of the Black Fox mine. However, we still have outstanding debt that matures in November, 2017, that will require additional funding or refinancing to repay in full. We have made progress with the Mexican tax authority and have started receiving VAT refund instalments, which has helped to improve our financial position."
Second quarter 2017 operating and financial results
Primero produced a total of 35,965 gold equivalent ounces in Q2 2017, which compares with 49,499 gold equivalent ounces produced in Q2 2016. Gold and silver production was 32,634 ounces and 970,000 ounces respectively in Q2 2017. The company incurred total cash costs per gold equivalent ounce of $852 during the quarter with AISC of $1,262 per gold ounce.
San Dimas produced 15,234 gold equivalent ounces (11,903 ounces of gold and 970,000 ounces of silver) during the second quarter of 2017, compared with 34,327 gold equivalent ounces produced in Q2 2016. Production during the quarter was impacted by a strike action taken by unionized employees in February, 2017. Agreement on the new CBA was achieved on April 17, 2017. The phased restart of the San Dimas operations commenced on April 22, 2017, with overall performance in line with the restart plan which was developed during the strike.
San Dimas mill throughput was affected by a 13-day suspension of milling activities in mid-June following the failure an anchor block affixed to one of eight cables supporting the tailings pipeline suspension bridge. Mill production was halted in order to reduce the environmental risk and to safely rebuild the anchor and retension the cable. The San Dimas mining operations continued uninterrupted during the tailings suspension bridge repair, and all ore produced was stockpiled at the mill site during this period. Full plant operations resumed on June 24, 2017, and the cost to repair the anchor block was minimal. The ore stockpile was fully processed by the mill in July.
Total cash costs on a gold equivalent and byproduct basis in the second quarter of 2017 were $1,144 and $1,115 per ounce, respectively, compared with $843 and $765 per ounce, respectively, in the second quarter of 2016. The increased unit costs were a result of the lower production rates in the current quarter and higher operating costs incurred during the initial restart of the San Dimas operations. All-in sustaining costs per gold ounce were $1,650 per ounce in the second quarter of 2017, compared with $1,063 per ounce in the second quarter of 2016. Sustaining capital expenditures were focused on underground development ($3.8-million) and drilling ($1.3-million). Subsequent to quarter-end, the company reached an agreement with the union on the annual bonus payout relating to 2016. This resulted in an additional charge of $2.0-million incurred in the second quarter as annual bonus accrual, affecting total cash costs and all-in sustaining costs.
The Black Fox mine produced 20,731 ounces of gold in the second quarter of 2017 compared with 15,172 ounces in the second quarter of 2016. Underground mining in Q2 2107 was primarily focused on production from the Deep Central zone, with underground gold grades averaging 7.09 grams per tonne, a 59-per-cent increase from second quarter of 2016. The Black Fox underground mine averaged 747 tpd of high-grade ore production in Q2 2017.
Mill throughput averaged 2,396 tpd in the second quarter of 2017, compared with 2,524 tpd in the second quarter of 2016. Improved grade and tonnes from the underground mine drove an increase in the average mill head grade to 3.04 g/t compared with 2.14 g/t in the first quarter of 2016. This resulted in higher quarterly gold production despite the lower average milling rate.
Total cash costs per gold ounce were $637 in the second quarter of 2017, 27 per cent lower than the $870 per ounce achieved in the second quarter of 2016. Total operating costs were similar in the second quarter of 2017 compared with the same period in 2016; however, the increase in Q2 2017 gold production led to decreased total cash costs per gold ounce. All-in sustaining costs of $827 per ounce in Q2 2017 were significantly lower than the $1,362 per ounce in the second quarter of 2016 due to reduced capital expenditures and higher gold production. Capital expenditures were lower in Q2 2017 mainly due to lower underground development rates and other sustaining capital costs. Significant development costs were incurred in the second quarter of 2016 as Black Fox worked to complete the access ramp to the Deep Central zone.
The Black Fox mine generated positive cash flows during the second quarter of 2017, as the mine achieved improved grades and a reduced cost structure which drove more profitable operations. The mine remains on track to achieve 2017 production guidance of between 50,000 and 60,000 ounces of gold at total cash costs of between $850 and $950 per ounce with all-in sustaining costs of between $1,150 and $1,250 per ounce.
Primero generated $16.2-million of revenue in Q2 2017, 62 per cent lower than in Q2 2016 as a result selling 54 per cent less gold equivalent ounces from San Dimas, noting that Black Fox has been classified as discontinued operations under international financial reporting standards (as a result of it being classified as held for sale). In Q2 2017, the company sold 9,997 ounces of gold from San Dimas at an average realized price of $1,262 per ounce and 850,000 ounces of silver at an average realized price of $4.28 per ounce. Revenue in Q2 2016 totalled $42.6-million from selling 28,873 ounces of gold from San Dimas at an average realized price of $1,265 per ounce and 1.43 million ounces of silver at an average realized price of $4.24 per ounce.
All silver sold was delivered to Wheaton Precious Metals International Ltd. (WPMI) under the silver purchase agreement. The threshold above which the company may sell 50 per cent of silver produced for its own account at market rates under the silver purchase agreement for the 2016 contract year (Aug. 6 of a year to Aug. 5 of the following year) is 6.0 million ounces of silver. As of June 30, 2017, the company has delivered 3.76 million ounces of silver toward this annual threshold. Gold produced at Black Fox is subject to a gold purchase agreement6 and as a result 1,472 ounces were sold to Sandstorm Gold Ltd. at a fixed price of $531 per ounce in Q2 2017.
The company recognized a net loss of $300.4-million in Q2 2017 compared with a net loss of $19.4-million in Q2 2016. The net loss incurred in Q2 2017 includes a $285.0-million impairment of the company's assets. Adjusted net loss was $2.9-million (two cents per share) for Q2 2017, compared with adjusted net loss of $3.5-million (two cents per share) for Q2 2016. Adjusted net loss primarily excludes the asset impairments, net tax impact of foreign exchange rate changes on deferred tax balances and the mark-to-market gain/loss on the convertible debenture and warrants.
As part of the strategic review process and the continued decline in its share price, the company revalued its assets using assumptions derived from observable market indicators and the current life-of-mines plans for each operation. As a result, an impairment of $285.0-million has been recognized comprising $195.0-million at the San Dimas mine, $40.0-million at the Black Fox complex and $50.0-million at Cerro del Gallo project.
Primero generated operating cash flow before working capital changes during Q2 2017 of $8.4-million (four cents per share). This compares with operating cash flow of $11.2-million (seven cents per share) in Q2 2016.
Liquidity update
The company's total liquidity position at June 30, 2017, totalled $22.1-million, comprising $12.1-million in cash and $10.0-million available under its existing revolving credit facility (RCF). As previously disclosed, Primero extended the maturity of its RCF to Nov. 23, 2017. Primero's current cash position is similar to its quarter-end and the company has fully drawn its $75-million RCF.
As at June 30, 2017, there are $33.5-million in VAT and $22.8-million income taxes receivable outstanding. The company has filed its VAT and income tax refunds in compliance with the Mexican law and is working co-operatively and more closely with the SAT. Subsequent to the quarter-end, in July, 2017, the company received $2.4-million in VAT refunds. The company is working with the SAT to arrange for the remaining eligible outstanding amounts to be refunded in due course.
Primero highlights the significant liquidity risk imposed by the pending RCF maturity date of Nov. 23, 2017, and notes that it may not be able to fully repay its debt obligations under the RCF without obtaining an extension of the existing RCF or an additional source of debt or equity financing. The company will continue to explore all operational and financial alternatives available.
San Dimas operations update
Despite seeing initial improvements in relations with unionized workers following the resolution of the San Dimas strike in Q2 2017, the situation degraded in July, 2017, with the negotiation of the 2016 annual workers' bonus (PTU bonus). The site experienced a significant work slowdown in July, which included coercive tactics employed by unionized workers to pressure the company to agree with their demands, such as a forced shutdown of long-hole drill rigs, terminating shifts early by walking off the job site, refusing to work as scheduled and other general production slowdowns.
The PTU bonus negotiation was resolved on July 29, 2017, with an agreement on the amount of the annual bonus and an immediate payment of two-thirds of the agreed bonus. In order to motivate the workers to return to productive work practices, the second payment of one-third of the total agreed amount, will be delivered in December, 2017, provided there is adherence to the CBA. Despite this, and based on union relations over the last 18 months, the company believes that labour disruptions may continue to adversely affect the company's ability to profitably operate the San Dimas mine.
At this time, Primero is not adjusting its San Dimas 2017 production guidance of 90,000 to 110,000 gold equivalent ounces at total cash costs of $650 to $800 per gold equivalent ounce, since the mine currently remains on plan. However, the company notes that the phased restart plan requires a step increase in production levels through the remainder of the year. Primero believes that production will track toward the lower end of the guidance range and there is the risk of a guidance reduction in 2017 if productivity does not increase as planned and union relations do not improve.
Despite significant investment at San Dimas, the company's exploration efforts have not identified large replacement veins for the depleting Roberta and Robertita veins. Without new large veins coming into production or changes to the operating environment, mining rates above 1,800 tonnes per day may not be possible.
In light of current site conditions and the company's near-term focus on maintaining liquidity and cash conservation, the San Dimas capital plan for 2017 has been re-evaluated and scaled back by $17.7-million to $33.4-million, retaining only capital expenditures necessary to maintain current operating levels. This has resulted in a reduction in the exploration and underground development spending associated with exploration planned for 2017 and as such has resulted in a decrease in expected all-in sustaining costs. All-in sustaining costs are now expected to be between $900 and $1,050 per ounce in 2017 from $1,100 to $1,300 per ounce previously. The reduction in 2017 planned exploration and development spending may affect the company's ability to achieve expected production levels in future years.
Strategic review update
As previously announced, the company's board of directors initiated a strategic review process to explore alternatives to improve shareholder value. Today the company announced that it has entered into an agreement with McEwen Mining Inc. to sell its interest in the Black Fox mine and associated assets located near Timmins, Ont., Canada. Under the terms of the agreement, Primero will receive consideration of $35-million, in cash, subject to certain closing adjustments. Definitive documentation is expected to be completed before the end of this month and the transaction remains subject to customary conditions of closing.
In addition, the company will continue to explore ways to improve stakeholder value related to its San Dimas mine in Mexico, including potential strategic investments, joint ventures, revision of the company's streaming agreement and potential divestiture.
Primero has received a number of proposals from interested parties regarding a potential acquisition of the San Dimas operation. However, all proposals received require a significant revision of the SPA with Wheaton Precious Metals (WPM). As a result discussions are currently focused on potential changes to the SPA with WPM and distribution of proceeds among stakeholders. At this time, there can be no certainty that these discussions will result in a resolution acceptable to all stakeholders.
The company has identified that at lower production rates the obligations under the current SPA do not allow for a sustainable operation at San Dimas. The company has been in discussions WPM about a sustainable solution for all parties but there can be no assurance that an acceptable solution will be achieved. Without a revision to the SPA the San Dimas mine life will become significantly shorter as a result of the company's inability to invest in exploration and development due to the economics inherent in the SPA and the current operating environment in Mexico and at San Dimas itself.
Primero will continue to advance discussions with financiers to extend or refinance the $75-million RCF due in November, 2017, and will look to reduce total debt through potential asset sales, joint ventures and strategic investments. Other potential sources of funds include cash flows from operations, VAT and income tax refunds, and additional debt or equity financings.
Conference call details
The company's senior management will host a conference call today, Thursday, Aug. 10, 2017, at 10 a.m. ET to discuss second quarter 2017 operating and financial results.
Participants may join the call by dialling North America toll-free 1-800-806-5484 or 416-340-2217 for calls outside Canada and the United States, and entering the participant passcode 7470837.
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 2017 results call will be available until Nov. 26, 2017, by dialling 1-800-408-3053 or 905-694-9451 and entering the call back passcode 4072756.
This release should be read in conjunction with Primero's second quarter 2017 financial statements and management's discussion and analysis report on the company's website in the financial reports section under investors, or on SEDAR or EDGAR.
About Primero
Primero Mining Corp. is a Canadian-based precious metals producer that owns 100 per cent of the San Dimas gold-silver mine and the Cerro del Gallo gold-silver-copper development project in Mexico and 100 per cent of the Black Fox mine and adjoining properties in the Township of Black River-Matheson near Timmins, Ontario, Canada.
Primero's website is www.primeromining.com.
SUMMARIZED FINANCIAL AND OPERATING RESULTS
(in thousands, except per share and per ounce)
Three months ended June 30 Six months ended June 30
2017 2016 2017 2016
Tonnes of ore milled 298,358 454,089 586,577 827,724
Produced
Gold equivalent (ounces) 35,965 49,499 62,698 85,657
Gold (ounces) 32,634 44,150 57,165 76,986
Silver (million ounces) 0.97 1.60 1.59 2.52
Sold
Gold equivalent (ounces) 30,290 47,787 62,081 91,378
Gold (ounces) 27,407 43,008 56,383 81,789
Silver (million ounces) 0.85 1.43 1.64 2.77
Average realized prices
Gold ($/ounce) 1,222 1,241 1,202 1,201
Silver ($/ounce) 4.28 4.24 4.28 4.24
Total cash costs (per gold ounce)
Gold equivalent basis 852 851 842 891
Byproduct basis 812 801 804 852
All-in sustaining costs (per gold ounce) 1,262 1,310 1,293 1,415
Financial data (in thousands of U.S.
dollars except per share amounts)
Revenues 16,232 42,578 35,601 76,911
(Loss) earnings from mine operations (2,968) 4,294 (3,832) (2,159)
Net (loss) (300,399) (19,432) (286,896) (32,600)
Adjusted net (loss) (2,906) (3,476) (2,899) (12,232)
Adjusted EBITDA 6,203 13,700 (5,231) 19,965
Basic net (loss) per share from
continuing operations (1.39) (0.12) (1.33) (0.20)
Diluted net (loss) per share from
continuing operations (1.39) (0.12) (1.33) (0.20)
Adjusted net (loss) per share (0.02) (0.02) (0.02) (0.07)
Operating cash flows before working
capital changes 8,449 11,205 6,376 2,744
SUMMARIZED OPERATING DATA
Three months ended
June 30, March 31, Dec. 31, Sept. 30, June 30,
2017 2017 2016 2016 2016
San Dimas
Tonnes of ore mined 90,648 81,321 194,670 185,080 231,224
Tonnes of ore milled 80,281 82,587 191,925 193,553 224,427
Tonnes of ore milled per day 1,408 1,835 2,086 2,104 2,466
Average mill head grade (grams/tonne)
Gold 4.81 3.87 3.87 3.69 4.10
Silver 407 238 245 232 231
Average gold recovery rate (%)
Gold 96% 98% 97% 97% 98%
Silver 93% 98% 94% 95% 96%
Produced
Gold equivalent (ounces) 15,234 12,320 28,286 28,454 34,327
Gold (ounces) 11,903 10,118 23,163 22,162 28,978
Silver (million ounces) 0.97 0.62 1.42 1.37 1.60
Sold
Gold equivalent (ounces) 12,880 16,009 28,252 27,405 33,653
Gold (ounces) 9,997 13,195 22,547 21,840 28,873
Silver at fixed price (million ounces) 0.85 0.80 1.57 1.06 1.43
Silver at spot (million ounces) 0.01 0.15
Average realized price (per ounce)
Gold $1,262 $1,210 $1,208 $1,335 $1,265
Silver 4.28 4.28 4.34 6.12 4.24
Total cash costs (per gold ounce)
Gold equivalent basis 1,144 790 746 865 843
By product basis 1,115 698 643 731 765
All in sustaining costs (per ounce) 1,650 975 994 1,080 1,063
Revenue (000) 16,232 19,369 34,089 36,581 42,578
Earnings (loss) from mine operations (2,765) (591) 1,780 407 4,348
Black Fox (discontinued operations)
Underground mining
Tonnes of ore mined 67,993 52,217 73,597 64,522 57,898
Average gold grade (grams/tonne) 7.09 5.47 5.21 5.18 4.46
Tonnes increase (decrease) in stockpile (150,084) (153,415) (152,005) (168,996) (171,764)
Tonnes processed
Tonnes of ore milled 218,077 205,632 225,602 233,518 229,662
Tonnes of ore milled per day 2,396 2,285 2,452 2,538 2,524
Average mill head grade (grams/tonne) 3.04 2.28 2.49 2.29 2.14
Average gold recovery rate (%) 97% 96% 97% 95% 96%
Produced
Gold (ounces) 20,731 14,413 17,512 16,230 15,172
Sold
Gold at spot price (ounces) 15,938 14,581 14,494 14,735 12,996
Gold at fixed price (ounces) 1,472 1,202 1,214 1,409 1,138
Average realized gold price (per ounce) $1,198 $1,159 $1,145 $1,264 $1,192
Total cash costs (per gold ounce) 637 859 828 926 870
All-in sustaining costs (per ounce) 827 1,233 1,101 1,286 1,362
Revenue (000) 20,865 18,318 18,092 20,431 16,861
Earnings (loss) from mine operations (000) 6,374 2,305 85 (422) 328
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(in thousands, except per share)
Three months ended June 30 Six months ended June 30
2017 2016 2017 2016
Revenue $16,232 $42,578 $35,601 $76,911
Operating expenses (13,603) (25,832) (27,423) (54,327)
Depreciation and depletion (5,597) (12,452) (12,010) (24,743)
Total cost of sales (19,200) (38,284) (39,433) (79,070)
(Loss) from mine operations (2,968) 4,294 (3,832) (2,159)
Mining interest impairment charge (245,000) - (245,000) -
Exploration expenses (350) (612) (824) (946)
Share-based compensation (922) (1,801) (2,708) (3,315)
General and administrative expenses (2,883) (4,215) (5,855) (7,550)
Other charges (1,702) (1,443) (9,513) (1,847)
(Loss) from operations (253,825) (3,777) (267,732) (15,817)
Interest and finance expenses (3,127) (1,723) (5,274) (4,811)
Mark-to-market gain (loss) on
debentures and warrants 243 (2,278) 6,896 (2,653)
Other income (expenses) 483 (462) 2,074 (344)
(Loss) before income taxes (256,226) (8,472) (264,036) (23,857)
Income tax (expense) recovery (10,217) (11,403) 9,302 (8,785)
Net loss from continuing operations (266,443) (19,875) (254,734) (32,642)
Net (loss) earnings from discontinued
operations, net of income taxes (33,956) 443 (32,162) 42
Net (loss) for the period (300,399) (19,432) (286,896) (32,600)
Other comprehensive loss, net of tax
Items that may be subsequently
reclassified to profit or loss
Exchange differences on translation of
foreign operations, net of tax of nil - 10 - 10
Unrealized gain on investment in
Fortune Bay, net of tax of nil - 138 - 223
Total comprehensive (loss) for the period (300,399) (19,284) (286,896) (32,367)
Basic and diluted (loss) per share
from continuing operations (1.39) (0.12) (1.33) (0.20)
Basic and diluted (loss) per share
from discontinued operations (0.18) 0.00 (0.17) 0.00
Basic and diluted (loss) per share
including discontinued operations (1.56) (0.12) (1.50) (0.20)We seek Safe Harbor.
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