This Gold Miner Is Undervalued Compared To Its Peers

| About: Primero Mining (PPP)

The smack down in the price of gold (NYSEARCA:GLD) from $1,900 to the lows of $1,180 in June has left many miners of the metal undervalued and underappreciated by investors. With the recent gold price recovery, however, many of these miners are now able to produce a significant amount of cash flow and remain highly leveraged to a further increase in the price of gold. They are starting to get the attention of investors, once again.

One gold miner that continues to remain undervalued despite the recent run-up in the gold price is a company called Brigus Gold (BRD). As gold continues its climb towards $1,500 and beyond, I believe Brigus will climb much, much higher, potentially outperforming its peers.

Company Overview

Brigus Gold has approximately 2 million ounces of gold in reserves in Canada. The company is currently producing gold from the Black Fox mine and is on track to reach steady state production levels of 90,000 - 100,000 gold ounces in 2013, with production expected to increase to 100,000+ ounces in 2014. Brigus ultimately holds the potential to produce 200+K ounces a year from their current projects.

Here is an overview of the company's resources:

Black Fox: 985K ounces, 765K proven and provable, 160K measured and indicated, 60K inferred. Black fox is the company's single producing mine. 92 percent of the gold is sold at spot, with the remaining 8 percent sold through a gold stream with Sandstorm Gold (NYSEMKT:SAND). It is an open pit and underground operation with excellent recovery rates of 94 percent and higher.

Grey Fox: This is where big upside potential lies for Brigus. The property has 736K ounces, 508K measured and indicated and 228K inferred. A huge amount of exploration on the property remains and I expect this resource to grow to over 1 million ounces eventually.

Goldfields: This project has been put on the back burner but still has a ton of potential. The resource stands at 1.2 million ounces, 1.02 million in proven and probable, and 226K in the inferred category. I think the company should considering partnering with another miner to explore and develop Goldfields. They could also consider selling the asset to pay off some debt.

All of these projects are located in Canada, one of the most mining-friendly jurisdictions in the world (if not the friendliest).

Production Profile and Low Costs

The main reason I like Brigus here compared to their peers is the profitability of the Black Fox mine at current gold prices.

Brigus reported Q1 2013 total cash costs of just $630, which is among the lowest of its peers.

Credit: Brigus Gold
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Q2 2013 Quarterly Results

Here are highlights for the second quarter:

  • Sold 22,490 ounces of gold, a 22% increase over Q2 2012
  • Decreased long-term debt by $7.3 million
  • Revenue of $30.4 million, a 7% increase over Q2 2012
  • Further reduced 2013 budgeted capital spending by $3 million, to $38.5 million
  • Produced 23,304 ounces of gold, a 28% increase over Q2 2012
  • Processed 154,667 tonnes of ore at 4.97 grams per tonne ("gpt") and a 94% recovery

Q2 2013 total sustaining cash costs were $1,365, much higher than expected. However, this was due to several one-time issues, including "the recognition of a net realizable value adjustment on the low grade ore stockpile, and a suspension of milling operations for 19 days, which resulted in the loss of approximately 40,000 tonnes of mill throughput." (Q2 2013 News Release).

Despite these challenges, the company was able to report adjusted cash flow from operations of $10,956 and reduced long-term debt by $7.3 million. Their total full year all-in cash costs sit at just $1,220, despite the poor quarter.

2014 Projections at $1,450 Gold

If the company is able to produce 100,000 ounces of gold at $1,450 gold, with all-in costs of $1,200, the company should bring in roughly $66.5 million in operating cash flow in 2014.

Here are my projections for 2014, assuming the company hits their production targets at an all-in cost of $1200 an ounce and produce 100K for the year:

Gold Price Profit
$1400 $20 million
$1500 $30 million
$1600 $40 million
$1700 $50 million

The company has 231.5 million shares outstanding and 288 million fully diluted. With a current stock price of .59, this gives them a market cap of just $135 million.

If gold stays at $1400 an ounce and the company keeps full costs at $1200, they would record a full year profit of $20 million, resulting in an EPS of .086. At the current share price, this would give them a forward P/E of just 6.86.

Should gold rise to $1500 an ounce (which I believe it could), then Brigus could report full year EPS of .13, giving them a forward P/E ratio of just 4.53.

Value Per Gold Ounce in the Ground

Brigus Gold has a total of 2.92 million ounces of gold in every category from their three properties. The company has $20.9 million in cash at the last quarter's end, with $68.7 in long-term debt. A rough estimate of their enterprise value is $182.8 million.

This places a value of $62.60 on each ounce of gold in the ground (EV/ounce). This is undervalued compared to most major mining companies and a few other mid-tier miners.

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Some comparisons:

  • Aurico Gold (NYSE:AUQ): $103/oz.
  • Goldcorp (NYSE:GG): $159/oz.
  • New Gold (NYSEMKT:NGD): $89/oz.
  • Yamana Gold (NYSE:AUY): $125/oz.

I'm not saying that this means that Brigus is a better investment than the miners listed above. These miners are all more established, low cost producers (Goldcorp, New Gold and Yamana, I'm not too sure about Aurico). However, this means that if Brigus can deliver, it should result in a higher valuation per ounce in the ground.

If Brigus was able to get the same enterprise value per ounce as Aurico, for example, it would mean a share price of $1.29, which is more than a double from current prices.

Final Thoughts

While Brigus has debt, they run a very profitable, low-cost operation at Black Fox, which should only be more profitable with a higher gold price.

Should the gold price continue to recover and climb higher next year, I believe Brigus could outperform its peers. The company produces gold at a low cost and has a great pipeline of near-term growth opportunities, especially at their Grey Fox mine.

I think Brigus could be a prime takeover candidate for a more established gold producer. If they don't get taken over, I still think they will do just fine, eventually becoming a 200K-plus per year gold producer at low costs. A higher gold price will certainly help get them there, and it should be interesting to see just how profitable they become at $1,500+ gold.

Disclosure: I am long BRD, SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.