Brigus Gold: Investors Should Be Bullish As Long As Operations Challenges Are Resolved

Oct. 5.11 | About: Primero Mining (PPP)

This is part 7 of a 10-pack series of metals miners articles. You can find articles for Great Basin Gold (GBG), Entree Gold (EGI), Jaguar Mining (JAG), Seabridge Gold (SA), AuRico (AUQ), and Silvercorp Metals (NYSE:SVM) here at Seeking Alpha.

Brigus Gold (BRD) is a Canadian Metals Miner with projects in Canada, Mexico, and the Dominican Republic. The majority of their documented reserves, 2 million ounces of Proven and Probable (P&P) gold are located in two projects – Black Fox Mine and the Goldfields project both located in Canada.

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Brigus is currently producing gold from the Black Fox mine using both above ground and newly implemented below ground operations. Black Fox has an estimated average 4.7 grams per ton gold resource. Recently, Brigus found larger than average gold concentrations along the southern zone of Black Fox. One drilling sample measured over 4000 grams per ton, and the grams per ton is expected to be much higher than the rest of the Black Fox Mine. It should be noted that 12% of production is sold at $500 per ounce due to a streaming agreement, though 6% can be purchased back. Overall, Black Fox sells 88% of gold ounces at market spot, and overall sales margins remain very high.

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The Goldfields project has an expected CAPEX of $200 million and an expected mine life of 14 years. The mine is in pre-feasibility stages. Currently, the mine has 1 million P&P gold ounces at an average grams per ton of 1.5. Costs of mining have been estimated at $400 per ounce.

In order to finance operations at Black Fox, Brigus has sold interest in two other properties. Brigus sold 75% of Ixhuatan to Cangold for $10 million over 3 years, 20 million shares, and a 2% net smelter return. With a 25% interest in the property, Brigus expects to participate in the property development with Cangold.

Brigus also sold Amplacion Pueblo Viejo in the Dominican Republic to Everton Resources for 15 million shares, $500,000 Canadian in cash, and a 1-2% net smelter return based upon spot gold prices. Prices over $1400 per ounce return the 2% rate.

Both of these deals help to support the Brigus bottom line while they mine and develop their two flagship properties. However, given Brigus’ current financial position, it would not surprise me if they sell off part of the Goldfields project in order to continue financing ongoing operations at Black Fox, their premier property.

Brigus suffered operations setbacks at Black Fox during Q1 due to staffing issues, where production fell precipitously. Brigus management has noted they expect full production by Q4 of 2011, as 90% of expected resources have been hired. In addition, Brigus expects full underground mining operations by end of Q3 of 2011 which significantly increase tons per day of ore mined at the property and will increase gold ounces sold moving forward. In the meantime, Brigus processed stockpiles of lower grade ore and sold them at market, which had the effect of increasing cost per ounce to $800. Brigus expects that cost per ounce of production for the remainder of 2011 to fall back into the $550 to $600 range.

Depending on your viewpoint, this could be a very positive opportunity for new investors to the stock. While shares have plunged 54% YTD, the expected resumption of full above ground mining and expansion into underground mining could propel the stock to higher highs.

I feel the same way about Brigus that I did when profiling Jaguar Mining. This is a company with a solid management team and established resources that should be profitable for many years, but recent operations stumbles have weakened the stock and caused short term liquidity problems for the companies as they navigate the minefield of junior metals mining. As long as the operations challenges are resolved at Black Fox, investors should be bullish about the stock where full production will bring profits and expansion into other rich resource fields.

The stock is cheap upon general gold selloff; however, even at current prices, the company will be eminently profitable on each ounce of gold sold. Gold would have to plunge by another $800 - $1000 per ounce before most miners worry about profits per ounce of gold sold.

Therefore, I am waiting on the Q3 management report to see that full production at Black Fox is resuming without any expectation of further slowdowns. I will enter the stock at this point with the expectation 2012 will be a solidly profitable year for the company, with revenues from both robust gold sales and eventual production sales agreements on other properties.

After a long climb uphill, Brigus Gold may turn into the little engine that could.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.