Primero Mining's (PPP) CEO Ernest Mast on Q4 2015 Results - Earnings Call Transcript

| About: Primero Mining (PPP)

Primero Mining Corp. (NYSE:PPP)

Q4 2015 Earnings Conference Call

February 18, 2016, 10:00 ET

Executives

Ernest Mast - President & CEO

Wendy Kaufman - CFO

Analysts

Rahul Paul - Canaccord Genuity

Ovais Habib - Scotia Bank

Dan Rollins - RBC Capital Markets

Mike Parkin - Desjardins Capital Markets

Jeff Killeen - CIBC

Lauren McConnell - Paradigm Capital

Operator

Welcome to the Fourth Quarter 2015 Financial Results Conference Call for Primero Mining. [Operator Instructions]. I would like to turn the meeting over to Mr. Ernest Mast, the President and Chief Executive Officer.

Ernest Mast

Thank you, operator and good morning to everyone on the line or joining us from the webcast, welcome to our fourth quarter and full year 2015 results conference call. On slide two as you're aware my planned succession to the role of President and CEO became effective on February 1st and I can certainly say it hasn't been a boring first few two weeks in the role. Joe Conway who is also on the call today is now Executive Vice Chairman, also joining me is Primero's Chief Financial Officer, Wendy Kaufman along with other members of our senior team should you have any questions.

On slide three please note our forward looking information slide, I'm sure you're all familiar with this and the risks associated with some of the forward looking statements that we might make. Also note that all dollar amounts in this presentation are in U.S. dollars otherwise unless otherwise specified. On slide 4, I am very proud of what the Primero team accomplished in 2015. We successfully achieved our fifth consecutive year of record production. We reduced all in sustaining cost by 20% over 2014 coming in well below our 2015 guidance range.

We have ensured balance sheet strength ending the year with an increased cash balance. Additionally we recently announced that we would repay in cash the outstanding convertible debenture due at the end of March and drew down our line of credit to make this [indiscernible]. Primero has a pipeline of organic growth and strong exploration upside in both of our operating mine San Dimas in Mexico and Black Fox in Canada and we believe the company is well positioned to continue to deliver strong operating results in 2016.

On slide five we review our production amounts. So Primero produced 68,155 gold equivalent ounces during the fourth quarter of 2015 at total cash cost of 613 per gold equivalent ounce and all in sustaining costs of $1009 per ounce. As a result we achieved record annual production of nearly 260,000 gold equivalent ounces also notable in 2015, it was the fifth consecutive year of achieving production record for the company. Cash costs remain low at $637 per gold equivalent ounce and all in sustaining cost of $972 per ounce. Our teams at San Dimas and Black Fox worked exceptionally hard in 2015 leading us to a 15% increase in production at 20% lower costs.

On slide 6, focusing on San Dimas it continues to deliver exceptional operating results. The mine produced 50,370 gold equivalent in the fourth quarter at low all in sustaining cost of $753 per ounce. This resulted in full year production totaling nearly 190,000 gold equivalent ounces at a very low all in sustaining cost of $680 per ounce. The strong performance at San Dimas was really due to a number of factors such as the higher throughput related to the expansion of the mill, to 3000 tons per day increased gold and silver recoveries, increased contribution from long haul mining and increased availability of the high grade Jessica vein. Slide 7, we discussed Black Fox which demonstrated steady cost control through 2015 with cash cost averaging $850 per ounce and all in sustaining cost averaging a $1163 per ounce. 2015 gold production came in just shy of our revised guidance of 70,000 ounces. This significant reduction in all in sustaining cost that we were able to achieve in 2015 was largely due to improvements made to the underground mining method following our recapitalization efforts in 2014 and early 2015. The weaker Canadian dollar relative to the U.S. dollar also had a positive impact on costs. I'm very optimistic by the 2016 outlook at Black Fox as we work towards production from the mines deep central zone having successfully demonstrated in 2015 but the mines can operate in the lower gold price environment.

I'll turn he presentation over to our CFO Wendy Kaufman who will now discuss our financial results.

Wendy Kaufman

Thanks, Ernie. Primero delivered strong results in 2015 despite declining metal prices. We have recorded record high revenues which resulted in operating cash flow before changes in working capital, increasing by 13% year over year reaching 83 million or $0.51 per share. The increase was largely due to increased production in sales from both of our mines, San Dimas and Black Fox and as a result of lower cash cost and G&A in 2015. We realized the loss of $98 million in the fourth quarter resulting in a loss of a 107 million for 2015 or $0.66 per share. This is largely due to [indiscernible] taken at the Black Fox complex and the [indiscernible] project.

I will discuss these impairments in greater detail on the next slide. After taking into account adjustments for items such as impairment charge, foreign exchange rate changes on deferred tax services [ph] and the mark to market gain on the 5.75% convert. We realized to 2015 adjusted net income of 6.6 million or $0.04 per share. We successfully ended 2015 in a stronger financial position than we started the year at with 46 million in cash and 75 million available on our line credit. As I mentioned on the previous slide, our 2015 earnings were significantly impacted by impairment charges totaling 104 million which included 82 million of the Black Fox complex, a result of declining metal prices the temporary decision to upgrade Black Fox development and changes in the Black Fox mine plan to focus primarily on higher grade underground ore.

An additional 22 million of impairment was associated with the [indiscernible] project. due to declining metal prices and the decision to further the development of the project.

As announced last week, we have drawn 50 million from our line of credit to repay in cash our outstanding convertible debentures due on March 31. Looking at our pro forma financial position we have total available liquidity of 71 million based on the December 31, 2015 cash balance of 46 million plus 25 million of undrawn and available line of credit. We expect to have sufficient liquidity available to fund our plans of 2016 capital expenditures and exploration program totaling 82 million which we expect to fund through a combination of our current cash balance and operating cash flows.

Ernest Mast

Now on slide 11, and thank you Wendy looking ahead in 2016 we expect to further increase our production by up to 8% relative to 2015 partly due to the completion of the San Dimas mill expansion to 3000 tons per day expected in Q3 2016, regarding between 260,000 and 280,000 gold equivalent ounces but note that production is expected to be lower than the quarterly average in Q1 2016 due to the implementation of improved safety procedures at San Dimas. We expect to further lower our overall spending profile in 2016 by focusing on prudent sustaining capital allocation. All in sustaining costs are expected to decrease by another 10% in 2016 to between $859 and $900 per gold ounce.

On slide 12 and now for the reason I'm sure many of you have dialed in today. We've received a lot of questions concerning the situation with the tax authority in Mexico and have caused a lot of speculation in the market, for a bit of background on February 3rd we announced that our subsidiary in Mexico received a legal claim from the Mexican tax authority the SAT seeking to nullify the advance pricing agreement or APA issued by SAT in 2012. The APA confirmed that the company should pay on the basis of the current Silver Wheaton contract price of approximately 424 per ounce which is the actual total revenue the company including its related parties receives for such sales.

The APA provided assurance that the company would only pay tax on the realized revenue for its sales under the silver purchase agreement and that it would not be assessed on a different basis for the years 2010 to 2014. Our legal and financial advisors confirm that the SATs legal claim is novel and the reversal of an APA through judicial proceeding is unprecedented and inconsistent with the underlying purpose of an APA which is to provide the taxpayer with certainty so that it may invest in and conduct its operations based on the certainty provided.

Primero in its Mexican legal and financial advisers continue to believe that the company has filed its tax returns and paid all the applicable taxes in compliance with the Mexican tax laws including the OECD principles for transfer pricing. It should be noted that the SAT legal claim does not indicate but the company owes more taxes than it has already paid but it is likely that SAT will take this position if the APA is nullified. Primero intends to vigorously defend its interests and the validity of the APA and it will provide updates on the status of that defense as it progress though we understand that the judicial process could take up to 2.5 years. In addition to vigorously defending the validity of the APA the company intends to explore opportunities to establish the stability for its tax filings in the future but there is no insurance that the company will find or be able to implement a reasonable solution.

On slide 13 most of you are familiar with our key assets San Dimas in Mexico and Black Fox in Canada. We also acquired land in 2015 located adjacent to San Dimas which we’re calling the [indiscernible] concession.

Now I'll be talking more about the high potential of this area in future slides. We also have Ventanas Property position near to San Dimas and we have the Grey Fox development project located at adjacent to the Black Fox mine near Timmins, Ontario. On slide 14 looking at San Dimas, Primero's platform asset is a low cost, high grade underground mine in the Sierra Madre Occidental mountains located on the border of Sinaloa and Durango states in Mexico. We're targeting a 192,000 to 200,000 of gold equivalent production this year. At industry leading all-in sustaining cost of $660 to $710 per gold ounce.

Slide 15, we show that since we acquired the mine in 2010 it has demonstrated a history of strong cash flow generation despite declining gold prices. Notably the San Dimas achieved its fifth consecutive year of increased production in 2015 and we're expecting another increase in production in 2016 as we work to complete the expansion to 3000 ton per day in Q3 of this year.

We believe we have planned for prudent capital expenditures in 2016 which will allow us to complete the expansion and invest in exploration as we look to expand outside of the original mining concessions.

Slide 16, we showed that the discovery of the Jessica vein in late 2015 really started the push to look outside the original San Dimas property. The Jessica vein had no surface outcropping and it's totally obstructed by the regional upper volcanic capping. Our geologist had believed that the volcanic capping was a post-mineralization event but it couldn't fully be confirmed until proven by the discovery of Jessica. As a result we're continuing to drive tunnels North of Jessica under the capping to look for other veins that can't be found from surface and we've turned our attention to the Southern extensions of the Central Block to look for veins to the south and towards the recently added Lechuguilla concession.

We added this concession in the second half of 2015 and it exists outside of the silver purchase agreement with Silver Wheaton. So we would realize full value on any future gold and silver production from this area. We have started tunneling to the south towards Lechuguilla and we believe we can reach this area by 2017. But I should know that Lechuguilla is almost completely covered by the volcanic capping. However we do have some indications that veins are likely present.

On slide 17 significantly the Lechuguilla concession contains what we call a geological window and this is an area of erosion through the upper volcanic capping exposing the lower volcanics sequence which host San Dimas' veins. Primero's geologists are currently doing initial field exploration of this window. The Ventanas Property is also outside of the silver purchase agreement and is a key target for exploration in 2016. We have dedicated $4 million to explore and drill this property in 2016 with the goal of defining a sufficient reason resource base to support a standalone 1000 ton per day mining operation sort of a mini San Dimas by 2018. Importantly the narrow vein mineralization at Ventanas is similar to the mineralization at San Dimas located 32 kilometers away.

On slide 18, moving north to our Canadian assets most of you are familiar with our Black Fox mine located near Timmins, Ontario where in 2015 we began to see the payoff from our recapitalization efforts and successfully demonstrated that the mine could be run at low cash costs. We are now pushing into new areas of the mine and targeting 70,000 to 80,000 ounces of gold production this year at all in sustaining cost of $940 to $990 per ounce. On slide 19, our focus at Black Fox is really divided into two main areas near term production from the deep central zone and potential medium term production from the Froome zone. The ramp to the deep central zone is progressing well passing the 620 meter level at year end 2015 we continue to expect initial production from this area in the first half of the year with total contribution increasing up to 850 times per day in Q4. We’re very optimistic about mining this area because it features high grades and wider intervals of mineralization then seen in the upper areas of the mine. Additionally this is a completely new area of the mine and will be able to implement best practices, mining techniques including proper soaping and sequencing.

The second focus is the recently discovered Froome zone located approximately 800 meters west of the Black Fox deposit. Froome displays an entirely different style of mineralization with much wider widths and disseminated in nature as opposed [indiscernible]. A significant advantage of the Froome discovery is that it is very close to surface so we're able to drill the deposit from surface Froome remains open to the east, west and the depth and we look at the deposit to potentially compliment ore from Black Fox to keep the mill full beyond 2017. We hope to include an early resource estimate for Froome with our yearend reserve resource update in early March.

On slide 20, we show that we’re looking at upcoming catalysts for the company and we'll watch for an exciting exploration update later this quarter with results from both San Dimas and Black Fox. We will also be releasing our yearend reserve and resource estimate in early March. Later in the year we expect to see increased cash flows from San Dimas as the mine achieves it's fully expanded rate of 3000 ton per day during the third quarter. We will also continue to provide the market with updates on the Mexican tax authorities legal claim and our progress in defending our position.

So on slide 21 to wrap up we believe Primero is well-positioned to generate strong cash flow in 2016. We've got a solid production base and have applied discipline cost management. We see our production increasing in 2016 to between 260,000 to 280,000 ounces at low all in sustaining cost of between $850 and $900 per ounce positioning us extremely well against industry peers.

Our balance sheet in total liquidity remains strong and even after repaying in cash the debentures due at the end of March. Additionally though 2016 has already seen some significant challenges for the company, I believe we have the right operating financial and legal teams in place to overcome these hurdles and deliver strong returns to our shareholders.

Thank you for joining us on the call today and we'll know open the phone lines to any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Rahul Paul with Canaccord Genuity. Please go ahead.

Rahul Paul

Question on the write-downs at Black Fox, I understand that the lower gold price had an impact on the mine at Black Fox, that said I would have imagined your exploration efforts below the 600 meter level would true up more around just off the bad decline. To what extent have you captured the upside at that? Is that something that you could quantify?

Wendy Kaufman

So, the upside is consistent to when we acquired the mine and we keep showing that upside in our discounted cash flows when we look at Black Box. So we’re very consistent when we acquired the mines the way we value, that underground potential. We’re valuing the underground potential and we’re valuing firm as well in our discounted cash flows.

Rahul Paul

But then since you acquired the mine I guess the reason I was asking that since you’ve acquired the mine you’ve done quite a bit of drilling particularly below 600 meters and you’ve come up with some really good results. Has any of that potential moved into your evaluation of is that still sort of too early stage?

Ernest Mast

Rahul, that has gone into our evaluation, however considering all the factors including prices it's resulted in the impairment which we've announced.

Rahul Paul

And then I'm not sure how much you can say but I will ask anyway, on the legal claim at this stage have you been able to quantify the magnitude of the liability of the APA ruling were to be nullified?

Ernest Mast

I think even if the APA ruling is nullified it doesn't necessarily mean is that there is going to be an impact. I think every person you can calculate that depending on what your assumption is on silver prices going forward.

Rahul Paul

Okay, and then on the situation going forward. So the past year's 2015 and beyond I'm just wondering based on your interpretation of Mexican cash flows do you think you would have sufficient legal trial [ph] to continue paying taxes that [indiscernible] prices even if the APA ruling is not extended?

Ernest Mast

We will submit our taxes at the end of March based on realized silver values.

Operator

Our next question is from Ovais Habib with Scotia Bank. Please go ahead.

Ovais Habib

Just a quick couple of questions here, in terms of recoveries at San Dimas with gold and silver the recoveries improved nicely over the year. What kind of recoveries do you expect in 2016? I mean are we going to see a similar to what we saw in Q4 or what's kind of the stabilized recovery rates?

Ernest Mast

You will see similar recoveries to what we had during 2015, what we did for the improving recoveries we changed the circuit for adding fresh water, all the fresh water added into the filter and by doing so we ensure that a lot of the solution that previously went away with the tailings is now being reincorporated in the process. So that was reason why we had a better recoveries and now with that process in place we continue to operate in that manner.

Ovais Habib

And just on moving on to Black Fox, regarding the central deep central zones, in terms of the drilling that you’ve done in 2015 how much is that going to be incorporated in the resource update and in terms of where you are in terms of the ramp down. When do you actually hit the central deep zone and are you still doing additional exploration work currently?

Ernest Mast

So we will include all of the drilling from 2015 and the updated resource from the central deep zone. We're currently on the 620 level, we're currently putting in the development drift into the 620 zone and we’re passed to 640 zone as well and soon will commence that development drift as well. So during the first half of the year we will see ore from the deep central zone in production but we only start long haul mining into that area during Q3 and much more heavily into Q4.

The deep central zone ramp this year goes down to the 760 level and our drilling has been up to approximately the 810 level as well. So during this year we intend to drill further down. We're extending a development draft on the 520 level to give us better access also to the western zone and so we'll continue with the similar aggressive exploration program for Black Hawk this year as we had for last year.

Operator

[Operator Instructions]. Our next question is from Dan Rollins with RBC. Please go ahead.

Dan Rollins

I was wondering if you could talk based on potentially pick up additional wins at San Dimas that sort of potentially consolidated in the area between the [indiscernible] and Ventanas concessions and you purchased a lot last year, are we going to more of these properties coming up over the next couple years as they sort of fall back to the government after a lack of spending by the existing concession holders?

Ernest Mast

Yes. So many of the land falls back to the government will definitely be in the running for that and we're currently discussing with some of the landowners around the San Dimas area of potentially looking at some form of acquisition as well. So we're very active in the area and we expect to have similar success this year as we had last year or over the next couple of years.

Dan Rollins

Okay and then just on the Ventanas you’ve talked about sort of ideal situation may be doing a thousand kind base in that operation, right now the resource is fairly small and the grades are fairly. What do you need to see here from a resource component like how much ton wise you need and what grades do you need to see relative to the greater San Dimas that’s sort of thousand ton a day.

Ernest Mast

I think we need to see in terms of the amount of resource, I'll give you the number of ounces. We need to see about 250,000 - 350,000 thousand ounces to get started and we have numerous veins that have been identified and essentially the work this year is to drill out those veins and see what results we get from each of them. And a grade north of five grams per ton is probably good enough for us to have enough incentive to do something.

Dan Rollins

Is that gold equivalent basis?

Ernest Mast

Gold equivalent.

Dan Rollins

And then just moving to the [indiscernible] follow-up on the deep central zone, how tightly drill I guess the [Technical Difficulty] mined this year or next?

Ernest Mast

They have been drilled and prior to mining in area we will have the drilling done in 12.5 meters.

Dan Rollins

And have you been able to actually drill out - have you got any of the drills yet or are you still couple of months away from actually being able to take a look at the dimensions of the ore body relative to the drilling that’s shown?

Ernest Mast

The areas we're going to mine have been drilled off at the 12.5 meter level. So you can say the work is being done as we've progress deeper, we’re still not there yet and as we've progress deeper we will continue to add - we will continue to do more drilling to get to that 12.5 meters.

Dan Rollins

Okay and so far the drilling is sort of matched what your original anticipation had been with respect to what's [Technical Difficulty]?

Ernest Mast

Yes it has and it's filling in quite nicely and at PDAC we should have some core from Black Fox complex that will be very interesting to look at.

Dan Rollins

Okay. And just maybe just around R&D, at San Dimas you guys were looking at putting in a new work schedule with the underground miners, longer shifts but less of them on a weekly basis gives them more time to face [ph], how do you see that they are been rarely adopted and so far what are the results been like?

Ernest Mast

Results have been very good, we currently have all of our long haul teams working on that updated shift schedule which is four days on four days off and 12 hour work days and we're looking to add more crews during 2016.

Operator

Our next question is from Mike Parkin with Desjardins Capital Markets. Please go ahead.

Mike Parkin

Would you just refresh on the target to hit a 1000 tons per day at Black Fox, is that something that’s still going to happen in the second quarter or is that more of a third quarter thing as you get into this central deep zone?

Ernest Mast

When we redid our budget this year we did put in a limit of 850 tons a day. We will be hitting that limit in Q4.

Mike Parkin

And then in the San Dimas the concession holdings those are for mineral rights you would still have to acquire surface rights?

Ernest Mast

Yes. We would still have to acquire surface rights but we don't really acquire the surface rights. We currently are operating over a very large land package and we have relationships with the local [indiscernible] that are in these new land packages are actually the same that we're already dealing with. So already have a boiler plate type arrangement with them which will just extend into these new areas. So they're happy about it, it means more land which allows--

Mike Parkin

It's a lease agreement then?

Ernest Mast

Yes. It's like a lease agreement. Yes.

Operator

Our next question is from Jeff Killeen with CIBC. Please go ahead.

Jeff Killeen

Just wondering on Black Fox given that it sounds like you're putting Grey Fox on the shelf for a little while here and with the pitch stockpiles coming off next year, just wondering what do you think the minimum milling rate you could actually run the stock mill at?

Ernest Mast

It's a good question, we're looking into it. It depends if we're forced into running at lower throughputs not keeping the mill full. We'll look at an arrangement where it's not a 24/7 operation and I don't have an answer for you unfortunately at this point. But one thing to keep in mind is we did put Grey Fox on the shelf but part of it was because of what we're seeing it through and we feel that the combination of Froome and Black Fox should give us a robust feed for the mill.

Jeff Killeen

Okay and with Froome is the ultimate plan to develop laterally from the current ramp over and extract it that way or do you think there's an opportunity to strike a new ramp from surface or does--?

Ernest Mast

The current plan looks like we would just ramp from the existing infrastructure. It's approximately 1700 meters away. So it's not really far.

Jeff Killeen

Okay. And then with Grey Fox as you indicated deferring it for now just wondering can you give us a sense of which option seem to be better at this point? Was it an underground option or an open pit option?

Ernest Mast

For Grey Fox it was an open pit option, we looked at and then after the open pit we would progress to an underground operation.

Jeff Killeen

And can you give me a sense of what rough gold price where would actually become viable and what your minimum IRR threshold is for it?

Ernest Mast

Our minimum IRR threshold is 15% and let's say 1250 would have been the threshold gold price so we weren't far, but you know as we did budget towards the end of last year and we were south of 1100 and we started getting our results from Froome we decided to change the strategy.

Operator

[Operator Instructions]. Our next question is from Lauren McConnell with Paradigm Capital. Please go ahead.

Lauren McConnell

Just have a question on Froome I know you're talking about doing an initial resource with your year-end resource, should we be expecting a secondary update sometime during the year with the drilling that you will be doing this year?

Ernest Mast

Actually this geological team just informed me this morning they have been working hard to incorporating the new drill results into the model and our model which comes out in early March will be sufficient for annual disclosure. So we will not have a second resource model come out.

Operator

Thank you. There are no further questions registered at this time. I would like to turn your meeting back over to Mr. Mast.

Ernest Mast

Okay. Well thank you everyone for attending our meeting. And we look forward to seeing everyone at the next event in the next conference call. Thank you.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

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