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  • This Junior Miner Could Generate Enough Cash To Take Itself Private In 3 Years [View article]
    Details of the silver stream agreement can be found in Primero's newly filed 40-F with the SEC, beginning at the bottom of page 12:

    http://1.usa.gov/HIXSFi

    Goldcorp will compensate Primero for any payments required under the stream agreement that are caused by a shortfall in silver production.

    The stream obligation transfers with any change in ownership of the mine, although obviously it can be renegotiated just as it was when Primero acquired the mine.

    Again, remember that the stream obligation was accounted for and factored into the acquisition agreement between Primero and Goldcorp when the $510 million price was set. The reduced silver revenue for Primero is already reflected in their calculation of costs per gold equivalent ounce, and despite this total cash costs still end up at ~$650/oz, leaving a margin of ~$1000 at current gold prices.
    Apr 3 07:08 PM | Likes Like |Link to Comment
  • This Junior Miner Could Generate Enough Cash To Take Itself Private In 3 Years [View article]
    Thank you for the comments everyone.

    The silver stream agreement with Silver Wheaton was revised after the San Dimas acquisition. Up through 2014 the first 3.5 million ounces of silver plus 50% of the excess over 3.5 million ounces is to be sold to SLW at a price slightly over $4. In 2014 the threshold increases from 3.5 million ounces to 6 million ounces. Primero can sell 50% of the excess over the threshold at spot prices.

    Primero produced 4.6 million ounces of silver during 2011, so it appears the company would have been able to sell 550,000 ounces of silver at spot prices. The increased threshold in 2014 shouldn't pose much of a problem, provided that Primero completes the expansion of its mill and achieves its goal of producing at an annual rate of 200,000 gold equivalent ounces from San Dimas.

    Regarding the tax treatment of the silver stream agreement - the original arrangement was that Primero's Mexican producer subsidiary was selling silver to its Barbados trading subsidiary at spot prices, and the Barbados subsidiary then sold the silver to Silver Wheaton at a loss. In October 2011, Primero modified the internal sales agreement between the two subsidiaries to specify that the Mexican subsidiary would sell the silver to the Barbados subsidiary at the same price at which Silver Wheaton would ultimately receive the silver. While the company has already put this revision into effect, it has also filed an application with the Mexican tax authorities basically requesting their approval of the arrangement. The tax ruling should be decided sometime in late 2012. To cover the potential risk of a negative tax ruling, Primero has been using call options on silver to hedge against the level of taxes the company would have to pay if the arrangement is rejected.

    From our perspective, none of the issues surrounding the silver stream agreement or its tax treatment will make or break the investment case for PPP. The pricing and volume aspects of the silver stream agreement were issues settled shortly after the San Dimas acquisition which should have long been priced into Primero's stock. The company's calculation of produced gold equivalent ounces already accounts for the reduced silver revenue received. As for the tax issues, chances are better than 50/50 that the tax ruling will be positive. A negative APA ruling may have a marginal negative impact in the short term that should be offset in the long run by the company's options strategy and growth in production.
    Mar 27 09:32 AM | 2 Likes Like |Link to Comment
  • 2 Cash-Rich Small Caps For The Next Renewable Energy Cycle [View article]
    Jon,

    40% of the PWER dilution you reference already occurred in November 2011 (and is reflected on Yahoo and Google). In preparing this article the figures above are based on the 10-K just filed on March 1. There has been no 8-K filing after that date.

    The Series C preferred stock still remains to be converted, which would result in further dilution of 22%. If we factor in the full dilution against the current balance sheet numbers, book value per share would fall from $3.61 to $2.96. However these figures ignore the probability that PWER will likely still be profitable and free cash flow positive in the coming year, which would augment book value.

    Here's where you have to decide for yourself whether PWER is cheap enough to merit an investment. Even with full dilution, at the current share price PWER would likely trade at an EV/FCF multiple well under 10 - and that's using FCF at the trough of the cycle. Sounds cheap enough to us.
    Mar 14 10:59 PM | 1 Like Like |Link to Comment
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