Brigus Gold Warns For Impairment Charges

| About: Primero Mining (PPP)
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In an earlier article I expressed my concerns about Brigus Gold's (BRD) abilities to cope with the current low gold price environment as the company is expected to be free cash flow negative this year if the average gold price is lower than $1425/oz.

I'll have a look at Brigus' Q2 financial results and the updated balance sheet, which will result in my updated investment thesis at the end.

The Q2 Financial Results

Brigus produced 23,304 ounces of gold and sold 22,490 ounces for a revenue of $30.4M, which is just a 7% revenue increase despite the 22% higher amount of gold sold. This is obviously caused by the much lower gold price on the market.

Brigus processed approximately 155,000 tonnes of ore at almost 5 g/t gold and an average recovery rate of 94%, which is very decent, considering the mill was shut down for about 19 days. Without this shutdown, the company would have processed closer to 200,000 tonnes of gold, which would have led to a production of approximately 28-29,000 ounces of gold in Q2. This excellent operational performance caused Brigus to increase the production guidance for 2013 to 95-105,000 ounces of gold.

The company recorded a net loss of $4.7M, which was mainly caused by a $9.8M depreciation charge. Moving over to the cash flow statement, the net cash provided by operating activities was a healthy $9.3M, which almost covered the $11.2M costs incurred at its plant and exploration expenses. Brigus recorded a net cash outflow of $10.4M, as it repaid $4.9M of its debt, which is always a good thing to see. All in all, this actually was a very satisfying quarter for Brigus, as if there had been no mill shut down, the company would have generated an additional $5-6M in cash.

The Balance Sheet

Moving over to Brigus' balance sheet, the working capital decreased to just $2.7M with a current ratio of only 1.07, which is very low. At the end of last year, the working capital was $6.2M and the current ratio 1.15.

On the positive side, the company's liabilities decreased by $18.6M in just six months to $170.1M at the end of Q2. This was mainly caused by a $7.2M decrease in long-term debt.

The company warns it might need to write down the value of its assets. If the gold price averages $1300/oz between 2014 and 2016 and less than $1200 thereafter, the company will have to take an impairment charge of $28.6M and another $28.6M impairment per $130-145/oz drop in the gold price thereafter.

A charge of $28.6M would have a negative effect of approximately $0.12 on the book value per share, which currently stands at $1.05/share.


As the mill shutdown in Q2 caused the all-in (includes cash costs, sustaining capex, rehabilitation costs and G&A costs but excludes exploration costs) cash costs to spike to $1365/oz, I'm now anticipating an average all-in cash cost of $1170 for this year, as Brigus has provided a guidance of $1100/oz for H2 2013. The company took action based on these new data and reduced the sustaining capital spending by $3M in 2013 to $38.5M, and is now guiding for a capital spending of $20-25M in 2014.

Investment Thesis

Brigus Gold would actually have had a pretty decent Q2 if the mill shutdown hadn't occurred. As the company is raising its guidance to approximately 100,000 ounces of gold this year, Brigus seems to have a firm grip on the operational side of things. I'll be looking forward to the company's updated guidance for 2014, but will stick with the convertible debt as the common shares are still a bit too risky for me.

Disclosure: I have no position in Brigus' common shares, but do own a small position in its convertible debentures. 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.