If we look at the company's two producing mines we see a relatively strong performance at San Dimas as the company is successfully ramping up production, while Black Fox continues to struggle. Gold production rose from 27,000 oz. to 33,000 oz. with gold equivalent production rising from 39,000 oz. to 46,000 oz., although investors should keep in mind that the company has a streaming agreement with Silver Wheaton (SLW) that entitles the latter company to buy the silver production from San Dimas at $4/oz., and half of the mine's silver production for $4/oz. after 3.5 million ounces have been produced. Production costs remained relatively low at San Dimas at just $626/oz. making it one of the most efficient gold mines in Mexico.
Black Fox was a different story as the mine continues to struggle with lower production and higher costs. Gold production came in at 17,000 oz. vs. 22,500 oz. produced Q2 last year by Brigus Gold as ore grade fell from 5 gpt. to 2.7 gpt. Production costs came in at $1,771/oz., meaning that the mine lost money. This loss was exacerbated as Sandstorm Gold (NYSEMKT:SAND) owns a streaming agreement on the mine that entitles it to 8% of the gold produced at $500/oz.
While management remains convinced that the company will be able to bring production back up at Black Fox while lowering production costs I remain concerned. Even if the company can bring costs down Black Fox will still be a relatively high cost producer compared with San Dimas and Cerro Del Gallo--the company's development-stage project that was recently delayed. As I argued back in April I think the Brigus Gold deal compromised 2 of the most appealing aspects of Primero: its industry-leading low production costs and its strong balance sheet. Investors have ignored this and have been bidding up the shares, although it seems that investors may be waking up to this reality as the shares traded down over 4% in early trading on Thursday. I remain bearish at the current valuation ($1.25 billion).
Disclosure: The author is long SLW. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.