We've seen a much better earnings season in Q4 for the gold miners (GDX) with more than 50% of companies beating earnings estimates, as well as more than 50% beating operating guidance with just a few names left to report. This is a significant improvement from only 32% of companies beating earnings estimates in Q3 2019, and less than 40% beating operating guidance. Unfortunately for investors parked in Premier Gold (OTCPK:PIRGF), the company's performance has diverged from the majority, with a massive miss on both production and cost guidance for FY-2019. Mined grades at the company's Mercedes mine in Mexico continue to trend lower, contributing to much higher costs year over year. Based on less-than-satisfactory operational performance and some of the weakest margins in the sector, I see Premier Gold as an Avoid currently. While bounces are possible after a rough start to 2020, I would view rallies to the C$2.00 level as selling opportunities.
(Source: Author's Table)
Premier Gold is the most recent name to report its FY-2019 earnings results, and to say it was a disappointing year would be an understatement. The company initially guided for 87,500 ounces of gold production for FY-2019 between South Arturo and Mercedes, with 90% of this production coming from the Mercedes mine. Unfortunately, the actual results came in more than 20% lower than expectations, with just 67,427 ounces of gold production and 198,289 ounces of silver production. Worse, all-in sustaining costs for the year came in at $1,218/oz on a consolidated basis, with all-in sustaining costs at Mercedes of $1,260/oz, more than $300/oz above the guidance mid-point of $925/oz. It's no surprise that the company ended up with yet another net loss this year ($20.4 million) based on a significant contraction in all-in margins, and this was despite a nearly 20% rise in the price of gold (GLD). Let's take a closer look at Premier Gold's operations below:
(Source: Company News Release)
Beginning with the company's Mercedes mine, we saw annual production of 59,900 ounces and 191,300 silver ounces. This was down significantly year over year for both metals, with gold production down 13% (FY-2018 - 68,700 ounces) and silver production down 38% (FY-2018 - 309,100 ounces). The lower gold production was the result of much lower grades delivered to the mill as gold grades dropped 43 basis points year over year, from 3.34 grams per tonne gold to 2.91 grams per tonne gold. This resulted in a significant jump in all-in sustaining costs year over year, from $1,060/oz to $1,260/oz. The main contributors to the disappointing year were higher-than-anticipated dilution, as well as the encounter of a large natural void in the Rey de Oro zone.
(Source: Mining-Journal.com, Premier Gold Mines)
(Source: Company News Release)
Unfortunately, silver grades were almost down materially last year at Mercedes and fell even more dramatically than gold grades. Silver grades at Mercedes came in at 26.18 grams per tonne in FY-2019, down from 35.34 grams per tonne silver in FY-2018. This translated to a more than 900-basis point drop in grades from FY-2018, a more than 20% decrease. This issue was compounded by a massive reduction in silver recovery from 41% to 34%, with both contributing to the much lower silver production compared to FY-2018. As we can see from the chart below, this trend lower in grades is undoubtedly a bit concerning, given that both gold and silver grades are down for the fourth year in a row and silver grades are experiencing their largest drop in several years.
(Source: Author's Chart)
Previously, the most significant drop in silver grades came in 2017, when they fell 686 basis points, from 44.49 grams per tonne silver to 37.63 grams per tonne silver. Meanwhile, FY-2019's drop was over 900 basis points and occurred from much lower levels. In the same four-year period, gold grades have dropped by over 40%, from 4.27 grams per tonne gold to 2.91 grams per tonne gold. Ultimately, these challenges led to a nearly 20% jump in costs year over year at Mercedes, from $1,060/oz to $1,260/oz.
(Source: Company Website)
Fortunately, Premier Gold did have a solid year at its 40%-owned South Arturo mine, with the El Niño mine achieving commercial production in Q3 2019 ahead of schedule. The El Niño mine is a 40%-owned joint venture with Nevada Gold Mines LLC, and Barrick Gold (GOLD) as the operator. The current focus is on the El Niño underground and the Phase 1 open pit operation. For FY-2019, South Arturo produced 7,526 ounces of gold, which met the guidance mid-point of 7,500 ounces. All-in sustaining costs came in well below the industry average at $836/oz for FY-2019, well below the industry average of $950/oz. Unfortunately, we haven't got any guidance for South Arturo for FY-2020, so it's difficult to speculate on what to expect for next year. The other issue is that the low production profile is not enough to offset the challenges at Mercedes, as South Arturo makes up less than 15% of Premier Gold's total annual production.
(Source: Company Presentation)
From a financial standpoint, the company's mine operating income came in at $3.6 million for FY-2019, down significantly from last year's $16.5 million due to higher costs and much lower production. This translated to a net loss per share of $0.10 for FY-2019, or $20.4 million, in line with the previous year. While this may seem reasonable as net losses remained in line, I see this as unacceptable in a year when the price of gold gained nearly 20%. The majority of miners saw a massive tailwind and positive earnings per share (EPS), but Premier Gold continues to be one of the few 50,000-plus ounce per annum producers unable to turn a net profit yet. Therefore, while the company has the title of a gold producer, as it has two operating mines in its portfolio, the stock is not generating positive earnings per share after factoring in $24 million in exploration and development in FY-2019. Based on this, I see Premier Gold as much less attractive than its gold miner peers. This is especially when factoring in that the company's all-in sustaining costs of $1,218/oz for FY-2019 were more than 25% above the industry average.
(Source: Company News Release)
The unfortunate risk of owning a gold producer that is not cash-flow positive is that shareholders are victim to further dilution, which is generally seen only in the exploration/development phase. This is what we witnessed in February, as Premier Gold sold 25.3 million shares at a price of C$1.50 per share to raise C$38 million. This financing represented a more than 10% dilution to shareholders based on a share count of fewer than 200 million shares, and the capital was raised near 10-year lows for the stock. This is the same thing that McEwen Mining (MUX) did last year when it went to the market to raise money twice near multi-year lows. This capital raise at multi-year lows is a minor red flag for me, as I don't care for holding stocks that are raising capital at successively lower prices. I want companies I own to be returning value to shareholders through dividends or share buybacks, not diluting, which costs shareholders' value, as a higher share count erodes their stake.
In summary, I do not see Premier Gold as an attractive way to play the gold price, as the stock is clearly a laggard as it's sitting near multi-year lows, and fundamentally it is a laggard as well. Not only did the company miss guidance by a wide margin for FY-2019, but its costs are 25% above the industry average, as its Mercedes mine continues to have challenges. While we could see an improvement in operations for FY-2020, I struggle to see how the company will get its costs below the industry average on a consolidated basis before Q3 2021. Therefore, I see the better way to play the gold price as owning high-margin miners like Franco-Nevada (FNV) or high-margin producers in Tier-1 jurisdictions. It is certainly possible that Premier Gold could bounce after striking new 52-week lows last week, but I would view rallies to the C$2.00 level as selling opportunities.