Premier Gold: Solid Quarter From South Arturo Not Enough To Offset COVID-19 Headwinds

Aug. 05, 2020 12:53 PM ETPremier Gold Mines Limited (PIRGF)10 Comments8 Likes
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Taylor Dart
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Summary

  • Premier Gold released its Q2 results on Tuesday with quarterly production significantly lower due to government-mandated shutdowns in Mexico affecting the Mercedes Mine.
  • The company reported gold production of 4,760 ounces, down over 70% year-over-year as the only mine contributing to production in the quarter was South Arturo.
  • Fortunately, the company is finally making changes at its high-cost Mercedes Mine, with a focus on margins going forward by mining solely Diluvio and Lupita.
  • Based on Premier's relatively high costs, continued dilution, and relatively small production profile, I continue to see better opportunities elsewhere in the sector.

We're now more than one-third of the way through the Q2 Earnings Season for the Gold Miners (GDX), and the most recent name to report is Premier Gold (OTCPK:PIRGF). Unfortunately, while many miners saw a 20% to 40% drop in production year-over-year due to COVID-19 related shutdowns, Premier Gold was hit much harder than the average miner, with gold production dropping by more than 70% from Q2 2019. These weak operating results led to the largest net loss in two years for the company, with over $5 million tied to shutdown related costs. While this is at no fault of Premier, the company continues to be a laggard, with or without the COVID-19 related closures. Therefore, while a rising gold price (GLD) will lift all boats, I believe there are better opportunities elsewhere in the sector.

(Source: Company Presentation)

Premier Gold released its Q2 results on Tuesday and reported quarterly gold production of 4,765 ounces, down 71% from the 16,450 ounces reported in the same period last year. The culprit for this massive drop in production was the Mexican government's decision to declare mining non-essential, which shuttered the company's Mercedes Mine temporarily. Unfortunately, while the mine was allowed to restart in June, Premier did not begin processing until early July. This led to zero contribution from Mercedes in Q2, with complete reliance on the South Arturo Mine to buoy the production figures. As a result, we saw the largest net loss in the past two years for Premier Gold, with a net loss of $14.1 million in Q2 alone, with the year-to-date net loss now sitting at $26.0 million. Let's take a closer look at the quarter below:

(Source: Author's Chart)

As we can see from the chart above of quarterly metals sales and revenue, we've seen a persistent downtrend in silver sales over the past two years, with gold production relatively flat over the same period. This is because of continued underperformance from the company's Mercedes Mine in Mexico, where grades have been trending lower. Unfortunately, while this downtrend in metals sales has been steady for over a year now, it accelerated in Q2, given that Mercedes has to temporarily move into care & maintenance to comply with government standards. This headwind led to a massive drop in metals sales to just 9,400 ounces of gold and 14,700 ounces of silver and a new 2-year low in revenue of $14.8 million despite much higher metals prices.

(Source: Author's Chart)

The good news that came of this is that the company had decided to explore an alternative mine plan during the shutdown, focusing on increasing margins. The new strategy is to limit mining and development activities to solely the Lupita and Diluvio zones and consolidate production from five mine portals to just one mine portal going forward. Based on this new initiative, the company completed a restructuring, which resulted in a 40% reduction in employees and 75% of mining-related contractors. This came at the cost of $1.9 million, a one-time headwind in the quarter, but it should, hopefully, lead to improved results going forward. Given that all-in sustaining costs have consistently been coming in above $1,200/oz at Mercedes ($1,900~/oz in Q1), it's clear that a change was needed here. Therefore, while it's early to suggest the operation has been turned around and that we might finally see costs at more reasonable levels below $1,000/oz, this is undoubtedly a step in the right direction.

(Source: Author's Chart)

Fortunately, while the Mercedes Mine was offline in Q2, the company's 40%-owned South Arturo Mine continues to operate as usual and had a decent quarter overall. As we can see above, we saw gold production of 4,765 ounces in Q2, which was the second-best quarter in the past two years, though well below the 6,730 ounces produced in Q1. During the quarter, we saw yet another improvement in grades to 9.3 grams per tonne gold, more than double the grades in the same period last year as the company focused exclusively on El Nino Underground in the quarter. Mill throughput in Q2 came in at 17,800 tonnes at 9.3 grams per tonne gold vs. 27,700 tonnes at 8.59 grams per tonne gold in Q1. The culprit for the lower production was the fact that the lower throughput more than offset higher grades on a sequential basis due to planned maintenance. Otherwise, this was a decent quarter with all-in sustaining costs down even further to $1,026/oz and grades increasing yet again.

(Source: Author's Chart)

However, while South Arturo had a decent quarter, this was not enough to offset the dearth of production from Mercedes and the one-time items which weighed on results. As the chart above shows, the net loss in Q2 came in at $14.1 million, the worst in over two years, while the cash & cash equivalents balance dropped materially to $51.1 million. It's worth noting that we saw a $5.1 million headwind in the quarter from shutdown costs related to COVID-19 and a $1.9 million one-time headwind related to the restructuring. Therefore, if we remove these items, the net loss was $9.0 million subtracting for COVID-19 and just $7.1 million after including the restructuring. This is still a disappointing result as 90% of miners are posting positive earnings at these metals prices. Still, the fact that the company's flagship operation was shutdown certainly did not help matters.

(Source: Company Presentation)

Fortunately, the good news is that while this was a very challenging quarter for Premier, it can't get much worse from here. This is because COVID-19 is an unprecedented event to affect the company's operations, disguised as a benefit, given that Premier has finally looked into an alternative plan to drive margins at the poorly performing Mercedes Mine. Meanwhile, while the net loss was the worst in years, it was also a product of both COVID-19 and one-time items. Finally, even if we don't see much improvement at Mercedes going forward, I would expect the company's average realized gold price for H2 2020 to come in above $1,725/oz. Given the significant decrease in the workforce, I would argue some improvement is inevitable.

(Source: Author's Chart)

This should be a massive boost to margins for FY2020, where the company previously had almost no margins at all (FY2019 costs of $1,218/oz). Therefore, even if operations don't improve materially going forward, the higher gold and silver price is going to bail Premier out. A company that gets bailed out by higher metals prices is not one I'm interested in owning, but at the end of the day, a rising tide will lift all boats. Besides, the technical picture for Premier is finally firming up. Let's take a look below:

(Source: TC2000.com)

As we can see in the chart above, Premier broke out of a multi-year downtrend earlier this year despite COVID-19, and we saw several accumulation bars in the C$2.00 area during May. Generally, these accumulation bars mark the new floor for the stock, and we can also see that the C$2.00 level was the prior broken support area. Given that Premier has reclaimed this previous support area, I would expect it to become new support on any corrections. Therefore, while I have no interest in chasing the stock near C$3.00, I believe that any pullbacks to the C$2.00 to C$2.20 zone should provide low-risk buying opportunities.

(Source: Company Presentation)

While Premier Gold just had one of the worst quarters for all producers across the sector, we're finally seeing some progress with the company willing to make some changes at its Mercedes Mine. The mine has been an anchor on profits for years given its declining grades, and the costs here have offset what would otherwise be respectable margins based on the more recent contribution from South Arturo. However, now that we've seen a shift to a focus on margins, Premier should finally be able to generate positive earnings going forward. While this isn't anything to write home about as it took a $1,500/oz gold price to achieve this, it does mean that corrections are likely to be buying opportunities going forward as the company will finally be making money. I continue to see better opportunities elsewhere in the sector, but I believe the new floor for the stock is at C$2.00.

This article was written by

Taylor Dart profile picture
24.75K Followers
"A bull market is when you check your stocks every day to see how much they went up. A bear market is when you don't bother to look anymore."- John Hammerslough - Disclosure: I am not a financial advisor. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading or investing.
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Disclosure: I am/we are long GLD. 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.

Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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