Primero Mining

Acquisition and reserves update lift target price

Mr. Parkin updated his model for Primero Mining Corp. (P-TSX, $7.10) after the precious metals producer made a pair of announcements: the acquisition of Brigus Gold Corp. and its year-end 2013 reserves information.

Mr. Parkin views both of these developments as positive. Maintaining his "buy" recommendation, he's also upgrading his risk rating to "above-average" from speculative, while boosting his 12-month price target to $8.25 from $6.25. Mr. Parkin writes:

With its acquisition of Brigus Gold, Primero also now has full ownership of the Black Fox mine and Grey Fox exploration property near Timmins, Ont.

The company is focused on becoming a leading intermediate gold producer, building a portfolio of high-quality, low-cost, precious metals assets in the Americas.

Primero is attractive as it offers exposure to un-hedged, below-average-cash-cost gold production, with a substantial resource base in politically stable jurisdictions.

We've updated our model to include both Black Fox and Grey Fox, which were the key assets gained via the Brigus Gold acquisition.

We've also factored in the positive year-end reserves and resources update for the company's San Dimas gold-silver mine in Mexico.

Overall, we view the acquisition of Brigus Gold as adding to all the key per-share metrics, including net asset value and cash flow.

In our opinion, this deal marks a transformational moment for Primero, elevating it to mid-tier producer status.

In other words, Primero joins the ranks of companies that produce more than 250,000 ounces of gold equivalent a year.

We believe this should help to re-rate Primero's shares to trade more in-line with those of its peers.

We also believe Black Fox could have excellent exploration potential. Over time, this could greatly improve the per-ounce amount Primero paid for the asset.

Primero is expected to immediately launch a fairly aggressive exploration program at Black Fox.

In addition to completing its acquisition of Brigus Gold, Primero also released its year-end resources and reserves update.

This included increases of 32 per cent and 26 per cent, respectively, in gold and silver reserves at the San Dimas mine in Mexico.

And it did this despite using gold and silver price assumptions that were 11 and 20 per cent lower than a year earlier.

Measured and indicated resources also grew compared to a year earlier by 28 and eight per cent for gold and silver, respectively.

The San Dimas reserve update was positive on three key metrics: tonnes, grade and mine life. And further exploration work may justify a second expansion to 3,000 tonnes a day.

San Dimas has an excellent history of converting resources (a more preliminary, speculative estimate) to reserves (a better defined, more certain measure of the mineral asset). This update is very positive for Primero.

Factoring in the Brigus acquisition and the San Dimas reserve update, our net asset value rises to 55.6 per cent, while our estimate of cash flow per share for the next 12 months rises to 20.2 per cent.

Based on our estimates, Primero could be producing over 300,000 gold equivalent ounces by 2016 at an all-in sustainable cost of about US$1,100 an ounce.

This assumes the Cerro Del Gallo property in Mexico is developed. We expect to hear more about Primero's development plans for Cerro Del Gallo later this year.

Because of Black Fox's slightly higher cost structure, Primero's AISC base is expected to rise from about US$950 an ounce in 2013.

But even at an estimated $1,100 an ounce by 2016, Primero should still be generating very good margins at current spots for both gold prices and silver.

As well, Primero is expected to carry out a fairly in-depth exploration program at Black Fox over the next year.

And any success at discovering higher-grade ore could improve the company's overall cost structure.

A further weakening in the Canadian dollar would also have a significant positive impact on Primero's overall profitability.

We estimate a 10 per cent change in our base-case assumptions would lift cash flow per share in 2015 by 4.3 per cent.

We're boosting our 12-month target price for Primero due to a significant rise in our CFPS forecast for the next 12 months, as well as because of an increase in our estimate of net asset value.

We derive our new price target of $8.25 a share from an equally weighted combination of 1.3 times our net asset value estimate and 9.5 times estimated CFPS for the next 12 months.

Primero now trades at 1.08 times our revised net asset value and 7.7 times and 6.7 times our 2014 and 2015 CFPS estimates, respectively.

We believe the addition of a second producing asset located in a jurisdiction with low political risk should help to re-rate Primero's shares to trade more in-line with the mid-tier producer average, now at approximately 11.4.

Headquartered in Toronto, Primero owns 100 per cent of the San Dimas gold-silver mine and the Cerro del Gallo gold-silver-copper development project in Mexico.

Desjardins Capital MarketsDigested from a March 5 report by analyst Michael Parkin