TREND: Primero's struggles at San Dimas

By
Tuesday, February 21, 2017

Primero Mining has faced a string of setbacks at its San Dimas mine in Mexico, the latest a strike which saw operations suspended last week.

The Durango state operation has been hit by costly bonus payments, a tax dispute, challenges associated with an overhaul of safety standards and disruptions to the mine plan due to worker absences, which have seen it flip from being one of Mexico's lowest cost gold producers to one of its highest.

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STRIKE

About 1,000 workers aligned to the national mining-metallurgy union SNTMMSSRM downed tools at San Dimas last week after collective contract negotiations broke down.

Primero said it is seeking to better align bonuses with mine performance in order to return the operation to profitability.

WORKER ABSENCES

Well before the strike, San Dimas' performance had been impacted by worker absences, hitting development and grades and disrupting mine plans, resulting in falling output and soaring costs.

San Dimas produced 93,881oz gold and 5.3Moz silver in 2016, down from 151,355oz and 8.3Moz, respectively, in the previous year.

Cash costs were US$856/oz gold equivalent, compared with original guidance of US$570/oz.

Production and costs were also impacted early in 2016 by the implementation of enhanced ground support aimed at addressing poor safety results in 2015, while an expansion was scrapped.

TAX CHALLENGE

Mexico's tax authority SAT is seeking to nullify an agreement allowing Primero to pay taxes on realized silver prices at San Dimas.

The Toronto-based company sells the bulk of silver to Silver Wheaton for about US$4/oz under a streaming deal, and pays taxes on this price rather spot, currently around US$18/oz, under a 2012 agreement with SAT.

Primero is considering an arbitration claim against Mexico in response to SAT's plans to axe the agreement, which is important to San Dimas' economic viability.

FINANCIAL FALLOUT

As well as net losses partly linked to higher costs at San Dimas, Primero's cash reserves were hit by bonus payments to workers of about US$10mn in Q3.

Liquidity concerns have been raised ahead of the maturity of a US$50mn revolving credit facility in May.

Amid the challenges, the company's shares have traded below the NYSE's US$1 minimum since November, which could result in delisting.

OUTLOOK

Primero has several immediate priorities to juggle to get back on track at San Dimas.

One is to negotiate an end to the strike, but on terms which enable the mine to return to sustainable, profitable operations.

At the same time, the company needs to ensure it can repay in full or extend the US$50mn revolving credit facility ahead of the May deadline.

And it must achieve this while avoiding an NYSE delisting and continuing to fight the tax case.

In terms of operations, Primero plans to reduce the complexity of mining at San Dimas, prioritizing work in key production areas.

Returning cash costs to sub-US$600/oz levels is likely to take some time.