The following came from Canaccord on Nov 12, 2012:


Primero Mining (PPP : NYSE, P : TSX| BUY, Target US$13.00)

Q3/12 results miss but optimizations and long-hole mining should improve operations


We reiterate our BUY rating on Primero Mining following the release of Q3/12 results that were weaker than expected due to lower gold and silver grades at San Dimas. We expect a sequentially stronger fourth quarter as the throughput and dilution control benefit from the productivity initiative and higher grade stopes are mined.


Investment highlights

Adjusted fully-diluted EPS of $0.03 vs our estimate of $0.13 and consensus of $0.12. The variance to our estimate was due to lower margins ($0.05) and higher non-cash stock-based compensation ($0.05).


Production was 25,582 oz AuEq (sales of 23,251 oz AuEq) at total cash costs of $699/oz versus our estimate of 29,600 oz AuEq at $606/oz. Production variance was largely due to lower-than-expected grades at San Dimas: 3.4 g/t gold (versus our 4.0 g/t) and 210 g/t silver (versus our 235 g/t). Sales were lower than production due to a broken crucible in the refinery, which delayed shipments into Q4 (worth ~$0.03/sh).


The benefits of the optimization program are being observed early in Q4, with October mill throughput above the design rate of 2,150 tpd and dilution of only 30% versus 2011 average of 55% and 58% assumed in reserve base.


While the production guidance range for 2012 remains unchanged, management expects to come in at the low-to-mid point of the range of 110,000 to 120,000 oz AuEq. Our 2012 EPS estimate has been revised to $0.50 from $0.57, largely due to the Q3/12 underperformance.



We maintain our target price at US$13.00 based on ~0.90x our 5%/peak NAVPS estimate of US$14.22 (previously US$14.57, reduction on dilution from options-in-themoney). Shares remain undervalued at 0.58x 5%/spot P/NAV vs the junior average of 0.71x and 3.6x 2014 P/CF vs the junior average of 7.4x.


Upcoming potential catalysts

Year-end reserve update at San Dimas Optimization of underground operations and mill to 2,150 tpd (Q1/13E)

Expansion of mill to 2,500 tpd (Q1/14E)

Ongoing exploration results


Investment risks

The typical risks associated with any mining investment include commodity and exchange rate risk, and permitting, technical (development/operating) and financing risk. Investors considering an investment in Primero Mining should consider the normal development risk associated with expanding the San Dimas operation.


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