The First Priority for Primero Mining

Just when it seemed my favorite gold stock was finally off to the races, along comes another compelling buying opportunity for shares of Primero Mining (NYS: PPP) .

Joe Conway built the successful mid-tier marvel IAMGOLD (NYS: IAG) through methodical and consistent execution, and it is now clear he will stand for nothing less from the flagship mine of his latest corporate creation. Adapting to the gap between anticipated ore grades at the San Dimas mine in Mexico and the moderately lower-grade reality underground, Conway has inserted a pause (of "no more than 12 months") into the planned expansion of the operation in order to conduct aggressive drilling and target a more accurate modeling methodology for San Dimas.

Diligent Fools have known from the start that the vast network of gold- and silver-bearing veins at San Dimas were both inadequately defined and grossly underexplored. Prior owner Goldcorp (NYS: GG) made that fact explicitly clear at the time of Primero's founding transaction, and the major miner's retained 36% stake in Primero offers a compelling signal of Goldcorp's expectation of major reserve expansion as exploration activity progresses. But investors have just received a reminder -- just as Goldcorp investors occasionally received before the operation changed hands -- that the mystery of an underexplored orebody can cut both ways.

Primero met its revised guidance for 2011 with output of just over 100,000 gold-equivalent ounces and set 2012 guidance at roughly the same range. Effectively snuffing out the benefit of an 8% increase in mill throughput over 2010, Primero suffered a 13% dip in average gold grades and a 7% drop in silver grades. It is precisely that sort of unanticipated variability in realized grades that Conway seeks to resolve through the exploration and resource-estimation initiative announced this week.

Primero is certainly not alone in encountering challenges with respect to pre-production modeling of precious-metal deposits. Great Panther Silver (ASE: GPL) saw its shares pummeled by lower-than-anticipated silver grades last year from a portion of its similarly underexplored treasure at Guanajuato, though during the recently completed fourth quarter those grades improved very nicely. Even major miner Newmont Mining (NYS: NEM) had precious little time to celebrate the opening of its Boddington mine in Australia before revealing to the market that initial ore grades were running about 12% below plan.

As a long-term investor and committed Primero shareholder, I welcome Primero's decision to forestall the targeted expansion of San Dimas until the vein structures and their grades can be more reliably and comprehensively modeled through exploration. In the meantime, the mine continues to pump out more than 100,000 gold-equivalent ounces of gold per year, and I consider the shares an unmistakable bargain for production at that scale. For investors who may be concerned about the potential for a moderate adjustment to the average grade of the existing reserves, I would counter that fresh rounds of resource-expanding intercepts from brownfield exploration among the scores of prospective vein structures at San Dimas are extremely likely to yield a net increase in resource ounces during this year of careful study. Despite the pause in Primero's near-term production, I remain convinced of this stock's profound long-term potential. Primero remains my top recommendation among all gold stocks, and the corresponding bullish CAPScall within my Motley Fool CAPS portfolio is likely to remain in place for years to come.

Looking for more ideas? Download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future --for free!

At the time this article was published Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Great Panther Silver, IAMGOLD, Goldcorp, and Primero Mining. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story