TORONTO Nov 3, 2015 (Thomson StreetEvents) -- Edited Transcript of Primero Mining Corp earnings conference call or presentation Tuesday, November 3, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Joseph Conway Primero Mining Corp. - CEO * Ernie Mast Primero Mining Corp. - President, COO * Wendy Kaufman Primero Mining Corp. - CFO ================================================================================ Conference Call Participants ================================================================================ * Rahul Paul Canaccord Genuity - Analyst * Ovais Habib Scotia Capital - Analyst * Jeff Killeen CIBC World Markets - Analyst * Dan Rollins RBC Capital Markets - Analyst * Steve Green TD Securities Inc. - Analyst * Mike Parkin Desjardins Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Welcome to the Third Quarter 2015 Operating Financial Results Conference Call for Primero Mining. After the completion of management's presentation, we will open the lines for Q&A. Questions will be fielded from the phone lines first and then from participants connected via the webcast. I would like to turn the meeting over to Mr. Joseph Conway, Chief Executive Officer. Please go ahead, Mr. Conway. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [2] -------------------------------------------------------------------------------- Thank you, operator, and everyone who's on the line or on the web, welcome to the third quarter call. In terms of the cautionary statement, of course, it's customary and I'll let you read that at your leisure. In terms of the agenda for today, I'm going to lead the discussion, and then obviously open up the Q&A and all of the senior management team is available for questions in that period of time. When we look at the highlights for the quarter, certainly, strong operating results. We've continued at both operations of San Dimas and Black Fox to focus on expansion, optimization, and importantly obviously cost control in this kind of environment. We are going to meet our guidance and in fact we believe that we'll do it at slightly lower cost structure, and I'll comment on that a little later. I would like to note that despite our solid operating results, certainly during the quarter, there was a relative underperformance of our share price, largely driven by a couple of different events; one was the uncertainty associated with the blockage or dropping of our import export license in Mexico. That was shortly resumed but it definitely had an impact and certainly the next major one was the exclusion of ourselves, the company from a major index, gold index, which in both of those scenarios, the conventional wisdom would have been that we would have rebounded, but obviously, as everyone knows, this is a challenging market for gold equities in particular, and that had a dramatic impact on us despite our operating results. In terms of our guidance for the year, as I've mentioned, we are on track and I would guide people to the right hand side of the slide. What you see from the start of this company back in 2004 is a steady increase in production year-over-year-over-year and we expect that trend to continue. When we look to where we are this year, when we look at our guidance, we would note that Black Fox was slightly off about, we've reduced our guidance on the production side by about 5,000, but conversely at San Dimas we've increased production by about the same. And importantly, on the cost side of it, Black Fox despite lower volumes has kept its cost structure in line and when we look at San Dimas we're starting to see some improvements there on the cost side of it as well. Looking to production on terms of our change, significant change in terms of our silver production, and we're now looking, we were at 6.5 million ounces to 7.5 million ounces, now we're at 7.5 million ounces to 8 million ounces. And that's largely driven by the Jessica Vein, which I'll comment on a little bit later. In terms of our all-in sustaining costs, basically a reduction of about $60 per ounce for the year and our cash costs of about $30 per ounce for the year. And this year in particular was one of a large capital expenditure of almost $103 million and we are on track and on budget with respect to that expenditure. Looking to our balance sheet, and if you look at $43 million in cash, an undrawn line of $75 million. And I would note, we have two debentures, one due in March of next year but if you look at our financial resources plus our cash flow, we certainly are -- we would more than easily pay that debenture out with our cash proceeds or cash availability to us. Our longer-term note is the convertible of $75 million and that's due to 2020. So from a liquidity point of view, $118 million against a prudent debt level of $123 million. So we're more than prepared to continue going forward. Looking at the Q3 results in particular, starting with the revenue line, we've seen a 13% decline in the gold price and our revenue line has gone up from $75 million on a year-over-year basis to $79 million, and that's largely driven by volume, and volume is going to be a big part of the story throughout the quarter. When we look at our net income number, significant swings are associated with that on a non-cash basis. Certainly, one was the peso denominated deferred taxes, and then the mark-to-market value of our debentures which obviously swung things around quite significantly, $13 million and $9 million, respectively, which ended out ourselves on a income basis of $0.0 per share versus $0.04 of last year. However, when you look at the operating cash flow against a 13% decline in prices [from 1,250 to just around 1,100] for the quarter, and yet operating cash flows in the $20 million versus the $21 million, $22 million on a year-over-year basis. So, a modest decline in cash flow per share, despite a significant decrease in the commodity price. When we look at our operating results in particular, gold equivalent production up 15% year-over-year and certainly gold production itself was about 52,600 ounces and 51,000 ounces in last year. What's been the swing is certainly the silver price or silver production from 1.4 million ounces to 1.9 million ounces and again driven largely by San Dimas and the Jessica vein and that's going to be an important part of next year's production as well. In terms of our cost structure, sustaining basis, overall 33% decline. Looking at a cash cost basis, $120 decline and those are significant numbers and I think an area of the business that we've been particularly proud of that we've been able to keep our cost structure continuing to go down year-over-year and that's going to be our continued focus as we move forward into 2016 and beyond. Looking at San Dimas specifically, let's -- as it's always been here, it's been throughput, mill throughput was up from [just under 2,400 tonnes per day to almost 2,500 tonnes per day]. This is typically the quarter where we do have an impact from the rainy season and this year was no exception, but we did manage to do better on a year-over-year basis. When we look at our production on an equivalent basis from 37,000 to almost 50,000. And again, if you look at the silver side of it, that's been a bigger part of that number. Looking at the grade, for example, our gold has been relatively flat, silver is [up though] about 25% in grade. So that's been an important part of it. And again, the cost structure on a cash cost basis has dropped by [about $119 an ounce], but when you look at the all-in sustaining cost, you're down by 50% and that's a strong accomplishment that we can see. When we look at Black Fox, mill throughput slightly above where we were last year, about 100 tonnes per day more, and the gold production was down from 22,000 last year to 19,000 this year. And that's largely been an impact of a number of things. Certainly one was ground conditions associated with the ramp, where we essentially lost three weeks of mining, but despite all of that, we were able to keep our cost structures relatively in line, on an all-in basis, dropping from 1,200 to 1,000 and cash costs were up slightly, but we're still well in line relative to the commodity price that we are receiving. Looking at the assets overall and looking at those in quite a bit more detail, I'd say the real -- clearly the San Dimas has been driving the value over the last several years. And as we -- as you know that we see Black Fox is one of a turnaround situation and we remain confident that this mine is going to add significant value for our shareholders -- the complex, I should say will add significant value for us, particularly as we get into 2016 and 2017. Looking at San Dimas a little bit more detail, I think clearly the thing to note is, we've expanded this mine twice already. We're in the midst of a final expansion or next phase of expansion I should say to 3,000 tonnes a day. And as we noted earlier, we have increased our guidance in terms of production and lowered our cost structure. Looking at the upside that we see here, certainly one is where is the 3,000 tonne a day expansion. We have had periods of time where we've been very close to that earlier, early in part of the year, but once that is fully complete, we expect that there's going to be some additional benefits that we see perhaps beyond the 3,000 tonnes a day, we'll have to see when we get this mine up and running at that level. But importantly, we reduced the capital by about $9 million, and in other parts of the business, we're certainly looking at continued optimization and debottlenecking. One of those critical steps will be, which is going to be in place shortly, is the reduction in haulage distance from the result of an internal tunnel going forward. We've done a number of optimizations, including tailings washings which has boosted recovery. We're continuing to work with the union to switch to a seven day a week, 12-hour shift. And we've expanded our hydro facility to basically put ourselves a 100% from the grid or off the grid, I should say and you'll note in the presentation, grid power is $0.12, our generating power is $0.015, so significant improvement there and that will continue. In terms of where we see our production going beyond here, you see a chart from 2015 to 2017 and we see ourselves doing 215,000 ounces of minimum in 2017 and a steady increase slightly in next year. Obviously, those numbers are still under review because we have our budget process going on currently. Looking at the exploration side of it, which has always been a key story with respect to San Dimas and I would say, when we look at exploration, we need to talk about grade. And Jessica for example, if you look at the grade that we talked about here, one intercept of 47 grams of gold and almost 6,000 ounces of silver. Then we look to the Perez Vein again, 5 grams to 6 grams of gold, almost 370 grams of silver over good widths and even other areas, 11 grams and 2,800 grams of silver. And this has been the whole plan at this mine, and in fact, is the same that we're approaching with respect to -- with Black Fox, is looking to develop mining or exploration activities, largely focused around infrastructure. So that, we can turn something that we discovery into an operating result fairly quickly. And frankly, Jessica is a perfect example of that where we basically was not in the reserves or resources for that matter in last year, and yet, has been a significant contributor in 2015 in terms of production. And again we expect that to happen more as we go forward into 2016 and beyond. Basically, the whole story really what we see with San Dimas as a district is great. Jessica certainly was a game changer for us because it demonstrated to us for the first time that mineralization does exist under the upper volcanic tapping and that the continuity of the ore-body to the North and likely to the South is likely is going to be continued. Once we realized that, we have been under a fairly aggressive land acquisition program around the existing San Dimas property and the idea here is to acquire as much as we can, it's relatively inexpensive and that will allow us to look at what we call geologic windows, Ventanas is an example of that. And this country, if you have been to this mine, it is very hilly and very mountainous I should say and it's challenging exploration, but if we can find the windows, we generally are finding good mineralization and Ventanas is a case in point. And when we look at the mineralization, or should I say the land concessions that we've acquired, all of them had geologic windows with demonstrated mineralization. So from a long-term perspective, we think this is going to be an important acquisition for us in terms of what we're going to do in the future. Moving to Black Fox now, again we have had some challenges in this quarter and we are expecting to be -- we were expecting to be a little higher in terms of the underground throughput, but it hasn't worked because of the reasons I've mentioned shortly, a moment ago. We expect that to turn around. But in the meantime, being in this district is an important part of where we see ourselves, it's a good jurisdiction with lots of geologic potential and we see the Black Fox complex itself having a lot of that and I'll talk a bit more about that as we go through. First of all, looking at our cost side of it, I think despite the fact that we've been transitioning to underground and looking at turning this operation around, there was no change in the cost guidance despite lower volumes and that's an important part of it. When we look to the depth potential and where we -- when I say depth which is literally less than 200 meters below where we are today, it's all about grade. And that's a critical thing, particularly in this environment. And the highlights from example of the exploration 16 grams over 12 meters, 15 grams over 10 meters, numerous intercepts that are much higher grade than the reserve grade that we have here. So we remain very comfortable that the actual deeper part of the Central Zone is uniquely -- is geologically unique, it looks to be of much greater continuity, less ground condition issues, and we think that's going to be important part as we go into 2016. For the remainder of this year, we did about 400 tonnes a day from the underground in Q3. We expect 600 tonnes to 700 tonnes a day in Q4 and obviously we'll be looking to ramp up as quickly as possible to get to that 1,000 tonne a day mark, which allows us to continue to run the stockpiles at a reasonable rate and keep going. In terms of the production improvement, so one of the things we've certainly done is we have been running up against a cap if you like in terms of our throughput per day. We've recently received verbal permits, if you like, that we will be able to go to 3,200 tonnes a day. So that allows us a significant amount of flexibility with respect to how we manage our stockpiles and in terms of our overall production in general. We have made a number of management changes, and we think we have a solid team there. And we have a great deal of confidence that group is going to be able to turn this operation to account as we expect it will. Looking at the Black Fox, the Central Zone in particular, right now, we've outlined this, what we call the Deep Central Zone, which isn't particularly deep, it's literally 150 meters below where we are currently, and it extends down about another 200 meters, but we have seen evidence of mineralization below that 800 meter level and part of our development and exploration work going to happen, in 2016, we'll be drilling down to a 1,000 meters and see where that comes from, that's certainly going to be a big part of our future. But let's not forget as well, part of that Deep Central Zone, it's still open on a lateral basis and that's going to be an important part of it. So far to date we've outlined, and this is as of June, a 160,000 ounces in a resource category, but with 8.5 gram. So clearly, when you look at that the ore body above it which is the old remnant mining if you like in the 4 gram to 5 gram range, getting down into better continuity, better -- less dilution, better ground control at a grade that's probably 50% to 60% better is going to make an impact. In terms of moving through to get to a 1,000 tonnes a day, we are targeting Q2 at the latest. However, we may -- we will see the wild card that we see -- as we develop the ramp and do the underground development in general, we will be running into mineralization. And obviously, we're going to be reviewing that for our budget processing for 2016. And we're anticipating all of that to be complete, whether it's San Dimas and Black Fox in mid-December and we will release the results of that at that point. When we look at the call at the regional play, really that's an important part of it. The question when we look at this asset is, we have a stockpile and an underground mine that we think the stockpile and the -- what we call, what we know now, the Black Fox deeper zone, but not to the bottom, that basically takes us into late 2017. So what happens after 2017? Well, we've got a couple of options. One is the continuation of depth of the Black Fox central zone if you like, then we obviously have the Grey Fox project which is less than four kilometers away. We will have a scoping study out there by the Q1 and we're looking to get in. We are already starting the environmental permitting process. So that project is likely to become a mine and we're targeting to say as early as mid 2017 for that to come through, so in time with respect to our stockpiles usually. The other areas is a recent newly discovered area called the Froome Zone. It's literally a kilometer away from the pit. It's within the existing permitted area, if you like and we're starting to run into reasonably good grades over extensive widths in the 50 meter range. And that's obviously going to be a priority for us in the first half of next year. And because it's already permitted, we may access that from an underground scenario. We're still working through that, it's very early days, but we find it geologically very exciting. So, I will be watching for news on that as we go forward. The next slide really gives you a timeline, it lays out very clearly what do we need to do to get Grey Fox up and running. And you can see during 2016, there will be a consultation phase, construction permits, the scoping study document will put out relatively early in 2016. And then by the end of the year, we expect to be all permitted and ready to go. There will be a pre-strip for say six months and that should put us into operations by mid next year, mid 2017, I should say. At this point, the capital is still working through those numbers, but we don't expect it to be a significant burden. The reality is, we don't -- there's a pre-strip component to it, there is no mill, we would process the ore at that from our existing mill. So there's a lot -- from a capital intensity point of view, this should be a fairly low capital intensity project. In terms of what we see going forward for us, we'll certainly have at -- we've given an update on the Black Fox side and we've given you the increased guidance just recently, today. We will expect the reserve update in Q1 which will include Jessica and Ventanas and Froome. We will release the Grey Fox study, and I think, preliminary numbers suggest it should be a very strong project. And then as we go forward, I would look to see Q2 -- the expansion complete, definitely and we will be at 1,000 tonnes a day at Black Fox at that same period of time. And in all likelihood, be in a position where we'll have the construction permits received and pre-stripping could begin in the second quarter of this year. So to wrap up really, notwithstanding some of the challenges we've had recently, we believe we are well positioned to outperform. We've got a solid production base and we believe that's going to grow from where we see our 250,000 ounces to 270,000 ounces. When we look at our cost -- looking at our cost structure this year in particular and recognizing this has been a year of expansion, optimization and turnaround, $1,000 -- $1,030 to $1,060 is a reasonable level for us all-in sustaining capital relative to the commodity price and as we go forward into next year, we expect capital to be reduced. Our financial position remains strong. And though we have had our challenges recently when we look at our track record since this company has began, we've outperformed the index and that's our top priority in terms of adding value for our shareholders. And with that, I'd like to turn it back to the operator and open up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. We will now take questions from the telephone line. (Operator Instructions). Rahul Paul, Canaccord. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [2] -------------------------------------------------------------------------------- Joe, for Black Fox underground, did you say, you are expecting 600 tonnes to 700 tonnes a day in Q4? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [3] -------------------------------------------------------------------------------- Yes, I did. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [4] -------------------------------------------------------------------------------- Okay. What is the bottleneck at this stage as it pertains to the underground ramp up. Are you still behind on the drilling or is it development in general? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [5] -------------------------------------------------------------------------------- It's a bit, Rahul, I would say it's certainly development side of it. I'm going to let Ernie speak to it in a moment. But we've found that the ground conditions in certain areas, we need to put in more support which has obviously slowed down our development in general on that basis. But Ernie, if you could comment on that. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [6] -------------------------------------------------------------------------------- Yes. Joe, that's right. And a lot of small stopes we're dealing with, that is taking a little more work than originally planned which is slowing us down. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [7] -------------------------------------------------------------------------------- Okay. Thanks. And then just on the grades, your original plan called for an average underground grade of 5 grams to 6 grams, but the actual grade in the first nine-months has been more like 4.1 grams. Why is it so much lower? Is it negative reconciliation or is it higher than expected dilution? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [8] -------------------------------------------------------------------------------- Yes. I can answer that for Joe. It's again, as I mentioned, smaller stopes, we're getting more dilution than we originally planned and we're looking at some stope designs to improve that. But as Joe mentioned, as we go deeper, we'll have much wider intercepts and then we believe that we'll be much more predictable. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [9] -------------------------------------------------------------------------------- Are most of the problems related to stopes in the remnant areas? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [10] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Rahul Paul, Canaccord Genuity - Analyst [11] -------------------------------------------------------------------------------- And so how is the -- have you been mining any stopes outside of the remnant areas, and if you have, how is the reconciliation and dilution been on those stopes? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [12] -------------------------------------------------------------------------------- Well, most of those stopes have been mined in the remnant areas. So the once that we've gone outside have been better performing. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Ovais Habib, Scotia Capital. -------------------------------------------------------------------------------- Ovais Habib, Scotia Capital - Analyst [14] -------------------------------------------------------------------------------- Just starting off with the San Dimas, we saw a throughput was lower than expected. And I guess that was due to rain. What are you guys planning to do going forward to mitigate this effect of rain, with this expansion that you're doing, is there anything that you're doing to reduce the risk of that, throughput coming down lower? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [15] -------------------------------------------------------------------------------- Yes. One of the things that [I thought it is] we'll be putting in some screens which will allow us to get rid of the -- sort through it a little bit better, so that should solve the problem. -------------------------------------------------------------------------------- Ovais Habib, Scotia Capital - Analyst [16] -------------------------------------------------------------------------------- Okay. And then in terms of grades, the grades were pretty much maintained quarter-over-quarter from Q2. How much did Jessica Vein contribute in Q3 and how much do you expect Jessica to contribute in 2016? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [17] -------------------------------------------------------------------------------- I'll let Ernie to answer that question. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [18] -------------------------------------------------------------------------------- Yes. Jessica is currently less than 10% of our ore and we'll see an increase in Jessica next year. -------------------------------------------------------------------------------- Ovais Habib, Scotia Capital - Analyst [19] -------------------------------------------------------------------------------- Okay. And just switching gears and going into Black Fox, moving towards -- you're ramping down towards the 600 meter level. Do you expect any significant changes in terms of the mining costs, the mining methods and so and so forth? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [20] -------------------------------------------------------------------------------- Ernie? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [21] -------------------------------------------------------------------------------- Yes. With Black Fox, we will still do everything long haul, but we're going to have wider stopes and we feel that we'll be more productive. We should get less dilution, better grades, more productivity. Although it's a little deeper, we still feel we're going to be more productive. So, we should see positive impact on costs. The development needed to get to an area will be the same, whether it's a big area or small area, and then once we're in these areas, we are going to be producing a lot more. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [22] -------------------------------------------------------------------------------- Yes. The haulage distance is not going to be all that -- it's not going to make a big impact. -------------------------------------------------------------------------------- Ovais Habib, Scotia Capital - Analyst [23] -------------------------------------------------------------------------------- Okay. Thanks for that. And then, in terms of -- obviously, once you're ramping down, you guys are going to be setting up more drill stations as well. I think you commented -- you're looking at an increased exploration spend for next year then at Black Fox? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [24] -------------------------------------------------------------------------------- That's still under review. I think, what I can tell you is that, we are looking at three areas and most of them are focused basically lateral development in what we call a Deeper Central Zone, sort of from the 600 meter to 700 meter level, as well as looking on the west side. And then there will be some dollars allocated to some deep mineralization. But we're still working through it. I don't -- we haven't got the exact details finalized. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Jeff Killeen, CIBC. -------------------------------------------------------------------------------- Jeff Killeen, CIBC World Markets - Analyst [26] -------------------------------------------------------------------------------- Couple of questions. So first of all, maybe for Ernie on Black Fox. Are you suggesting that 2016 mining won't be coming out of any of the current reserves and only from Deep Central Zone? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [27] -------------------------------------------------------------------------------- No. We plan to get the majority from the Deeper Central Zone, but we'll still be remnant -- we'll still be mining from the upper areas in the mine. But it's going to be more complementary than the main focus. -------------------------------------------------------------------------------- Jeff Killeen, CIBC World Markets - Analyst [28] -------------------------------------------------------------------------------- Okay, very well. And with that in mind, and the stope inventory that you needed, or that you thought you needed to get to a 1,000 tonnes here in this year, has that changed at all for next year, given some of your remnant mining is smaller stopes, more and more work than needed than [previous years]? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [29] -------------------------------------------------------------------------------- Yes. So the stope inventory that we'll need for next year came because of the larger stopes and larger areas in the lower area. We feel, we will need less than we currently need at the present time. -------------------------------------------------------------------------------- Jeff Killeen, CIBC World Markets - Analyst [30] -------------------------------------------------------------------------------- Okay, very well. Switching over to San Dimas, you noted that you're effectively 100% off the grid power in this quarter. Is that sustainable or was that really just the benefit of the heavier rains or what do you see as sort of an average contribution in terms of your required power over an annualized basis? -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [31] -------------------------------------------------------------------------------- No, it's not sustainable. Our current water reservoir doesn't have enough capacity for us to run the whole year. So we are getting about 60% to 70% of our overall power from the hydroelectric facility. But what we do in the other parts of the year is that, we produce the power during peak power period. So it's still -- it still reduces our power cost considerably even when we're not a 100% on our hydroelectric facility. We do have a project on the books, which would expand the reservoir or put another new reservoir upstream. And with that, we could go 100% off grid and it's just one of our options next year for capital and we're in the current process of reviewing our finances and making determinations on which projects we're going to fund next year. -------------------------------------------------------------------------------- Jeff Killeen, CIBC World Markets - Analyst [32] -------------------------------------------------------------------------------- Okay, great. And last question, in talking about the Froome zone, I think, Joe you had suggested you may think about attacking it from the underground. Is this just due to infrastructure on surface and challenges with developing a pit there or what's the reason there looking at it from an underground perspective? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [33] -------------------------------------------------------------------------------- I'll let Ernie to take that question. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [34] -------------------------------------------------------------------------------- Yes. It's near surface and we do have some marshy areas above us. And so we're considering both options, but right now, it looks like underground would maybe make more sense. But it's still early days, but open pit is a possibility [is where] we just felt our first part, it seems like it made more sense along the 235 level to just put out a development drift along the way there and encounter the zone. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [35] -------------------------------------------------------------------------------- If you look at it from a capital point of view, Jeff, it would be fairly low capital to go across from an underground point of view. Obviously, the development -- and it might be a little bit more money. But with those sorts of grades and that sort of thicknesses, it could be very profitable. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [36] -------------------------------------------------------------------------------- And also from a permitting point of view, it's not much simpler to go across from underground. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [38] -------------------------------------------------------------------------------- Just a couple of questions on Black Fox. Open-pit grade has been quite strong relative to the rate of the direct feed material 2.2 so far this year. When do you expect to be able to back down to sort of that stockpile grade of 1.1? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [39] -------------------------------------------------------------------------------- This quarter, basically. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [40] -------------------------------------------------------------------------------- Okay. And then with respect to Black Fox going forward. Obviously, most of the money -- cash flow coming in is going back into the asset. When it comes to start looking at Grey Fox and Froome and some of these other areas, is it the goal of the Company to fund these sort of growth projects with cash flow from the existing complex or will that be coming from the corporate side? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [41] -------------------------------------------------------------------------------- I think, Dan, it could be a mixture of both. When we look at it, obviously in this kind of environment, capital allocation for next year is going to be a very serious endeavor in that sense, right. So we're going to be asking people to be very judicious about it, we're going to be running scenarios where for example the commodity price is going to -- we could be significantly lower than where we are today, just to make sure that we understand where we're going. So on a company-wide basis, it's really going to be based on IRR at current prices and below and the ability to control those costs. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [42] -------------------------------------------------------------------------------- With respect to the cap allocation decision, a lot of us were just down to San Dimas, and a fantastic asset for the company. And now you've been acquiring additional lands, south of Ventanas on Latakia, around Ventanas. If in a tight market, how does the cap allocation look versus investing in Black Fox versus investing in the San Dimas potential given sort of [elephant country for you and it's elephant country] that the Company knows really, really well. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [43] -------------------------------------------------------------------------------- Yes. I think, where we see there, Dan is, particularly the mineralization -- the sort of the land package. The first phase of it is really going to be doing some detailed reconnaissance. So as you know what the territory is like there, we do know there are windows which we talked about in the presentation. But we need to go out -- literally go out and field map this thing. For us, we saw a great deal of opportunity here. And from a long-term perspective, if we can find mineralization there, that's truckable for example to San Dimas, that will generate more cash flow, because it's not subject to the streaming arrangements that we have. Right? So, but I wouldn't expect a large amount of money to be allocated to the exploration of that land package in next year. It's really going to be a first -- let's see what we see in the first half, and with respect to that, in terms of exploration field work going on, and then we'll have to see where we are from there and obviously look at the commodity price environment. When we look at sort of the other, let's call it, major projects, we're going to be sitting and looking at them and saying from an IRR perspective, is this worthwhile generating, is it going to have a payback that's quick, and that's probably payback and IRR are going to be the criteria that we use. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [44] -------------------------------------------------------------------------------- Okay, perfect. And just touching based on the Froome zone, how much underground workings would be required from the existing (technical difficulty) underground mine to get into Froome to actually drill that off at sufficient density there, sort of start putting some mine plan and economics around it? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [45] -------------------------------------------------------------------------------- Good question. I think we would be doing -- we'd be -- we are doing more drilling now. At best from what would be is going to be -- I don't think we will get it and Ernie can correct me if I'm wrong, I don't think we would get into a measured and indicated category. But, we'd certainly get it into an inferred, right. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [46] -------------------------------------------------------------------------------- Yes. Sure. And remember, Froome is relatively close to the surface, so we can drill it off from surface. Just as I mentioned, some areas are marshy, so we preferred -- we'll have to do that in the winter, when the grounds are frozen. And so Dan, we can actually get it to measured and indicated from surface. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Steve Green, TD Securities. -------------------------------------------------------------------------------- Steve Green, TD Securities Inc. - Analyst [48] -------------------------------------------------------------------------------- Quick question on taxes. Your cash taxes paid almost $6 million in the quarter were a bit higher. Obviously, that's from San Dimas. Is that related to the sale of all the silver from the year? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [49] -------------------------------------------------------------------------------- I'm going to turn that over to Wendy. -------------------------------------------------------------------------------- Wendy Kaufman, Primero Mining Corp. - CFO [50] -------------------------------------------------------------------------------- Hi. Sorry, I was away from the microphone. It's really just our corporate income taxes that we're paying. This is the first year that we haven't had losses and so we're paying installments on a monthly basis. -------------------------------------------------------------------------------- Steve Green, TD Securities Inc. - Analyst [51] -------------------------------------------------------------------------------- Okay. In the quarter at least, that would appear to be a fairly high effective tax rate? -------------------------------------------------------------------------------- Wendy Kaufman, Primero Mining Corp. - CFO [52] -------------------------------------------------------------------------------- That's a good question. I didn't look at it from that perspective, I have to be honest. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [53] -------------------------------------------------------------------------------- We can come back to you soon. -------------------------------------------------------------------------------- Wendy Kaufman, Primero Mining Corp. - CFO [54] -------------------------------------------------------------------------------- Yes. I think, it's best if I come back to you [offline]. -------------------------------------------------------------------------------- Steve Green, TD Securities Inc. - Analyst [55] -------------------------------------------------------------------------------- Okay. That's fine. That's all I had. And just on the outlook for the kind of -- what can we expect for an effective tax rate going forward? -------------------------------------------------------------------------------- Wendy Kaufman, Primero Mining Corp. - CFO [56] -------------------------------------------------------------------------------- From a cash perspective or from an accounting perspective? -------------------------------------------------------------------------------- Steve Green, TD Securities Inc. - Analyst [57] -------------------------------------------------------------------------------- Yes. Cash, more important. -------------------------------------------------------------------------------- Wendy Kaufman, Primero Mining Corp. - CFO [58] -------------------------------------------------------------------------------- I would still look at [about that] 30% rate. It's really difficult to forecast today with the foreign exchange fluctuations, inflation adjustments that flows through the peso denominated taxes. It's really difficult to forecast though. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Mike Parkin, Desjardins Capital Markets. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Capital Markets - Analyst [60] -------------------------------------------------------------------------------- Couple of questions. First on Black Fox. So when you get down into this new Deep Central Zone, should we expect development meters to start ramping back up again? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [61] -------------------------------------------------------------------------------- I would think so. Yes. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Capital Markets - Analyst [62] -------------------------------------------------------------------------------- Okay. And back towards, it sounds like possibly a little less than where they've been recently, but certainly more than where they are now. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [63] -------------------------------------------------------------------------------- Ernie, do you have a sense of the detail on that at this point. -------------------------------------------------------------------------------- Ernie Mast, Primero Mining Corp. - President, COO [64] -------------------------------------------------------------------------------- Not specifically, Joe. This year, we're looking to do about 8 kilometers of total development between operating and capital. Maybe it's going to go up a little bit from that. We need to see how the budgets work out before we have the detail on that. But as you said, it should be in the ballpark of where we are now, maybe a little higher. -------------------------------------------------------------------------------- Mike Parkin, Desjardins Capital Markets - Analyst [65] -------------------------------------------------------------------------------- Okay. And then on the transfer pricing agreement, can you give us an update where you guys stand on that, have you filed for a re-application at this point? -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [66] -------------------------------------------------------------------------------- No. We've had some -- we are having some discussions with the tax authorities on that front, just on an informal basis. We have until the end of 2016 to formally do it. But we have opened up a dialog. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Conway. -------------------------------------------------------------------------------- Joseph Conway, Primero Mining Corp. - CEO [68] -------------------------------------------------------------------------------- Thank you, operator, and for those of you on the line and on the web, thanks for your attention today. And we look forward to updating you in February in terms of what our results are, and importantly as well in mid to late December, what our outlook for 2016 looks like. And we're looking forward to what we can do with this suite of assets and turn them around accordingly. Thank you. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.
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