Resource World Magazine

16 www.resourceworld.com o c t o b e r / n o v e m b e r 2 0 1 4 i n s i g h t s & i n v e s t m e n t s E r i c H o e s g e n & D e n n i s H o e s g e n F or this month's publication we will highlight one of Canaccord Genuity's top picks in the mining space. The fol- lowing is a summary of a recent research update from one of our mining analysts, Rahul Paul. We maintain our BUY rating on Primero Mining Corp. [P-TSX; PPP-NYSE] follow- ing a positive visit to the San Dimas Mine on the border of Sinaloa and Durango states, Mexico. With the mine and mill consistently operating at/above 2,500 tpd, operational momentum remains strong heading into H2/14. The focus has now shifted to opti- mizing the operation (maximizing use of long-hole, optimizing haulage, increasing mine/mill personnel/equipment produc- tivity) with a view to increase throughput further to 3,000 tpd. We anticipate further production growth at San Dimas in 2015 based on an expected improvement in throughput and grades, with potential upside to our current fore- casts. In addition, we anticipate that the 2014 exploration program (>80,000 m) could have a positive impact on the year- end reserve and resource estimate. Despite inflationary pressures in Mexico, several opportunities have been identified that could more than offset the impact of inflation and attain a net reduction in cash costs through 2015 and 2016. Although the operation has seen significant changes over the last few years, we are impressed by how well the team has managed and adapted to the change. In that regard, strong additions to the mine management team have also had a positive impact in the last two years. Following completion of the expansion, the mine and mill have been operating consistently at/above the nameplate 2,500 tpd. In addition, grades have been trend- ing higher as development advances closer to the higher grade areas of the Victoria vein. The focus now is to improve produc- tion and lower costs. With the additional leach tank capacity installed in Q2/14, recoveries are now averaging design levels of 97%/94% for gold/silver respectively (vs average recoveries of 94%/92% in Q2/14) higher mine and mill throughput (possibly 2,500-3,000 tpd in 2015 vs <2,500 tpd on average in 2014) and increased grade (access to higher grade areas and increased mining rates permitting stockpiling of lower grade material). We currently estimate AuEq pro- duction of 171,144 oz in 2015 (an increase of 5.4% over 2014) based on processed grades of 4.75 g/t gold, 300 g/t silver and average throughput of 2,500 tpd. Current indications are that our forecasts may be conservative. The San Dimas plant has been consis- tently operating at or above 2,500 tpd. In fact, the plant has, on many operating days, been achieving throughput rates close to 3,000 tpd. An optimization pro- cess is underway to de-bottleneck the circuit, improve availability and thereby consistently attain throughput of 3,000 tpd. Crushing capacity is currently 3,200 tpd and grinding capacity is currently 3,600 tpd. The expansion to 3,000 tpd will likely require additional surge capacity, filters and tankage. With the plant currently perform- ing better than expected and opportunities for further optimization, management is optimistic that the expansion to 3,000 tpd could be completed below the $26 mil- lion budget. In addition, while the plan is to have the plant operating consistently at 3,000 tpd by Q1/16, we anticipate that throughput should improve gradually to those levels through 2015. Management indicated that the mine has been operating at close to 3,000 tpd on most operating days (Mon-Sat, i.e. six-day work week). The company is evaluating the opportunity to move to a seven-day work week by moving to two 12-hour shifts per day (vs three eight-hour shifts per day) which is expected to boost mining rates (per calendar day). This ini- tiative is currently being trialed with the long-hole mining group and management indicates that the response has been posi- tive so far. Assuming the trial is successful, we anticipate the transition to long-hole in 2015. The conversion to long-hole mining has also had a significant positive impact on productivity. Approximately 25% of all tonnage mined year-to-date has been through long-hole mining - the current run-rate is 30%, with the plan to eventu- ally mine close to 40% of the ore using the long-hole method. Cost reduction is another key area of focus for the team. Despite inflationary pressures in Mexico (including 5-6% wage inflation per year), we see a number of opportunities available to lower operating costs going forward with overall estimated savings potential of over 10-15%. Fixed costs account for approximately 45% of site costs. We expect unit costs to be lower at 3,000 tpd. In addition to economies of scale at the plant, management is confi- dent that a mine expansion to 3,000 tpd can be attained without a material increase in equipment and personnel. • Efforts are constantly underway to increase productivity to offset inflationary pressures (e.g. drilling more faces per shift). • Plans include moving to owner vs con- tractor mining to lower mining costs and optimizing haulage routes to lower haul- age costs and improve fleet productivity. The Phase I optimization includes comple- tion of the tunnel connecting the Central PRIMERO MINING San Dimas site visit highlights: making an already well-run operation even better

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