Another Painful Year Ahead for Premier Gold Mines

Premier Gold Mines [stock_market_widget type="inline" template="generic" color="default" assets="PG.TO" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] had a difficult 2018 thanks to the production issues it faced at its key mines. The gold and silver mining company’s production at the Mercedes mine was way behind expectations, though higher-than-anticipated output from the South Arturo mine helped the company achieve its overall targets for the year.

Let’s take a look at Premier’s 2018 performance and see why it is staring at yet another year of weakness.

Not Good Enough

Premier’s full-year gold production came in at 89,699 ounces, down substantially from the 2017 production level of 139,658 ounces. Meanwhile, silver production also fell to 321,814 ounces from 357,901 a year ago.

Premier witnessed production issues at both of its mines last year. South Arturo production took a hit on account of a transition toward open pit development. Meanwhile, the Mercedes mine performed well below expectations as Premier had to redesign stopes after running into unfavourable geological results that impacted production.

The production bottlenecks also led to higher costs. Premier’s all-in sustaining costs per ounce of gold sold increased to $927 last year from $627 in 2017. That easily exceeded the original range of $800-$850 an ounce that the company was targeting.

Looking ahead, Premier’s problems aren’t going to go away anytime soon as the guidance indicates.

Brace for More Pain

Premier anticipates production of 75,000 to 85,000 ounces of gold this year, while silver production is expected in the range of 225,000-250,000 ounces. This production will be exclusively derived from the company’s Mercedes mine, as the recoveries from South Arturo will be treated as a reduction in capital expenses.

In any case, South Arturo is expected to deliver only 5,000 to 10,000 ounces of gold this year, so its impact wouldn’t have been that great on Premier’s overall production profile. The bottom line is that Premier’s production is going to decline once again in 2019, and that would negatively impact the company’s financial performance.

The company’s 2018 revenue fell 43% annually despite a slight increase in the average realized price of both gold and silver.

The company’s 2018 revenue fell 43% annually despite a slight increase in the average realized price of both gold and silver. That wasn’t surprising given the massive production decline, which also pushed the company toward a full-year net loss of $20.4 million as compared to a profit of $16.2 million in the prior-year period.

A similar story will unfold once again this year as Premier’s guidance suggests, so investors shouldn’t expect much upside from Premier stock. However, the company is planning to get things back on track in the long run as it has managed to access high-grade deposits at Mercedes along with high-grade intercepts at South Arturo.

Premier has also entered into a joint venture with Barrick Gold [stock_market_widget type="inline" template="generic" color="default" assets="ABX.TO" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], which will give the former access to high gold and silver grades at the McCoy-Cove mine. But until such developments translate into actual results, Premier wouldn’t be able to stem the rot in its top and bottom lines since lower production will ensure that it won’t be able to take advantage of an increase in pricing.

That’s why it makes sense for investors to stay on the sidelines and wait for a turnaround to materialize before buying Premier Gold Mines stock.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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