Premier Gold Mines Rally Doesn’t Look Sustainable

Premier Gold Mines [stock_market_widget type="inline" template="generic" color="default" assets="PG.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] has shrugged off its shaky start to the year. The stock has managed to deliver gains of nearly 27% in 2019, with most of them coming in the past couple of months as the global economic scenario deteriorated on account of geopolitical tensions.

Premier’s rally isn’t surprising as the price of gold has been ticking up of late as investors are fleeing to safe-haven assets to protect themselves from the macroeconomic scenario. In fact, gold has shot up around 6.5% in the past three months and is nearing the $1,400 an ounce mark. Does this make Premier a good bet?

Premier Is Facing Production Problems

Premier Gold’s recent rally can be totally attributed to the positive sentiment around gold because the company’s operational profile isn’t very appealing. Last year, Premier’s gold and silver production was down substantially as compared to 2017 levels and the trend has continued in 2019.

For the first quarter of 2019, Premier’s gold production fell to 17,614 ounces as compared to 30,550 ounces in the year-ago period. Silver production also declined to 57,681 ounces as compared to 59,826 ounces a year ago.

Premier’s weak production profile can be attributed to the bottlenecks at the Mercedes and the South Arturo mines. At Mercedes, the company’s production has taken a hit thanks to geological problems, while South Arturo is transitioning toward open pit development.

But weak production isn’t the only problem haunting Premier. Its results were impacted by lower prices last quarter, with the average realized price of gold falling to $1,271 an ounce from $1,300 an ounce a year ago. The silver price also fell slightly to $16 an ounce from $17 an ounce in the year-ago period.

Moreover, the lower production also impacted the company’s cost profile. Its cash costs per ounce of gold sold increased to $786 an ounce from $691 an ounce a year ago, while all-in sustaining costs increased to $1,098 an ounce from $816 an ounce.

Because of the combination of lower production, higher costs, and weak pricing, Premier’s operating income slumped to $3.7 million from $9.6 million in the year-ago period. So, even if gold prices keep rising, the company’s financial fortunes won’t turn around until and unless there is an improvement in production.

What Next for Premier?

Analysts don’t expect much of a turnaround in Premier’s performance this year. Its top line is expected to decline 14.3% in 2019, while the loss is expected to increase year over year. But Premier’s performance is expected to improve big time in 2020, with analysts expecting a 49% jump in revenue. The company forecasts an uptick in its production next year. According to the press release:

South Arturo operations have transitioned from Phase 2 open pit mining to Phase 1 open pit and El Nino underground operations where development is underway and production is expected by early 2020.

As such, Premier Gold might not be able to take advantage of higher gold prices this year, so investors need to look for other alternatives as the stock’s rally isn’t driven by fundamentals.

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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