Brigus: Delivers Record Production in Q4-2012

Correction Notice

The original post did not account for the impact of the gold stream on revenue. Correcting this mistake resulted in a reduction in the share price target from $1.67 (original - incorrect), to $1.50 (current - correct). Thanks to one of our readers for finding this issue.

Introduction

In this post we'll analyze the latest quarterly production numbers from Brigus, forecast both Q4-2012 and 2013 financial results, and using this data, provide a share price target.

Q4-2013 Production

Brigus announced production results for Q4-2012 this past week [1] delivering record quarterly gold production of 22,672oz, bringing their total for the year to 77,374oz (another record for the company). In doing so, they also meet the lower end of their previously announced production target for 2012 of 77Koz to 85Koz. To put this in perspective, below is the quarterly production history for Brigus since they first began producing from the Black Fox mine back in Q2-2009.

As you can see, Brigus has had production hiccups in the past, but has achieved consistent production growth more recently, in fact, in every quarter of 2012. The production success Brigus had in 2012 allowed management to recently tighten production guidance for 2013 to 90Koz to 100Koz in the latest corporate presentation [2] (previously a target of  85Koz to 100Koz had been set).

Another trend going the right way for Brigus is that of increasing grades. Brigus milled ore with an average grade of 4.04g/t in Q4-2012, the highest grade milled since Q2-2009. Here is how the grades have looked historically.

The increased grade is the main factor that lead to the production increase this quarter, with the mill processing more high-grade ore from underground as opposed to lower-grade ore from the open-pit. In fact, the tonnes of ore milled actually dropped slightly quarter over quarter, milling 186Kt in Q4-2012 down from 191Kt in Q3-2012. The good news here is this sets them up well for further production increases going forward, simply by milling more ore, which, with the mill upgrade that was completed in 2012 from 2000tpd to 2200tpd, there is now capacity for. A milling rate of 2200tpd equates to 200Kt/quarter. Assuming grades are able to be maintained at 4.04g/t going forward (with the ramp up of the underground operation and higher grades expected with depth, this should be a conservative assumption), this would give a target quarterly gold production rate of 24,440oz (assuming recoveries remain ~95%).

2013 Production Forecast

A steady ramp up from the current quarterly production of 22,672oz to 24,400oz would deliver an annual production for 2013 near the middle of guidance provided by management. Here are the production targets we are using in our projections (quite simple really... an extra 500oz of gold every quarter from the Q4-2012 base):

• Q1-2013: 23,170oz
• Q2-2012: 23,672oz
• Q3-2013: 24,172oz
• Q4-2014: 24,672oz

Q4-2012 Financial Forecast

Now for the important part, how will this production impact the financials. The record quarter on the production side should translate to a record quarter on the financial side. Our methodology is as follows:

• Estimate the average price per ounce the company will receive for their gold sales in quarter; looking at the gold price charts, the nice round number of $1700/oz seems reasonable.
• Estimate the cash cost per ounce that will be incurred; we use $725/oz, slightly up from the $710/oz costs seen in Q3-2012 and right in the middle of the current cash cost forecast for 2013 provided by management of $700/oz to $750/oz.
• Estimate how many ounces of gold will be sold in quarter; since production is increasing quarter over quarter and since gold sales occur with some lag after production, we use the average of the Q3-2012 and Q4-2012 production numbers, or 21,100oz.
• Calculate estimated revenue by multiplying the estimated price per gold ounce sold by the estimated number of gold ounces sold at full price (88%), then adding $500 multiplied by the number of gold ounces sold under the gold stream (12%); this gives a revenue estimate of ~$31.7M (another company record).
• Calculate the estimated operating costs by multiply the estimated number of gold ounces produced by the estimated cash cost of production per ounce; this gives an operating cost estimate of ~$16.4M.
• Estimate general and administrative expenses for the quarter; somewhat hard to do since they bounce around a lot, but we are going to inflate the number from the previous quarter (which already looks rather high compared to the previous 4 quarters) by 2.5% to arrive at an estimate of ~$4.2M.
• Calculate the estimated operating cash flow by subtracting the estimates for operating costs and general and administrative costs from the estimate for revenue; this gives an operating cash flow estimate of ~$11.1M.

The important number here is the operating cash flow estimate as it can be used for coming up with a target valuation for the company. Adding this estimate for operating cash flow for Q4-2012 to the previously reported operating cash flow numbers for the prior quarters we get an estimated cash flow for 2012 of ~$32.6M. To arrive at a price target, we'll calculate the cash flow per share in 2012 by dividing $32.6M by the current number of shares outstanding (232M) to get $0.14/share, then apply a trailing price to cash flow of 10x to arrive at a current share price target of $1.40.

Note: The actual revenue number reported by the company will be higher than this because it will include some deferred revenue that resulted from the gold stream, however, this deferred revenue gets removed again on the "statement of cash flows" to arrive at the operating cash flow.

2013 Financial Forecast

Another way to value the company is to forecast the cash flow for 2013, then use a different lower forward price to cash flow multiple (we think 8x is reasonable here). We then use a very similar process to the one we used to arrive at the Q4-2012 estimate; here are the relevant details:

• Estimated price per ounce: $1650 (slightly below the current gold price, likely quite conservative)
• Estimated cash cost per ounce: $725 (middle of management projection)
• Estimated gold ounces sold: 94.5K (just below middle of management projection)
• Estimated revenue: ~$147M (calculated from the above values... this time accounting for an 8% gold stream @$500)
• Estimated operating costs: ~$69M (calculated from the values above)
• Estimated G&A expenses: ~$18M (inflated from Q4-2012 estimate by 2.5% per quarter)
• Estimated operating cash flow: ~$60M (calculated from the values above)

To arrive at a price target, we'll calculate a cash flow per share in 2013 by dividing $60M by the current fully diluted number of shares (293M) to get $0.20/share, then apply a forward price to cash flow multiple of 8x to arrive at a current share price target of $1.60.

Conclusion

Taking the average of the the share price targets from the previous sections gives a blended share price target of $1.50. We own shares in Brigus and are looking for the market to recognize the potential cash flow Brigus can offer going forward, and reprice the shares accordingly. With Brigus currently trading at $0.96, our $1.50 price target gives a potential return of 56%.

Further Reading

There were several articles written on Brigus recently, all of which are worthwhile reading if you are considering a position in Brigus (the first one in particular):

• Financial Post: Brigus Gold CEO Wade Dawe Discusses High Grade and Mine Expansion [3]
• The Chronicle Herald: Brigus Gold Corp. digs up record 22,672 ounces in Q4 [4]
• Proactive Investors: Casimir Capital analyst Eric Winmill this morning kept his strong buy rating and $1.85 per share price target [5]
• InfoBarrel: 3 Undervalued Canadian Junior Mining Companies for 2013 [6]
• AMP Gold and Precious Metals Portfolio: We maintain our 12-month target price of US$2.10 [7]
• AMP Gold and Precious Metals Portfolio: Top Gold Stocks for 2013 [8]

We have also published articles on Brigus before, if you have not read them yet, you may also find them of interest:

• Analysis of the Gold Stream Buy-Back [9]
• Grey Fox [10]
• Grey Fox Resources and Assays [11]

References

[1] http://www.snl.com/Cache/1500045697.PDF
[2] http://www.snl.com/Cache/1500045727.PDF
[3] http://business.financialpost.com/2013/01/09/brigus-gold-ceo-wade-dawe-discusses-high-grade-and-mine-expansion/
[4] http://thechronicleherald.ca/business/398971-brigus-gold-corp-digs-up-record-22672-ounces-in-q4
[5] http://www.proactiveinvestors.com/companies/news/39277/brigus-gold-shares-apt-to-re-rate-higher-says-broker-39277.html
[6] http://www.infobarrel.com/3_Undervalued_Canadian_Junior_Mining_Companies_for_2013_
[7] http://ampgoldportfolio.com/2013/01/09/brigus-gold-corp/
[8] http://ampgoldportfolio.com/2013/01/05/top-gold-stocks-for-2013/
[9] http://www.investmentrevaluationcatalyst.com/2012/11/brigus-analysis-of-gold-stream-buy-back.html
[10] http://www.investmentrevaluationcatalyst.com/2012/12/brigus-grey-fox.html
[11] http://www.investmentrevaluationcatalyst.com/2012/12/in-this-post-well-look-at-grey-fox.html