PRIMERO 2015 ANNUAL REPORT

Transcription

1 third QUARTER REPORT 2016 PRIMERO 2015 ANNUAL REPORT

2 SEPTEMBER 30, 2016 TABLE OF CONTENTS Management s discussion and analysis 1-37 Condensed consolidated interim statements of operations and comprehensive income (loss) 38 Condensed consolidated interim statements of financial position 39 Condensed consolidated interim statements of changes in equity 40 Condensed consolidated interim statements of cash flows 41 Notes to the condensed consolidated interim financial statements 42-62

3 This management s discussion and analysis ( MD&A ) of the financial condition and results of operations of Primero Mining Corp. ( Primero or the Company ) should be read in conjunction with the condensed consolidated interim financial statements of the Company as at and for the three and nine months ended, Additional information on the Company, including its Annual Information Form for the year ended December 31, 2015, can be found under Primero s profile at Management is responsible for the preparation of the financial statements and MD&A. The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board. All dollar figures in this MD&A are expressed in U.S. dollars, unless stated otherwise. This MD&A contains forward-looking statements and should be read in conjunction with the risk factors described in the Risks and uncertainties and Cautionary statement on forward-looking information sections at the end of this MD&A. This MD&A has been prepared as of November 8, OVERVIEW OF THE BUSINESS Primero is a Canadian-based precious metals producer with operations in both Mexico and Canada. The Company is focused on building a portfolio of high quality, low cost precious metals assets in the Americas through acquiring, exploring, developing and operating mineral resource properties. The Company owns two producing properties, the San Dimas gold-silver mine, located in Mexico s San Dimas district, on the border of Durango and Sinaloa states, and the Black Fox mine located in the Township of Black River Matheson, Ontario, Canada. The Company owns properties adjacent to the Black Fox mine - Grey Fox and Pike River, which together with the Black Fox mine and the Black Fox mill, located on the Stock Mill property, comprise the Black Fox Complex. In addition, the Company owns two exploration properties the Cerro del Gallo gold-silver-copper project, located in the state of Guanajuato in central Mexico and Ventanas, located in Durango State, Mexico. The profitability and operating cash flow of the Company are affected by numerous factors, including the amount of gold and silver produced and sold, market prices of gold and silver, operating costs, labour relations, regulatory and environmental compliance, as well as currency exchange rates, political risks, and varying levels of taxation. The Company seeks to manage these risks, but many of the factors affecting these risks are beyond the Company s control. The Company s shares are listed on the Toronto Stock Exchange ( TSX ) under the symbol P and on the New York Stock Exchange ( NYSE ) under the symbol PPP. In addition, Primero has a convertible debenture trading on the TSX under the symbol P.DB.V and common share purchase warrants trading on the TSX under the symbol P.WT.C. 1

4 Three months ended Nine months ended Key Performance Data Tonnes of ore milled 427, ,902 1,254,794 1,388,900 Produced Gold equivalent (ounces) 44,684 68, , ,183 Gold (ounces) 38,392 52, , ,904 Silver (million ounces) Sold Gold equivalent (ounces) 43,549 71, , ,889 Gold (ounces) 37,984 52, , ,425 Silver (million ounces) Average realized prices Gold ($/ounce) 1 $1,305 $1,106 $1,234 $1,155 Silver($/ounce) 1 $6.12 $7.42 $4.81 $5.73 Total cash costs (per gold ounce) 2 Gold equivalent basis $887 $577 $889 $642 By-product basis $813 $415 $843 $546 All-in sustaining costs (per gold ounce) 2 $1,350 $775 $1,397 $962 Financial Data (in thousands of US dollars except per share amounts) Revenues $57,012 $79,219 $166,995 $219,900 Earnings (loss) from mine operations (65) 17,825 (1,238) 40,373 Net income (loss) (11,733) (5,403) (44,333) (8,558) Adjusted net income (loss) 2 (8,094) 2,447 (20,599) 9,149 Basic net income (loss) per share (0.06) (0.03) (0.26) (0.05) Diluted net income (loss per share) (0.06) (0.03) (0.26) (0.05) Adjusted net income (loss) per share 2 (0.04) 0.02 (0.12) 0.06 Operating cash flows before working capital changes 5,539 20,106 8,283 62,487 Operating cash flows before working capital changes per share Weighted average shares outstanding (basic)(000 s) 187, , , ,202 Weighted average shares outstanding(diluted) (000 s) 187, , , ,202 September 30, 2016 December 31, 2015 Assets Mining interests $807,270 $790,118 Total assets $918,057 $924,968 Liabilities Long-term liabilities $173,423 $162,427 Total liabilities $268,794 $276,092 Equity $649,263 $648,876 1 Average realized gold and silver prices reflect the impact of the gold purchase agreement with Sandstorm at the Black Fox mine and the silver purchase agreement with Silver Wheaton Caymans at the San Dimas mine (see Other liquidity considerations ). 2 See NON-GAAP measurements 2

5 Q HIGHLIGHTS Total production of 44,684 gold equivalent ounces in Q compared to 68,620 gold equivalent ounces in the same period of Gold production was 38,392 ounces in Q compared to 52,677 ounces in Q3 2015, and silver production was 1.37 million ounces from San Dimas in Q compared to 1.90 million ounces in Q At San Dimas, the mine extraction in Q was notably reduced with output averaging 2,012 TPD, approximately 20% below the comparative quarter of Lower grades were realized in Q compared to Q as access to certain high-grade areas was limited. A considerable backlog of mine development has built up through 2016, and additional time is required to implement the planned ventilation improvements. Additionally, the mine has experienced a high level of unplanned worker absences and there were some work stoppages in October. The Las Truchas hydroelectric facility had a 10-day shutdown in October due to a weld failure in the penstock (water feed pipe). During this time, the mine received only 70% of its required power supply. As a result of these factors, the current development backlog will not be corrected as planned and will continue to restrict access to mining areas that were originally included in our production plans. Primero continues to implement the San Dimas seven point action plan, which includes a vein prioritization system. Following an economic analysis of all working veins, the Company will increase focus on the mine s six key high-grade veins (Roberta, Robertita, Jessica, Victoria, Santa Gertrudis and Regina). This strategy will be the basis of the short-term operating plan in order to reduce mining complexity, maximize resources in high-priority areas, and improve cash flow. Critically, the implementation of this focused strategy is expected to enable San Dimas to produce ounces with lower operating costs and capital intensity, driving down all-in sustaining costs. At Black Fox, stope production from the Deep Central Zone commenced in early September, resulting in the highest production month of the year at 6,744 ounces. For the comparative quarter of 2015, the Black Fox open pit contributed the majority of ore. Through the remainder of 2016, Black Fox will become less reliant on the upper, remnant areas and will focus on mining from the Deep Central Zone, which is expected to improve overall mine grades. With the low-grade stockpile expected to be fully depleted by mid-2017, Black Fox will re-engineer the operation to focus on improved cost efficiency ensuring profitability at reduced mill feed rates. This will involve optimizing surface operations as well as streamlining capital programs. The Company also expects a reduction in capital intensity per ounce as underground operations become focused on production from the Deep Central Zone. Loss from mine operations for Q was $0.1 million compared to earnings of $17.8 million in Q mainly due to lower gold sales resulting from the lower gold production and lower silver spot sales. The Company incurred total cash costs per gold equivalent ounce of $887 for Q compared to $577 for Q All-in sustaining costs were $1,350 per gold ounce for Q compared to $775 for Q The increase in unit costs was largely due to the lower production levels at both mines and an increase in unit costs at San Dimas due to lower production levels in Q The Company recognized a net loss of $11.7 million in Q compared to net loss of $5.4 million in Q due to the lower earnings from mine operations and a $3.2 million tax expense in Q mainly resulting from the devaluation of the Mexican peso compared to the U.S. dollar during the quarter and its impact on Mexican peso denominated tax assets. Adjusted net loss was $8.1 3

6 million ($0.04 per share) for Q3 2016, compared to adjusted net income of $2.4 million ($0.02 per share) for the same period in Primero s reduced 2016 production guidance is between 170,000 and 190,000 gold equivalent ounces compared to a previous estimate of 195,000 to 215,000 gold equivalent ounces. The Company has also updated its cost guidance with total cash cost guidance revised to $850 to $900 per equivalent ounce and all-in sustaining costs revised to $1,350 to $1,400 per gold ounce. Primero is currently considering potential divestitures of non-core subsidiary assets. To this end, the Company is evaluating expressions of interest regarding the potential sale of the Cerro del Gallo development project. During Q3, 2016 Primero engaged in dialogue with the Mexican government regarding the legal claim of the Servicio de Administración Tributaria (The SAT) which attempts to retroactively nullify the Company s advance pricing agreement ( APA ) on silver sales, which was obtained in As a result, the Company has not yet initiated international arbitration proceedings pursuant to the North American Free Trade Agreement ( NAFTA ) in order to continue such dialogue. REVIEW OF CONSOLIDATED FINANCIAL INFORMATION Earnings (loss) from mine operations comprises: Three months ended Nine months ended (in thousands of U.S. dollars) Gold revenue $49,557 $57,988 $147,762 $185,324 Silver revenue 7,455 21,231 19,233 34,576 Operating expenses (41,083) (41,859) (120,407) (121,038) Depreciation and depletion (15,994) (19,535) (47,826) (58,489) Earnings (loss) from mine operations ($65) $17,825 ($1,238) $40,373 The table below sets out variances in the key drivers of earnings from mine operations for the three and nine months ended, 2016 compared with the three and nine months ended September 30, 2015: (in thousands of U.S. dollars) 4 Three months ended Nine months ended 2 Earnings from mine operations in 2015 $17,825 $40,373 Differences: Revenue Higher realized gold price 7,560 9,453 Lower ounces of gold sold (15,964) (46,961) Lower realized silver price (1,554) (3,700) Lower ounces of silver sold (12,249) (11,697) Lower operating expenses Lower depreciation and depletion 3,541 10,663 Loss from mine operations as reported in 2016 ($65) ($1,238)

7 Gold and silver revenue decreased for the three and nine months ending, 2016 compared to the same periods in 2015 due to reduced production at both mines (refer to review of operations for further discussion). Silver revenue was significantly higher in Q compared to 2016 due to the reinstatement of the Company s export permit allowing the sale of silver produced in Q The average price realized for gold during the third quarter of 2016 was $1,305 per ounce, above the $1,106 per ounce realized in the third quarter of For the nine months, the gold price realized of $1,234 per ounce in 2016 was above the $1,155 per ounce realized in Silver prices realized during Q were $6.12 per ounce, lower than the $7.42 per ounce in Q due to lower spot silver sales. Lower silver production resulted in San Dimas selling 0.7 million ounces less on the spot market compared to Q The lower silver production and associated spot sales also impacted the silver price realized for the nine-month period, with a 2016 year-todate price realized of $4.81 per ounce compared to $5.73 in the comparative period of Operating expenses were $41.1 million in Q3 2016; $0.8 million lower than Q mainly driven by a lower mine extraction at San Dimas, which more than offset higher labour costs. For the first nine months of 2016, operating expenses were consistent with 2015, as the increase in union bonus at San Dimas has been offset by cost savings at Black Fox due to sourcing a significant portion of the mill feed from the low grade, lower cost stockpile. Depreciation and depletion was $16.0 million in Q3 2016, compared to $19.5 million in Q3 2015, a decrease of $3.5 million due to lower production in Lower production also drove the first nine months of 2016 depreciation and depletion lower than the comparative 2015 period by $10.7 million. 5

8 3 3 A summary income statement follows: Three months ended Nine months ended (in thousands of U.S. dollars) Earnings (loss) from mine operations ($65) $17,825 ($1,238) $40,373 Exploration expenses (206) (231) (1,152) (1,091) General and administrative expenses (8,223) (6,247) (21,402) (21,411) Transaction costs and other expenses - - (1,214) (3,685) Finance expense (2,314) (3,057) (7,454) (7,860) Mark-to-market gains 2,756 9, ,500 Other income (expense) (484) (5,347) (836) (2,475) Income tax expense (3,197) (17,346) (11,140) (25,909) Net loss ($11,733) ($5,403) ($44,333) ($8,558) General and administrative expenses for the three and nine months ended, 2016 was $8.2 million and $21.4 million, respectively, compared to $6.2 million and $21.4 million, respectively, for the comparative periods in The increase during Q was attributed mainly to increases in share-based compensation and salaries and wages due to severance paid to a former officer. In addition, legal costs relating to the NAFTA and APA claims increased the general and administrative expenses for the quarter. For the nine month-period ended, 2016, other general expenses decreased due to the closure of the Vancouver office during 2015, while total general and administrative expenses were relatively consistent with that of the prior year. The breakdown of general and administrative expenses is as follows: Three months ended Nine months ended (in thousands of U.S. dollars) Share-based compensation $2,268 $1,153 $5,583 $5,099 Salaries and wages 2,896 2,337 6,572 8,018 Legal, accounting and consulting services 1, ,020 2,385 Other general expenses 1,376 2,423 4,227 5,909 Total $8,223 $6,247 $21,402 $21,411 No transaction costs were incurred for the three month period ended, 2016 and For the nine months ended, 2016 transactions costs include costs allocated to the warrants issued in connection with the equity offering completed in June 2016 and for the comparative period in 2015 costs relate to the issuance of the 5.75% Convertible Debenture. Mark-to-market gains during the three and nine month periods ended, 2016 were $2.8 million and $0.1 million, respectively, compared to $9.0 million and $13.5 million for the comparative periods in In June 2016, the Company recognized a warrant liability in connection with the equity offering and along with the 5.75% Convertible Debenture are measured at fair value and marked-to-market each period based on the corresponding trading price. 6

9 3 For the three and nine months ended, 2016, other income (expense) included $0.5 million and $0.9 million of unrealized foreign exchange losses, respectively, arising from the translation of Canadian dollar denominated liabilities, as the Canadian dollar strengthened during this period relative to the U.S. dollar (the Company s functional currency). This compares to $5.6 million and $3.2 million unrealized foreign exchange gains for the respective comparative periods in 2015 due to the weakening of the Canadian dollar relative to the U.S. dollar. The Company s income tax expense is detailed as follows: Three months ended Nine months ended (in thousands of U.S. dollars) Current tax expense (recovery) Mining royalty at San Dimas ($15) $1,602 $146 $3,811 Other current tax (605) 5, ,520 ($620) $7,575 $956 $15,331 Deferred tax expense Withholding tax on intercompany interest $823 $862 $2,517 $3,034 San Dimas change in tax shelter 3,197 9,403 9,156 11,189 Mining royalty at San Dimas (5) (94) (355) (744) Amortization of flow through share premium (179) (380) (1,021) (1,962) Other deferred tax (19) (20) (113) (939) $3,817 $9,771 $10,184 $10,578 Total $3,197 $17,346 $11,140 $25,909 San Dimas expenses current taxes based on the taxable earnings of the period. For the three and nine months ended, 2016, San Dimas did not generate any taxable earnings and therefore was not subject to current income taxes and only a small amount of mining royalty tax. The tax recovery from the San Dimas operating losses is recorded as a deferred tax recovery, included in the San Dimas change in tax shelter. San Dimas income taxes are based on its Mexican peso financial statements, which includes foreign exchange and other income items (permanent differences) different than the U.S. dollar reporting financial statements. In addition, foreign exchange losses are recognized in deferred income tax expense when the Mexican peso denominated deferred income tax balance is translated to its U.S. dollar reporting currency. For the three and nine month periods ended, 2016, this increased deferred tax expense by $4.5 million and $19.2 million, respectively (2015-$13.2 million and $23.7 million, respectively). The reduction in San Dimas tax shelters reflects the impact of this foreign exchange offset by inflation on the San Dimas deferred income tax balances and the impact of higher book to tax depreciation. The volatility of the exchange rate between the Mexican peso and the U.S. dollar can result in significant adjustments to deferred tax expense. 7

10 REVIEW OF OPERATIONS San Dimas Mine Three months ended Nine months ended Key Performance Data Tonnes of ore mined 185, , , ,229 Tonnes of ore milled 193, , , ,296 Tonnes of ore milled per day 2,104 2,483 2,070 2,719 Average mill head grade (grams/tonne) Gold Silver Average gold recovery rate (%) Gold 97% 96% 98% 96% Silver 95% 95% 96% 94% Produced Gold equivalent (ounces) 28,454 49,566 85, ,263 Gold (ounces) 22,162 33,623 70, ,984 Silver (million ounces) Sold Gold equivalent (ounces) 27,405 53,475 90, ,850 Gold (ounces) 21,840 34,471 75, ,386 Silver at fixed price (million ounces) Silver at spot (million ounces) Average realized price (per ounce) Gold $1,335 $1,115 $1,257 $1,172 Silver 1 $6.12 $7.42 $4.81 $5.73 Total cash costs (per gold ounce) 2 Gold equivalent basis $865 $507 $892 $564 By product basis $731 $219 $816 $401 All in sustaining costs (per ounce) 3 $1,080 $454 $1,156 $660 Revenue ($000's) $36,581 $59,660 $113,492 $160,279 Earnings (loss) from mine operations ($000's) $407 $18,179 ($1,635) $42,309 1 Average realized silver prices reflect the impact of the silver purchase agreement with Silver Wheaton Caymans (see Other liquidity considerations ). 2 See NON- GAAP measurements 3 For the purposes of calculating all-in sustaining costs at individual mine sites, the Company does not include corporate general and administrative expenses. See NON- GAAP measurements. 8

11 The San Dimas mine produced 22,162 ounces of gold and 1.37 million ounces of silver in the third quarter of 2016, 34% and 28% lower for gold and silver respectively, in comparison to the third quarter of As previously disclosed, production at San Dimas in July was impacted by lower than planned grades and unexpected labour disruptions relating to the local union seeking to increase short term production bonuses. The increased bonuses were agreed upon and paid out in July with San Dimas management expecting a subsequent improvement in labour relations and productivity, as there were no other significant outstanding issues between the union and management. However, through the quarter production continued to suffer from high unplanned worker absences and lack of achievement of mine plans, which resulted in reduced underground development and delayed certain ventilation improvement projects. Mine extraction in Q was notably reduced with output averaging 2,012 TPD, approximately 20% below the comparative quarter of Dialogue has increased considerably with the union leaders to ensure all employees are aligned in returning San Dimas to profitability. However, the Company believes that there is the potential for shortterm work stoppages ahead of collective bargaining agreement negotiations in February As a result of the reduced mine development rates and ventilation restrictions in Q3 2016, access to certain high-grade areas of the San Dimas mine was limited. Early in the quarter, there was a negative reconciliation of the Jessica vein which proved to have lower continuity and higher dilution in certain areas than previously recognized. Realized gold grade in the third quarter of 2016 was 3.69 grams per tonne, approximately 22% below the average grade in the third quarter of Silver grades were impacted by these same factors and averaged 232 grams per tonne during Q3, San Dimas returned to better areas of the mine in September, with gold and silver grades averaging 4.47 grams per tonne and 305 grams per tonne respectively during the month the highest monthly grades achieved year to date. During the third quarter, both gold and silver sales were reduced in line with production. The majority of silver sold in the quarter was delivered to Silver Wheaton Caymans under the silver purchase agreement. The threshold limit under the silver purchase agreement for the 2015 contract year (August 6 of a year to August 5 of the following year) is 6.0 million ounces of silver. Once this threshold is exceeded, the Company is able to sell 50% of the silver produced at San Dimas at spot market prices. The annual threshold was exceeded during the third quarter, but given the lower silver production during the year, only 0.15 million ounces were sold into the spot market. Total operating expenses were slightly lower during the third quarter of 2016 compared to the third quarter of Increased labour costs were more than offset by savings on major variable costs such as contractors, reagents, and explosives, driven by a lowering mining rate. Total cash costs on a gold-equivalent and by-product basis in the third quarter of 2016 were $865 and $731 per ounce, respectively, compared with $507 and $219 per ounce, respectively, in the third quarter of Unit costs were higher during the quarter mainly due to lower gold and silver production. The minimal silver spot sales had a significant impact on by-product cash costs compared to the third quarter of

12 All-in sustaining costs per gold ounce were $1,080 in the third quarter of 2016, compared to $454 per ounce in the third quarter of The increase was primarily driven by the lower gold production and spot silver sales during the quarter as sustaining capital was lower between periods. Capital spending at San Dimas was $9.1 million in the third quarter and focused on underground development and surface drilling. The third quarter of 2015 had comparative capital spending at $12.3 million. For the nine months ended, 2016, the San Dimas mine produced 70,718 ounces of gold and 3.89 million ounces of silver, 36% and 35% lower than the same period of The 2016 year has been impacted by the retrofitting of all active mine areas with enhanced standards for ground support during the first quarter, and reduced mining rates and the deferral of certain high-grades areas due to delays in development and ventilation. Reduced mine development rates and ventilation restrictions have limited access to certain high-grade areas of the San Dimas mine, driving the production below the comparative 2015 period. For the nine months to September 2016, total operating expenses were lower than the comparative 2015 period as the impact of the reduced mining and milling activity throughout the year has more than offset the increased union bonus cost in the second quarter. Despite the lower overall costs, the lower gold and silver production levels drove unit costs higher than the comparative period of Total cash costs on a gold-equivalent basis and by-product basis for the three and nine months ended September 30, 2016 were $892 and $816 per ounce, respectively, compared to $564 and $401 per ounce in Total capital expenditures for the nine months to September 2016 were below the comparative 2015 period due to lower underground development and drilling rates. All-in sustaining costs per gold ounce were $1,156 for the nine months to September 2016, compared to $660 per ounce for the nine months to September Similar to cash costs, the lower production level drove all-in sustaining costs higher when compared to Primero continues to implement the San Dimas seven point action plan. This includes a vein prioritization system. Following an economic analysis of all working faces, the Company has determined that a specific focus is required on the mine s six key high-grade veins (Roberta, Robertita, Jessica, Victoria, Santa Gertrudis, Regina). This strategy will be the basis of our short-term operating plans in order to reduce mining complexity, maximize resources in high-priority areas, and improve cash flow. Critically, the implementation of this focused strategy is expected to enable San Dimas to produce ounces with lower operating costs and capital intensity, driving down all-in sustaining costs. Other improvements were implemented during Q at San Dimas include: utilizing experienced instructors to train our miners in best operating practices for new requirements such as rock bolting, ensuring all supplies and services to maximize efficiency are available as needed, dismissing employees with excessive unplanned absences, and realigning supervisors and providing training to ensure consistent supervision. On a technical level, the mine is working on implementing an advanced production control system, installing 3.7 kilometers of large-diameter compressed air piping, and installing 16 new ventilation raises with 9 completed year to date. With the implementation of these initiatives, mine development rates are expected to increase which is anticipated to improve mining flexibility and the ability to meet production targets. At San Dimas a considerable backlog of mine development has built up through in Q1, Q2 and Q3 and additional time is required to implement the planned ventilation improvements. Additionally, the mine has experienced a high level of unplanned worker absences and there were some work stoppages in 10

13 October. The Las Truchas hydroelectric facility had a 10-day shutdown in October due to a weld failure in the penstock (water feed pipe). During this time, the mine received only 70% of its power supply. As a result of these factors, the current development backlog will not be corrected as planned and will continue to restrict access to mining areas that were originally in included in the production plans. The San Dimas 2016 production guidance has been reduced to between 110,000 and 120,000 gold equivalent ounces. Accordingly, cash cost guidance has also been revised to $850 to $900 per gold equivalent ounce, with all-in sustaining costs expected to be between $1,125 and $1,175 per ounce. Operations through the remainder of the 2016 will be focused on increasing mine development rates and improving ventilation in key areas, which will allow for a build-up of high-grade stopes in inventory going into Furthermore, in addition to the recent hiring of Damien Marantelli as Chief Operating Officer of the Corporation (as of October 6, 2016), San Dimas has hired a new production manager. These management enhancements are expected to provide increased oversight and input from Primero corporate management and better site execution, leading to improved achievement of the San Dimas mine plans. 11

14 Black Fox Three months ended Nine months ended Key Performance Data Open pit mining Tonnes of ore mined - 201, ,668 Strip ratio Average gold grade (grams/tonne) Underground mining Tonnes of ore mined 64,522 36, ,921 83,795 Average gold grade (grams/tonne) Drawdown of stockpile (tonnes) 168, ,712 - Open pit and underground Tonnes of ore milled 233, , , ,604 Tonnes of ore milled per day 2,538 2,538 2,510 2,369 Average mill head grade (grams/tonne) Average gold recovery rate (%) 95% 96% 95% 96% Produced Gold (ounces) 16,230 19,054 44,659 51,920 Sold Gold at spot price (ounces) 14,735 16,302 40,877 48,163 Gold at fixed price (ounces) 1,409 1,640 3,883 4,876 Average realized gold price 1 Gold price (per ounce) $1,264 $1,089 $1,194 $1,123 Gold at spot price (per ounce) $1,335 $1,122 $1,258 $1,175 Gold at fixed price (per ounce) $524 $517 $523 $516 Total cash costs (per gold ounce) 2 $926 $780 $885 $856 All-in sustaining costs (per ounce) 3 $1,286 $1,000 $1,347 $1,183 Revenue ($000's) $20,431 $19,559 $53,503 $59,621 Earnings (loss) from mine operations (000's) ($422) ($354) $564 ($1,936) 1 Average realized gold prices reflect the impact of the gold purchase agreement with Sandstorm (see Other liquidity considerations ). 2 See NON- GAAP measurements 3 For the purposes of calculating all-in sustaining costs at individual mine sites, the Company does not include corporate general and administrative expenses. See NON- GAAP measurements. 12

15 The Black Fox mine produced 16,230 ounces of gold in the third quarter of 2016 compared to 19,054 ounces in the third quarter of Stope production from the Deep Central Zone commenced in early September, resulting in the highest production month of the year at 6,744 ounces. For the comparative quarter of 2015, the Black Fox open pit contributed the majority of ore. Black Fox has increased gold production each quarter of 2016, and mining operations will continue to focus on the higher-quality, more predictable Deep Central and Central zones of the mine, with less reliance on the upper remnant areas. This is expected to improve overall mine grades. During the quarter, 168,996 tonnes from the low-grade stockpile were processed through the mill. This stockpile drawdown allowed milling at a similar rate to that in the third quarter of 2015, with 2,538 TPD being milled. Despite higher grades and increased tonnage being realized from underground mining in the third quarter of 2016 compared to the third quarter of 2015, mill head grades were lower compared to In Q3 2015, the mill was supplemented with ore from open pit operations that were higher in grade than the low-grade stockpile fed to the mill in the third quarter of The lower mill grades were principally responsible for the lower gold production. Total cash cost per gold ounce were higher in the third quarter of 2016 at $926 per ounce compared to $780 per ounce in the third quarter of 2015 as the lower gold production more than offset lower operating costs. All-in sustaining costs were higher in the third quarter of 2016 compared to 2015 due to the lower gold production, and slightly higher capital expenditures due to increased development costs and cost to lift the tailings dam. For the nine months to September 2016, the Black Fox mine produced 44,659 ounces of gold, 14% lower than the same period in The operation of the open pit in 2015 with higher grade ore than the lowgrade stockpile processed in 2016 was the main factor in lower gold production. A total of 526,712 tonnes have been drawn from the low-grade stockpile through the first nine months of the year. For the nine months to September 2016, total cash costs per gold ounce were $885, 3% higher than the prior year as lower gold production more than offset overall cost savings. The drawdown of the lowercost stockpile to fill the mill as opposed to open pit mining operations was the main driver of lower average costs compared to the nine months to September All-in sustaining costs for the nine months to September 2016 were $1,347 per ounce, 14% above the comparative 2015 period due to increased underground development to reach the Deep Central Zone, combined with lower overall gold production. With the low-grade stockpile expected to be fully depleted by mid-2017, Black Fox intends to re-engineer the operation to focus on improved cost efficiency ensuring profitability at reduced mill feed rates. This will involve optimizing surface operations as well as streamlining capital programs. The Company also expects a reduction in capital intensity per ounce as underground operations become focused on production from the Deep Central Zone. The Company is focused on the strategy of expanding the resources at depth in Black Fox and opening a new mining front, at an area such as the Froome Zone, in order to generate a Complex operating rate of 90,000 to 100,000 ounces per year on a sustainable basis. 13

16 During the third quarter of 2016 Primero continued advanced engineering work on the Froome Zone located approximately 800 metres west of the Black Fox mine. Focus has been on various optimizations designed to reduce capital and operating costs, and de-risk the Froome project. An underground mine plan has been developed with detailed stope designs, production sequencing and mine scheduling. Primero also completed a detailed evaluation of different ramp-access options, with the option of a small open pit mine to capture the near surface mineralization and in-pit portal access and ramp development to the lower-portion of the ore body providing the best economics. The combination open-pit/underground option has the potential to generate cash flow earlier than options that involve solely underground ramping, with a lower initial capital cost. Primero expects to commence geotechnical verification of the open-pit option in Q4 and will work to complete a revised financial evaluation. The Company also continues to advance the environmental permitting process. Primero expects to be in a position to make a production decision in early As discussed above, Black Fox commenced production from the Deep Central Zone in September with initial stope production from the 660 metre level. The grades and tonnes reconciled well with the block model giving Primero confidence in the performance of the Deep Central Zone. Ground conditions were managed with standard ground support techniques and a rock mechanics specialist with experience in the district has been retained to review Black Fox ground support approaches. Backfilling and curing of this first stope occurred through late-september and October, and production mining the second stope from this level began in late-october. Mining from the 680 level will commence during November and development has commenced on the 700 level. The mine is now positioned to achieve steady-state production from the Deep Central Zone with concurrent stope mining and backfilling activities. Black Fox operations remain on track to meet current production guidance of 60,000 to 70,000 gold ounces for the year. Cash cost guidance remains at $850 to $900 per gold ounce and AISC remains at $1,250 to $1,300 per ounce. 14

17 2 OUTLOOK FOR 2016 OPERATING RESULTS Primero has reduced its 2016 production guidance to between 170,000 and 190,000 gold equivalent ounces at total cash costs of between $850 and $900 per gold equivalent ounce with AISC of between $1, 350 and $1,400 per gold ounce. The Company has also re-evaluated its capital budget in light of guidance revisions and as a result 2016 capital expenditures have been reduced to $69.8 million which included $38.8 million at San Dimas and $29.0 million at Black Fox. The Company's 2016 production outlook is summarized in the following table: Attributable gold equivalent production 1 (gold equivalent ounces) Gold production 1 (ounces) Silver production 1 (million ounces) Total cash costs 2 (per gold equivalent ounce) All-in sustaining costs 2 (per gold ounce) Capital expenditures (millions of U.S. dollars) San Dimas Black Fox Estimated , ,000 60,000-70, , ,000 90, ,000 60,000-70, , , N/A $850-$900 $850-$900 $850-$900 $1,125-$1,750 $1,250-$1,300 $1,350-$1,400 $38.8 $29.0 $ San Dimas previously disclosed production outlook was 130,000 to 145,000 gold equivalent ounces, 110,000 to 120,000 gold ounces and 6.5 to 7.5 million silver ounces. The Company s previously disclosed consolidated production outlook was 195,000 to 215,000 gold equivalent ounces, 170,000 to 190,000 gold ounces and 6.5 to 7.5 million silver ounces. 2 San Dimas previous outlook for cash cost per equivalent ounce was $725 to $775 and all-in sustaining cost per ounce of $950 to $1,000. The Company s previous outlook for consolidated cash cost per equivalent ounce was $775 to $825 and all-in sustaining cost per ounce of $1,200 to $1,250. Material assumptions used to forecast total cash costs for 2016 were based on the Company s actual results to, 2016 and include an estimated average gold price of $1,250 per ounce (based on actual gold prices received through Q and $1,250 per ounce for the remainder of the year), silver market price of $17.50 per ounce, and foreign exchange rates of $1.30 Canadian dollars and 18 Mexican pesos to the U.S. dollar for the remainder of Silver sold under the silver purchase agreement is expected to average $4.26 for the 2016 year. The Company s 2016 outlook for revenues and operating expenses are directly correlated to its production outlook and cash cost outlook with the assumption that production will match sales quantities. 15

18 3 ANALYSIS OF CASH FLOWS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015 Sources and uses of cash Three months ended Nine months ended (in thousands of U.S. dollars) Cash flow: Provided by (used in) operating activities before working capital changes $5,539 $20,106 $8,283 $62,487 Changes in non-cash working capital (10,718) 7,998 (199) (18,970) Provided by (used in) operating activities (5,179) 28,104 8,084 43,517 Used in investing activities (14,363) (20,687) (53,200) (60,448) Provided by (used in) financing activities and other (3,775) (4,143) 30,674 32,646 Increase (decrease) in cash ($23,317) $3,274 ($14,442) $15,715 Operating activities Primero s cash flows from operating activities before working capital changes were lower in the third quarter of 2016 when compared to the third quarter of 2015 due to lower gold production and sales at both San Dimas and Black Fox. For the first nine months of 2016, the reduced gold and silver production was also the primary reasons for the decrease in cash flows from operating activities before working capital changes. The changes in non-cash working capital was a cash outflow of $10.7 million in the third quarter of 2016 compared with an inflow of $8.0 million in the third quarter of The outflow in the third quarter of 2016 was due mainly to the build-up of income tax and VAT receivable in Mexico and the payment of the annual union bonus at San Dimas. The inflow in the third quarter of 2015 was partially due to a decrease in silver inventories after the reinstatement of the export license at San Dimas allowed for silver to be shipped outside of Mexico. The nine months to September 2016 cash flow from changes in non-cash working capital is almost nil. The payment of a larger union bonus at San Dimas relating to the 2015 year and a build-up of income tax and VAT receivable was offset by decreases in inventory as more gold was sold than produced at San Dimas and Black Fox continued to deplete their low-grade stockpile. In the first nine months of 2015, the cash outflow from changes in working capital was due to a build-up of inventories as Black Fox was stockpiling ore and payments of payables. 16

19 Investing activities Cash used in investing activities are mostly capital expenditures as shown in the table below. Three months ended 1 Nine months ended 1 Estimated (in millions of U.S. dollars) Capital Expenditures San Dimas Underground Development $5.1 $6.5 $10.9 $13.2 $15.9 San Dimas Sustaining Capital San Dimas Projects San Dimas Sub Total $7.6 $9.7 $21.9 $24.4 $30.8 Black Fox Underground Development Black Fox Sustaining Capital Black Fox Complex Sub Total $4.7 $3.8 $17.0 $14.9 $20.1 Cerro del Gallo Development Total Capital Expenditures $13.2 $13.8 $40.1 $40.1 $52.5 Capitalized Exploration Expenditures San Dimas Diamond Drilling $1.1 $0.9 $3.6 $3.3 $4.9 San Dimas Drifting San Dimas Regional Diamond Drilling San Dimas Sub Total $1.5 $2.6 $5.9 $7.2 $8.0 Black Fox Diamond Drilling Grey Fox & Regional Exploration Black Fox Complex SubTotal $1.9 $2.5 $7.5 $10.9 $8.9 Cerro del Gallo Geology Mapping Total Capitalized Exploration Expenditures $3.4 $6.7 $13.7 $20.1 $17.3 TOTAL CAPITAL EXPENDITURES $16.6 $20.5 $53.8 $60.2 $ Expenditures on mining interests included on the condensed consolidated interim statements of cash flows varies from capital expenditures shown in the table because of timing of payments and the acquisition of the mining concessions near the San Dimas mine. San Dimas capital spending during the quarter was focused on progressing underground development, but labour issues and delays in ventilation upgrades impacted the development rate in the quarter. Sustaining capital included rebuild work on underground equipment and various minor mill projects. Similar to the quarter, underground development has been the major focus of the capital plan for San Dimas for the year-to-date. Additional equipment was purchased earlier in the year to improve the efficiency of ground support work, including three scissor trucks and two bolters. Projects spending related to the upgrade to the main crushing circuit and completing the back-up crusher circuit. The back-up crusher will be used during the rainy season when material is wetter causing plugging and a reduced capacity. For the full 2016 year, estimated San Dimas capital expenditures are expected to be $38.8 million, slightly below the previous estimate due to lower underground development to date. 17

20 Black Fox capital expenditure continued to focus on ramp and level development in the Deep Central Zone. The majority of the Black Fox sustaining capital is related to the annual tailings lift project. Financing activities During the third quarter of 2016 and the comparative quarter of 2015, financing activities were limited, encompassing only payments of interest and capital lease payments. For the nine months to September 2016, the Company drew $50 million on the revolving credit facility to finance the March 31, 2016 repayment of the $48 million due on the 6.5% Convertible Debentures assumed with the acquisition of Brigus. In addition, the Company completed an equity offering in June, which provided proceeds of $37.5 million net of commissions and fees. Total interest paid for the nine months to September 2016 was $7.0 million on the 5.75% Convertible Debentures, the 6.5% Convertible Debentures, and the revolving credit facility. For the nine months to September 2015, the Company received $75 million in gross proceeds from the issuance of the 5.75% convertible debentures, and repaid $40 million of debt, associated with the outstanding balance of its revolving credit facility. A release of restricted cash of $9.8 million in relation to a reduction in collateral on a reclamation bond at Black Fox also contributed to positive cash flows provided by financing activities for the first nine months of An additional $1.6 million was released in

21 3 FINANCIAL CONDITION REVIEW A key financial objective is to make sure the Company has access to funds to achieve its medium term (three year) objectives. The Company s strategy is to ensure liquidity is available to finance exploration and development requirements at its mining operations and growth projects as well as to repay financial obligations. The Company seeks to manage its liquidity by ensuring that, even in a low gold price environment, its operations can manage spending and provide adequate cash flow. Key financial ratios the Company uses to assess new growth opportunities and to determine how much debt the Company can take on are shown in the net asset table below. (in thousands of U.S. dollars except ratios and per share amounts) As at, 2016 As at December 31, 2015 Cash and cash equivalents $31,159 $45,601 Other current assets 60,921 72,970 Non-current assets 825, ,397 Total assets $918,057 $924,968 Current liabilities (excluding short-term debt) $39,428 $61,248 Non-current liabilities (excluding long-term debt) 115,247 99,700 Short-term debt 51,746 52,417 Long-term debt 62,373 62,727 Total liabilities $268,794 $276,092 Total shareholders' equity $649,263 $648,876 Total equity $649,263 $648,876 Total common shares outstanding 188,251, ,185,807 Total common share purchase warrants outstanding 11,011,250 - Total options outstanding 1 6,220,620 4,246,198 Key financial ratios Current ratio Total liabilities-to-equity Debt-to-total capitalization As at the date of this MD&A, the Company had 188,287,331 common shares outstanding, the total number of options outstanding was 6,217,120 of which 3,670,884 are exercisable. 2 Current ratio is calculated as (cash and cash equivalents + other current asset) (current liabilities + short-term debt). 3 Total liabilities-to-equity is calculated as total liabilities total equity. 4 Debt-to-total capitalization is calculated as (short-term debt + long-term debt) (short-term debt + long-term debt + total equity). The Company s net assets (equity) as at, 2016 were $649 million, consistent with the $649 million of net assets as at December 31, The net loss for the first nine months of the year was mostly offset by the proceeds from the equity raise completed in the second quarter of the year. The current ratio has increased slightly from December 31, 2015 as current liabilities are lower due to the payment of annual royalties and income taxes in Mexico during the first quarter of 2016, and a buildup of income tax and VAT receivable throughout These factors more than offset lower cash on 19

22 3 hand, and lower inventories due to the drawdown of the Black Fox ore stockpile and gold sales in excess of production for the year-to-date at San Dimas. The 6.5% Convertible Debenture was repaid during the first quarter 2016, through a drawdown of the revolving credit facility. The credit facility obligation is now classified as current and thus total shortterm debt at, 2016 is similar to that at December 31, The Company s objective is to manage financial risk by maintaining a conservative balance sheet. Liquidity at, 2016 included cash and cash equivalents of $31.2 million and an undrawn amount on its revolving credit facility of $25.0 million. The Company s revolving credit facility matures on May 23, The Company expects to renew this facility, but in the event full repayment is required, cash generated by operations may not be sufficient to repay amounts outstanding under the revolving credit facility in full at maturity. The Company will seek other sources of financing should renewal of the revolving credit facility be not available on terms acceptable to the Company. In light of the challenges faced by the Company over the last six months, the Board created an Executive Advisory Committee. This committee is providing support and advice to Management as it continues dialogue with the Mexican tax authorities, reviews its silver purchase agreement structure, examines liquidity initiatives and evaluates other strategic opportunities such as the potential sale of the Cerro del Gallo development project. There can be no assurance that the Company's efforts will be successful in any of these initiatives. Capital structure Debt (in thousands of U.S. dollars) As at, 2016 As at December 31, 2015 Current debt 6.5% convertible debentures $- $47,751 Finance lease liabilities 2,327 4,666 Revolving credit facility 49,419 - Total current debt $51,746 $52,417 Long-term debt 5.75% convertible debentures $61,875 $61,500 Finance lease liabilities 498 1,227 Total long-term debt $62,373 $62,727 Total debt $114,119 $115,144 Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements, other than the availability of the undrawn portion of the revolving credit facility of $25.0 million at, The revolving 20

23 3 credit facility is secured by substantially all of the Company s assets and contains customary covenants and default clauses typical to this type of facility. Pursuant to the terms of the revolving credit facility, the Company is required to maintain the following financial covenants: Covenant Requirement As at, 2016 Tangible net worth (in $millions) 1 =/> $586 $649 Net debt leverage ratio 2 =/< 3.5:1 2.5:1 Senior net debt leverage ratio 3 =/< 2.0:1 1.4:1 Interest coverage ratio 4 =/> 4.5:1 1 Tangible net worth represents equity less goodwill and other intangible assets. 5.1:1 2 Net debt leverage ratio represents total liabilities, less trade payables incurred in the ordinary course of business less unrestricted cash divided by rolling 4 quarter EBITDA, as defined in the credit agreement. 3 Senior net debt leverage ratio represents that portion of net debt that ranks pari passu with or in priority to the line of credit divided by rolling 4 quarter EBITDA, as defined in the credit agreement. 4 Interest coverage ratio represents earnings before interest, depreciation and amortization, as defined in the credit agreement, divided by interest expense. As at, 2016, the Company was compliant with these covenants. The Company closely monitors the compliance to these covenants as a breach of a covenant would be considered an event of default under the credit agreement which, if not addressed, would entitle the lenders to make the borrowings under the revolving credit facility immediately due and payable and also causing borrowings under the 5.75% convertible debentures to become immediately due and payable. Being able to remain in compliance with the covenants is dependent upon many factors including, but not limited to, commodity prices, exchange rates, and levels of gold production. Adverse changes in one or more of these factors could negatively impact the Company s ability to remain in compliance. Cash requirements The following table summarizes the contractual maturities of the Company s financial liabilities and operating and capital commitments: (in thousands of U.S. dollars) Within 1 year As at, Over 5 years years Total As at Dec. 31, 2015 Total Trade and other payables and accrued liabilities $35,982 $- $- $35,982 $44,307 Share based payments % Convertible debentures and interest , % Convertible debentures and interest 4,313 85,409-89,722 92,959 Revolving credit facility and interest 51, ,068 - Finance lease payments 2, ,826 5,893 Minimum rental and operating lease payments 1,486 2,120-3,606 3,630 Reclamation and closure cost obligations 2,422 2,345 61,638 66,405 60,637 Commitment to purchase plant and equipment ,689 Total $98,619 $90,372 $61,638 $250,629 $263,456 21