January 17, 2012 / 3:22 PM / in 6 years

UPDATE 3-Primero's estimation method review may hit reserves

* Sees 2012 production of 100,000-110,000 gold equivalent ounces

* Q4 gold equivalent output 23,100 ounces vs 24,800 ounces yr ago

* Full-year 2011 production up 2 percent

* Shares fall as much as 16 percent (Adds analyst comments, rewrites throughout)

By Arnav Sharma

Jan 17 (Reuters) - Canada’s Primero Mining Corp will review the method used to estimate the reserve at its only producing San Dimas mine in Mexico, which had failed to meet forecasts over the past decade, potentially leading to lower mineral reserves in the future.

The review tries to assess whether the precious metals producer can improve mine planning by using other methods and predict production more accurately, Chief Executive Joseph Conway said in a statement.

Primero shares fell as much as 16 percent to C$3.14 on the Toronto Stock Exchange on Tuesday after it reported a lower fourth-quarter production and forecast a largely flat output for 2012.

Mackie Research Capital analyst Barry Allan said the review news caught a number of people by surprise.

“Is the ore grade overstated? That’s the question which is concerning people,” he said.

“Nine times out of ten, it means that their quality of reserves is overstated. That’s where the worry lies.”

The company, which bought San Dimas from Goldcorp Inc in 2010, forecast production of 100,000 gold equivalent ounces to 110,000 gold equivalent ounces for 2012. It had produced 102,200 gold equivalent ounces last year.

Gold equivalent ounces include silver ounces produced, and converted to a gold equivalent based on a ratio of the average commodity prices received for each period.

CEO Conway said Primero’s 2012 forecast was one of the reasons for reviewing the resource estimation method.

According to the company’s website, the San Dimas mine had total reserves of 5.9 million tonnes as of 2010-end.

Fourth-quarter production fell to 23,100 ounces of gold equivalent from 24,800 ounces a year ago.

Analyst Allan said Primero’s ability to reinstill market confidence will entirely depend upon the answers it gets from the review process.

“If, the answer is that the grade is overstated, that would mean a permanant impairment to the company,” he said. (Reporting by Arnav Das Sharma in Bangalore; Editing by Joyjeet Das)

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