Q2 report website

SECOND QUARTER REPORT 2012
C U T

PRIMERO MINING CORP.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
JUNE 30, 2012
(Amounts in tables in thousands of United States dollars unless otherwise stated)
(Unaudited)

Table of contents

Management’s discussion and analysis of financial condition and results of operations…………………1-41

Condensed consolidated interim statements of operations and comprehensive income (loss) ............. 42

Condensed consolidated interim balance sheets .................................................................................................. 43

Condensed consolidated interim statements of shareholders’ equity ............................................................ 44

Condensed consolidated interim statements of cash flows ............................................................................... 45

Notes to the condensed consolidated interim financial statements ......................................................... 46-66

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012

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 unaudited condensed consolidated financial statements of the Company as at and for the three
and six months ended June 30, 2012, as well as the annual audited consolidated financial statements
for the year ended December 31, 2011 and the corresponding MD&A. Additional information on the
Company, including its Annual Information Form for the year ended December 31, 2011 can be found
under Primero’s profile at www.sedar.com.

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 US 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, as well as “Risks and uncertainties” in the Company’s
Revised Annual Information Form dated May 15, 2012.

This MD&A has been prepared as of August 1, 2012.

SECOND QUARTER HIGHLIGHTS

 Production increased by 22% to 33,598 gold equivalent ounces1 from 27,576 gold equivalent
ounces in 2011;
 Gold and silver production were 23,277 ounces and 1.36 million ounces, respectively,
compared to 19,374 ounces and 1.06 million ounces, respectively, in 2011;
 Total cash costs per gold equivalent ounce2 were $525, compared to $586 in 2011. On a by-
product basis, total cash costs per gold ounce were $44, compared to $190 per gold ounce for
2011;
 Primero met the threshold under the silver purchase agreement in April 2012 and
subsequently sold 470,000 ounces at spot prices, compared with 260,593 ounces in 2011;
 Net income was $15.0 million ($0.17 per share), compared to net income of $3.9 million
($0.04 per share) in 2011. Adjusted net income3 was $15.4 million ($0.17 per share),
compared to $5.6 million ($0.06 per share) in 2011;
 Operating cash flows before working capital changes amounted to $35.8 million, compared to
$17.9 million in 2011;
 As a result of its operating performance to date, Primero revised its production outlook for
2012 to 110,000 to 120,000 gold equivalent ounces, a 10% increase over previous guidance.

1 “Gold equivalent ounces” includes silver ounces produced, and converted to a gold equivalent based on a ratio of the average
commodity prices received for each period. The ratio for the second quarter 2012 was based on realized prices of $1,610 per
ounce of gold and $12.24 per ounce of silver.

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SECOND QUARTER 2012

2 Total cash costs per gold equivalent ounce and total cash costs per gold ounce on a by-product basis are non-GAAP measures.
Total cash costs per gold equivalent ounce are defined as costs of production (including refining costs) divided by the total
number of gold equivalent ounces produced. Total cash costs per gold ounce on a by-product basis are calculated by deducting
the by-product silver credits from operating costs and dividing by the total number of gold ounces produced. The Company
reports total cash costs on a production basis. In the gold mining industry, these are common performance measures but do not
have any standardized meaning, and are non-GAAP measures. As such, they are unlikely to be comparable to similar measures
presented by other issuers. In reporting total cash costs per gold equivalent and total cash costs per gold ounce on a by-product
basis, the Company follows the recommendations of the Gold Institute standard. The Company believes that, in addition to
conventional measures, prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s
performance and ability to generate cash flow. Accordingly, it is intended to provide additional information and should not be
considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Refer to “Non-GAAP
measure – Total cash costs per gold ounce” below for a reconciliation of cash costs per gold ounce on both a by-product and gold
equivalent basis to reported operating expenses (the most directly comparable GAAP measure).

3 Adjusted net income and adjusted net income per share are non-GAAP measures. Adjusted net income is net income adjusted for
unusual items. Neither of these non-GAAP performance measures has any standardized meaning and is therefore unlikely to be
comparable to other measures presented by other issuers. The Company believes that, in addition to conventional measures
prepared in accordance with GAAP, certain investors use this information to evaluate the Company’s performance. Accordingly, it
is intended to provide additional information and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP. Refer to “Non-GAAP measure – Adjusted net income” below for a reconciliation of
adjusted net income to reported net income.

OVERVIEW

Primero is a Canadian-based precious metals producer with operations in Mexico. 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. Primero currently has one
producing property – the San Dimas Mine, which it acquired on August 6, 2010.

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 common
share purchase warrants which trade on the TSX under the symbol “P.WT”.

The Company intends to transition from a single-asset gold producer to an intermediate gold producer
in the future. The Company believes that the San Dimas Mine provides a solid production base with
short-term opportunities to optimize mine capacity, increase mill throughput and expand production.

RECENT CORPORATE DEVELOPMENTS

Convertible debt

On July 24, 2012, the Company’s board of directors resolved to repay the $30 million convertible note
on its maturity date of August 6, 2012, in common shares in order to retain its cash for general
corporate purposes, including potential acquisition opportunities. The conversion price will be the
greater of Cdn$3.74 or 90% of the volume weighted average trading price of the Company’s common
shares for the five trading days ended August 6, 2012 and for the purposes of the conversion the note
will be translated into Canadian dollars at Cdn$1.05 to US $1.00. Accordingly the maximum number of
shares to be issued will be 8,422,460.

Change in reserve and resource estimation methodology and filing of National Instrument 43-101(“NI 43-101)

As discussed in the Company’s first quarter 2012 MD&A, the Company elected to review its Mineral
Resource estimation methodology, in order to enhance its geological understanding, facilitate mine

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SECOND QUARTER 2012

planning and improve the predictability of near term results at the San Dimas Mine. As part of the
Mineral Resource and Mineral Reserve estimation review, the Company retained AMC Consultants
(“AMC”), an independent mining and geological consulting firm that had not previously reported on
the property. AMC assisted the Company in its review of the best estimation method applicable at
San Dimas and completed an independent Mineral Resource and Reserve estimation as at December
31, 2011. The Company and AMC selected a block modeling approach using kriging interpolation. The
resulting block models are more tightly constrained to the data and may better reflect the variability of
the mineralization along strike and dip. To convert Mineral Resources to Mineral Reserves, mining
dilution was added and mining recovery factors were applied on an individual vein basis. The
estimates made using this approach, and a review of current operating experience, resulted in a
reduction of Mineral Resources and Mineral Reserves as at December 31, 2011 as compared with
December 31, 2010. On May 15, 2012, the Company filed an updated NI 43-101 report, with the
following reserves and resources.

San Dimas Mine Mineral Resources and Mineral Reserves as at December 31, 2011

Classification Tonnage Gold Grade Silver Grade Contained Contained
(million tonnes) (g/t) (g/t) Gold Silver
(000 ounces) (000 ounces)
Mineral Resources
Indicated 2.877 6.2 390 577 36,470
Inferred 5.833 3.8 320 704 60,770
Mineral Reserves
Probable 3.514 4.5 280 505 31,800

Notes to Resource Statement:
1. Mineral Resources include Mineral Reserves.
2. Cutoff grade of 2 g/t AuEq is applied and the AuEq is calculated at a gold price of US$1,400 per troy ounce and silver
price of $25 per troy ounce.
3. A constant bulk density of 2.7 tonnes/m3 has been used.
4. The Mineral Resource estimates were prepared by Mr. Rodney Webster MAusIMM, MAIG and Mr. J. Morton Shannon
P.Geo., both of AMC Mining Consultants (Canada) Ltd. and Qualified Persons (‘‘QP’s’’) for the purposes of NI 43-101.

Notes to Reserve Statement:
1. Cutoff grade of 2.52g/t AuEq based on total operating cost of $98.51/t. Metal prices assumed are a gold price of $1,250
per troy ounce and silver price of US$20 per troy ounce. Silver supply contract obligations have been referenced in
determining overall vein reserve estimate viability.
2. Processing recovery factors for gold and silver of 97% and 94% assumed.
3. Exchange rate assumed is 13.00 pesos/$1.00.
4. The Mineral Reserve estimates were prepared by Mr. Herbert A. Smith P.Eng. of AMC Mining Consultants (Canada) Ltd.
and a QP for the purposes of NI 43-101.

There is significant exploration potential at San Dimas beyond the stated Mineral Resources and
Mineral Reserves. The scale of the identified targets is in the order of 6-10 million tonnes at grade
ranges of 3-5 grams per tonne of gold and 200-400 grams per tonne of silver. This potential
mineralization is believed to exist within the geologic model and is comprised of a portion of the
previously reported (2010) resource bases. It should be noted that these targets are conceptual in
nature. There has been insufficient exploration to define an associated Mineral Resource and it is
uncertain if further exploration will result in the target being delineated as a Mineral Resource.

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SECOND QUARTER 2012

SELECTED QUARTERLY AND YEAR- TO- DATE DATA

Three months ended Six months ended
June 30 June 30
2012 2011 2012 2011
Operating Data
Tonnes of ore milled 174,742 136,464 353,265 298,981
Produced
Gold equivalent (ounces) 33,598 27,576 59,309 51,659
Gold (ounces) 23,277 19,374 45,865 39,872
Silver (million ounces) 1.36 1.06 2.67 2.29
Sold
Gold equivalent (ounces) 35,442 26,807 61,532 51,313
Gold (ounces) 24,876 18,837 47,880 39,343
Silver (million ounces) 1.39 1.03 2.72 2.41
Average realized prices
Gold ($/ounce) $1,610 $1,523 $1,643 $1,452
Silver ($/ounce)¹ $12.24 $11.73 $8.26 $7.35
Total cash costs (per gold ounce)
Gold equivalent basis $525 $586 $591 $604
By-product basis $44 $190 $282 $345

Financial Data
(in thousands of US dollars except per share amounts)
Revenues 57,061 40,830 101,065 74,818
Income from mine operations 30,169 18,723 48,831 29,635
Net income/(loss) 15,005 3,897 33,583 (3,997)
Basic income/(loss) per share 0.17 0.04 0.38 (0.05)
Diluted income/(loss) per share 0.16 0.04 0.35 (0.05)
Operating cash flows before working capital changes 35,813 17,877 55,961 16,696
Assets
Mining interests 486,910 485,478 486,910 485,478
Total assets 653,218 672,898 653,218 672,898
Liabilities
Long-term liabilities 53,745 140,271 53,745 140,271
Total liabilities 115,071 242,828 115,071 242,828
Equity 538,147 430,070 538,147 430,070
Weighted average shares outstanding (basic)(000's) 88,260 87,915 88,260 87,844
Weighted average shares outstanding (diluted)(000's) 96,688 88,197 96,698 87,844
1 Due to a silver purchase agreement originally entered into in 2004, Primero sells the majority of silver produced at the
San Dimas Mine at a fixed price (see “RESULTS OF OPERATIONS -Silver purchase agreement” below).

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SECOND QUARTER 2012

REVISED OUTLOOK FOR 2012

As a result of its year-to-date operating performance, which has exceeded budget, Primero has revised
its outlook for 2012. The Company now expects to produce between 110,000 and 120,000 gold
equivalent ounces, a 10% increase from its original guidance. Primero's revised 2012 outlook is
summarized in the following table.

Revised outlook 2012

Gold equivalent production (gold equivalent ounces) 110,000-120,000

Gold production (ounces) 85,000-95,000

Silver production (ounces) 5,000,000-5,500,000

Silver production at spot market prices (ounces) 700,000-750,000

Total cash costs (per gold equivalent ounce) $610 - $640

Total cash costs - by-product (per gold ounce) $340 - $370

Capital expenditures $33 million

Material assumptions used to forecast total cash costs for 2012 have not been modified from the
assumptions used at the beginning of the year and include: an average gold price of $1,600 per ounce;
an average silver price of $9.41 per ounce (calculated using the silver purchase agreement contract
price of $4.08 per ounce and assuming excess silver beyond contract requirements is sold at an
average silver price of $30 per ounce); and foreign exchange rates of 1.05 Canadian dollars and 12.8
Mexican pesos to the US dollar. The 3.5 million ounce threshold under the silver purchase agreement
(see “Silver purchase agreement” under “RESULTS OF OPERATIONS” below) was met at the end of April
2012, and subsequently the Company sold 470,000 ounces of silver at market prices during the
second quarter.

Capital expenditures in 2012 are expected to increase by approximately 10% from original guidance to
$33 million. Spending to date on underground development and exploration drilling has been more
accelerated than the Company’s original plan, reflecting management's focus on reserve and resource
growth. The Company now expects to carry out 80,000 metres of diamond drilling, 6,500 metres of
infrastructure drifting and 2,000 metres of exploration drifting. The remainder of the capital
expenditures in 2012 will be sustaining capital of $5.8 million plus other capital projects of $4.1 million.

The Company expects to make a decision to expand the milling facility to either 2,500 tonnes per day
or 3,000 tonnes per day in the third quarter of 2012.

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SECOND QUARTER 2012

REVIEW OF OPERATIONS

San Dimas Mine
The following table discloses operating data for the San Dimas Mine for the second quarter 2012 and
the preceding four quarters.
Three months ended
30-Jun-12 31-Mar-12 31-Dec-11 30-Sep-11 30-Jun-11
Operating Data
Tonnes of ore milled 174,742 178,523 176,633 186,997 136,464
Average mill head grade (grams/tonne)
Gold 4.25 4.05 3.70 3.35 4.56
Silver 256 242 223 195 259
Average recovery rate (%)
Gold 97% 97% 98% 97% 97%
Silver 95% 95% 95% 94% 94%
Produced
Gold equivalent (ounces) 33,598 25,793 23,115 27,450 27,576
Gold (ounces) 23,277 22,588 20,191 19,500 19,374
Silver (million ounces) 1.36 1.32 1.20 1.10 1.06
Sold
Gold equivalent (ounces) 35,442 26,229 21,192 27,633 26,807
Gold (ounces) 24,876 23,004 18,487 19,659 18,837
Silver at fixed price (million ounces) 0.92 1.33 1.11 0.86 0.77
Silver at spot (million ounces) 0.47 - - 0.25 0.26
Average realized price (per ounce)
Gold $1,610 $1,678 $1,679 $1,668 $1,523
Silver $12.24 $4.08 $4.08 $12.00 $11.73
Total cash operating costs ($000s) $17,645 $17,381 $16,622 $17,584 $16,173
Total cash costs (per gold ounce)
Gold equivalent basis $525 $674 $719 $641 $586
By-product basis $44 $532 $580 $222 $190

San Dimas produced 23,277 ounces of gold and 1.36 million ounces of silver in the second quarter
2012, 20% more and 28% more, respectively, than the same period in 2011. The increase in gold
production was in part due to a month-long strike by mill workers at San Dimas in April 2011 which
reduced production for the second quarter 2011. Although underground mining continued during the
strike period and ore was stockpiled, all the stockpiled ore was not processed through the mill before
the end of the second quarter 2011 and as a result, the tonnes of ore milled were 28% higher in the
second quarter 2012 than the second quarter 2011. The gold grade was lower in the second quarter
2012 at 4.25 grams per tonne compared with 4.56 grams per tonne in the second quarter 2011.

Total cash costs on a gold equivalent and by-product basis in the second quarter 2012 were $525 and
$44 per ounce respectively, compared with $586 and $190 per ounce in the second quarter 2011 as

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SECOND QUARTER 2012

higher cash costs were offset by higher ounces produced. Cash costs increased to $17.6 million in
2012 from $16.2 million in 2011 due to a number of factors including higher reagent costs, particularly
sodium cyanide ($0.4 million), higher labour costs ($0.2 million), higher power costs as a result of dry
weather conditions leading to low power production from the Company’s hydro-electric facility that
caused the Company to consume more diesel fuel and purchase more electricity off the grid ($0.2
million), and increased spending on consumables and mine and mill materials ($0.4 million). Total
cash costs on a gold equivalent and by-product basis were 22% and 92% lower than the first quarter
2012; the significant decrease in by-product cash costs being due to the Company reaching the 3.5
million ounce threshold under the silver purchase agreement with Silver Wheaton Caymans in late
April 2012 and subsequently selling 470,000 ounces of silver at market prices (see “Silver purchase
agreement” below).

Transition Matters
Since August 6, 2010, the transition matters relating to the acquisition of the San Dimas Mine have
largely been resolved. As at the date of this MD&A, the only significant outstanding matter is securing
a permit to operate the aircraft. In Mexico, aircraft can only be operated through a licensed carrier and
the Company is currently operating its aircraft through the carrier of the previous mine owner,
Desarrolos Mineros San Luis, S.A. de C.V. (“DMSL”) The Company is working to acquire its own
carrier licence, and expects this to be completed by the end of 2012.

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SECOND QUARTER 2012

THREE MONTHS ENDED JUNE 30, 2012 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2011

For the three months ended
In thousands of US dollars except per share amounts June 30
2012 2011
$ $
Revenue 57,061 40,830
Operating expenses (18,253) (16,166)
Depreciation and depletion (8,639) (5,941)
Total cost of sales (26,892) (22,107)
Income from mine operations 30,169 18,723
General and administration (6,017) (5,106)
Other expense (343) -
Foreign exchange gain (loss) (1,280) 4,956
Finance income 695 2,414
Finance expense (692) (3,132)
Loss on derivative contracts (176) (1,229)
Income before income taxes 22,356 16,626
Income tax expense (7,351) (12,729)
Net income for the period 15,005 3,897
Basic income per share 0.17 0.04
Diluted income per share 0.16 0.04

Weighted average number of common shares
outstanding - basic 88,259,831 87,914,731

outstanding - diluted 96,688,005 88,197,130

The Company earned net income of $15.0 million ($0.17 per share) for the three months ended June
30, 2012 compared with net income of $3.9 million ($0.04 per share) for the three months ended June
30, 2011. Income before income taxes was $5.7 million higher in the period relative to 2011, as a result
of $11.4 million more income from mine operations, partly offset by $0.9 million higher general and
administration expenses and $5.7 million net difference in foreign exchange gains and losses, net
finance income/expense and loss on derivative contracts. Income taxes expense was $5.4 million
lower in 2012 as compared to 2011 primarily as a result of reflecting the benefit of the Advance Pricing
Agreement (“APA”) filing in the fourth quarter of 2011. The APA filing resulted in the Company’s
Mexican subsidiary subsequently recording revenue and taxes from sales under the silver purchase
agreement at realized prices rather than spot prices (see “Silver purchase agreement” below). Adjusted
net income for 2012 was $15.4 million ($0.17 per share) compared with $5.6 million ($0.06 per share)
for 2011. The 2011 adjusted net income primarily includes the benefit of the APA filing for the period
April 1, 2011 to June 30, 2011, as well as the reversal of unrealized foreign exchange gains and finance
income on the VAT receivable from the Mexican government relating to the acquisition of the San
Dimas Mine.

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SECOND QUARTER 2012

Revenue

Revenue was $57.1 million for the three months ended June 30, 2012 as a result of selling 24,876
ounces of gold at an average realized price of $1,610 per ounce, and 1.39 million ounces of silver at an
average realized price of $12.24 per ounce. Revenue was $40.8 million for the same period in 2011
from selling 18,837 ounces of gold at an average realized price of $1,523 per ounce and 1.03 million
ounces of silver at an average realized price of $11.73 per ounce. Sales in 2011 were impacted by the
month long mill workers strike that reduced the tonnes of ore milled by 28% compared with 2012.
Upon acquisition of the San Dimas Mine, the Company assumed the obligation to sell silver at below
market prices (see “Silver purchase agreement” below). In the second quarter 2012, the Company
reached the 3.5 million ounce threshold under the silver purchase agreement with Silver Wheaton
Caymans at the end of April, and subsequently sold 470,000 ounces of silver at an average price of
$28.21. In the prior year, the 3.5 million threshold was met at the end of May and the Company
subsequently sold 260,593 ounces of silver at an average price of $34.59.

Silver purchase agreement

In 2004, the owner of the San Dimas Mine entered into an agreement to sell all the silver produced at
the San Dimas Mine for a term of 25 years to Silver Wheaton Caymans in return for an upfront
payment comprising cash and shares of Silver Wheaton Corp. and a per ounce payment of the lesser
of $3.90 (adjusted for annual inflation), or the market price. This transaction was documented in two
silver purchase agreements, the first one between Silver Trading and Silver Wheaton Caymans (the
“External SPA”), and the second one between the owner of the San Dimas Mine and Silver Trading
(the “Internal SPA”). The Internal SPA specified that the purchase price of silver was the market price.
The Company was required to assume these two agreements when it acquired the San Dimas Mine,
with amendments. For each of the first four years after the acquisition date of August 6, 2010, the first
3.5 million ounces per annum of silver produced by the San Dimas Mine, plus 50% of the excess silver
above this amount, must be sold to Silver Wheaton Caymans at the lesser of $4.04 per ounce
(adjusted by 1% per year) and market prices. After four years, for the life of the mine, the first 6
million ounces per annum of silver produced by the San Dimas Mine, plus 50% of the excess silver
above this amount, must be sold to Silver Wheaton Caymans at the lesser of $4.20 per ounce
(adjusted by 1% per year) and market prices. All silver not sold to Silver Wheaton Caymans is
available to be sold by the Company at market prices.

The expected cash flows associated with the sale of the silver to Silver Wheaton Caymans at a price
lower than the market price have been reflected in the fair value of the mining interests recorded upon
acquisition of the San Dimas Mine. The Company has presented the obligation to sell any silver
production to Silver Wheaton Caymans as part of the mining interest, as the Company did not receive
any of the original upfront payment which was made by Silver Wheaton to acquire its interest in the
silver production of the San Dimas Mine. Further, the Company does not believe that the obligation
meets the definition of a liability as the obligation to sell silver to Silver Wheaton Caymans only arises
upon production of the silver.

Until October, 2011, the Company computed income taxes in Mexico based on selling all silver
produced at the San Dimas Mine at market prices (the price in the Internal SPA that it was required to
assume on the acquisition of the San Dimas Mine). From a consolidated perspective, therefore, the
silver sales to Silver Wheaton Caymans realized approximately $4 per ounce, however, the Company

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SECOND QUARTER 2012

recorded income taxes based on sales at market prices. On October 11, 2011, as part of its
restructuring initiatives and based on recognized transfer pricing methodology, the Company amended
the Internal SPA to provide that the price payable by Silver Trading to purchase silver is the same price
as the fixed price charged by Silver Trading under the External SPA. On October 17, 2011, the
Company’s Mexican subsidiary filed a formal application to the Mexican tax authorities for an APA on
the Company’s restructuring plan that, if successful, would result in paying income taxes based on
realized revenue.

Operating expenses

Operating expenses of the San Dimas Mine were $18.3 million in the second quarter 2012 compared to
$16.2 million in the same period 2011 due to the increase in sales, as well as higher electricity and
cyanide costs. Operating expenses include $0.2 million and $0.6 million of non-cash share-based
payment expense related to personnel at the mine for 2012 and 2011, respectively. Cash production
costs per gold ounce were $525 and $44, respectively, on a gold equivalent and by-product basis for
the second quarter 2012 compared with $586 and $190, respectively, for 2011. The significant
decrease in by-product cash costs was due to the Company reaching the 3.5 million ounce threshold
under the silver purchase agreement with Silver Wheaton Caymans in late April in 2012 compared
with late May in 2011, resulting in a 33% increase in by-product silver credits in 2012.

Depreciation and depletion expense

The depreciation and depletion expense was $8.6 million for the three months ended June 30, 2012
compared to $5.9 million in the same period 2011. This 46% increase in expense is partly due to the
increase in sales year-on-year, and partly due to a significantly higher amount of depletion being part
of the inventory balance at March 31, 2012 (as compared to 2011), which was then charged to
depletion expense during the second quarter 2012. Depletion cost is initially charged to inventory
during the production process and then transferred to cost of sales when the inventory is sold. Mining
properties are depleted using a units-of-production basis over the mine’s estimated and economically
proven and probable reserves and an estimate of the portion of mineralization expected to be
classified as reserves.

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SECOND QUARTER 2012

General and administration expenses

General and administration expenses were $6.0 million for the second quarter 2012, compared to $5.1
million for 2011, broken down as follows:

Three months ended
June 30,
(In thousands of U.S. dollars) 2012 2011

Share-based payment 1,862 1,982
Salaries and wages 1,414 1,082
Rent and office costs 218 271
Legal, accounting, consulting, and other professional fees 1,852 1,238
Other general and administrative expenses 671 533
Total 6,017 5,106

The reduced share-based payment charge in 2012 was primarily a result of options being expensed
based on a graded schedule, resulting in a greater expense being charged in earlier periods. The
increase in salaries and wages expense was primarily due to employee hires in the third and fourth
quarters of 2011 and in the first quarter 2012. The increase in legal, accounting, consulting, and other
professional fees was due mainly to costs related to the Company’s change in reserve and resource
estimation methodology (see “RECENT CORPORATE DEVELOPMENTS” above), as well as consulting fees
associated with the Company’s tax restructuring initiatives. The increase in other general and
administration expenses was mainly due to costs associated with the Company’s listing on the NYSE
and the associated compliance requirements (the Company’s NYSE listing occurred in August 2011),
as well as costs for increased investor relations activities.

Finance income

The Company earned finance income of $0.7 million in the second quarter 2012 compared with $2.4
million during the same period 2011. The amount in 2012 was primarily interest income on VAT
repayments from the Mexican government during the second quarter 2012. The amount in 2011
included $2.4 million of accrued interest income on the $80.6 million VAT receivable from the
Mexican government that was collected in July 2011.

Finance expense

Finance expense was $0.7 million for the three months ended June 30, 2012, compared to $3.1 million
for the same period in 2011. The expense in 2011 included $1.8 million of accretion expense on the
convertible note (not incurred in 2012 as the convertible note was fully accreted by August 6, 2011),
and accrued interest on the promissory note, convertible note and VAT loan, all of which were issued
in the third quarter of 2010 concurrent with the acquisition of the San Dimas mine. Principal
repayments of $30 million on the convertible note in October 2011 and $5 million on the promissory
note in early January 2012, as well as full repayment of the $70 million VAT loan in July 2011, further
reduced finance expense in 2012 compared with 2011 (see “LIQUIDITY AND CAPITAL RESOURCES” below).

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SECOND QUARTER 2012

Foreign exchange

The Company recorded a foreign exchange loss of $1.3 million in the second quarter 2012 compared
with a foreign exchange gain of $5.0 million in 2011. The loss in 2012 was mainly due to unrealized
foreign exchange losses on deferred tax asset and accounts receivable balances, partially offset by
gains on accounts payable balances, as a result of the sharp depreciation of the Mexican peso relative
to the US dollar during the three month period ended June 30, 2012. The gain in the second quarter
2011 was due primarily to the revaluation of the peso-denominated VAT receivable as the peso
appreciated against the US dollar (this gain was realized in July 2011 when the Mexican government
refunded the VAT).

Gain (loss) on derivative contracts

The Company currently has one type of derivative contract – call options to purchase silver, designed
to partially mitigate potential adverse tax consequences of the silver purchase agreement. In the three
months ended June 30, 2012 the Company realized a loss of $0.9 million on the expiry of silver call
option contracts and also recognized unrealized gains of $0.7 million on unexpired contracts, for a net
loss of $0.2 million. The Company recorded a loss on derivative contracts of $1.2 million in the second
quarter 2011, which comprised realized gains of $0.2 million on the sale of silver call option contracts
(net of losses on expired contracts), unrealized losses on unexpired call options contracts of $1.6
million, as well as a mark-to-market gain of $0.2 million on the fair value of an embedded derivative
included in the convertible note.

The Company purchased two tranches of silver call option contracts in 2011. On March 18, 2011, it
purchased contracts for 1.2 million ounces of silver at a strike price of $39 per ounce for a total cost of
$2.2 million. The contracts covered approximately two-thirds of the monthly silver production sold to
Silver Wheaton Caymans over the period April 1, 2011 to September 30, 2011. On September 15, 2011,
the Company entered into another series of monthly call option contracts to purchase 1.5 million
ounces of silver at a strike price of $49 per ounce for a total cost of $3.7 million. These contracts were
designed to cover approximately 30% of the monthly silver production sold to Silver Wheaton
Caymans over the period September 27, 2011 to September 26, 2012.

Income taxes

The Company recorded an income tax expense of $7.4 million in the three months ended June 30,
2012, compared with $12.7 million in the same period in 2011. Income tax expense in 2011 reflects tax
on sales of silver under the silver purchase agreement based on spot prices rather than realized prices.
Upon the acquisition of the San Dimas mine, the Company assumed the obligation to sell silver at
below market prices according to a silver purchase agreement with a subsidiary of Silver Wheaton
Corp. Until the fourth quarter of 2011, silver sales under the silver purchase agreement realized
approximately $4 per ounce; however, the Company's provision for income taxes was computed based
on sales at market prices. If income taxes were computed based on realized prices in the second
quarter 2011, income tax expense would have been reduced by $5.2 million to $7.5 million.

On October 17, 2011, the Company filed an application (the APA application) to the Mexican tax
authorities for a ruling on the appropriate price for intercompany silver sales from its Mexican
subsidiary to its Barbadian subsidiary under the silver purchase agreement. Primero submitted its
APA application after preparation of a detailed transfer pricing study. The APA review is an interactive

12

SECOND QUARTER 2012

process between the taxpayer and the tax authority, which the Company has been advised is likely to
take 12 to 14 months. At the end of the APA process, the tax authority will issue a tax resolution letter
specifying the pricing method that they consider appropriate for the Company to apply to
intercompany sales under the silver purchase agreement.

For the duration of the APA process, under Mexican tax law, the taxpayer can record its revenues and
intercompany pricing under the terms that the taxpayer considers reasonable (given they are
compliant with applicable transfer pricing requirements). As a result, in the fourth quarter of 2011,
after filing the APA application, the Company's Mexican subsidiary adjusted (retrospectively to the
date of the purchase of the San Dimas Mine) the revenue recorded under the silver purchase
agreement to the fixed price realized and adjusted its income tax provision to record taxes based on
realized revenue. The Company requested a refund of income taxes paid prior to the date of the APA
filing and received approximately $20 million (including inflationary payments of $0.7 million) during
the second quarter 2012, and approximately $2 million is still pending. The refund does not indicate
that the APA has been successful, and should the Mexican authorities rule against the Company at
conclusion of the APA process, this amount, and increased taxes on sales since the APA filing, would
be payable. Throughout the APA process, the Company will identify the potential tax that would be
payable if the APA is unsuccessful as a contingent liability in the notes to its financial statements. As
at June 30, 2012, the amount of the contingent liability was $52.4 million plus estimated interest of
$5.8 million.

Mining interests and impairment

For the duration of 2011 and 2012, the Company’s market capitalization was less than the carrying
value of the San Dimas Mine. Management considered this an impairment indicator at December 31,
2011, and as such, performed an impairment analysis as at that date. The impairment analysis
performed was a value in use model, that is, a discounted cash flow analysis to assess the recoverable
amount of the San Dimas cash generating unit (“CGU”). Based on the inputs to the model, there was
no impairment to the San Dimas CGU at December 31, 2011. There have been no additional
impairment triggers noted by management between December 31, 2011 and June 30, 2012 and as such
no further impairment test has been performed. Management believes that the net carrying value of
the San Dimas CGU is supported based on the estimates included in the model as at December 31,
2011. The most significant of the assumptions incorporated into the model are i) the estimate of
reserves, resources and exploration potential (see “Change in reserve and resource estimation
methodology” under “RECENT CORPORATE DEVELOPMENTS” above), and ii) the inclusion of the benefit of a
positive APA ruling on the Company’s tax position (see “Income Taxes” under “RESULTS OF OPERATIONS”
above). Should any of the assumptions in the value in use model be materially changed, there is a risk
that the San Dimas CGU could be impaired.

13

SECOND QUARTER 2012

SIX MONTHS ENDED JUNE 30, 2012 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2011

For the six months ended
In thousands of US dollars except per share amounts June 30
2012 2011
$ $
Revenue 101,065 74,818
Operating expenses (37,146) (32,034)
Depreciation and depletion (15,088) (13,149)
Total cost of sales (52,234) (45,183)
Income from mine operations 48,831 29,635
General and administration (9,532) (9,610)
Other expense (431) -
Foreign exchange gain 204 3,388
Finance income 832 2,447
Finance expense (1,839) (6,081)
(Loss) gain on derivative contracts (197) 1,898
Income before income taxes 37,868 21,677
Income tax expense (4,285) (25,674)
Net income (loss) for the period 33,583 (3,997)
Basic income (loss) per share 0.38 (0.05)
Diluted income (loss) per share 0.35 (0.05)

outstanding - basic 88,259,831 87,843,998

outstanding - diluted 96,698,257 87,843,998

The Company earned net income of $33.6 million ($0.38 per share) in the six months ended June 30,
2012 compared with a net loss of $4.0 million ($0.05 per share) in the six months ended June 30 2011.
Income before income taxes was $16.2 million higher in 2012 than 2011, as a result of $19.2 million
more income from mine operations, partly offset by a $3.2 million difference in foreign exchange gains,
net finance income/expense and gains/losses on derivative contracts. Income tax expense was $4.3
million in 2012 compared with $25.7 million in 2011. Income taxes in 2012 reflect the benefit of the
APA filing in the fourth quarter of 2011, which resulted in the Company’s Mexican subsidiary recording
revenue and taxes from sales under the silver purchase agreement at realized prices rather than spot
prices. Income taxes in 2012 also include the impact of Mexican inflation on the tax values of mineral
properties, which increased deferred tax assets in the first quarter 2012, with a corresponding credit to
income tax expense. Adjusted net income for 2012 was $34.2 million ($0.39 per share) compared
with $7.3 million ($0.08 per share) for 2011. The 2011 adjusted net income primarily includes the
benefit of the APA filing for the period January 1, 2011 to June 30, 2011, as well as the reversal of the
unrealized foreign exchange gain and finance income on the VAT receivable from the Mexican
government relating to the acquisition of the San Dimas Mine.

14

SECOND QUARTER 2012

Revenue

Revenue was $101.1 million for the six months ended June 30, 2012 as a result of selling 47,880 ounces
of gold at an average realized price of $1,643 per ounce, and 2.72 million ounces of silver at an average
realized price of $8.26 per ounce. Revenue was $74.8 million for the same period in 2011 from selling
39,343 ounces of gold at an average realized price of $1,452 per ounce and 2.41 million ounces of
silver at an average realized price of $7.35 per ounce. Sales in 2011 were impacted by the month long
mill workers strike that reduced the tonnes of ore milled by 18% compared with 2012. Upon
acquisition of the San Dimas Mine, the Company assumed the obligation to sell silver at below market
prices (see “Silver purchase agreement” above). The Company reached the 3.5 million ounce threshold
under the silver purchase agreement with Silver Wheaton Caymans at the end of April in 2012 and
subsequently sold 470,000 ounces of silver at an average price of $28.21, compared with the end of
May in 2011, after which it sold 260,593 ounces of silver at an average price of $34.59.

Operating expenses

Operating expenses of the San Dimas Mine were $37.1 million in the first half of 2012 compared to
$32.0 million in the same period 2011 due to the increase in sales. Operating expenses include $0.4
million and $0.9 million of non-cash share-based payment expense related to personnel at the mine
for 2012 and 2011, respectively. Cash production costs per gold ounce were $591 and $282,
respectively, on a gold equivalent and by-product basis for the six months ended June 30, 2012
compared with $604 and $345, respectively, for 2011. Cash operating costs were 12% higher in 2012
than 2011 due mainly to higher personnel costs resulting from new hires and higher wages and
benefits, higher cyanide prices (because of a global shortage) and higher power costs (due to lower
water levels at the Company’s hydro-electric facility that required the Company to purchase more
diesel fuel and more power off the grid). In the computation of cash costs per gold ounce, these
increased cash costs were offset by a 15% increase in gold and gold equivalent ounces produced and a
26% increase in by-product silver credits.

Depreciation and depletion expense
The depreciation and depletion expense was $15.1 million for the six months ended June 30, 2012
compared to $13.1 million in the same period 2011 due to increased sales. Depletion cost is initially
charged to inventory during the production process and then transferred to cost of sales when the
inventory is sold. Mining properties are depleted using a units-of-production basis over the mine’s
estimated and economically proven and probable reserves and an estimate of the portion of
mineralization expected to be classified as reserves. Historically, over the past 30 years, the San
Dimas Mine has converted approximately 90% of resources into reserves.

15

SECOND QUARTER 2012

General and administration expenses

General and administration expenses were $9.5 million for the first half of 2012, compared to $9.6
million for the first half of 2011, broken down as follows:

Six months ended
June 30,
(In thousands of U.S. dollars) 2012 2011

Share-based payment 2,308 3,708
Salaries and wages 2,540 2,273
Rent and office costs 471 590
Legal, accounting, consulting, and other professional fees 2,661 1,827
Other general and administrative expenses 1,552 1,212
Total 9,532 9,610

The reduced share-based payment charge in 2012 was primarily a result of options being expensed
based on a graded schedule, resulting in a greater expense being charged in earlier periods. The
increase in salaries and wages expense was primarily a result of employee hires during the third and
fourth quarters 2011 and in the first quarter 2012. The increase in legal, accounting, consulting, and
other professional fees was due mainly to costs related to the Company’s change in reserve and
resource estimation methodology (see “RECENT CORPORATE DEVELOPMENTS” above), as well as
consulting fees associated with the Company’s tax restructuring initiatives. The increase in other
general and administration expenses was mainly due to costs associated with the Company’s listing on
the NYSE and the associated compliance requirements (the Company’s NYSE listing occurred in
August 2011), as well as increased investor relation activities.

Finance income

The Company earned finance income of $0.8 million in the six months ended June 30, 2012 compared
with $2.4 million in the six months ended June 30, 2011. The amount in 2012 was primarily interest
income on VAT repayments from the Mexican government during the second quarter 2012. The
amount in 2011 included $2.4 million of accrued interest income on the VAT receivable from the
Mexican government that was collected in July 2011.

Finance expense

Finance expense was $1.8 million for the first half of 2012, compared to $6.1 million for the same period
in 2011. The expense in 2011 included $3.5 million of accretion expense on the convertible note (not
incurred in 2012 as the convertible note was fully accreted by August 6, 2011), and accrued interest on
the promissory note, convertible note and VAT loan, all of which were issued in the third quarter of
2010 concurrent with the acquisition of the San Dimas mine. Principal repayments of $30 million on
the convertible note in October 2011 and $5 million on the promissory note in early January 2012, as
well as full repayment of the $70 million VAT loan in July 2011, further reduced finance expense in
2012 compared with 2011 (see “LIQUIDITY AND CAPITAL RESOURCES” below).

16

SECOND QUARTER 2012

Foreign exchange

The Company recorded a foreign exchange gain of $0.2 million in the six months ended June 30, 2012
compared with $3.4 million for the same period in 2011. The gain in 2012 was mainly due to unrealized
foreign exchange gains on deferred tax assets and accounts receivable balances as a result of the
appreciation of the Mexican peso relative to the US dollar during the six month period. The gain in
2011 was due primarily to the revaluation of the peso-denominated VAT receivable as the peso
appreciated against the US dollar (this gain was realized in July 2011 when the Mexican government
refunded the VAT).

Gain (loss) on derivative contracts

The Company currently has one type of derivative contract – call options to purchase silver, designed
to partially mitigate any potential adverse tax consequences of the silver purchase agreement. In the
six months ended June 30, 2012 the Company realized a loss of $1.9 million on the expiry of silver call
option contracts and also recognized unrealized gains of $1.7 million on unexpired contracts, for a net
loss of $0.2 million.

The Company recorded a gain on derivative contracts of $1.9 million in the six months ended June 30,
2011, which comprised realized gains of $0.4 million on the sale of silver call option contracts (net of
losses on expired contracts), unrealized losses on unexpired call options contracts of $1.1 million, as
well as a mark-to-market gain of $2.6 million on the fair value of an embedded derivative included in
the convertible note.

Income taxes

The Company recorded an income tax expense of $4.3 million in the six months ended June 30, 2012,
compared with $25.7 million in the same period 2011. The tax expense in 2012 was lower than the
expense for the three months to June 30, 2012 as a result of a recovery of income taxes in the first
quarter 2012, due mainly to the impact of Mexican inflation on the tax values of mineral properties,
which increased deferred tax assets, with a corresponding credit to income tax expense. As discussed
above, income tax expense in 2011 reflects tax on sales of silver sold under the silver purchase
agreement based on spot prices rather than realized prices. If income taxes were computed based on
realized prices in 2011, income tax expense would have been reduced by $16.1 million to $9.6 million.

Dividend Report and Policy
The Company has not paid any dividends since incorporation and currently has no plans to pay
dividends.

17

SECOND QUARTER 2012

SELECTED QUARTERLY FINANCIAL DATA

The following table provides summary unaudited financial data for the last eight quarters.

(In thousands of US$ except for per
share amounts and operating data) 2012 2011 2010
Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3
Revenue 57,061 44,004 35,645 46,079 40,830 33,988 41,425 18,853
Net income (loss) 15,005 18,578 36,758 35,066 3,897 (7,895) 6,893 (35,630)
Basic income (loss) per share 0.17 0.21 0.42 0.40 0.04 (0.09) 0.08 (0.68)
Diluted income (loss) per share 0.16 0.19 0.38 0.40 0.04 (0.09) 0.08 (0.68)
Adjusted net income (loss) 15,369 18,780 4,685 11,567 5,634 1,621 10,177 (8,079)
Adjusted net income (loss) per share 0.17 0.21 0.05 0.13 0.06 0.02 0.12 (0.15)
Operating cash flow before
working capital changes 35,813 21,257 14,602 40,761 17,877 (1,182) 13,354 (27)
Cash and cash equivalents 125,733 86,268 80,761 107,227 63,629 65,380 58,298 55,007
Total assets 653,218 640,084 624,697 619,416 672,898 658,044 656,733 638,001
Long-term liabilities 53,745 52,196 52,299 118,191 140,271 114,850 114,329 120,392
Equity 538,147 522,741 503,278 465,656 430,070 424,769 430,046 422,618
Gold produced (ounces) 23,277 22,588 20,191 19,500 19,374 20,498 21,171 10,772
Gold sold (ounces) 24,876 23,004 18,487 19,659 18,837 20,506 27,329 11,845
Average price realized per gold ounce 1,610 1,678 1,679 1,668 1,523 1,387 1,359 1,257
Cash cost per gold equivalent ounce 525 674 719 641 586 624 645 681
Cash cost per gold ounce, net of
silver by-products 44 532 580 222 190 491 524 527
Silver produced (million ounces) 1.36 1.32 1.20 1.10 1.06 1.23 1.21 0.58
Silver sold at fixed price (million ounce 0.92 1.33 1.11 0.86 0.77 1.37 1.06 0.98
Silver sold at spot (million ounces) 0.47 - - 0.25 0.26 - - -

Gold production and sales were higher in Q2 2012 compared to Q1 2012 or any quarter in 2011, as a
result of either higher throughput or higher grades. Gold production and sales remained relatively
consistent each quarter during 2011, despite a month-long strike by the union of millworkers in Q2
2011. Somewhat higher grades in Q2 2011 as compared to other quarters in 2011, and an increase in
throughput after the strike ended offset the impact of the strike. Revenue in Q2 2012, Q2 2011 and Q3
2011 included $13.3 million, $9.0 million and $9.8 million, respectively, of silver sales at spot prices,
after the Company reached the annual threshold for deliveries under the silver purchase agreement.

18

SECOND QUARTER 2012

The Company had no operations until it acquired the San Dimas Mine in August 2010, hence revenue
in Q3 2010 was generated from just 56 days of operations.

Net income in Q2 2012 was $3.6 million lower than Q1 2012 despite an increase of $11.5 million in
income from mine operations due to a $10.4 million negative tax movement between the quarters and
a $2.8 million negative movement in the foreign exchange expense. The net income of the first two
quarters of 2012 is not directly comparable to any of the quarters in 2011 as a result of unusual items in
the 2011 results. The significantly higher net income in Q3 2011 was due mainly to receiving the $18.3
million Northgate termination fee, net of transaction costs, interest income and realized foreign
exchange gains of $4.3 million on the VAT refund and a reduction of $11.4 million in income taxes due
to foreign exchange losses in Mexico upon the novation of an intercompany loan. The higher net
income in Q4 2011 was mainly due to recording the benefit of the APA filing, retroactive to August 6,
2010 and conversely the lower net income in Q2 2011 and Q1 2011, as well as Q4 2010 and Q3 2010
reflects tax on silver sales under the silver purchase agreement based on market prices rather than
realized prices. The significant loss in Q3 2010 was due mainly to the partial period of operations, San
Dimas transaction costs and a $12.5 million legal claim settlement. Adjusted net income (loss) reflects
the benefit of the APA filing in each quarter as well as eliminating unusual items.

The cash balance of $125.7 million at the end of Q2 2012 reflects the benefit of $13.3 million of silver
sales at spot prices during the second quarter 2012 and the receipt of a refund of approximately $20.0
million in taxes (see “Liquidity Outlook” under “LIQUIDITY AND CAPITAL RESOURCES” below). Cash in Q1
2012 includes the repayment at the beginning of January 2012 of the first $5 million instalment of the
promissory note held with Goldcorp Inc. (“Goldcorp”) plus $4.4 million in accrued interest thereon
(see “Debt” below under “LIQUIDITY AND CAPITAL RESOURCES”). The significant increase in the cash
balance during Q3 2011 was due mainly to strong sales proceeds (including spot silver sales), the
receipt of the $18.3 million Northgate termination fee, net of transaction costs, and the $17.1 million
VAT refund, net of the VAT loan repayment. Cash in Q4 2011 was reduced by the $30 million
convertible note repayment. In Q3 2010, the Company received the net proceeds of the equity offering
to fund the San Dimas acquisition.

The approximate $60 million reduction in long-term liabilities during 2011 was due to the $30 million
convertible note repayment in Q4 2011 and the reclassification of the $30 million balance of the
convertible note to a current liability based on its contractual maturity.

19

SECOND QUARTER 2012

NON- GAAP MEASURES

Non – GAAP measure – Cash costs per gold ounce
The Company has included the non-GAAP performance measures of total cash costs per gold ounce
on a gold equivalent ounce and by-product basis, throughout this document. The Company reports
total cash costs on a production basis. In the gold mining industry, this is a common performance
measure but does not have any standardized meaning. In presenting cash costs on a production basis,
the Company follows the recommendations of the Gold Institute Production Cost Standard. The
Company believes that, in addition to conventional measures prepared in accordance with GAAP,
certain investors use this information to evaluate the Company’s performance and ability to generate
cash flow. Accordingly, it is intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with GAAP. The
following table provides a reconciliation of total cash costs per gold equivalent ounce and total cash
costs per gold ounce on a by-product basis to operating expenses (the nearest GAAP measure) per
the consolidated financial statements.

June 30 June 30
2012 2011 2012 2011
Operating expenses per the consolidated
financial statements ($000's) 18,253 16,166 37,146 32,034
Share-based payment included in
operating expenses($000's) (240) (553) (396) (1,039)
Inventory movements and adjustments ($000's) (368) 560 (1,724) 209
Total cash operating costs ($000's) 17,645 16,173 35,026 31,204
Ounces of gold produced 23,277 19,374 45,865 39,782
Gold equivalent ounces of silver produced 10,321 8,202 13,444 11,787
Gold equivalent ounces produced 33,598 27,576 59,309 51,569
Total cash costs per gold equivalent ounce $525 $586 $591 $604

Total cash operating costs ($000's) 17,645 16,173 35,026 31,204
By-product silver credits ($000's) (16,617) (12,489) (22,082) (17,460)
Cash costs, net of by-product credits ($000's) 1,028 3,684 12,944 13,744
Ounces of gold produced 23,277 19,374 45,865 39,872
Total by-product cash costs per gold ounce produced $44 $190 $282 $345

20

SECOND QUARTER 2012

Non – GAAP measure – Adjusted net income
The Company has included the non-GAAP performance measures of adjusted net income and
adjusted net income per share, throughout this document. Items are adjusted where considered to be
unusual or non-recurring based on the historical and expected future performance of the Company.
Neither of these non-GAAP performance measures has any standardized meaning and is therefore
unlikely to be comparable to other measures presented by other issuers. The Company believes that,
in addition to conventional measures prepared in accordance with GAAP, certain investors use this
information to evaluate the Company’s performance and ability to generate cash flow. Accordingly, it
is intended to provide additional information and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. The following table
provides a reconciliation of adjusted net income to net income (the nearest GAAP measure) per the
consolidated financial statements.

(In thousands of US dollars except per share amounts) June 30 June 30
2012 20111 2012 20111
Net income (loss) 15,005 3,897 33,583 (3,997)
Loss (gain) on derivative contracts 176 1,229 197 (1,898)
Accretion charged on convertible debt - 1,792 - 3,500
Foreign exchange gain and finance income on
VAT loan, net of tax - (6,603) - (6,603)
Transaction costs 188 80 370 173
Benefit of APA filing - 5,239 - 16,081
Adjusted net income 15,369 5,634 34,150 7,256

Adjusted net income per share 0.17 0.06 0.39 0.08

Weighted average number of
common shares outstanding (basic) 88,259,831 87,914,731 88,259,831 87,843,998

1 Adjusted net income restated to take account of APA filing.

21

SECOND QUARTER 2012

Non – GAAP measure - Operating cash flows before working capital changes

The Company has included the non-GAAP performance measure operating cash flows before working
capital changes in this MD&A. Non-GAAP performance measures do not have any standardized
meaning and are therefore unlikely to be comparable to other measures presented by other issuers.
The Company believes that, in addition to conventional measures, prepared in accordance with GAAP,
certain investors use this information to evaluate the Company’s performance and ability to generate
cash flow. Accordingly, it is intended to provide additional information and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance with GAAP. The
following table provides a reconciliation of operating cash flows before working capital changes to
cash (used in) provided by operating activities (the nearest GAAP measure) per the consolidated
financial statements.

(In thousands of US dollars) June 30 June 30
2012 2011 2012 2011
Cash provided by operating activities 46,915 6,610 69,731 18,728
Change in non-cash operating working capital (11,102) 11,267 (13,770) (2,032)
Operating cash flows before working capital changes 35,813 17,877 55,961 16,696

22

SECOND QUARTER 2012

LIQUIDITY AND CAPITAL RESOURCES

THREE MONTHS ENDED J UNE 30, 2012 COMPARED WITH THREE MONTHS ENDED J UNE 30, 2011

As at June 30, 2012, the Company had cash of $125.7 million (December 31, 2011 - $80.8 million) and
working capital of $90.9 million (December 31, 201 – $53.4 million). Net cash flows for the three
months ended June 30, 2012 and 2011 were as follows:

Three months ended
(In thousands of US dollars) June 30
2012 2011
Cash Flow: $ $
Provided by operating activities 46,915 6,610
Used in investing activities (7,215) (8,829)
Provided by financing activities - 366
Effect of exchange rate changes on cash (235) 102
Increase (decrease) in cash 39,465 (1,751)
Cash, beginning of period 86,268 65,380
Cash, end of period 125,733 63,629

Operating activities

During the three months ended June 30, 2012, the Company’s net cash flows provided by operating
activities were $46.9 million, being cash flows before changes in working capital of $35.8 million and
changes in non-cash working capital of $11.1 million. The cash flows before changes in working capital
primarily comprised cash income from mine operations of $38.8 million, offset by cash general and
administrative costs of $4.2 million and income taxes paid of $0.4 million. The change in non-cash
working capital of an inflow of $11.1 million resulted primarily from collecting taxes receivable of $15.8
million, an increase in taxes payable of $1.4 million, offset by a decrease of $6.6 million in trade and
other payables.

During the three months ended June 30, 2011, the Company’s net cash inflow from operating activities
was $6.6 million. The Company recorded net income before taxes of $16.6 million, which, adjusted for
non-cash items, resulted in cash inflows of $17.9 million before changes in working capital. This
amount mainly comprised cash earnings from mine operations of $24.7 million and cash receipts of
$0.9 million from the sale of silver call options, offset by cash general and administrative costs of $3.1
million, and taxes paid of $3.8 million. The change in non-cash working capital was an outflow of $11.3
million mainly due to a decrease of $12.1 million in trade and other payables, an increase of $3.0 million
in taxes receivable, an increase of $1.5 million in trade and other receivables, and an increase of $6.1
million in taxes payable.

23

SECOND QUARTER 2012

Investing activities

Cash flows used in investing activities were $7.2 million for the three months ended June 30, 2012,
compared with $8.8 million for the same period in 2011. Substantially all of the outflows in both 2012
and 2011 were for capital expenditures at the San Dimas Mine, mainly being exploration and
delineation drilling and drifting and mine development.

Financing activities

The Company did not have any cash flows related to financing activities in the three months ending
June 30, 2012. In 2011, the Company received inflows from financing activities of $0.4 million, being
$0.9 million from the exercise of warrants and options, offset by $0.5 million of interest paid.

SIX MONTHS ENDED J UNE 30, 2012 COMPARED WITH SIX MONTHS ENDED J UNE 30, 2011

Net cash flows for the six months ended June 30, 2012 and 2011 were as follows:

Six months ended
(In thousands of US dollars) June 30
2012 2011
Cash Flow: $ $
Provided by operating activities 69,731 18,728
Used in investing activities (15,023) (14,020)
(Used in) provided by financing activities (9,406) 90
Effect of exchange rate changes on cash (330) 533
Increase in cash 44,972 5,331
Cash, beginning of period 80,761 58,298
Cash, end of period 125,733 63,629


During the six months ended June 30, 2012, the Company’s net cash flows provided by operating
activities were $69.7 million, being cash flows before changes in working capital of $56.0 million and
changes in non-cash working capital of $13.8 million. The cash flows before changes in working capital
primarily comprised cash income from mine operations of $64.4 million, offset by cash general and
administrative costs of $7.2 million and income taxes paid of $1.1 million. The change in non-cash
working capital of $13.8 million resulted primarily from the collection of taxes receivable.

During the six months ended June 30, 2011, the Company’s net cash inflow from operating activities
was $18.7 million. The Company recorded net income before tax of $21.7 million, which, adjusted for
non-cash items, resulted in cash inflows of $16.7 million before changes in working capital. This
amount mainly comprised cash earnings from mine operations of $43.7 million, offset by $1.3 million
to buy silver call options (net of proceeds on sale of option contracts), cash general and administrative

24

SECOND QUARTER 2012

costs of $5.9 million, and income taxes paid of $18.3 million. The change in non-cash working capital
was an inflow of $2.0 million mainly due to a decrease in trade and other receivables of $12.4 million,
offset by an increase in taxes receivable of $9.0 million, an increase in taxes payable of $10.2 million
and a decrease in trade and other payables of $11.0 million.

Cash flows used in investing activities were $15.0 million in 2012, compared with $14.0 million 2011.
Substantially all of the outflows in both 2012 and 2011 were for capital expenditures at the San Dimas
Mine, mainly being exploration and delineation drilling and drifting and mine development.


The Company used $9.4 million of cash for financing activities in 2012, relating to the repayment of
the first $5.0 million instalment under the terms of the Promissory note and $4.4 million of interest
thereon (see “Ðebt” below). In 2011, the Company realized financing inflows of $0.1 million, being $1.0
million from the exercise of warrants and options, offset by $0.9 million in interest paid.

Debt

On August 6, 2010, in connection with the acquisition of the San Dimas Mine, the Company
issued the following debt instruments:

(i) A convertible promissory note (“the Note”) in the principal amount of $60
million with an annual interest rate of 3%, to DMSL, which DMSL immediately
assigned to Goldcorp. The Note may be repaid in cash by the Company at any
time or converted, at any time up to the maturity date (being the “Initial
Maturity Date” or “the Second Maturity Date”), by Goldcorp at a conversion
price of Cdn$6.00 per share. In determining the number of common shares to
be issued on conversion, per the Note, the principal amount will be translated
into Canadian dollars by multiplying such amount by 1.05, which was the
approximate exchange rate at the time of the acquisition.

On the first anniversary of the Note (“Initial Maturity Date”), the Note was
repayable in cash or, at the option of Primero, convertible into common shares
at 90% of the volume weighted average trading price of the common shares
for the five trading days ending immediately prior to the Initial Maturity Date
(the “Maturity Conversion Price”). If on the Initial Maturity Date, Primero
served notice to convert (“Debtor Conversion Notice”), Goldcorp had the right
to extend the maturity Date until the second anniversary of the Note (the
“Second Maturity Date”). On July 20, 2011, Primero served notice to Goldcorp
to convert the Note into common shares of the Company and on August 4,
2011, Goldcorp elected to extend the Maturity date of the Note until the
Second Maturity Date, which gave the Company the right to (1) pay the
principal amount in cash immediately or (2) convert the debt to shares on the
Second Maturity Date at a price equal to the greater of a) the Maturity
Conversion Price (which was Cdn$3.74) and b) 90% of the volume weighted

25

SECOND QUARTER 2012

average trading price of the common shares for the five trading days ending
immediately prior to the Second Maturity Date.

On October 19, 2011, the Company used its cash resources to repay $30
million (or 50%) of the Note plus $1.1 million of accrued interest.

On July 24, 2012, the Company’s board of directors resolved to repay the
convertible note in common shares in order to retain its cash for general
corporate purposes, including potential acquisition opportunities. The
conversion price will be the greater of Cdn$3.74 or 90% of the volume
weighted average trading price of the Company’s common shares for the five
trading days ended August 6, 2012. Accordingly the maximum number of
shares to be issued will be 8,422,460.

(ii) A promissory note in the principal amount of $50 million with an annual
interest rate of 6% to DMSL, which DMSL subsequently assigned to a wholly-
owned Luxembourg subsidiary of Goldcorp. The promissory note is repayable
in four annual installments of $5 million, starting on December 31, 2011, with
the balance of principal due on December 31, 2015. On January 3, 2012, the
Company repaid the first $5 million annual installment plus accrued interest of
$4.4 million. In addition to the annual installments, the Company is required to
pay 50% of annual excess free cash flow (as defined in the promissory note)
against the principal balance.

(iii) A non-revolving credit facility of $70 million from The Bank of Nova Scotia to
partly pay $80.6 million of VAT due to the Mexican government on the
acquisition of the San Dimas Mine. On July 4, 2011, the Company received
$87.2 million, being the VAT refund plus interest and realized foreign
exchange gains on the refund due to the strengthening of the peso. On this
date, the Company repaid all of the principal and interest on the term credit
facility.

Liquidity Outlook
As at June 30, 2012, the Company had cash of $125.7 million and working capital of $90.9 million. The
working capital reflects the $30 million convertible note due August 6, 2012 as a current liability;
however, as described above under “LIQUIDITY AND CAPITAL RESOURCES” – “Debt” above, the Company
plans to settle the note by converting it into common shares and hence no cash will be used to settle
this liability. The Company expects its current cash resources, as well as ongoing cash flow from the
San Dimas Mine, will be sufficient to fund its operations for the foreseeable future.

On October 17, 2011 the Company’s Mexican subsidiary filed an APA that, if successful, will result in
paying income taxes in Mexico based on realized rather than spot revenue. As described under
“RESULTS OF OPERATIONS – Income taxes” above, upon the acquisition of the San Dimas mine, the
Company assumed the obligation to sell silver at below market prices according to a silver purchase
agreement. Silver sales under the silver purchase agreement realize approximately $4 per ounce;

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SECOND QUARTER 2012

however, the Company’s provision for income taxes until filing the APA was based on sales at market
prices.

For the duration of the APA process, under Mexican tax law, the taxpayer can record its revenues and
intercompany pricing under the terms that the taxpayer considers reasonable (given that they are
compliant with applicable transfer pricing requirements). As such, the Company’s Mexican subsidiary
has recorded revenues from sales of silver under the silver purchase agreement (and taxes thereon) at
the contracted price of approximately $4 since the acquisition of the San Dimas Mine, and in addition,
claimed a refund for taxes paid prior to the APA filing. A refund of approximately $20 million
(including inflationary payments of $0.7 million) was received by the Company during the second
quarter 2012, and approximately $2 million is still pending. The refund does not indicate that the APA
has been successful, and should the Mexican authorities rule against the Company at conclusion of the
APA process, this amount would be payable.

At the conclusion of the APA process, the Mexican tax authorities will issue a tax resolution letter
specifying the price that they consider appropriate for the Company to apply to intercompany sales
under the silver purchase agreement. If Primero is unsuccessful in its APA application, it could owe
significant taxes. If the Mexican tax authorities resolved that the market price of silver was the
appropriate price for sales under the silver purchase agreement, the Company would be required to
pay additional income taxes of $52.4 million plus estimated interest of $5.8 million as at June 30,
2012.

Related party transactions

The Company has a convertible note and a promissory note outstanding to Goldcorp and a wholly-
owned subsidiary of Goldcorp, respectively. Goldcorp owns approximately 35% of the Company’s
common shares. Interest accrues on the promissory and convertible notes and is recorded within
trade and other payables. A payment of $5 million plus accrued interest of $4.4 million was paid
under the terms of the Promissory note on January 3, 2012.

During the three and six months ended June 30, 2012, $0.3 million and $1.6 million (2011 - $1.0 million
and $2.3 million) was paid to DMSL for the purchase of equipment, equipment leasing fees and
services received under a transition services agreement between the Company and DMSL. These
amounts are considered to be at fair value. As at June 30, 2012, the Company had an amount payable
of $2.4 million due to DMSL (December 31, 2011 - $2.9 million).

Shares issued

The Company did not issue any shares during the three or six months ended June 30, 2012, nor has it
issued any shares since that date to the date of this MD&A.

Outstanding Share Data

Shareholders’ equity as at June 30, 2012 was $538.1 million compared to $503.3 million as at
December 31, 2011.

Share Capital

As at June 30, 2012, December 31, 2011 and the date of this MD&A, the Company had 88,259,831
common shares outstanding.

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SECOND QUARTER 2012

Options

As at June 30, 2012, the Company had 8,469,490 options outstanding with a weighted average
exercise price of Cdn$5.51. As at the date of this MD&A, the total number of options outstanding was
8,469,490, of which 5,833,996 are exercisable.

Common Share Purchase Warrants

As at June 30, 2012, the Company had a total of 20,800,000 common share purchase warrants
outstanding with a weighted average exercise price of Cdn$8.00 per share. As at the date of this
MD&A, the total number of common share purchase warrants outstanding was 20,800,000, all of
which are exercisable. On February 6, 2012, 476,980 brokers’ warrants with an exercise price of
Cdn$6.00 expired.

Convertible Note

As at June 30, 2012, the Company had a $30 million convertible note outstanding (see “LIQUIDITY AND
CAPITAL RESOURCES” – “Debt” above). On July 24, 2012, the Company’s board of directors resolved to
repay the convertible note on its maturity date of August 6, 2012, in common. The conversion price
will be the greater of Cdn$3.74 or 90% of the volume weighted average trading price of the
Company’s common shares for the five trading days ended August 6, 2012 and, for the purposes of the
conversion, the note will be translated into Canadian dollars at Cdn$1.05 to US $1.00. Accordingly the
maximum number of shares to be issued will be 8,442,460.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

ADOPTION OF NEW ACCOUNTING POLICIES

Changes in accounting policies

The Company has made no changes to its accounting policies during the three and six months ended
June 30, 2012.

Recent pronouncements issued

The Company has reviewed new and revised accounting pronouncements that have been issued but
are not yet effective and determined that the following may have an impact in the future on the
Company:

IFRS 13 Fair Value Measurement (“IFRS 13”) was issued by the IASB in May 2011, and is effective for
annual periods beginning on or after January 1, 2013, with early application permitted. IFRS 13 was
issued to remedy the inconsistencies in the requirements for measuring fair value and for disclosing
information about fair value measurement in various current IFRSs. IFRS 13 defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.

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SECOND QUARTER 2012

IFRS 13 relates to how to measure fair value, not what should be measured at fair value. As at June 30,
2012, the only asset the Company recognized to which IFRS 13 would apply was the silver call option
derivative asset which is measured at fair value.

The measurement of the derivative asset is based on observable inputs in the silver futures market
using Level 1 inputs (quoted prices in active markets for items identical to the asset or liability being
measured); the valuation methodology is in accordance with IFRS 13. Based on the financial
instruments of the Company as at June 30, 2012, there will be no impact to the Company from the
adoption of this standard.

In October 2011, the IASB issued IFRIC 20 - Stripping Costs in the Production Phase of a Mine (“IFRIC
20”). IFRIC 20 clarifies the requirements for accounting for the costs of stripping activities in the
production phase of an open-pit mine when two benefits accrue: (i) usable ore that can be used to
produce inventory and (ii) improved access to further quantities of material that will be mined in future
periods. The IFRIC allows a company to determine a measure to allocate costs between inventory
produced and the stripping activity asset; the IFRIC provides examples of measures.

IFRIC 20 is effective for annual periods beginning on or after January 1, 2013 with earlier adoption
permitted and includes guidance on transition for pre-existing stripping assets. At present the
Company has no open pit mining operations and as such is not impacted by this new standard. Should
the Company own an open pit mine in the future it will apply the provisions of IFRIC 20 from initial
recognition, and develop a policy for allocation of costs if relevant.

In June 2011, the IASB issued amendments to IAS 1 – Presentation of Financial Statements (“IAS 1”). The
amendments are effective for annual periods beginning on or after July 1, 2012, with early adoption
permitted. The amendments to IAS 1 require companies preparing financial statements in accordance
with IFRS to group together items within other comprehensive income (“OCI”) that may be reclassified
to the profit or loss section of the Consolidated Statement of Operations. The amendments also
reaffirm existing requirements that items in OCI and profit or loss should be presented as either a
single statement or two consecutive statements.

The only implication the amendments to IAS 1 has on the Company is with respect to the balances
shown in OCI. At June 30, 2012, the Company only presented one amount in OCI; this related to the
foreign exchange gains or losses recognized upon translation of the parent company results from its
functional currency (CDN$) to the presentational currency (US$). This amount would be unlikely to
be recycled through the Statement of Operations in future, as it relates to the parent company (and
not a subsidiary which may be disposed of in future). The fact that this amount will not be recycled
through the Statement of Operations will need to be disclosed in the notes to the financial statements
as a result of this change to IAS 1.

As of January 1, 2015, Primero will be required to adopt IFRS 9, “Financial Instruments”, which is the
result of the first phase of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and
Measurement”. The new standard replaces the current multiple classification and measurement
models for financial assets and liabilities with a single model that has only two classification
categories: amortized cost and fair value. The Company is currently assessing the impact IFRS 9 will
have on its financial statements.

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SECOND QUARTER 2012

As at June 30, 2012, the Company recognized and classified/measured the following financial
instruments in accordance with IAS 39:

Financial instrument Classification under IAS 39 Measurement basis
under IAS 39

Cash Loans and receivables Amortized cost

Trade and other receivables Loans and receivables Amortized cost

Trade and other payables Other financial liabilities Amortized cost

Convertible note (expires Other financial liabilities Amortized cost
August 2012)

Promissory note Other financial liabilities Amortized cost

Derivative asset Fair value through profit or loss Fair value

Under IFRS 9, each of these financial instruments will have to be classified as either, amortized cost or
fair value. The Company would retain the same classifications as above, and based on an analysis of
IFRS 9, there would be no change to the recognition of these financial instruments as a result of the
adoption of IFRS 9.

There will likely be some disclosure differences for the Company as a result of the transition from IAS
39 to IFRS 9.

CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

The preparation of financial statements in conformity with IFRS requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Management has identified the following critical accounting
policies and estimates.

Inventories

Finished goods, work-in-process and stockpiled ore are valued at the lower of average production cost
and net realizable value.

The Company records the costs of mining ore in process as work-in-process inventories measured at
the lower of cost and estimated net realizable value. These costs are charged to income and included
in operating expenses on the basis of ounces of gold recovered. The estimates and assumptions used
in the measurement of work-in-process inventories include quantities of recoverable ounces of gold
and silver in the mill processing circuits and the price per gold ounce expected to be realized when the
ounces of gold are recovered. If these estimates or assumptions prove to be inaccurate, the Company

30

SECOND QUARTER 2012

could be required to write down the carrying amounts of its work-in-process inventories, which would
reduce the Company’s income and working capital. At June 30, 2012, the average costs of inventories
are significantly below their net realizable values.

Mining interests and impairment testing

The Company records mining interests at cost. Exploration costs are capitalized where they meet the
Company’s criteria for capitalization.

A significant portion of the Company’s mining properties are depleted using the units-of-production
method. Under the units-of-production method, depletion of mining properties is based on the
amount of reserves expected to be recovered from the mines. If estimates of reserves expected to be
recovered prove to be inaccurate, or if the Company revises its mining plan for a location, due to
reductions in the metal price forecasts or otherwise, to reduce the amount of reserves expected to be
recovered, the Company could be required to write down the carrying amounts of its mining
properties, or to increase the amount of future depletion expense, both of which would reduce the
Company’s income and net assets.

The Company reviews and evaluates its mining properties for impairment when events or changes in
circumstances indicate that the related carrying amounts may not be recoverable. For the year ended
December 31, 2011, as a result of the Company’s continuing depressed share price, the Company
reviewed its mining properties for impairment. This review was based upon the expected discounted
future net cash flows to be generated from the San Dimas Mine and it was concluded that there was
no impairment (as discussed above under “RESULTS OF OPERATIONS - Mining interests and impairment”).
If the Company determines there has been an impairment because its prior estimates of future net
cash flows have proven to be inaccurate, due to reductions in the metal price forecasts, increases in
the costs of production, reductions in the amount of reserves expected to be recovered or otherwise,
or because the Company has determined that the deferred costs may not be recovered based on
current economics or permitting considerations, the Company would be required to write down the
carrying amounts of its mining properties, which would reduce the Company’s income and net assets.

At December 31, 2011, the expected future cash flows of the San Dimas Mine were derived from the
Company’s most recent estimates of proven and probable reserves and value beyond proven and
probable (as discussed above under “Change in reserve and resource estimation methodology” under
“RECENT CORPORATE DEVELOPMENTS” above). Other estimates included in the expected future cash
flows from the San Dimas Mine were, a long-term gold price of $1,330 and a discount rate of 6.5% for
reserves and resources and 8.5% for exploration potential. Of most significance, the impairment
model used by the Company includes the recognition of taxation on silver sales under the silver
purchase agreement at realized prices (see “Income Taxes” under “RESULTS OF OPERATIONS” above).

Plant and equipment are depreciated over their estimated useful lives. In some instances, the
estimated useful life is determined to be the life of mine in which the plant and equipment is used. If
estimates of useful lives including the economic lives of mines prove to be inaccurate, the Company
could be required to write down the carrying amounts of its plant and equipment, or to increase the
amount of future depreciation expense, both of which would reduce the Company’s income and net
assets.

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SECOND QUARTER 2012

Fair value of assets purchased in a business combination

The Company’s business combinations are accounted for using the acquisition method of accounting
whereby assets acquired and liabilities assumed are recorded at their fair values as of the date of
acquisition and any excess of the purchase price over such fair values is recorded as goodwill. No
goodwill has been recorded to date.

Assumptions underlying fair value estimates are subject to significant risks and uncertainties, which if
incorrect could lead to an overstatement of the mineral properties of the Company which would then
be subject to an impairment test as described above.

Reclamation and closure cost obligations

The Company has an obligation to reclaim its mining properties after the minerals have been mined
from the site, and has estimated the costs necessary to comply with existing reclamation standards.
IFRS requires the Company to recognize the fair value of a decommissioning liability, such as site
closure and reclamation costs, in the period in which it is incurred if a reasonable estimate of fair value
can be made. The Company records the estimated present value of future cash flows associated with
site closure and reclamation as liabilities when the liabilities are incurred and increases the carrying
values of the related assets by the same amount. At the end of each reporting period, the liabilities are
increased to reflect the passage of time (accretion expense). Adjustments to the liabilities are also
made for changes in the estimated future cash outflows underlying the initial fair value measurements,
and changes to the discount rate used to present value the cash flows, both of which may result in a
corresponding change to the carrying values of the related assets. The capitalized asset retirement
costs are amortized to income over the life of the related assets using the units-of-production method.
Should the estimation of the reclamation and closure cost obligations be incorrect, additional amounts
may need to be provided for in future which could lead to an increase in both the liability and
associated asset. Should the reported asset and liability increase, the amortization expense in the
statement of operations of the capitalized asset retirement cost would increase.

Taxation

The Company recognizes the future tax benefit related to deferred income tax assets to the extent that
it is probable that future taxable profits will be available against which they can be utilized. Assessing
the recoverability of deferred income tax assets requires management to make significant estimates
related to expectations of future taxable income, applicable tax strategies and the expected timing of
the reversals of existing temporary differences. In making its assessments, management gives
additional weight to positive and negative evidence that can be objectively verified. Estimates of future
taxable income are based on forecasted cash flows from operations and the application of existing tax
laws in each jurisdiction. Forecasted cash flows from operations are based on life of mine projections
internally developed and reviewed by management.

The Company recognizes current income tax benefits when it is more likely than not, based on
technical merits, that the relevant tax position will be sustained upon examination by applicable tax
authorities. The more likely than not criteria is a matter of judgment based on the individual facts and
circumstances of the relevant tax position evaluated in light of all available evidence.

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SECOND QUARTER 2012

The recoverability of deferred income tax assets and the recognition and measurement of uncertain
tax positions are subject to various assumptions and management judgment. Actual results may differ
from these estimates. In circumstances where the applicable tax laws and regulations are either
unclear or subject to ongoing varying interpretations, it is reasonably possible that changes in these
estimates could occur that materially affect the amounts of current and deferred income taxes
recognized by the Company, as well as deferred income tax assets and liabilities recorded at June 30,
2012.

Share-based payments

For equity-settled awards, the fair value of the award is charged to the statement of operations and
credited to the share-based payment reserve rateably over the vesting period, after adjusting for the
number of awards that are expected to vest. The fair value of the awards is determined at the date of
grant using the Black-Scholes option pricing model. To the extent that the inputs into the Black-
Scholes pricing model are inaccurate, there could be an increase or decrease to the share-based
payment charge to the statement of operations.

Capital management

There have been no significant changes in the Company’s objectives, policies and processes for
managing its capital, including items the Company regards as capital, during the six months ended
June 30, 2012. At June 30, 2012, the Company expects its capital resources and projected cash flows
from continuing operations to support its normal operating requirements on an ongoing basis, planned
development and exploration of its mineral properties, and other expansionary plans. At June 30,
2012, there were no externally imposed capital requirements to which the Company is subject and
with which the Company had not complied.

Financial instruments

The Company’s financial instruments at June 30, 2012 and December 31, 2011 consist of cash, trade
and other receivables, the derivative asset, trade and other payables, the convertible note and the
promissory note.

At June 30 2012, the carrying amounts of cash, trade and other receivables, and trade and other
payables are considered to be reasonable approximation of their fair values due to their short-term
nature.

The fair value of the convertible note liability was determined on the date of issue using a discounted
future cash-flow analysis. The fair value of the promissory note upon initial recognition was considered
to be its face value. The derivative asset is marked-to market each period.

Derivative instruments - Embedded derivatives

Financial instruments and non-financial contracts may contain embedded derivatives, which are
required to be accounted for separately at fair value as derivatives when the risks and characteristics
of the embedded derivatives are not closely related to those of their host contract and the host
contract is not carried at fair value. The Company regularly assesses its financial instruments and non-
financial contracts to ensure that any embedded derivatives are accounted for in accordance with its

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SECOND QUARTER 2012

policy. There were no material embedded derivatives requiring separate accounting at June 30, 2012
or December 31, 2011, other than those discussed below.

(i) Derivative contracts on silver

On March 18, 2011, the Company entered into a series of monthly call option contracts to purchase
1,204,000 ounces of silver at $39 per ounce for a total cost of $2.2 million. These contracts were
designed to partially mitigate the adverse tax consequences of the silver purchase agreement while at
the same time exposing the Company to gains from a potential rise in silver prices. The contracts
covered approximately two-thirds of the monthly silver production sold to Silver Wheaton Caymans
over the period April 1, 2011 to September 30, 2011. During the three months ended June 30, 2011,
contracts to purchase 334,000 ounces of silver were sold, resulting in a gain of $0.5 million and $0.6
million for the three and six months ended June 30, 2011, respectively, and contracts to purchase
140,000 ounces expired, resulting in a realized loss of $0.3 million and $0.2 million, respectively, for
the three and six months ended June 30, 2011.

The fair value of the remaining contracts (which were accounted for as a derivative asset) was $0.5
million at June 30, 2011, based on current and available market information. As such, a net loss of $1.6
million and $1.1 million was recognized as an unrealized mark-to-market loss on the outstanding
contracts for the three and six months ended June 30, 2011 respectively in the statement of operations.
All contracts purchased on March 18, 2011 expired in September 2011.

On September 15, 2011, the Company entered into another series of monthly call option contracts to
purchase 1,489,400 ounces of silver at $49 per ounce for a total cost of $3.7 million. These contracts
were designed to cover approximately 30% of the monthly silver production sold to Silver Wheaton
Caymans over the period September 27, 2011 to September 26, 2012. These options were intended to
offset the incremental income tax that would be payable by the Company if spot prices exceed the
strike price. The fair value of these contracts (which are accounted for as a derivative asset) was
$7,000 at June 30, 2012, based on current and available market information. In the three and six
months ended June 30, 2012, the Company recognized a loss on these contracts of $0.2 million and
$0.2 million respectively, comprising a realized loss on expired contracts of $0.9 million and $1.9
million, respectively, and an unrealized marked-to-market gain on unexpired contracts of $0.7 million
and $1.7 million, respectively.

(ii) Convertible note and promissory note

The convertible note was considered to contain an embedded derivative liability which was re-
measured at fair value each period during the initial one year term that expired on August 6, 2011, at
which time the fair value of the derivative was $nil. During the three and six months ended June 30,
2011 unrealized derivative gains of $0.2 million and $2.6 million respectively were recognized in
relation to this derivative liability.

The fair value of the convertible note liability was determined using a statistical model, which
contained quoted prices and market-corroborated inputs. The fair value of the promissory note upon
initial recognition was considered to be its face value.

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SECOND QUARTER 2012

RISKS AND UNCERTAINTIES

Financial instrument risk exposure

The following describes the types of financial risks to which the Company’s financial instruments are
exposed and its objectives and policies for managing those risk exposures.

(a) Credit risk

Credit risk is the risk that the counterparty to a financial instrument will cause a financial loss for the
Company by failing to discharge its obligations. Credit risk is primarily associated with trade
receivables; however, it also arises on cash. To mitigate exposure to credit risk on financial assets, the
Company limits the concentration of credit risk, ensures non-related counterparties demonstrate
minimum acceptable credit worthiness and ensures liquidity of available funds.

The Company closely monitors its financial assets and does not have any significant concentration of
credit risk with non-related parties. The Company invests its cash in highly rated financial institutions
and sells its products exclusively to organizations with strong credit ratings. The credit risk associated
with trade receivables at June 30, 2012 is considered to be negligible.

The Company’s maximum exposure to credit risk at June 30, 2012 and December 31, 2011 is as
follows:

June 30, 2012 December 31, 2011
(In thousands of US dollars) $

Cash 125,733 80,761
Trade and other receivables 3,403 5,526
Taxes receivable 9,514 20,969

(b) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated
with its financial liabilities that are settled by delivering cash or another financial asset. The Company
has developed a planning, budgeting and forecasting process to help determine the funds required to
support its normal operating requirements on an ongoing basis and its expansionary plans.

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SECOND QUARTER 2012

In the normal course of business, the Company enters into contracts and performs business activities
that give rise to commitments for future minimum payments. The following table summarizes the
contractual maturities of the Company’s financial liabilities and operating and capital commitments at
June 30, 2012:

December 31
June 30, 2012 2011
Within Over
1 year 2-5 years 5 years Total Total
$ $ $ $ $
Accounts payable and accrued
liabilities 16,676 - - 16,676 20,553
Taxes payable 7,561 - - 7,561 4,213
Convertible debt and interest 31,846 - - 31,846 31,846
Promissory note and interest 7,760 46,476 - 54,236 63,900
Minimum rental and operating
lease payments 477 372 - 849 1,115
Reclamation and closure cost
obligations - - 19,362 19,362 19,362
Commitment to purchase plant
and equipment 3,348 - - 3,348 694
67,668 46,848 19,362 133,878 141,683

(c) Market risk

(i) Currency risk

Currency risk is the risk that the fair values or future cash flows of the Company’s financial
instruments will fluctuate because of changes in foreign currency exchange rates. Exchange
rate fluctuations may affect the costs incurred in the operations. Gold is sold in U.S. dollars and
costs are incurred principally in U.S. dollars and Mexican pesos. The appreciation of the
Mexican peso against the U.S. dollar can increase the costs of gold production and capital
expenditures in U.S. dollar terms. The Company also holds cash that is denominated in
Canadian dollars and Mexican pesos which are subject to currency risk. The Company’s head
office general and administrative expenses are mainly denominated in Canadian dollars and
are translated to US dollars at the average rate during the period, as such if the US dollar
appreciates (depreciates) as compared to the Canadian dollar, the costs of the Company
would decrease (increase) in US dollar terms. The Company’s equity is denominated in
Canadian dollars; the convertible U.S. dollar debt held by Goldcorp is convertible into equity at
a fixed Canadian dollar price, as such the Company is subject to currency risk if the Canadian
dollar depreciates against the U.S. dollar.

During the three and six months ended June 30, 2012, the Company recognized a loss of $1.3
million and a gain of $0.2 million, respectively, on foreign exchange (2011 - gain of $5.0 million
and $3.4 million, respectively).

The Company does not currently use derivative instruments to reduce its exposure to currency
risk, however, management monitors its differing currency needs and tries to reduce its

36

SECOND QUARTER 2012

exposure to currency risks through exchanging currencies at what are considered to be
optimal times.

(ii) Interest rate risk

Interest rate risk is the risk that the fair values and future cash flows of the financial
instruments will fluctuate because of changes in market interest rates. The exposure to
interest rates is monitored. The Company has very limited interest rate risk as the net
exposure of financial instruments subject to floating interest rates is not material.

(iii) Price risk

Price risk is the risk that the fair value or future cash flows of the Company’s financial
instruments will fluctuate because of changes in commodity prices. Profitability depends on
metal prices for gold and silver. Metal prices are affected by numerous factors such as the sale
or purchase of gold and silver by various central banks and financial institutions, interest rates,
exchange rates, inflation or deflation, fluctuations in the value of the U.S. dollar and foreign
currencies, global and regional supply and demand, and the political and economic conditions
of major producing countries throughout the world. This risk includes the fixed price
contracted sales of silver and associated taxation. As discussed above, during 2011, the
Company entered into two sets of silver call options to partially mitigate the adverse tax
consequences of increases in the price of silver.

Other risks and uncertainties

In 2012, there have been no changes to the Company’s exposure to other risks and uncertainties,
including risks relating to the Company’s foreign operations, government regulation, and
environmental regulation, as described in the 2011 year-end MD&A. With respect to commitments
and contingencies of Primero, the reader is referred to Note 14 of the Company’s Condensed
Consolidated Interim Financial Statements for the three and six months ended June 30, 2012 as filed
on SEDAR.

Disclosure controls and procedures

Disclosure controls and procedures form a framework designed to provide reasonable assurance that
information disclosed publicly fairly presents in all material respects the financial condition, results of
operations and cash flows of the Company for the periods presented in this MD&A. The Company’s
disclosure controls and procedures framework includes processes designed to ensure that material
information relating to the Company, including its consolidated subsidiaries, is made known to
management by others within those entities to allow timely decisions regarding required disclosure.

The Company’s management, with the participation of its CEO and CFO, has evaluated the design,
operation and effectiveness of the Company’s disclosure controls and procedures. Based on the
results of that evaluation, the Company’s CEO and CFO have concluded that, as of the end of the
period covered by this report, the Company’s disclosure controls and procedures were effective to
provide reasonable assurance that the information required to be disclosed by the Company in its

37

SECOND QUARTER 2012

annual filings, interim filings or other reports filed or submitted by it under securities legislation is
recorded, processed, summarized and reported, within the time periods specified in the securities
legislation, and is accumulated and communicated to the Company’s management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal controls over financial reporting

The Company’s management, with the participation of its CEO and CFO is responsible for establishing
and maintaining adequate internal control over financial reporting. The Company’s internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS. The Company’s internal control over financial reporting includes policies and procedures
that:

• pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, the
transactions and dispositions of assets of the Company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with IFRS and that the Company’s receipts and expenditures are
made only in accordance with authorizations of management and the Company’s Directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the Company’s assets that could have a material effect on the Company’s
consolidated financial statements.

There has been no material change in internal controls of the Company during the six months ended
June 30, 2012.

Readers are cautioned that any controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Due to the inherent limitations in all controls systems, they cannot provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been prevented or detected.
These inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
unauthorized override of the control. The design of any control system also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Accordingly,
because of the inherent limitations in a cost effective control system, misstatements due to error or
fraud may occur and not be detected.

Cautionary Statement on Forward-Looking Statement Information
Certain statements made and information contained in this MD&A constitute “forward-looking
information” within the meaning of Canadian securities laws, for example, references to the possibility
of acquiring producing or near-term producing precious metals assets, future gold and silver
production and the requirement for future financings. Forward –looking information and statements in
this MD&A include those that relate to:

38

SECOND QUARTER 2012

 the ability to be successful in its APA application with the intention of paying taxation on silver
sales to Silver Wheaton Caymans at realized prices,
 the ability of the Company to expand production at the San Dimas Mine,
 the ability of the Company to identify appropriate acquisition opportunities, or if an
opportunity is identified, to conclude a transaction on satisfactory terms,
 the actual results of exploration activities, including the ability of the Company to continue the
historical conversion of resources to reserves at the San Dimas Mine,
 actual results of reclamation activities at the San Dimas Mine,
 the estimation or realization of Mineral Reserves and Resources,
 the timing and amount of estimated future production, capital expenditures and costs,
including forecasted cash costs,
 the timing of the development of new mineral deposits,
 the Company’s requirements for additional capital and ability to complete future financings,
 future prices of precious and base metals,
 expected ore grades, recovery rates, and throughput
 that plant, equipment or processes will operate as anticipated,
 accidents, labour disputes, road blocks and other risks of the mining industry,
 the ability of the Company to obtain governmental approvals or permits in connection with the
continued operation and development of the San Dimas Mine,
 the ability of the Company to comply with environmental, safety and other regulatory
requirements,
 the completion of development or construction activities,
 expectations regarding currency fluctuations,
 title disputes relating to the Company’s properties,
 the timing and possible outcome of pending litigation

Such forward-looking information is necessarily based upon a number of factors and assumptions that,
while considered reasonable by the Company as of the date of such statements, are inherently subject
to significant business, economic and competitive uncertainties and contingencies. The assumptions
made by the Company in preparing the forward looking information contained in this MD&A, which
may prove to be incorrect, include, but are not limited to: the expectations and beliefs of management;
the specific assumptions set forth above in this MD&A; assumptions relating to the existence of
companies that may wish to dispose of producing or near-term producing precious metals assets, that
there are no significant disruptions affecting operations, whether due to labour disruptions, supply
disruptions, damage to or loss of equipment, whether as a result of natural occurrences including
flooding, political changes, title issues, intervention by local landowners, loss of permits, or
environmental concerns or otherwise; that there are no disruptions in the supply of power from the Las
Truchas power generation facility, whether as a result of damage to the facility or unusually limited
amounts of precipitation; that development and expansion at San Dimas proceeds on a basis
consistent with current expectations and the Company does not change its development and
exploration plans; that the exchange rate between the Canadian dollar, Mexican peso and the United
States dollar remains consistent with current levels; that prices for gold and silver remain consistent
with the Company's expectations; that prices for key mining supplies, including labour costs and
consumables, remain consistent with the Company's current expectations; that production meets
expectations; that the Company’s current estimates of mineral reserves, mineral resources,
exploration potential, mineral grades and mineral recovery are accurate; that the Company identifies
higher grade veins in sufficient quantities of minable ore in the Central Block and Sinaloa Graben; that

39

SECOND QUARTER 2012

the geology and vein structures in the Sinaloa Graben are as expected; that the Company completes
the Sinaloa Graben/Central Block tunnel; that the ratio of gold to silver price is maintained in
accordance with the Company’s expectations; that there are no material variations in the current tax
and regulatory environment, including the imposition of mining royalties; that the Company will
receive required permits and access to surface rights; that the Company can access financing,
appropriate equipment and sufficient labour and that the political environment within Mexico will
continue to support the development of environmentally safe mining projects.

No assurance can be given as to whether these assumptions will prove to be correct. These
assumptions should be considered carefully by investors. Investors are cautioned not to place undue
reliance on the forward-looking information and statements or the assumptions on which the
Company’s forward-looking information and statements are based.

Forward-looking information is subject to a variety of risks and uncertainties which could cause actual
events or results to differ from those reflected in the forward-looking statements. Such risks include,
but are not limited to: the volatility of prices of gold and other metals; uncertainty of mineral reserves,
mineral resources, exploration potential, mineral grades and mineral recovery estimates; uncertainty of
future production, delays in completion of the mill expansion, exploration and development plans;
insufficient capital to complete mill expansion, development and exploration plans; currency
fluctuations; financing of additional capital requirements; cost of exploration and development
programs; inability to complete the Sinaloa Graben/Central Block tunnel or other development; mining
risks, including unexpected formations and cave-ins, which delay operations or prevent extraction of
material; risks associated with foreign operations; governmental and environmental regulation; the
volatility of the Company's stock price; landowner dissatisfaction and disputes; delays in permitting;
damage to equipment; labour disruptions; interruptions. Should one or more of these risks and
uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary
materially from those described in forward-looking statements.

Investors are advised to carefully review and consider the risk factors identified in this MD&A under
the heading “Risk and uncertainties” , in the Company’s MD&A dated March 27, 2012 (as filed on
SEDAR) under the headings “Risks and uncertainties” and “Other risks and uncertainties”, and in the
Company’s short form prospectus dated July 9, 2010 under the heading “Risk Factors” for a discussion
of the factors that could cause the Company’s actual results, performance and achievements to be
materially different from any anticipated future results, performance or achievements expressed or
implied by the forward-looking statements. Investors are further cautioned that the foregoing list of
assumptions and risk factors is not exhaustive and it is recommended that prospective investors
consult the more complete discussion of the Company’s business, financial condition and prospects
that is included in this MD&A. The forward-looking information and statements contained in this
MD&A are made as of the date hereof and, accordingly, are subject to change after such date.

The Company does not undertake to update any forward-looking information, except as, and to the
extent, required by applicable securities laws. The forward-looking statements contained herein are
expressly qualified by this cautionary statement.

40

O C
MANAGEMENT’S DISCUSSION AND ANALY
A YSIS
SECOND QUARTER 2012
D 2

Cautiona Note for United State Investors
ary es

As a Brit tish Columbia corporatio and a “re
on eporting issu
uer” under C Canadian securities laws the s,
Company is subject to certain rules and regulat
y o tions issued b Canadian Securities Ad
by dministrators The
s.
Company is required to provide de
y t etailed inform
mation regardding its propeerties includi mineralization,
ing
drilling, sa
ampling and analysis, on security of samples and mineral rese
s erve estimate under Can
es nadian
National Instrument 43-101 (“NI 43-101”). Th United Sta
4 4 he ates Securities and Exchange Commission
applies di dards than th standards under NI 43 -101 in order to classify m
ifferent stand he r mineralization as a
n
reserve. Accordingly, mineral rese
A erve estimates contained iin this MD&A may not qu
A ualify as “rese
erves”
under SEC standards. Further, th Company describes a mineral resources as
he y any ssociated with its
properties utilizing te erminology such as “infe
s erred” or “inndicated” wh hich are term recognize by
ms ed
Canadian regulators under NI 43-101 but not re ecognized by the United SStates’ Securities and Exch hange
Commiss sion. United States inves stors are also cautioned that disclosu of exploration potential is
o ure
conceptual in nature by definition and there is no assuranc that explo
b ce oration of the mineral pot
e tential
identified will result in any category of NI 43-10 mineral res
y 01 sources being identified.
g

On behalf of the Board
f d

_____________________
__
Joseph F. Conway
President CEO and Di
t, irector

41


CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
THREE AND SIX MONTHS ENDED JUNE 30, 2012 and 2011
(In thousands of United States dollars, except for share and per share amounts)
(Unaudited)
Three months ended June 30, Six months ended June 30,
Notes 2012 2011 2012 2011
$ $ $ $

Revenue 5 57,061 40,830 101,065 74,818

Operating expenses (18,253) (16,166) (37,146) (32,034)
Depreciation and depletion 7 (8,639) (5,941) (15,088) (13,149)
Total cost of sales (26,892) (22,107) (52,234) (45,183)

Income from mine operations 30,169 18,723 48,831 29,635
General and administrative expenses (6,017) (5,106) (9,532) (9,610)

Income from operations 24,152 13,617 39,299 20,025
Other expense (343) - (431) -
Foreign exchange (loss) gain (1,280) 4,956 204 3,388
Finance income 695 2,414 832 2,447
Finance expense 8 (692) (3,132) (1,839) (6,081)
(Loss) gain on derivative contracts 12 (i) (176) (1,229) (197) 1,898

Income before income taxes 22,356 16,626 37,868 21,677

Income taxes expense 6 (7,351) (12,729) (4,285) (25,674)

Net income (loss) for the period 15,005 3,897 33,583 (3,997)

Other comprehensive income
Exchange differences on translation
of foreign operations (146) (1,431) 98 (711)
Total comprehensive income (loss)
for the period 14,859 2,466 33,681 (4,708)

Basic income (loss) per share 0.17 0.04 0.38 (0.05)
Diluted income (loss) per share 0.16 0.04 0.35 (0.05)

Weighted average number of
common shares outstanding
Basic 9 (a) 88,259,831 87,914,731 88,259,831 87,843,998
Diluted 9 (a) 96,688,006 88,197,130 96,698,257 87,843,998

See accompanying notes to the condensed consolidated interim financial statements. 42

CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
(In thousands of United States dollars)
(Unaudited)
June 30, December 31,
Notes 2012 2011
$ $

Assets
Current assets
Cash 14 (a) 125,733 80,761
Trade and other receivables 3,403 5,526
Taxes receivable 6, 14 (a) 9,514 20,969
Prepaid expenses 5,401 5,570
Inventories 8,195 9,463
Derivative asset 12(i) 7 203
Total current assets 152,253 122,492

Non-current assets
Mining interests 7 486,910 486,424
Deferred tax asset 6 14,055 15,781
Total assets 653,218 624,697

Liabilities
Current liabilities
Trade and other payables 18,765 24,907
Taxes payable 7,561 4,213
Current portion of long-term debt 8 35,000 40,000
Total current liabilities 61,326 69,120

Non-current liabilities
Decommissioning liability 9,736 9,373
Long-term debt 8 40,000 40,000
Other long-term liabilities 9( e) 4,009 2,926
Total liabilities 115,071 121,419

Equity
Share capital 9 (b) 423,250 423,250
Warrant reserve 9 (d) 34,237 34,237
Share-based payment reserve 9( c) 15,833 14,645
Foreign currency translation reserve (1,352) (1,450)
Retained earnings 66,179 32,596
Total equity 538,147 503,278
Total liabilities and equity 653,218 624,697

Commitments and contingencies (Note 14)


CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of United States dollars, except for number of common shares)
Foreign
Share-based currency Retained
Share capital Warrants payment translation Earnings/
Notes Shares Amount reserve reserve reserve (Deficit) Total Equity
$ $ $ $ $ $

Balance, January 1, 2011 87,739,005 420,994 35,396 8,751 138 (35,233) 430,046
Shares issued for
Exercise of warrants 9 (d) 492,076 2,127 (1,159) - - - 968
Exercise of stock options 9 ( c) 18,750 87 87
Foreign currency translation - - - - (711) - (711)
Share-based payment 9 (c ) - - - 3,677 - - 3,677
Net loss - - - - - (3,997) (3,997)
Balance, June 30, 2011 88,249,831 423,208 34,237 12,428 (573) (39,230) 430,070
Shares issued for
Exercise of warrants 9 (d) - - - - - - -
Exercise of stock options 9 ( c) 10,000 42 - (50) - - (8)
Foreign currency translation - - - - (877) - (877)
Share-based payment 9 ( c) - - - 2,267 - - 2,267
Net Income - - - - - 71,826 71,826
Balance, December 31, 2011 88,259,831 423,250 34,237 14,645 (1,450) 32,596 503,278
Foreign currency translation - - - - 98 - 98
Share-based payments 9 ( c) - - - 1,188 - - 1,188
Net income - - - - - 33,583 33,583
Balance, June 30, 2012 88,259,831 423,250 34,237 15,833 (1,352) 66,179 538,147

Total comprehensive income was $14,859 and $33,681 for the three and six months ended June 30, 2012 (June 30, 2011 - income of $2,466 and loss of $4,708).


CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(In thousands Of United States dollars)
(Unaudited)
Notes 2012 2011 2012 2011
$ $ $ $

Income before taxes 22,356 16,626 37,868 21,677
Adjustments for:
Depreciation and depletion 7 8,639 5,941 15,088 13,149
Changes to decomissioning liability - 68 - 771
Share-based payments 9( c), ( e) 2,106 2,410 2,704 4,640
Cash paid for derivative contracts (net of
sales proceeds) 12 (i) - 922 - (1,313)
Unrealized (gain) loss on derivative asset 12 (i) (734) 1,436 (1,668) (1,509)
Realized (gain) loss on derivative asset 12 (i) 910 (207) 1,865 (389)
Assets written off 79 - 324 -
Unrealized foreign exchange (gain) loss 2,494 (6,552) (568) (6,264)
Taxes paid (362) (3,756) (1,071) (18,317)
Other adjustments
Finance income (disclosed in investing
activities) (695) (2,414) (832) (2,447)
Finance expense net of capitalized borrowing
costs (disclosed in financing activities) 1,020 3,403 2,251 6,698
35,813 17,877 55,961 16,696

Changes in non-cash working capital 10 11,102 (11,267) 13,770 2,032
Cash provided by operating activities 46,915 6,610 69,731 18,728

Expenditures on exploration and 7
evaluation assets (6,831) (2,204) (13,791) (4,120)
Expenditures on mining interests 7 (1,079) (6,698) (2,064) (9,994)
Interest received 695 73 832 94
Cash used in investing activities (7,215) (8,829) (15,023) (14,020)

Repayment of debt 8 (ii) - - (5,000) -
Proceeds on exercise of warrants and 9 (d )
options - 937 - 1,021
Interest paid 8 (ii) - (571) (4,406) (931)
Cash used in financing activites - 366 (9,406) 90

Effect of foreign exchange rate changes on cash (235) 102 (330) 533

Increase in cash 39,465 (1,751) 44,972 5,331
Cash, beginning of period 86,268 65,380 80,761 58,298
Cash, end of period 125,733 63,629 125,733 63,629

Supplemental cash flow information (Note 10)


NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
JUNE 30 2012
(Unaudited)

1. Nature of operations

Primero Mining Corp. (“Primero” or the “Company”) was incorporated in Canada on
November 26, 2007 under the Business Corporations Act (British Columbia). The Company’s
registered office is Suite 1500, 1055 West Georgia Street, Vancouver, British Columbia B.C.
Primero is a publicly traded company, listed on both the Toronto and New York Stock
Exchanges; Primero has no parent company.

Primero is a Canadian-based precious metals producer with mining operations in Mexico. 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. Primero currently has one reportable operating segment.

2. Significant accounting policies

These condensed consolidated interim financial statements have been prepared in accordance
with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, as issued by
the International Accounting Standards Board (“IASB”) and using the accounting policies the
Company expects to adopt in its consolidated financial statements for the year ending
December 31, 2012 based on current standards. The accounting policies followed in these
condensed consolidated interim financial statements are the same as those applied in the
Company’s consolidated financial statements for the year ended December 31, 2011, and its
condensed consolidated interim financial statements for the three months ended March 31,
2012.

These condensed consolidated interim financial statements do not include all the necessary
annual disclosures in accordance with IFRS. These condensed consolidated interim financial
statements should be read in conjunction with the Company’s consolidated annual financial
statements for the year ended December 31, 2011.

These condensed consolidated interim financial statements have been prepared on a historical
cost basis, other than the derivative asset, which is accounted for as fair value through profit
and loss.

The preparation of the condensed consolidated interim financial statements requires
management to make estimates and assumptions that affect the reported amounts of
revenues, expenses, assets, and liabilities at the date of the condensed consolidated interim
financial statements. If in future such estimates and assumptions, which are based on
management’s best judgment at the date of the condensed consolidated interim financial
statements, deviate from actual circumstances, the original estimates and assumptions will be
modified as appropriate in the period in which the circumstances change.

In the opinion of management, all adjustments necessary to present fairly the financial position
of the Company as at June 30, 2012 and the results of its operations and cash flows for the
three and six months then ended have been made. The interim results are not necessarily
indicative of results for a full year.

46

JUNE 30 2012
(Unaudited)

(a) Basis of consolidation

These condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries from their respective dates of acquisition.
All material intercompany transactions and balances, revenues and expenses have
been eliminated. The Company’s significant subsidiaries are: Primero Empresa Minera,
S.A. de C.V., which owns the San Dimas Mine, Silver Trading (Barbados) Limited and
Primero Mining Luxembourg S.a.r.l.

(b) Measurement uncertainties

Significant estimates used in the preparation of these financial statements include, but
are not limited to:

(i) asset carrying values and impairment charges;

(ii) the economic recoverability of exploration expenditures incurred and the
probability of future economic benefits from development expenditures
incurred;

(iii) the valuation of inventories;

(iv) the recoverable tonnes of ore from the mine and the related depreciation and
depletion of mining interests;

(v) the proven and probable mineral reserves and resources, as well as mineral
potential associated with the mining property, the expected economic life of
the mining property, the future operating results and net cash flows from the
mining property and the recoverability of the mining property;

(vi) the expected costs of reclamation and closure cost obligations;

(vii) the assumptions used in accounting for share-based payments;

(viii) the ultimate determination of contingent liabilities disclosed by the Company;

(ix) the provision for income and mining taxes including expected recovery and
periods of reversals of timing differences and composition of deferred income
tax assets and liabilities; and

(x) the fair values of assets and liabilities acquired in business combinations.

Significant judgments used in the preparation of these financial statements include, but
are not limited to:

47

JUNE 30 2012
(Unaudited)

(i) accounting and presentation relating to the agreement acquired upon the
Company’s acquisition of the San Dimas Mine to sell silver to Silver Wheaton
Caymans (Note 4);

(ii) the likelihood that tax positions taken will be sustained upon examination by
applicable tax authorities, in particular, the benefit of a successful advance
pricing agreement (“APA”) filing and resultant provision for income taxes
based on realized silver prices ( Notes 4, 6 and 14 (a));

(iii) the componentization of buildings, plant and equipment, and the useful lives
and related depreciation of these assets;

(iv) the grouping of the San Dimas assets into a Cash Generating Unit (“CGU”) and
the determination that the Company has just one CGU;

(v) the expected conversion of the convertible debt; and

(vi) the functional currency of the entities within the consolidated group.

3. Recent pronouncements issued

The Company has reviewed new and revised accounting pronouncements that have been
issued but are not yet effective and determined that the following may have an impact in the
future on the Company:

IFRS 13 Fair Value Measurement (“IFRS 13”) was issued by the IASB in May 2011, and is effective
for annual periods beginning on or after January 1, 2013, with early application permitted. IFRS
13 was issued to remedy the inconsistencies in the requirements for measuring fair value and
for disclosing information about fair value measurement in various current IFRSs. IFRS 13
defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.

IFRS 13 relates to how to measure fair value, not what should be measured at fair value. As at
June 30, 2012, the only asset the Company recognized to which IFRS 13 would apply was the
silver call option derivative asset which is measured at fair value.

The measurement of the derivative asset is based on observable inputs in the silver futures
market using Level 1 inputs (quoted prices in active markets for items identical to the asset or
liability being measured); the valuation methodology is in accordance with IFRS 13. Based on
the financial instruments of the Company as at June 30, 2012, there will be no impact to the
Company from the adoption of this standard.

In October 2011, the IASB issued IFRIC 20 - Stripping Costs in the Production Phase of a Mine
(“IFRIC 20”). IFRIC 20 clarifies the requirements for accounting for the costs of stripping
activities in the production phase of an open-pit mine when two benefits accrue: (i) usable ore
that can be used to produce inventory and (ii) improved access to further quantities of
material that will be mined in future periods. The IFRIC allows a company to determine a
48

JUNE 30 2012
(Unaudited)

measure to allocate costs between inventory produced and the stripping activity asset; the
IFRIC provides examples of measures.

IFRIC 20 is effective for annual periods beginning on or after January 1, 2013 with earlier
adoption permitted and includes guidance on transition for pre-existing stripping assets. At
present the Company has no open pit mining operations and as such is not impacted by this
new standard. Should the Company own an open pit mine in the future it will apply the
provisions of IFRIC 20 from initial recognition, and develop a policy for allocation of costs if
relevant.

In June 2011, the IASB issued amendments to IAS 1 – Presentation of Financial Statements (“IAS
1”). The amendments are effective for annual periods beginning on or after July 1, 2012, with
early adoption permitted. The amendments to IAS 1 require companies preparing financial
statements in accordance with IFRS to group together items within other comprehensive
income (“OCI”) that may be reclassified to the profit or loss section of the Consolidated
Statement of Operations. The amendments also reaffirm existing requirements that items in
OCI and profit or loss should be presented as either a single statement or two consecutive
statements.

The only implication the amendments to IAS 1 has on the Company is with respect to the
balances shown in OCI. At June 30, 2012, the Company only presented one amount in OCI;
this related to the foreign exchange gains or losses recognized upon translation of the parent
company results from its functional currency (CDN$) to the presentational currency (US$).
This amount would be unlikely to be recycled through the Statement of Operations in future,
as it relates to the parent company (and not a subsidiary which may be disposed of in future).
The fact that this amount will not be recycled through the Statement of Operations will need to
be disclosed in the notes to the financial statements as a result of this change to IAS 1.

As of January 1, 2015, Primero will be required to adopt IFRS 9, “Financial Instruments”, which is
the result of the first phase of the IASB’s project to replace IAS 39, “Financial Instruments:
Recognition and Measurement”. The new standard replaces the current multiple classification
and measurement models for financial assets and liabilities with a single model that has only
two classification categories: amortized cost and fair value. The Company is currently
assessing the impact IFRS 9 will have on its financial statements.

As at June 30, 2012, the Company recognized and classified/measured the following financial
instruments in accordance with IAS 39:

Financial instrument Classification under IAS 39 Measurement basis
under IAS 39
Cash Loans and receivables Amortized cost
Trade and other receivables Loans and receivables Amortized cost
Trade and other payables Other financial liabilities Amortized cost
Convertible note (expires Other financial liabilities Amortized cost
August 2012)
Promissory note Other financial liabilities Amortized cost
Derivative asset Fair value through profit or loss Fair value
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Under IFRS 9, each of these financial instruments will have to be classified as either, amortized
cost or fair value. The Company would retain the same classifications as above, and based on
an analysis of IFRS 9, there would be no change to the recognition of these financial
instruments as a result of the adoption of IFRS 9.

There will likely be some disclosure differences for the Company as a result of the transition
from IAS 39 to IFRS 9.

4. Silver purchase agreement

On August 6, 2010, the Company obtained control of the San Dimas Mine, located in Mexico’s
San Dimas district, on the border of Durango and Sinaloa states. This was achieved by
acquiring 100% of the assets and liabilities of the operations from Desarrolos Mineros San
Luis, S.A. de C.V. (“DMSL”), a subsidiary of Goldcorp Inc. (“Goldcorp”). The purchase was part
of the Company’s strategy of building a portfolio of high-quality, low-cost precious metal
assets.

In addition to the San Dimas Mine, the Company acquired all of the shares of Silver Trading
(Barbados) Limited. (“Silver Trading”), which is party to a silver purchase agreement with
Silver Wheaton and Silver Wheaton Caymans (“the silver purchase agreement”).

In 2004, the owner of the San Dimas Mine entered into an agreement to sell all the silver
produced at the San Dimas Mine for a term of 25 years to Silver Wheaton Caymans in return
for an upfront payment comprising cash and shares of Silver Wheaton Corp. and a per ounce
payment of the lesser of $3.90 (adjusted for annual inflation), or the market price. This
transaction was documented in two silver purchase agreements, the first one between Silver
Trading and Silver Wheaton Caymans (the “External SPA”), and the second one between the
owner of the San Dimas Mine and Silver Trading (the “Internal SPA”). The Internal SPA
specified that the purchase price of silver was the market price. The Company was required to
assume these two agreements when it acquired the San Dimas Mine. The Internal SPA and
External SPA were amended when the Company acquired the San Dimas Mine, such that for
each of the first four years after the acquisition date, the first 3.5 million ounces per annum of
silver produced by the San Dimas Mine, plus 50% of the excess silver above this amount, must
be sold to Silver Wheaton Caymans at the lesser of $4.04 per ounce (adjusted by 1% per year)
and market prices. After four years, for the life of the mine, the first 6 million ounces per
annum of silver produced by the San Dimas Mine, plus 50% of the excess silver above this
amount, must be sold to Silver Wheaton Caymans at the lesser of $4.20 per ounce (adjusted
by 1% per year) and market prices. All silver not sold to Silver Wheaton Caymans is available
to be sold by the Company at market prices.

The expected cash flows associated with the sale of the silver to Silver Wheaton Caymans at a
price lower than market price have been reflected in the fair value of the mining interest
recorded upon acquisition of the San Dimas Mine. The Company has presented the value of
any expected future cash flows from the sale of any future silver production to Silver Wheaton
Caymans as part of the mining interest, as the Company did not receive any of the original
upfront payment which was made by Silver Wheaton to acquire its interest in the silver
production of the San Dimas Mine. Further, the Company does not believe that the agreement
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to sell to Silver Wheaton Caymans meets the definition of an onerous contract or other liability
as the obligation to sell silver to Silver Wheaton Caymans only arises upon production of the
silver (Note 2 (b)).

Until October, 2011, the Company computed income taxes in Mexico based on selling all silver
produced at the San Dimas Mine at market prices (the price in the Internal SPA that it was
required to assume on the acquisition of the San Dimas Mine). From a consolidated
perspective, therefore, the silver sales to Silver Wheaton Caymans realized approximately $4
per ounce, however, the Company recorded income taxes based on sales at market prices. On
October 11, 2011, as part of its restructuring initiatives, the Company amended the Internal SPA
to provide that the price payable by Silver Trading to purchase silver is the same price as the
fixed price charged by Silver Trading under the External SPA. On October 17, 2011, the
Company’s Mexican subsidiary filed a formal application to the Mexican tax authorities for an
APA on the Company’s restructuring plan that, if successful, would result in paying income
taxes based on realized revenue (Note 6).

5. Revenue

Revenue is comprised of the following sales:

Three months ended June 30 Six months ended June 30
2012 2011 2012 2011
$ $ $ $

Gold 40,050 28,690 78,642 57,130
Silver (Note 4) 17,011 12,140 22,423 17,688
57,061 40,830 101,065 74,818

As described in Note 4, for the first four years post-acquisition of the San Dimas Mine, the
Company is entitled to sell 50% of silver production above a 3.5 million ounce threshold (until
August 6 of the current year) at market price. This threshold for 2012 was met in at the end of
April, and as such, the Company sold 470,000 ounces of silver at market prices during the
three and six months ended June 30, 2012. The Company sold 260,593 ounces of silver at
market prices during the three and six months ended June 30, 2011.

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6. Income taxes

(a) The following table reconciles income taxes calculated at the statutory rate with the
income tax expense presented in these financial statements:

June 30 June 30
2012 2011 2012 2011
$ $ $

Income before income taxes 22,356 16,626 37,868 21,677

Canadian federal and provincial income tax
rate 25.00% 28.50% 25.00% 28.50%

Expected income tax expense (5,589) (4,738) (9,467) (6,178)

(Increase) decrease attributable to:
Effect of different foreign statutory
rates on earnings of subsidiaries (1,379) 526 (1,781) 247
Share-based payments (392) (564) (501) (1,222)
Amounts allowable (excluded)
for tax purposes 3,301 (580) 6,363 (3,306)
Impact of Mexican inflation
on tax values 317 - 4,727 -
Impact of foreign exchange (1,647) 610 27 4,050
Withholding taxes on
intercompany interest (1,130) (829) (2,331) (1,658)
Benefit of tax losses not recognized (832) (7,154) (1,322) (17,607)
Income tax expense (7,351) (12,729) (4,285) (25,674)

Income tax expense is
represented by:
Current income tax recovery (expense) 719 13,081 (13) (1,093)
Deferred income expense (8,070) (25,810) (4,272) (24,581)
Net income tax expense (7,351) (12,729) (4,285) (25,674)

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(b) The significant components of the Company’s deferred tax asset are as follows:

2012 2011
$ $

Non-capital losses and other future
deductions (Note 14 (a)) 8,952 14,508
Mineral property, plant and equipment 4,262 369
Decommissioning liability (1,899) (1,855)
Other 2,740 2,759
Deferred income tax asset 14,055 15,781

On October 17, 2011 the Company’s Mexican subsidiary filed an APA that, if successful, would
result in paying income taxes in Mexico based on realized rather than spot revenue. As
described in Note 4, upon the acquisition of the San Dimas Mine, the Company assumed the
obligation to sell silver at below market prices according to a silver purchase agreement. Silver
sales under the silver purchase agreement realize approximately $4 per ounce; however, the
Company’s provision for income taxes until filing the APA was based on sales at market prices.

For the duration of the APA process, under Mexican tax law, the taxpayer can record its
revenues and intercompany pricing under the terms that the taxpayer considers reasonable
(given that they are compliant with applicable transfer pricing requirements). As such, the
Company’s Mexican subsidiary has recorded revenues from sales of silver under the silver
purchase agreement (and taxes thereon) at the contracted price of approximately $4 since the
acquisition of the San Dimas Mine and in addition claimed a refund for the previous
overpayment of taxes. A refund of approximately $20 million (including inflationary payments
of $0.7 million) was received by the Company during the three months ended June 30, 2012,
and approximately $2 million is still pending. The refund does not indicate that the APA has
been successful, and should the Mexican authorities rule against the Company at conclusion of
the APA process, this amount would be payable (Note 14 (a)). The recovery of taxes from
August 6, 2010 to the date of filing was accounted for prospectively in the fourth quarter 2011
in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

No tax penalties are applied for the duration of the APA process should the Mexican tax
authorities disagree with the restructuring plan (Note 14 (a)).

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7. Mining interests

Mining interests include mining and exploration properties and related plant and equipment:

Mining Exploration and Plant, Construction
properties evaluation Land and equipment in Computer
and leases assets buildings and vehicles progress equipment Total
$ $ $ $ $ $ $
Cost

At January 1, 2011 383,718 4,744 46,599 49,977 9,884 792 495,714
At December 31, 2011 416,465 - 50,562 53,416 2,408 1,637 524,488
At June 30, 2012 416,465 6,307 50,533 55,084 9,891 1,760 540,040

Depreciation
and depletion

At January 1, 2011 8,629 - 710 1,947 - 68 11,354
At December 31, 2011 26,364 - 2,871 8,408 - 421 38,064
At June 30, 2012 36,527 - 4,012 11,960 - 631 53,130

Carrying value

At January 1, 2011 375,089 4,744 45,889 48,030 9,884 724 484,360
At December 31, 2011 390,101 - 47,691 45,008 2,408 1,216 486,424
At June 30, 2012 379,938 6,307 46,521 43,124 9,891 1,129 486,910

All property acquired as part of the San Dimas Mine or since that point in time is pledged as
security for the Company’s obligations under the silver purchase agreement, the convertible
note and promissory note entered into upon the acquisition of the San Dimas Mine (Note 8).

Depreciation and depletion expense for the three and six months ended June 30, 2012 was
$7.5 million and $15.1 million respectively (2011 - $6.1 million and $12.9 million), of which $(1.1)
million and $22,000 represent the change in the inventories balance in the three and six
months ended June 30, 2012 respectively (2011 - $0.2 million and $(0.2) million). Borrowing
costs of $0.3 million and $0.4 million were capitalized to mining interests during the three and
six months ended June 30, 2012 (2011 - $0.3 million and $0.6 million) at a weighted average
borrowing rate of 4.90% (2011 – 4.37%).

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8. Current and long-term debt

2012 2011
$ $

Convertible debt (i) 30,000 30,000
Promissory note (ii) 45,000 50,000
75,000 80,000
Less: Current portion of debt (35,000) (40,000)
Long-term debt 40,000 40,000

On August 6, 2010, in connection with the acquisition of the San Dimas Mine, the Company
issued the following debt instruments:

(i) A convertible promissory note (“the Note”) in the principal amount of $60
million with an annual interest rate of 3%, to DMSL, which DMSL immediately
assigned to Goldcorp. The Note may be repaid in cash by the Company at any
time or converted, at any time up to the maturity date (being the “Initial
Maturity Date” or “the Second Maturity Date”), by Goldcorp at a conversion
price of Cdn$6.00 per share. In determining the number of common shares to
be issued on conversion, per the Note, the principal amount will be translated
into Canadian dollars by multiplying such amount by 1.05, which was the
approximate exchange rate at the time of the acquisition.

On the first anniversary of the Note (“Initial Maturity Date”), the Note was
repayable in cash or, at the option of Primero, in common shares at 90% of the
volume weighted average trading price of the common shares for the five
trading days ending immediately prior to the Initial Maturity Date (the
“Maturity Conversion Price”). If on the Initial Maturity Date, Primero served
notice to convert (“Debtor Conversion Notice”), Goldcorp had the right to
extend the maturity Date until the second anniversary of the Note (the
“Second Maturity Date”). On July 20, 2011, Primero served notice to Goldcorp
to convert the Note into common shares of the Company and on August 4,
2011, Goldcorp elected to extend the Maturity date of the Note until the
Second Maturity Date, which gave the Company the right to (1) pay the
principal amount in cash immediately or (2) convert the debt to shares on the
Second Maturity Date at a price equal to the greater of a) the Maturity
Conversion Price (which was Cdn$3.74) and b) 90% of the volume weighted
average trading price of the common shares for the five trading days ending
immediately prior to the Second Maturity Date.

On October 19, 2011, the Company used its cash resources to repay $30
million (or 50%) of the Note plus $1.1 million of accrued interest.

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In accordance with IAS 39, Financial Instruments: Recognition and Measurement,
the Note is considered to contain an embedded derivative relating to the
conversion option which is set at a fixed exchange rate from US dollars to the
Canadian-dollar denominated shares. The carrying amount of the debt, on
initial recognition, was calculated as the difference between the proceeds of
the convertible debt as a whole and the fair value of the embedded derivative.
Subsequent to initial recognition, the derivative component was re-measured
at fair value at each reporting date while the debt component was accreted to
the face value of the Note using the effective interest rate through periodic
charges to finance expense over the initial one-year term of the debt. As the
initial one-year term was reached on August 6, 2011, the derivative component
had $nil value at June 30, 2012 and will continue to have $nil value through to
the final maturity date of the Note. Accretion relating to the Note for the three
and six months ended June 30, 2012 was $nil and $nil respectively (2011 - $1.8
million and $3.5 million).
(ii) A promissory note in the principal amount of $50 million with an annual
interest rate of 6% to DMSL, which DMSL subsequently assigned to a wholly-
owned Luxembourg subsidiary of Goldcorp. The promissory note is repayable
in four annual installments of $5 million, starting on December 31, 2011, with
the balance of principal due on December 31, 2015. On January 3, 2012, the
Company repaid the first $5 million annual installment plus accrued interest of
$4.4 million. In addition to the annual installments, the Company is required to
pay 50% of annual excess free cash flow (as defined in the promissory note)
against the principal balance.

9. Share capital

(a) Authorized share capital consists of unlimited common shares without par value and
unlimited preferred shares, issuable in series with special rights and restrictions
attached.

2012 2011
Common shares issued and fully paid

At January 1 88,259,831 87,739,005
Issued during three month period (Note 9 (b)) - 41,666
At March 31 88,259,831 87,780,671
Issued during three month period (Note 9 (b)) - 469,160
At June 30 88,259,831 88,249,831

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The following is a reconciliation of the basic and diluted weighted average number of common
shares:

2012 2011 2012 2011

Weighted average number of common 88,259,831 87,914,731 88,259,831 87,843,998
shares - basic
Potentially dilutive options 5,715 115,964 15,966 -
Potentially dilutive warrants - 166,435 -
Potentially dilutive convertible debt 8,422,460 - 8,422,460 -
Weighted average number of common 96,688,006 88,197,130 96,698,257 87,843,998
shares - diluted

(b) Common shares issuance

(i) During the six months ended June 30, 2011, the Company issued 492,076
common shares upon the exercise of common share purchase warrants and
18,750 common shares upon the exercise of stock options.

(ii) During the year ended December 31 2011, the Company issued 492,076
common shares upon the exercise of common share purchase warrants and
28,750 common shares upon the exercise of stock options.

(c) Stock options

Under the Company’s stock option plan, the number of common shares that may be
issued on the exercise of options granted under the plan is equal to 10% of the issued
and outstanding shares of the Company at the time an option is granted (less any
common shares reserved for issuance under other share compensation arrangements).
The majority of options issued typically vest over two years; one third upon the date of
grant, one third a year from the grant date, and one third two years from the grant
date, however, this is at the discretion of the Board of Directors upon grant. All options
are equity-settled and have a maximum term of five or ten years when granted.
Vested options granted under the Rolling Plan will generally expire 90 days after the
date that the optionee ceases to be employed by, provide services to, or be a director
or officer of, the Company, and any unvested options will terminate immediately.

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As at June 30, 2012, the following stock options were outstanding and exercisable:

Outstanding Exercisable
Number Remaining Number Remaining
of options Exercise contractual of options Exercise contractual
Expiry date outstanding price life (years) exercisable price life (years)
Cdn$ Cdn$

July 29, 2013 160,000 4.20 1.1 160,000 4.20 1.1
July 9, 2014 10,000 2.70 1.8 10,000 2.70 1.8
August 6, 2015 4,659,490 6.00 3.1 3,453,998 6.00 3.1
August 25, 2015 2,355,000 5.26 3.2 1,570,000 5.26 3.2
November 12, 2015 460,000 6.43 3.4 306,665 6.43 3.4
March 7, 2016 175,000 3.99 3.7 58,333 3.99 3.7
November 8, 2016 300,000 3.47 4.4 - - -
March 31, 2017 75,000 2.60 4.8 - - -
July 9, 2019 275,000 2.70 6.8 275,000 2.70 6.8
8,469,490 5.51 3.3 5,833,996 5.59 3.3

The following is a continuity schedule of the options outstanding for the period:

Weighted
average
Number of exercise
options price
Cdn$
Outstanding at January 1, 2011 8,158,240 5.64
Exercised (28,750) 2.74
Granted 475,000 3.66
Cancelled (30,000) 5.26
Outstanding at December 31, 2011 8,574,490 5.54
Granted 75,000 2.60
Cancelled (180,000) 5.78
Outstanding at June 30, 2012 8,469,490 5.51

The fair value of the options granted in 2012 and 2011 was calculated using the Black-
Scholes option pricing model. For all grants, the assumed dividend yield and forfeiture
rate were nil and 5%, respectively. Other conditions and assumptions were as follows:

Average Weighted
expected average
Number of life of options Exercise Risk free Volatility Black-Scholes
Issue date options (years) price interest rate (i) value assigned
Cdn$ % % Cdn$
March 31, 2012 75,000 3.5 2.60 1.39 47 0.92
November 8, 2011 300,000 3.5 3.47 1.19 47 1.22
March 7, 2011 175,000 3.5 3.99 2.34 48 1.39

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(i) Volatility was determined based upon the average historic volatility of a
number of comparable companies, calculated over the same period as the
expected life of the option.

(d) Warrants

As at June 30, 2012, the following share purchase warrants were outstanding:

Exercise
Amount Note price Expiry date
Cdn$
20,800,000 8.00 July 20, 2015

The following is a continuity schedule of the warrants outstanding for the period:

Weighted
average
Number of exercise
warrants price
Cdn$

Outstanding and exercisable at January 1, 2011 21,775,692 7.82
Exercised (492,076) 1.92
Expired (6,636) 2.00
Outstanding and exercisable at December 31, 2011 21,276,980 7.96
Expired (476,980) 6.00
Outstanding and exercisable June 30, 2012 20,800,000 8.00

Where warrants were issued as part of a unit or subscription receipt comprised of
common shares and warrants, the value assigned to the warrants was based on their
relative fair value (as compared to the shares issued), determined using the Black-
Scholes pricing model.

(e) Phantom share unit plan

On May 29, 2010, the Board of Directors approved the establishment of the
Company’s Phantom Share Unit Plan (“PSUP”); this is a cash-settled plan and the
exercise price of all PSU units (“units”) is $nil. The amount to be paid out in respect of
units which vest under the plan is the volume weighted average price per share of the
Company traded on the Toronto Stock Exchange over the last twenty trading days
preceding the vesting date.

On May 28, 2012 the Company’s shareholders approved the establishment of the
Directors PSU plan. A person holding Director PSUs is entitled to elect to receive, at
vesting either (1) a cash amount equal to the volume weighted average trading price

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per common share over the five preceding trading days, or (2) the number of common
shares equal to the number of Directors’ PSUs (subject to the total number of common
shares issuable at any time under the Directors’ PSU Plan, combined with all other
common shares issuable under any other equity compensation arrangements then in
place, not exceeding 10% of the total number of issued and outstanding common
shares of the Company). If no election is made, the Company will pay out such
Directors’ PSUs in cash.

The following units were issued and outstanding as at June 30, 2012:

Number of
units
Date of issue outstanding Vesting date Expiry date
August 6, 2010 1,528,076 August 6, 2013 December 31, 2013
February 27, 2011 95,666 February 27, 2013 December 31, 2013
February 27, 2011 95,667 February 27, 2014 December 31, 2014
May 19, 2011 36,748 May 19, 2013 December 31, 2013
May 19, 2011 36,749 May 19, 2014 December 31, 2014
November 8, 2011 33,333 November 8, 2012 December 31, 2012
March 31, 2012 825,046 March 31, 2013 December 31, 2013
March 31, 2012 38,461 December 1, 2012 December 31, 2012
May 25, 2012 31,410 May 25, 2013 December 31, 2013
May 25, 2012 31,410 May 25, 2014 December 31, 2014
May 25, 2012 31,411 May 25, 2015 December 31, 2015
Total 4,577,659

All of these units have been measured at the reporting date using their fair values. The
total amount of expense recognized in the statement of operations during the three
and six months ended June 30, 2012 in relation to the PSUP was $1.6 million and $1.5
million respectively ( 2011 - $0.5 million and $0.9 million). None of these units were
vested at June 30, 2012, but all remain outstanding.

The fair value of the units granted as at June 30, 2012 was calculated using the Black-
Scholes option pricing model with an assumed dividend yield and forfeiture rate of nil
and 0% respectively. Other conditions and assumptions were as follows:

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Number of Exercise Risk free Volatility Black-Scholes
Issue date units Term (years) price interest rate (i) value assigned
Cdn$ % % Cdn$

August 6, 2010 1,528,076 1.1 0.00 1.03 58 2.63
February 27, 2011 191,333 0.7 0.00 1.03 59 2.63
May 19, 2011 73,497 0.9 0.00 1.03 60 2.63
November 8, 2011 100,000 1.4 0.00 1.03 55 2.63
March 31, 2012 2,590,522 1.8 0.00 1.03 52 2.63
May 25, 2012 94,231 1.9 0.00 1.03 52 2.63

(i) Volatility was determined based upon the average historic volatility of a
number of comparable companies, calculated over the same period as the
expected life of the unit.

10. Supplementary cash flow information

Net changes in non-cash working capital comprise the following:

June 30, June 30,
2012 2011 2012 2011
$ $ $ $

Trade and other receivables 196 (1,508) 3,053 12,458
Taxes receivable 15,816 (2,946) 11,573 (8,994)
Prepaid expenses 30 (542) 175 (294)
Inventories 291 (275) 1,224 (360)
Trade and other payables (6,641) (12,106) (3,967) (10,982)
Taxes payable 1,410 6,110 1,712 10,204
11,102 (11,267) 13,770 2,032

11. Capital management

There have been no significant changes in the Company’s objectives, policies and processes
for managing its capital, including items the Company regards as capital, during the three and
six months ended June 30, 2012. The Company manages its common shares, stock options,
warrants and debt as capital. The Company’s objectives in managing capital are to safeguard
its ability to continue as a going concern in order to provide returns for shareholders and
benefits for other stakeholders. To meet this objective, the Company ensures it has sufficient
cash resources to pursue the exploration and development of its mining properties, and to fund
potential acquisitions and future production in the San Dimas mine. To support these
objectives the Company manages its capital structure and makes adjustments to it in light of
changes in economic conditions and risk characteristics of its underlying assets. To maintain or
adjust its capital structure, the Company may issue shares, issue debt, acquire or dispose of
assets or adjust the amount of cash held. The Company does not currently pay out dividends.

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The Company’s investment policy is to invest its cash in highly liquid short-term interest-
bearing investments with maturities 90 days or less from the original date of acquisition,
selected with regards to the expected timing of expenditures from continuing operations. The
Company is subject to a number of externally imposed capital requirements relating to its debt
(Note 8). The requirements are both financial and operational in nature; the Company has
complied with all such requirements during the period.

Pursuant to the terms of the promissory note and the convertible debt (Note 8), the Company
is required to maintain the following financial covenants:

 Tangible net worth as at the end of each fiscal quarter of at least $400 million, and
 Commencing the quarter ended September 30, 2011, free cash flow of at least
$10 million, calculated on a rolling four fiscal quarter basis.

Tangible net worth means equity less intangible assets. Free cash flow means cash flow from
operating activities as reported in the consolidated statement of cash flows, less the aggregate
of capital expenditures at the San Dimas Mine, principal and interest on the promissory note
and convertible debt and up to $5 million per year on account of acquisition opportunities.

12. Financial instruments

The Company’s financial instruments at June 30, 2012 and December 31, 2011 consist of cash,
trade and other receivables, the derivative asset, trade and other payables, the convertible
note, and the promissory note.

At June 30, 2012, the carrying amounts of cash, trade and other receivables, and trade and
other payables are considered to be reasonable approximation of their fair values due to their
short-term nature.

The fair value of the convertible note liability was determined on the date of issue using a
discounted future cash-flow analysis. The fair value of the promissory note upon initial
recognition was considered to be its face value. The derivative asset is marked-to market
each period.

Derivative instruments - Embedded derivatives

Financial instruments and non-financial contracts may contain embedded derivatives, which
are required to be accounted for separately at fair value as derivatives when the risks and
characteristics of the embedded derivatives are not closely related to those of their host
contract and the host contract is not carried at fair value. The Company regularly assesses its
financial instruments and non-financial contracts to ensure that any embedded derivatives are
accounted for in accordance with its policy. There were no material embedded derivatives
requiring separate accounting at June 30, 2012 or December 31, 2011, other than those
discussed below.

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(i) Derivative contracts on silver

On March 18, 2011, the Company entered into a series of monthly call option contracts
to purchase 1,204,000 ounces of silver at $39 per ounce for a total cost of $2.2 million.
These contracts were designed to partially mitigate the adverse tax consequences of
the silver purchase agreement while at the same time exposing the Company to gains
from a potential rise in silver prices. The contracts covered approximately two-thirds
of the monthly silver production sold to Silver Wheaton Caymans over the period April
1, 2011 to September 30, 2011. During the three months ended June 30, 2011, contracts
to purchase 334,000 ounces of silver were sold, resulting in a gain of $0.5 million and
$0.6 million for the three and six months ended June 30, 2011, respectively, and
contracts to purchase 140,000 ounces expired, resulting in a realized loss of $0.3
million and $0.2 million, respectively, for the three and six months ended June 30,
2011.

The fair value of the remaining contracts (which were accounted for as a derivative
asset) was $0.5 million at June 30, 2011, based on current and available market
information. As such, a net loss of $1.6 million and $1.1 million was recognized as an
unrealized mark-to-market loss on the outstanding contracts for the three and six
months ended June 30, 2011 respectively in the statement of operations. All contracts
purchased on March 18, 2011 expired in September 2011.

On September 15, 2011, the Company entered into another series of monthly call
option contracts to purchase 1,489,400 ounces of silver at $49 per ounce for a total
cost of $3.7 million. These contracts were designed to cover approximately 30% of
the monthly silver production sold to Silver Wheaton Caymans over the period
September 27, 2011 to September 26, 2012. These options were intended to offset the
incremental income tax that would be payable by the Company if spot prices exceed
the strike price. The fair value of these contracts (which are accounted for as a
derivative asset) was $7,000 at June 30, 2012, based on current and available market
information. In the three and six months ended June 30, 2012, the Company
recognized a loss on these contracts of $0.2 million and $0.2 million respectively,
comprising a realized loss on expired contracts of $0.9 million and $1.9 million
respectively and an unrealized marked-to-market gain on unexpired contracts of $0.7
million and $1.7 million respectively.

(ii) Convertible note and promissory note

The convertible note was considered to contain an embedded derivative liability which
was re-measured at fair value each period during the initial one year term that expired
on August 6, 2011, at which time the fair value of the derivative was $nil. During the
three and six months ended June 30, 2011 unrealized derivative gains of $0.2 million
and $2.6 million respectively were recognized in relation to this derivative liability.

The fair value of the convertible note liability was determined using a statistical model,
which contained quoted prices and market-corroborated inputs. The fair value of the
promissory note upon initial recognition was considered to be its face value.
63

JUNE 30 2012
(Unaudited)

13. Related party transactions

The Company has a convertible note and a promissory note outstanding to Goldcorp and a
wholly-owned subsidiary of Goldcorp, respectively. Goldcorp owns approximately 35% of the
Company’s common shares. Interest accrues on the promissory and convertible notes and is
recorded within trade and other payables. A payment of $5 million plus accrued interest of
$4.4 million was paid under the terms of the Promissory note on January 3, 2012 (Note 8).

During the three and six months ended June 30, 2012, $0.3 million and $1.6 million (2011 - $1.0
million and $2.3 million) were paid to DMSL for the purchase of equipment, equipment leasing
fees and services received under a transition services agreement between the Company and
DMSL. These amounts are considered to be at fair value. As at June 30, 2012, the Company
had an amount payable of $2.4 million due to DMSL (December 31, 2011 - $2.9 million).

14. Commitments and contingencies

(a) As described in Notes 4 and 6, on October 17, 2011 the Company’s Mexican subsidiary
filed a formal application to the Mexican tax authorities for an advance ruling on the
Company’s restructuring plan that, if successful, would result in paying income taxes in
Mexico based on realized rather than spot revenue.

The Company’s restructuring plan relies on a detailed transfer pricing analysis in order
to support the ongoing sale of silver from Mexico to a related party at the fixed price.
Given the intensified scrutiny of transfer pricing in recent years and the significant
adjustments and penalties assessed by tax authorities, many jurisdictions (including
Mexico) allow companies to mitigate this risk by entering into an APA.

The APA review is an interactive process between the taxpayer and the tax authority.
At the end of the APA process, the tax authorities will issue a tax resolution letter
specifying the pricing method that they consider appropriate for the Company to apply
to intercompany sales under the silver purchase agreement.

For the duration of the APA process, under Mexican tax law, the taxpayer can record
its revenues and intercompany pricing under the terms that the taxpayer considers
reasonable (given that they are compliant with applicable transfer pricing
requirements). As such, the Company’s Mexican subsidiary has recorded revenues
from sales of silver under the silver purchase agreement (and taxes thereon) at the
contracted price of approximately $4 since the date of acquisition of the San Dimas
Mine (August 6, 2010), and in addition claimed a refund for the overpayment of taxes
between the date of purchase of the San Dimas Mine and the date of the filing (Note
6).

Should the Company be unsuccessful in its APA application , it will need to pay to the
Mexican government the amount of tax which the government deems to be owing in
respect of taxation on silver sales under the silver purchase agreement. The Company
considers this to be a contingent liability, the outcome of which will not be known until
the tax authorities issue their final opinion. The maximum contingent liability in
64

JUNE 30 2012
(Unaudited)

respect of such an adverse ruling as at June 30, 2012 is $52.4 million plus estimated
interest of $5.8 million . During the three months ended June 30, 2012, the Company
received a refund of approximately $20 million (including inflationary payments of
$0.7 million) for overpayment of taxes, and approximately $2 million is still pending.
As such, the cash that would have to be paid to satisfy the contingent liability at June
30, 2012 is $56.2 million. The refund does not indicate that the APA has been
successful, and should the Mexican authorities rule against the Company at conclusion
of the APA process, this contingent liability would be payable (Note 6). Since the
Company intends to continue to record taxes in Mexico based on realized prices, the
contingent liability will grow during the APA process.

(b) An Ejido is a communal ownership of land recognized by the federal laws in Mexico.
While mineral rights are administered by the federal government through federally
issued mining concessions, an Ejido controls surface rights over communal property
through a Board of Directors which is headed by a president. An Ejido may also allow
individual members of the Ejido to obtain title to specific parcels of land and thus the
right to rent or sell the land. Four of the properties included in the San Dimas mine are
subject to legal proceedings commenced by local Ejidos. None of the proceedings
name the Company as a defendant; in all cases, the defendants are previous owners of
the properties, either deceased individuals who, according to certain public deeds,
owned the properties more than 80 years ago or corporate entities that are no longer
in existence. In addition, three proceedings name the Tayoltita Property Public
Registry as co-defendant. In all four proceedings, the local Ejido is seeking title to the
property. In one case, which was commenced before the Company’s acquisition of the
mine and was brought without the knowledge of DMSL, the court initially ruled in
favour of the Ejido. Proceedings will be initiated in an attempt to annul this order on
the basis that the initial proceeding was brought without the knowledge of DMSL and
other legal arguments. With respect to the other properties, since Primero is not a
party to the proceeding, the Company has been advised to allow the proceeding to
conclude and, in the event that the decision is in favour of the Ejido, to seek an
annulment on the basis that it is in possession of the property and is the legitimate
owner. If these legal proceedings (or any subsequent challenges to them) are not
decided in favour of the Company, then the San Dimas mine could face higher
operating costs associated with agreed or mandated payments that would be payable
to the local Ejidos in respect of use of the properties. No provision has been made in
in the consolidated financial statements in respect of these proceedings.

(c) As at June 30, 2012, the Company had entered into commitments to purchase plant
and equipment totaling $3.3 million (2011 - $0.3 million).

(d) Due to the size, complexity and nature of the Company’s operations, various legal and
tax matters arise in the ordinary course of business. The Company accrues for such
items when a liability is both probable and the amount can be reasonably estimated. In
the opinion of management, any potential charges not yet accrued will not have a
material effect on the consolidated financial statements of the Company.

65

JUNE 30 2012
(Unaudited)

15. Subsequent events

Convertible debt

On July 24, 2012, the Company’s board of directors resolved to repay the $30 million
convertible note on its maturity date of August 6, 2012, in common shares (Note 8) in order to
retain its cash for general corporate purposes, including potential acquisition opportunities.
The conversion price will be the greater of Cdn$3.74 or 90% of the volume weighted average
trading price of the Company’s common shares for the five trading days ended August 6, 2012
and for the purposes of the conversion the note will be translated into Canadian dollars at
Cdn$1.05 to US $1.00. Accordingly the maximum number of shares to be issued will be
8,422,460.

66

Directors and Officers
Directors
Wade Nesmith Officers
Chairman Joseph F. Conway
Vancouver, BC President & Chief Executive Officer

Joseph F. Conway 1 Renaud Adams
President & Chief Executive Officer, Chief Operating Officer
Primero Mining Corp.
Toronto, ON David Blaiklock
Chief Financial Officer
David Demers2, 3, 4
Chief Executive Officer, Westport Innovations Inc. Tamara Brown
Vancouver, BC Vice President, Investor Relations

Grant Edey3, 5 H. Maura Lendon
Corporate Director Vice President, Chief General Counsel
Oakville, ON and Corporate Secretary

Rohan Hazelton1, 5 Joaquin Merino
Vice President Finance, Goldcorp Inc. Vice President, Exploration
Vancouver, BC
David Sandison
Timo Jauristo2 Vice President, Corporate Development
Executive Vice President Corporate Development,
Goldcorp Inc.
Vancouver, BC Board Committees
1
Eduardo Luna1 Member of the Health, Safety and Environment
Corporate Director Committee
Mexico City, Mexico
2
Member of the Human Resources Committee
2, 3
Robert A. Quartermain
3
President & Chief Executive Officer, Pretivm Member of the Governance and Nominating
Resources Committee
Vancouver, BC
4
Lead Director
5
Michael Riley
5
Corporate Director Member of the Audit Committee
Vancouver, BC

Corporate and Shareholder Information
Transfer Agent and Registrar
Computershare Trust Company of Canada
100 University Avenue Toronto (until August 30, 2012)
9th Floor, North Tower Richmond Adelaide Centre
Toronto, Ontario, M5J 2Y1 120 Adelaide Street West
T: 514 982 7555 Suite 1202
www.computershare.com Toronto, ON M5H 1T1
E: service@computershare.com Canada
T: 416 814 3160
Auditors F: 416 814 3170
Deloitte & Touche LLP TF: 1877 619 3160

Legal Counsel Toronto (after September 1, 2012)
McMillan LLP 20 Queen Street West
Royal Centre, Suite 1500 Suite 2301
1055 W. Georgia St., PO Box 11117 Toronto, Ontario M5H 3R3
Vancouver, BC V6E 4N7 Canada
T: 416 814 3160
Shares Listed F: 416 814 3170
Toronto Stock Exchange TF: 1877 619 3160
TSX:P
TSX:P.WT (Warrants - Cdn$8 exercise price, Operation Offices
expire 07/20/15) Mexico City
Arquimedes 33, 2nd Floor
New York Stock Exchange Colonia Polanco
NYSE:PPP 11560 Mexico, D. F.
Mexico
Shares Issued T: +52 55 52 80 6083
At June 30, 2012
Total issued and outstanding 88 million Investor Inquiries
Fully diluted: 105 million (excluding warrants) Tamara Brown
Vice President, Investor Relations
Company Filings T: 416 814 3168
www.sedar.com
www.edgar.com Tania Shaw
Manager, Investor Relations
Corporate Offices T: 416 814 3179
Vancouver
One Bentall Centre F: 416 814 3170
Suite 1640 E: info@primeromining.com
505 Burrard Street, Box 24
Vancouver, BC V7X 1M6 Website
Canada www.primeromining.com
T: 604 669 0040
F: 604 669 0014
TF: 1877 619 3160

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