Timmins Gold: Ana Paula is ‘great downside insurance’

Timmins Gold (TSX: TMM; NYSE-MKT: TGD) is one step closer to production its high-grade Ana Paula gold project in Guerrero, Mexico, after a deal with major Goldcorp (TSX: G; NYSE: GG) for a mill and processing facility that could cut development costs for the mine by as much as US$60 million.

The deal could be a major win for the company, since it is picking up most of Ana Paula’s processing infrastructure at a fraction of the price. Under the deal, Timmins will acquire equipment from Goldcorp’s El Sauzal plant for an $8-million cash-and-share consideration. The company will pay $1 million in cash upfront; $3 million by issuing 10 million shares at 30¢; and another $4 million in cash in a year.

Timmins will relocate a nominal 6,000-tonne-per-day milling and processing facility with a cyanide circuit and a carbon-in-pulp circuit, which reflects the flowsheet outlined in Ana Paula’s preliminary economic assessment (PEA). Timmins picked up the project via a $140-million merger with Newstrike Capital in mid-February.

“After we wrapped up the Newstrike deal, we looked for ways to optimize our expenses at Ana Paula. The one thing that stood out to us was the development costs, and how we might bring those down,” Bruce Bragagnolo said during his final interview before being removed as CEO by the board.

“It just so happened that we were looking for used equipment and Goldcorp was decommissioning, and it came together perfectly. Our team in Mexico checked it out and gave us the green light to make an offer, and we had a good idea of the value, since there aren’t a lot of people building mines right,” he added.

Newstrike released a PEA on Ana Paula in late 2014, which models a 6,000-tonne-per-day operation that would crank out 116,000 oz. gold annually over eight years, at all-in sustaining costs of US$567 per oz. The study was based on measured and indicated resources of 41 million tonnes grading 1.5 equivalent grams gold for 1.86 million contained oz. gold, and 7.1 million  contained oz. silver.

Based on US$1,300 per oz. gold and US$20 per oz. silver, Ana Paula features a US$232-million after-tax net present value (NPV) at a 5% discount rate, and a 32.8% internal rate of return.

The Guerrero gold belt (GGB) hosts skarn-porphyry mineralization related to an early Tertiary intrusive event. Ana Paula is along the northwesterly trend of the GGB, where it straddles a boundary between two older tectonic subterranes, a volcanic-volcaniclastic arc assemblage to the west and a thick carbonate platform sequence, overlain by younger marine deposits to the east.

Mineralization on the property is associated with arsenopyrite and pyrite. The dominant mineralization is epithermal, with brecciation observed at contact zones.

Initial estimates had pegged Ana Paula’s development costs at nearly US$165 million, but thanks to the plant acquisition, Timmins figures it can slash that figure by between US$40 million and US$60 million. Timmins is also in the midst of a metallurgical drill program it hopes will boost recoveries, and cut estimated operating costs.

“As the markets get worse, we really want to assure we can bring the mine into production. We’ve stress-tested the proposed mine plan, and determined Ana Paula is an asset that can  withstand these lower gold prices,” Bragagnolo said. “The project is great downside insurance, because it’s a high-grade, low-cost open-pit mine. The only thing that we viewed as a risk was the capital expenditure, because the market is sensitive to that sort of burden.”

The project gives Timmins upside at a time that it’s hard to turn a profit at its San Francisco heap-leach operation, 150 km north of Hermosillo. The company saw quarterly gold production drop 31% year-on-year during the second quarter due to declining grades, and is assessing the potential for a higher-grade, underground operation.

In mid-February the company reported it had delineated three mineralized veins near the south wall of the San Francisco pit averaging 4 metres wide, with grades ranging between 2.5 grams and 5 grams gold per tonne. Timmins is working on an underground pilot phase at the mine, which involves drifting 90 metres into the south wall of the pit to access the veins, followed by 200 metres of lateral drifting to extract 14,000 tonnes of ore.

“We’re assessing things in light of gold prices. We just have to ensure the mine is viable and improve costs to improve cash flows. We’re not making any price assumptions right now, because I don’t think anyone knows where gold is going,” Bragagnolo elaborated. “If it drops any lower, we might have to push even harder — and we’re pushing pretty hard right now. This year wasn’t the best part of the mine plan in any event, but we should get into much better territory over the next twelve months, in terms of grade and strip ratio.”

Timmins produced 22,869 oz. gold during the second quarter at all-in sustaining costs of US$1,134 per oz. The company had a 34% year-on-year drop in quarterly metal revenues, and registered a US$1.9-million operational loss.

Given the volatile gold price, Timmins is adjusting San Francisco’s operating schedule to mine the lowest strip areas of the pit as early as possible to maximize near-term cash flow. The company expects to crank out between 100,000  and 110,000 oz. gold this year.

“We can move quickly down at Ana Paula now that we have the equipment,” Bragagnolo added. “We’re hoping to accelerate our timelines at this point, and we can get the mine into production cheaper and faster than some people expect. There’s a small footprint on the equipment and we have the environmental advantage of drystack tailings, so it should be a tight design.”

The Ana Paula plant acquisition will also see Goldcorp take a larger share position in Timmins via a $6-million private placement, wherein the major will pick up another 20 million units at 30¢ each. The units consist of a share and half a warrant, exercisable at 35¢ for two years. Goldcorp will hold a 9.9% stake in the company.

BMO Capital Markets analyst Brian Quast had a “market perform” rating on Timmins and a 40¢-per-share price target before the CEO change. BMO Research said the $50 million estimated savings from the Goldcorp deal will boost Ana Paula’s modelled NPV by US$28 million to US$188 million.

“We were already modelling a [6,000-tonne-per-day] mining operation at Ana Paula, implying that the processing plant is a good fit for Timmins,” Quast wrote on Sept. 20. “Although BMO Research views this deal as positive, Ana Paula is not expected to pour first gold for approximately four years. We view Goldcorp’s [stake] in the company as a vote of confidence on [the project].”

Timmins has traded within a 52-week range of 26¢ to $1.53, and closed at 33.5¢ per share at press time. The company reported US$22 million in cash and equivalents at the end of June, and has 285 million shares outstanding for a $98-million market capitalization.