Timmins Gold bids for Newstrike to secure growth

Timmins Gold (TSX: TMM; NYSE-MKT: TGD) is poised to buy Newstrike Capital (TSXV: NES; US-OTC: NWSKF) for its high-grade Ana Paula project, which would become Timmins’  third major gold asset in Mexico.

Timmins is offering 0.90 of a share and $0.0001 in cash for each Newstrike share held. The deal values Newstrike at $140 million, or $1.15 per share, reflecting a 20% premium to the target firm’s closing price on Feb. 13.

“The combination of these two highly complementary businesses will create an emerging Mexican-focused, low-cost intermediate gold producer, with a leading production growth profile,” Timmins CEO Bruce Bragagnolo said on a conference call.

Timmins operates the San Francisco mine in the northern state of Sonora. The heap-leach operation should produce 115,000 to 125,000 oz. gold this year at cash costs of US$800 to US$850 per oz.

On the development front, Timmins holds Caballo Blanco, an advanced heap-leach project 65 km northwest of Veracruz. 

Upon closing, Ana Paula, located in the southern Guerrero state, would become Timmins’ second development project.

“We are excited about this opportunity. It gives us the growth profile that we’ve been looking for,” Bragagnolo said.

If built according to parameters in the preliminary economic assessments (PEA), the two development projects could boost Timmins’ annual production by 175% to 326,000 oz. in 2019. Annual gold output from Caballo Blanco should average 92,000 oz., and from Ana Paula, 116,000 oz. At that time, Bragagnolo expects all-in sustaining costs to drop 21% to US$780 per oz. This reduction translates into a US$200 improvement in the company’s expected all-in margin per ounce, he adds.  

Timmins plans to use the cash flow from its sole producing asset to help fund construction of the Caballo Blanco and Ana Paula projects, which are anticipated to cost US$85 million and US$164 million.

“We believe the development capital requirements of the combined company will be manageable, supported by the cash flow from San Francisco,” Bragagnolo said. 

Commenting on the transaction, Newstrike CEO Richard Whittall says Timmins has a management team with in-country mine construction and operational expertise as it put its San Francisco mine into production, three years after acquiring it in 2007. He adds the combined firm will have a better chance of raising the capital required to build Ana Paula.  

Ana Paula, envisioned as a conventional 6,000-tonne-per-day open-pit operation, has an attractive rate of return in the current gold environment. According to a 2014 PEA, Ana Paula features a 33% after-tax internal rate of return and a US$232-million net present value at a 5% discount rate, using a US$1,300 per oz. gold price. Payback should occur within two and half years.

Annual production should average 116,000 oz. gold and 239,000 oz. silver for eight years, at all-in sustaining costs of US$526 per oz., net of by-product credits.

Timmins expects to spend up to a year optimizing and building upon Ana Paula’s PEA by focusing on metallurgy, improving the current resource and start-up costs, and exploring the asset’s underground potential, Bragagnolo says.

The project has an open-pit measured and indicated resource of 1.9 million contained oz. gold and 7.1 million contained oz. silver from 41 million tonnes grading 1.4 grams gold and 5.37 grams silver. It has 1.9 million inferred tonnes at 1.11 grams gold and 10.85 grams silver.

With Ana Paula, Timmins’ total measured and indicated resource would jump by 75% to 4.35 million oz., while its average head grade would more than double to 1.15 grams gold per tonne.

As part of the deal, Timmins will undertake a non-brokered private placement to raise up to $10 million at $1.25 per share. The proceeds would go towards advancing the Ana Paula project.

Considering Timmins still has to permit and finance Caballo Blanco and Ana Paula, Dundee Capital Markets analyst Joseph Fazzini believes the firm will have its plate full in the coming years. He cautions that spending on these assets will leave Timmins with limited to no free cash flow and higher financing and development risks. “These risks are, in our opinion, likely to limit near-term share price upside,” Fazzini writes. As a result, he has downgraded the stock to “neutral” from “buy,” and trimmed his target to $1.50 from $2.

Cowen and Co. analyst Adam Graf expects Ana Paula will receive its permits by the end of 2016, and operate by 2018. Given the project still needs a lot of work, Graf has lowered his price target on Timmins to $1.80 per share from $2.76, but has kept his “outperform” rating.

The transaction is set to close in April, after regulatory and shareholder approvals from both firms. Newstrike shareholders would hold 37% of the combined firm, and current Timmins shareholders holding the rest.

On the acquisition news, Newstrike Capital shares gained 4% to close at $1, while Timmins Gold fell 10% to $1.15.