Timmins gains ‘breathing room,’ thanks to gold rally

VANCOUVER — Mexico-focused Timmins Gold (TSX: TMM; NYSE-MKT: TGD) will stay in the gold mining business thanks to the sustained rise in precious metal prices over the past six months.

Eight months ago Timmins was forced to announce the impending closure of its San Francisco operation, which lies 150 km north of Hermosillo, Mexico. The open-pit gold mine is the company’s sole producing asset, and its prospects for developing the recently acquired Ana Paula gold project looked grim at the time, owing to the firm’s weak balance sheet.

Fast forward to Aug. 12, and Timmins Gold’s second-quarter financials were headlined by adjusted earnings of US$6.4 million, or 2¢ per share, on metal revenue of US$33 million, compared to US$629,000 and US$27.8 million a year ago. The company ended the quarter with  US$12.5 million in its treasury.

The company boosted its average head grade at San Francisco 12% year-on-year to 0.6 gram gold per tonne, while all-in sustaining costs dropped 33% to US$761 per oz. over the same period. Timmins cranked out nearly 26,000 oz. gold during the quarter.

Open pit operations at the San Francisco mine roughly 150 km north of Hermosillo, Mexico.

The company raised its full-year production guidance by 15,000 oz. to between 90,000 and 100,000 oz. As a result of the “higher sustained gold price,” management said operations at San Francisco could continue well beyond 2016. Timmins is engaged in engineering work to determine an optimal mine plan.

“San Francisco continues to exceed expectations in terms of grade, strip ratio and unit operating costs,” interim CEO Mark Backens said during a conference call. “We’re pleased to report that due to positive operating results at [the mine], we have elected to cancel its planned closure. We expect similar operating margins and associated cash flow for the balance of the year.”

Timmins boosted its balance sheet in May by selling its Caballo Blanco property to Candelaria Mining, which resulted in US$9.3-million in upfront cash payments. The company repaid a US$10.2-million loan facility and settled a $2-million debenture with the Lundin Group.

Timmins also started “pre-construction activities” at Ana Paula, which it acquired through a merger with Newstrike Capital in early 2015. The property sits along the prospective Guerrero gold belt next to Torex Gold Resources’ (TSX: TXG; US-OTC: TORXF) emerging El Limon-Guajes mine.

An employee logs core at the Ana Paula exploration site. Credit: Timmins Gold.

The company will spend US$9.2 million at Ana Paula this year on 16,000 metres of drilling, metallurgical test work and a new feasibility study. Timmins expects to finish the studies by September, and get all construction permits before March 2018.

Based on a preliminary economic assessment released in 2014, Ana Paula could produce 116,000 oz. gold annually over eight years, at all-in sustaining costs of US$526 per oz., net of by-product credits. The study pegged initial costs at US$121.7 million, and used a US$1,300 per oz. gold price.

“With the improvements in our balance sheet and operations at San Francisco, we can unlock the value of Ana Paula. We view this project as one of the best development-stage gold projects in North America,” Backens said.

Ana Paula hosts 1.9 million oz. gold and 7.1 million contained oz. silver within 41 million tonnes grading 1.47 equivalent grams gold.

On Aug. 22 Timmins tabled an updated mine plan for San Francisco that would see operations continue through 2023. Life-of-mine production is an estimated 450,000 to 500,000 oz. gold at cash costs  between US$900 and US$950 per ounce. Backens says that “expected cash flow from operations will comfortably fund the pre-construction work program at Ana Paula.”

Updated reserves at San Francisco total 574,000 contained oz. gold, within 32 million tonnes grading 0.56 gram gold.

BMO Capital Markets analyst Brian Quast noted that the updated outlook at San Francisco appears “only slightly better” than the previous mine plan at “half the amount of production.” BMO Research has an “underperform” rating on Timmins, along with a 63¢ target price.

“Although San Francisco should help generate cash flow at the current gold price, we expect that Timmins will have to raise a substantial amount of capital [likely in the form of equity] to fund Ana Paula to completion,” Quast said.

“The repayment of debt and the recent gold price rally gives [the company] a slight amount of breathing room, in our view. We recognize that the share price likely has a lot of torque to a rising gold price, because of the optionality,” he said.

Timmins has traded within a 52-week range of 10¢ to 80¢, and closed at 63¢ per share at press time. The company has 316 million shares outstanding for a $203-million market capitalization.