Timmins Gold targets lower costs at San Francisco

Vancouver-based producer Timmins Gold (TMM-T, TGD-X) is moving into the second year of commercial operations at its 100%-owned San Francisco open-pit gold mine in Sonora State, Mexico. The company continues to demonstrate production and revenue growth despite being in a period of operational expansion and cost reduction reviews.

Timmins reported a profit increase of 31% year-on-year to US$13.6 million for the quarter, a rise from the US$10.4 million the company recorded in the first quarter of 2011. Cash flows from operations subsequently rose to US$7.5 million, which resulted in cash-on-hand of US$21 million to end June.

The company posted record production with 23,203 oz. gold for the quarter, at average costs of US$758 per oz. — an increase from the US$740 per oz. Timmins recorded during first-quarter 2011. The rise in cash costs is attributed to variable compensation totalling US$300,000, or roughly US$14 per oz. Management reported the accruement of the compensation in June, and indicated the payments are expected to be negotiated and completed by May 2013.

“The nice thing is we’re adding cash to the bottom line every quarter, despite the fact that we’re in a capital expansion and capital spending period,” CEO Bruce Bragagnolo commented during a second-quarter conference call. “We expect the cash-flow generation to improve as the subsequent quarters come in, and they’ll improve because we’ll be producing more ounces.”

Timmins focused on cost control during the second quarter along with an ongoing expansion of San Francisco’s throughput levels. The company is renegotiating its mining contracts, and has locked-down a four-year cyanide supply arrangement at lower costs. Timmins secured its cyanide supply at US$3.50 per kg, which measures up well to a market price at US$4.50.

According to Bragagnolo the company is looking at its “major cost” bundle, which includes its mining contractor, explosives and diesel consumption. Timmins expects its cost-saving efforts could result in a US$50 per oz. savings on production over the next few quarters.

Timmins will process lower-grade ore through the remainder of the year, however, which the company is stockpiling at a rate of roughly 8,000 tonnes per day — 3.7 million tonnes of ore have been stockpiled so far at an average grade of 0.26 gram gold per tonne.

San Francisco has hit millage throughput highs of 18,000 tonnes per day during the past six months, but the real target is a 24,000-tonne-per-day expansion that is slated for completion by the fourth quarter. Timmins is installing a “scalping system” to sift out larger pieces of ore at its primary crusher — the upgrade will help the company realize efficiencies from its current blast pattern. The last piece to the puzzle is a plate feeder, with upgraded conveyors and a new stacker being installed on site.

“The team at the mine has really been working on achieving higher throughput and it’s anticipated that the scalping system or pre-screen system will be fully operational by November,” Bragagnolo commented. “There’s always some tweaking to do after you put in a new piece of equipment.”

Timmins capital expenditures for the year total US$19 million, which includes: US$5 million for the upgraded pre-screen, US$4 million for new conveyors, US$5 million for new leach pads and gold-plant expansion, and US$5 million in exploration.

The company is implementing an improved mine plan at its nearby La Chicharra deposit, with pre-stripping scheduled to start in November. Bragagnolo said there are four drill rigs on the site, and exploration results at the satellite target are expected in the next few months.

“We’ve previously announced that we’ve hit some very good intercepts towards the southeast, about 500 metres away from the current pit,” Bragagnolo explained. “And now we’re continuing with that program. The four reverse-circulation rigs are over at La Chicharra right now, and they’re designed to add ounces and also to improve the current mine plan.”

The San Francisco and La Chicharra pits host proven and probable reserves totalling 72 million tonnes grading 0.6 gram gold for 1.3 million contained oz. Potential for expansion comes in the form of 82 million indicated tonnes grading 0.6 gram gold for 1.6 million contained oz.

Timmins’ bottom line was hit by higher-than-expected income tax rates that clocked in at US$6.6 million, including US$4.6 million in current taxes.

The company explained that taxes were higher partially due to payments on a 2011 year-end tax bill paid out in May.

“We had some unrealized deductions related to the corporate Canadian entity that were not allowable for tax deductions at this point,” explained chief financial officer Darren Prins. “And also with the stock-based compensation, we don’t take that into account when calculating our tax provision. We’re engaging in tax planning strategies right now to help utilize our losses that we have at the Canadian level.”

Timmins is targeting production in excess of 100,000 oz. gold for 2012 before eventually hitting an average annual rate of 130,000 oz. through 2018.

The company has completed metallurgical testing over the past six months that Bragagnolo commented “leads us to believe with all certainty that the metallurgical recoveries of 68.5 per cent will be achieved.”

Canaccord Genuity analyst Nicholas Campbell changed his rating from “sell” to “hold” on Timmins in May, and bumped his target price by 5¢ to $1.65 in late June.

“While we factor in a decline in mine-site operating costs over the next [six to 18 months],” Campbell wrote in an Aug. 14 research update. “We expect the drop in grade associated with expanded throughput to result in higher cash operating costs per oz. gold produced.”

Timmins has jumped 22%, or 38¢ over the past four weeks en route to a $2.10 presstime close. The company has 145 million shares outstanding for a $300-million market capitalization.