Timmins Gold to close San Francisco mine next year

Timmins Gold (TSX: TMM; NYSE-MKT: TGD) is now planning to suspend mining in mid-2016 at its only operating asset — the San Francisco heap-leach gold mine in Mexico’s Sonora state — moving up the date from 2022 in response to low gold prices. Heap-leach operations should continue to early 2017, after which the mine will go on care and maintenance.

Timmins Gold shares fell 30% on the news.

The company could restart the mine with “minimal capital, as all existing infrastructure will remain in place,” interim-CEO Mark Backens said on a Nov. 3 conference call. But to do so, “we would need to see sustained gold prices north of US$1,300.” (The spot gold price recently closed at US$1,085 per oz.)

Timmins Gold expects San Francisco will crank out 20,000 oz. during the fourth quarter, and 65,000 to 70,000 oz. in 2016. Estimated cash costs for 2016 should range between US$700 and US$750 per oz.

The revised operating plan resulted in Timmins Gold taking a US$226.5-million impairment charge in the third quarter. This contributed to a quarterly net loss of US63¢ per share, compared to last year’s US1¢ per share in earnings.

During the September quarter, San Francisco produced and sold 23,387 oz. gold, down 12% from the year before on the back of lower grades. All-in sustaining costs rose 11% to US$1,105 per oz., driven by higher cash costs from higher strip ratios.

The miner revised its full-year guidance to 90,000 oz. from 100,000 to 110,000 oz., at cash costs of US$1,000 to US$1,050 — previously US$875 to US$925 per oz.

“With no significant cash flow after 2016, Timmins Gold reverts from a producer to an unfunded developer with its Ana Paula project (in Mexico’s Guerrero state), and a cash balance of $10 million at the end of the third quarter,” BMO analyst Brian Quast said. He points out the company has a US$10.2-million loan maturing at year-end, which it is renegotiating.

But Timmins Gold is excited by the prospects at Ana Paula, which it acquired in February through a merger with Newstrike Capital.

Its recent 2,000-metre drill program confirmed previous drilling and returned high-grade intercepts, including 122 metres of 4.45 grams gold per tonne, and 88 metres of 7.14 grams gold. These will be incorporated in the upcoming feasibility study, along with the estimated US$50 million in cost savings from buying Goldcorp’s (TSX: G; NYSE: GG) El Sauzal mill, Backen says. The acquisition closed in early November. The feasibility study should be done by mid-2016, with permits anticipated in early 2017.

Based on Newstrike’s 2014 preliminary economic assessment, Ana Paula can 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$164 million, and used a US$1,300 per oz. gold price.

BMO’s Quast says that financing is the project’s main hurdle. “Given the recently announced shutdown of San Francisco and the deteriorating cash balance, Timmins Gold is facing major headwinds, and an equity issuance at these levels would result in severe dilution.”

He rates the stock as an “underperform,” with no target price. 

Timmins Gold shares, however, rose on the newest Ana Paula drill results to close Nov. 12 up 8% to 21¢. Before that its shares were down 30%, after releasing its third-quarter results and deciding to close San Francisco six years early. There are 285 million shares outstanding.