Timmins Gold revamps mine plan at San Francisco

VANCOUVER — The future came into focus for Timmins Gold (TSX: TMM; NYSE-MKT: TGD) in early November, when the company released an updated reserve estimate and mine plan for its wholly owned San Francisco gold operation, 150 km north of Hermosillo, Mexico.

The new reserve numbers incorporate the results of 220,000 metres of drilling completed over the past two years — which bumped reserves and inferred resources by 20% and 77% — as well as an economic study on Timmins’ revised mining strategy.

San Francisco is comprised of two pits: the larger San Francisco pit and La Chicharra pit, located 1.5 km west. Timmins has focused on expanding and extending mineralization around its operations.  Reserves and resources were last updated in July 2011.

The largest contributor to San Francisco’s reserve growth was La Chicharra, which accounted for 77% of the global increase in gold ounces. Total proven and probable reserves at the project total 91.2 million tonnes grading 0.54 gram gold per tonne for 1.59 million contained oz. at a 0.2 gram gold cut-off. Average reserve grades at the project declined 5% since the previous update.

Measured and indicated resources jumped 30% to 102 million tonnes averaging 0.57 gram gold for 1.9 million contained oz., while inferred resources increased to 122 million tonnes grading 0.45 gram gold for 1.8 million contained oz. All resources were calculated under a 0.17 gram gold cut-off.

As a result of its drilling, Timmins extended San Francisco’s life by seven years, relative to an amended mine plan released in August 2011.

The company achieved a steady 24,000-tonne-per-day throughput in October, and intends to maintain that rate through 2015.

La Chicharra will chip in another 6,000 to 8,000 tonnes of mill feed starting in 2016. A crushing unit and leach pad at La Chicharra are scheduled for installation in late 2015.

San Francisco’s capital requirements should be manageable, with development costs pegged at US$29 million through 2022. Around 41% — or US$12 million — of the expenditures will come during pre-stripping at La Chicharra in 2016. The mine’s average annual production is estimated at 122,000 oz. gold over the next seven years, at all-in sustaining costs of US$843 per oz.

Based on US$1,350 per oz. gold, San Francisco’s updated plan carries a US$381-million pre-tax net present value (NPV) at a 5% discount rate, and will generate US$489 million in undiscounted cash flows.

Timmins cranked out 29,000 oz. gold at San Francisco during the third quarter, which generated US$13.7 million in cash flows and earnings of US$4.8 million, or 3¢ per share.

That compares to cash flows of US$22.5 million, or 16¢ per share, during the same period in 2012, as the company has been hit by declining gold prices.

Cash flow and earnings were down despite a 16% year-on-year production jump during the quarter.

BMO Capital Markets analyst Andrew Kaip notes that Timmins presented the “best possible option at San Francisco,” but dropped his stock rating from “market outperform” to “market perform,” while knocking his target price on the company down from $2.75 to $1.50 per share.

“Although [Timmins] has made the best of a low-grade, high-cost deposit, [the company’s] 10% nominal NPV has declined 40% at spot metal prices,” Kaip wrote in a Nov. 11 research report, noting that BMO Research previously modelled San Francisco’s average life-of-mine costs at US$855 per oz., before increasing its prediction to US$917 per oz. after the update. He says that the higher costs are related to a higher strip ratio and lower grade.

Timmins reported having US$14.4 million in cash at the end of September, and maintains access to a US$17-million loan facility. Shares traded within a 52-week window of $1.20 and $3.48, and closed at $1.28 per share at press time.

Timmins has 144 million shares outstanding for a $177-million market capitalization.