- Timmins Gold operates one of Mexico's finest gold mines.
- The San Francisco mine is on track to produce 120k ounces of gold in 2014.
- This mine's production occurs at some of the lowest operating costs in the industry.
- Timmins' stock has so far had outstanding positive leverage to gold.
The Timmins gold district is by far the most productive within Canada's prolific Abitibi greenstone belt. It has produced in the neighborhood of 70m ounces of gold, and operations are still going strong. Namesake mining company Timmins Gold (NYSEMKT:TGD) is forecasting 2014 output of 120k ounces, making it one of North America's top junior gold producers. But provocatively not one of Timmins's ounces is coming from within the Timmins district.
Timmins Gold CEO and founder Bruce Bragagnolo did grow up in Timmins, which gives his company roots in this famous Canadian gold district. But TGD is finding its mining success on the other side of the continent, along the Mexican portion of the Mojave-Sonora Megashear. And its San Francisco mine ranks as one of the finest in all of Mexico.
Timmins Gold was one of the first movers into a country that has been party to a massive gold rush. This rush has led to widespread exploration and development, which has translated into production volume that has increased by a whopping 390% over the last decade. With 2013 output that exceeded 3.2m ounces, Mexico now ranks as the world's 8th-largest gold producer (per data from the US Geological Survey).
Timmins's Mexican success rests on the shoulders of Bruce Bragagnolo's partner and co-founder Arturo Bonillas. Bonillas, who is a Mexican national, is a mining engineer with vast experience in his home country. His extensive connections and understanding of Mexico's social and legal frameworks allowed Timmins to snatch up an advanced-stage project that was primed for development.
The San Francisco project is located in north-central Sonora, only 2km off the Pan American Highway. And this project was the perfect play to get Timmins off the ground to take advantage of the new gold bull market. San Francisco was a past-producing mine, and there were still significant resources in the ground.
One huge advantage to San Francisco was its past production occurred in the not-too-distant past. It ran as a modern heap-leach mining operation, producing 300k ounces of gold up until its closure in 2000. And since this closure was purely for economic reasons as gold dipped to brutal secular-bear lows nearing $250, it would only be a matter of time before San Francisco got another look.
When Timmins gained its initial interest in San Francisco in 2005, it was already known to hold in the neighborhood of 700k ounces of resources. And TGD's expert geological team aggressively took to the drill bit in order to prove up the resources and ultimately feed a feasibility study.
Timmins did just that, and after delivering a positive study and procuring permits and financing, it built its mine. San Francisco poured its first gold in December 2009. And this mine's best years were yet to come.
One of the keys to success in this second phase of San Francisco's mining life involves a major tweak to the process flow. In its past life San Francisco's recoveries were quite low given its ore was placed on the leach pads with either minimal or no crushing. But Timmins determined that the extra costs involved in systematic multi-stage crushing were more than offset by higher recoveries and thus higher output.
Once it had the process flow dialed in, Timmins wasted no time seeking to expand operations. And affording this was a huge growth to the resource base. TGD quickly discovered that the mineralization in San Francisco's mesothermal system was still wide open, so it continued with aggressive exploration well beyond mine commissioning.
This project has now seen in excess of 500k meters of drilling to date, including 240k+ meters just since 2012. And this has led to big upgrades and expansions to the in-ground inventory. Per the latest resource estimate, San Francisco's deposits contain 3.7m ounces of gold in all categories, including 1.6m ounces of proven-and-probable reserves. It now ranks as one of the largest primary gold deposits in Mexico.
Timmins would be foolish not to expand operations considering San Francisco's large resource base. It thus rolled out a series of expansions, with the latest that was completed in early 2013 increasing throughput by 140% over initial feasibility-study levels.
The San Francisco mine is now producing at a rate of 24k metric tons per day, which yields gold at a rate of 120k ounces per year. Even at this newly-expanded rate, the mining life will still exceed 10 years based on the latest reserve count. But as existing resources are upgraded and new ones are found, we should see a mining life that greatly exceeds this.
On the cost front San Francisco operates in the lower quartile of industry average. In 2013, its all-in sustaining costs came in at an impressive $872/ounce. And in Q1 2014, they continued to impress, coming in at only $790/ounce. Timmins Gold is one of the rare miners with the ability to turn a profit even at today's anomalously-low gold prices. And with life-of-mine all-in sustaining costs projected at less than $850/ounce, it'll be doing this for a long time to come.
Looking forward Timmins has its sights set on further expansion. And this expansion would likely come from the La Chicharra pit, less than 2km from the pit that is currently being mined. La Chicharra's ore would need its own dedicated crushing unit. And it's been tossed around that this would bring total throughput to 30k tpd. This expansion should only require a modest capex commitment since the existing ADR plant has the capacity to process a much higher throughput rate.
And best of all is this potential expansion isn't likely to be a burden to investors. Timmins Gold has funded all previous expansions from cash flow. And with a strong balance sheet to support what should be substantial net free cash flow in the future, developing La Chicharra should also be a self-funded endeavor.
Speaking of investors, Timmins Gold has the make-up to be an investor favorite as gold's bull gets its legs back underneath it. There aren't many low-cost unhedged gold producers with exceptionally strong longevity. And TGD is among the best. It has performed very well with gold in the past. And it ought to continue to do so in the future.
Interestingly, Timmins Gold made a name for itself as one of the top-performing gold stocks following the infamous 2008 stock panic that dragged gold down with it. From its late 2008 low to 2011 high, TGD was up a staggering 1585%. Compared to gold's impressive 167% gain from its own late 2008 low to 2011 high, I'd say TGD exhibited darned-good positive leverage, a staggering 9.5 to 1 to be exact.
What I'm more interested in, though, is how TGD has performed relative to gold subsequent to gold's late-2011 high. This has been a pretty crazy last three or so years for gold and its mining stocks, a period that truly has tested the resolve of this entire sector. It started out with a normal and healthy correction and consolidation period. But then the selling spiraled out of control, underscored by an anomalous panic that made this sector the most hated in all the markets.
Amidst this three-year period, gold stocks' typical positive leverage to gold has gotten somewhat out of whack. Even stocks that exhibited consistent leverage in the past have struggled. But as you can see in the chart above, for the most part TGD has still continued to deliver.
Gold has had four meaningful uplegs following its 2011 all-time high. And in the first two during 2012, Timmins remained a gold-stock all-star. In each upleg gold rallied 15%, with TGD posting spectacular trough-to-peak gains of 72% and 90%. This represents outstanding positive leverage of a remarkable 4.7x and 5.9x, respectively.
Of course, Timmins tanked with gold like every other gold stock in 2013. There was, however, one meaningful upleg coming out of the Q2 panic that TGD had the opportunity to participate in. But as you can see, it didn't. And this disconnect was actually quite perplexing. Yes, Timmins had a rough Q2'13 with much lower year-over-year profits along with a small impairment charge. But this was pandemic for the sector. We'll chalk this up as an anomaly, especially considering the follow-up action.
Things reverted back to normal amid gold's latest upleg in early 2014. TGD positively leveraged gold's 16% gain by 4.4x, soaring 71%. And just over the last few weeks, TGD has really embraced a rare summer gold rally by surging 48% to gold's 6.7% (stellar 7.2x leverage). Time will tell whether a new gold upleg is being born, but what is clear is that TGD is wound tight and ready to spring on any upward momentum in its underlying metal.
Overall Timmins Gold has everything it takes to be an elite junior gold producer. It has a spectacular mine that will be producing low-cost gold for a long time to come. It has a top-shelf management team adept at exploration and development. It has a solid financial standing. And its stock has demonstrated the ability to superbly leverage the underlying metal.
Timmins is a proven leader of the junior-gold-producer sub-sector. This sub-sector does carry more risk than the larger more-diversified miners, which can lead to sharp downside leverage. But the rewards can be exceedingly great on the upside. These stocks are small enough that it doesn't take much investor interest and thus capital inflows for them to explode higher. And when gold regains its legs, it won't take long for this capital to find them.
The bottom line is Timmins Gold is one of the industry's top junior gold producers. This company skillfully executed a plan to develop an advanced-stage Mexican project in order to take advantage of gold's secular bull market. And it did just this with production from what is now one of the country's finest gold mines.
The San Francisco mine is a long-life low-cost beauty with ample resources and huge upside exploration potential. And for this reason investors have latched on to Timmins' stock. TGD is a proven high-positive-leverage play that ought to continue to greatly outperform as gold's bull market presses on.
(Guidance and other data from latest corporate presentation and/or financial statements)
July 3, 2014
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Disclosure: The author is long TGD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.