Update: Timmins Gold Earnings

Jul.29.14 | About: Timmins Gold (TGD)


Timmins Gold reported $3.2 million in earnings on $42.4 million of revenue, missing expectations on both fronts.

I had anticipated better results based on the company's expected production costs, which came in at $928/oz. vs. the $846/oz. estimate.

This adds to concerns I addressed in January regarding rising production costs, although my most recent "sell" recommendation was based primarily on qualitative rather than quantitative reasons.

Timmins remains a good company, but there are some issues for now, and there are better plays in the sector.

Timmins Gold (NTGD) recently announced its second quarter earnings results. The company reported $42.4 million of revenue, which increased from $35.1 million in revenue in the second quarter last year on increased gold production and on a higher realized gold price ($1,288/oz. vs. $1,253/oz.). Earnings came in at $3.2 million or $0.02/share versus $1 million or $0.01/share last year. While production costs rose more than the gold price the company incurred a $5.5 million impairment charge last year that brought earnings down, meaning that excluding this item earnings are down year over year despite higher production and a higher realized gold price. This is due largely to rising production costs. The company produced 33,000 ounces of gold in Q2 this year at $928/oz. vs. $28,000 ounces at $855/oz. The company's production costs greatly exceeded expectations of $846/oz.

In my January article I expressed my concern that the company's production costs had been rising. The company's latest mine plan--released last November--extended the life of the company's San Francisco Mine in Mexico. However production cost estimates rose. I remained bullish considering that the share price had weakened considerably, but unfortunately we are seeing costs increase more than expected. While this could be a one-time thing investors need to watch out to make sure that it doesn't repeat. If the company's actual production costs are going to be about $82/oz. higher than expected this will shave over $6 million off of the company's annual earnings power, over $50 million for the life of the mine, and over $40 million if we discount the cash-flow 8%. This is a big deal for a company valued at just over $300 million.

Keep in mind, however, that in my more recent analysis of the company my concerns were less quantitative and more qualitative. The company's largest investor--Sentry Investments--is skeptical of management's performance and is trying to get its foot in the door to potentially broker a sale of the company. I expressed that I disagreed with Sentry's opinion and that Sentry's involvement was not only a distraction but that it limited the stock's upside. With this in mind, and given the company's rising costs--even if this may not be permanent--I think investors need to stay away for the time being. There are other companies in the space that aren't experiencing managerial shakeups and who aren't seeing costs rise to the extent that Timmins is. However I still like the company and I would reconsider taking a position if there is a major development with Sentry Investments, if production costs come down, or if the company makes a major discovery.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.