Timmins Gold (TGD) just announced that it has entered into an agreement with Goldgroup Mining to purchase 100% of its Caballo Blanco gold project in Mexico. Timmins will pay $10 million in cash and 16.06 million Timmins Gold shares. Timmins also must make an additional $5 million payment when Caballo Blanco receives its permit.
- Caballo Blanco is an advanced stage, open pit, heap leach gold project in Mexico.
- Timmins will add 575,000 ounces of gold in the indicated category and 419,000 ounces in inferred, and the deposit has exploration upside.
- The projected production from Caballo Blanco would nearly double Timmins annual production to over 220,000 ounces, with Caballo Blanco adding 90,000 ounces of gold at projected cash costs of $784 per ounce, based on a preliminary economic assessment.
- At $1,200 gold, the project carries a pre-tax net present value of $128.2 million and an internal rate of return of 37.5%.
- Initial capital costs are a reasonable $84.8 million.
In a previous article on Timmins, I argued that it's an undervalued junior gold mining stock that presented a compelling buying opportunity for a few reasons. First, the company is profitable, with cash flow of $4.8 million in the last quarter and all-in sustaining costs below $1,000 per ounce. Next, the company has a solid balance sheet for a junior miner, with $50.2 million in cash and equivalents and $15 million in debt. Finally, the company's growth has been impressive, with a 151% production increase and 170% reserve growth over the past four years.
I am not crazy about this deal for a few reasons. First, while Caballo Blanco is projected to produce 90,000 ounces a year, investors need to realize that this is based on a preliminary economic assessment (PEA) - not a pre-feasibility or a feasibility study, which are far more comprehensive studies and use actual gold reserves in its calculation, as opposed to resources. Caballo Blanco's resource base is primarily made up of inferred resources, which is not actual gold reserves and is the lowest confidence category in exploration, but the inferred resources are used in the PEA.
Next, total cash operating costs are projected at $784 per ounce, but this is not to be confused with the all-in sustaining cost metric, which is a more transparent way to look at the true cost of mining gold as it takes into account sustaining capital, corporate, general and administrative expenses, and exploration expenses (although it doesn't include debt interest expenses or taxes). Therefore, the true all-in sustaining cost at Caballo Blanco is likely to be well over $800 per ounce - I would estimate $950 to $1,050 as a likely figure - which still isn't bad, but not terrific.
Perhaps most importantly, investors should read this statement in the release: "The Company's ability to execute on its goals for Caballo Blanco is dependent upon successfully obtaining the permits which have been applied for but have not yet been received." There is really no telling when or if Timmins can get Caballo Blanco fully permitted, so this is a risk they are willing to take.
In conclusion, I think Timmins is overpaying for an undeveloped, unpermitted resource. I hope the company proves me wrong, but for now, I am sitting on the sidelines as I see too much risk here. The deposit will cost millions of dollars to develop and there are too many question marks surrounding the project in my opinion.
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