VANCOUVER — The outlook on future production came into sharper 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 release incorporated the results of 220,000 metres of drilling completed over the past two years – which bumped reserves and inferred resources by 20% and 77%, respectively – 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 around 1.5 km due west. Timmins has focused on expanding and extending mineralization around its existing operations, with its recent resource and reserve estimate being the most recent in situ gold update at the project since July 2011.
The largest contributor to San Francisco's reserve growth was La Chicharra, which accounted for around 77% of the global increase in gold ounces. Total proven and probable reserves at the project now total 91.2 million tonnes grading 0.54 g/t Au for 1.59 million contained oz at a 0.2 g/t Au cut-off. Average reserve grades at the project declined around 5% since the previous update.
Meanwhile, Timmins also expanded resources in both the measured and indicated and inferred categories. Measured and indicated resources jumped roughly 30% to 102 million tonnes averaging 0.57 g/t Au for 1.9 million contained oz, while inferred resources increased to 122 million tonnes grading 0.45 g/t Au for 1.8 million contained oz. All resources were calculated under a 0.17 g/t Au cut-off.
As a result of its drilling, Timmins was able to extend San Francisco's life by roughly seven years relative to an amended mine plan released in Aug. 2011. The company achieved steady-state throughput of 24,000 tonnes per day in October, and intends to maintain that rate through 2015; with La Chicharra chipping in an additional 6,000 tonnes to 8,000 tonnes of mill feed starting in 2016. The installation of a new crushing unit and leach pad at La Chicharra is scheduled to begin in late 2015.
San Francisco's capital requirements should be quite manageable, with development costs pegged at around 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 Au over the next seven years at all-in sustaining costs of US$843 per oz.
Based on US$1,350 per oz Au, 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 around 29,000 oz Au 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 nevertheless 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 modeled San Francisco’s average life-of-mine costs at US$855 per oz before increasing its prediction to US$917 per oz following the update. "[The higher costs] are related to a higher strip ratio and lower grade."
Timmins reported US$14.4 million in cash at the end of September, and maintains access to a US$17 million loan facility. The company has traded within a 52-week window of $1.20 and $3.48, and closed at $1.28 per share at the time of writing. Timmins maintains 144 million shares outstanding for a $177 million press time market capitalization.
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