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Timmins Gold Corp. - A 96% Growth Potential Ahead

Summary

Timmins Gold is a small gold producer owning an operating mine, called San Francisco; apart from that the company owns a prospective gold project, called Ana Paula.

In my opinion, it is possible to find the floor value of the company's shares - this value is related to the San Francisco mine.

I also believe that Ana Paula is significantly undervalued by Mr. Market.

In this article I put a thesis that Timmins shares are, similarly to Ana Paula, significantly undervalued.

The last two years were hard for Timmins Gold Corp. (NYSEMKT:TGD) and its shareholders. The company encountered a number of problems. Let me name just a few:

  • In December 2014 Timmins acquired the Caballo Blanco gold project, paying around $26.0M. This year, the project was sold for $17.5M (the company lost around $8.5M)
  • Since late 2014 the company's performance has been getting worse; in 2015 the management, blaming low prices of gold, announced it was going to cease Timmins operations
  • In 2014 the management went into harsh dispute with its largest shareholder
  • In May 2015 the company acquired Newstrike, a gold exploration company owning the Ana Paula project in Mexico
  • In 2015 Timmins suddenly parted ways with its founder CEO, Bruce Bragagnolo

Due to these events, the company's shares crashed and in the beginning of 2016 they printed their historical bottom at $0.07 a share. At such a price the company was valued at a mere $13.0M, the market cap typical for small exploration companies rather than for an established miner.

Then, things had changed. During the ongoing bull market in gold, which started in January 2016, Timmins shares were one of the best performers - they went up nearly tenfold (to $0.63 a share). What is more, in 1Q and 2Q 2016 the company reported very decent results. A few days ago Timmins announced it no longer wanted to cease its operations at the San Francisco deposit, the flagship property. That is why I think it is a good time to remind this company to Seeking Alpha readers. In this article I am trying to look at the company's business and find the value of Timmins' shares.

Introduction.

Currently Timmins runs an open pit operation called San Francisco, located in the Sonora State, Mexico. According to the latest announcement, the company wants to mine gold at San Francisco (and at the neighboring La Chicharra deposit) until 2023. Then, the mine will be closed.

Apart from the San Francisco mine, Timmins owns another gold project, called Ana Paula. It is located in the Guerrero State, Mexico. I believe that the main idea standing behind Timmins Gold is as follows:

  • San Francisco, as an ongoing operation, should be delivering substantial cash flow over the coming years (until 2023)
  • Part of this cash flow will be used to develop and construct the Ana Paula mine
  • In this way the company will be able to shift its operations from San Francisco to Ana Paula.

Now, most recently the company delivered a lot of information on San Francisco and Ana Paula deposits. Having that information, I prepared two simple and transparent valuation models to find the value of the company's shares. Below I am presenting these models.

Let me start from the current operation, the San Francisco mine.

San Francisco

On August 22, 2016 Timmins published a new mine plan, prepared for the San Francisco mine. Table 1 presents basic economic measures:

Table 1

Using these data I have constructed the cash flow model for San Francisco. Apart from the company's Mine Plan Summary data, I added the following additional assumptions:

  • Gold price of $1,300 per ounce over the mine life
  • General and administrative expenses at the level reported in 2Q 2016 (run rate)
  • Working capital flows were projected taking measures reported in 2Q 2016
  • I assume that VAT receivables of $5.6M (as of the end of 2Q 2016) will be recovered over the mine life
  • In the second part of 2016 the company will get cash coming from the sale of Caballo Blanco ($12.5M)
  • Corporate tax rate (CIT) stands at 30%; in 2019, 2020 and 2021 the company will pay no CIT because it should report tax losses; gross profit is calculated as revenue less direct mining costs less depreciation and amortization
  • Depreciation and amortization expenses are calculated on a per ounce basis ($155 per ounce of gold produced)

The table below presents the cash flow model:

Table 2

Using a discount factor of 8%, the net present value of San Francisco stands at $81.5M.

General note on discount factors:

Basically, in their feasibility studies mining companies apply discount factors of 5% or 8%. I think that in the era of low interest rates these discount factors fully reflect the risks associated with mining projects. In the case of the San Francisco mine I apply the discount factor of 8%. In my opinion, it is a very conservative rate because it is relatively easy to predict cash flows delivered by...


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