The 300 Club

Timmins Gold achieves full commercial production and boosts resource by 25%

by Jackie Steinitz

Last week's publication of a 25% increase in the measured and indicated resources of the San Francisco gold mine in Mexico marks another milestone in a bumper year for Timmins Gold and its shareholders. In the last 12 months or so the company has also completed the construction and development of its 100%-owned mine, reached full commercial production, and raised over C$30M in debt and equity.

The share price has responded positively to the stream of good news more than trebling in a year. However the company is still trading at a multiple considerably below its peers; a recent Canaccord Adams note from 9th April contrasted the Timmins price at 3.2 times the estimated cash flow per share in 2011 with the average multiple of 11.9 for junior producers.

Timmins is now seeking to add value to shareholders by moving from development to exploration in order to extend the life of the current deposit at San Francisco and to find satellite deposits on the project. It will also be progressing several other gold exploration projects in Mexico.

The San Francisco Project

Timmins Gold, named after the Timmins Ontario hometown of CEO Bruce Bragagnolo, was formed in March 2005 to acquire the San Francisco project. As Bragagnolo told Proactiveinvestors the acquisition of the existing resource was essentially a hedge on gold; the team was looking to buy the largest possible project with near term ounces and became aware of the potential of San Francisco. This open pit heap leach project, in Sonora in North West Mexico, was explored in the 1980s by Fresnillo (LON:FRES). It was then mined for 6 years from 1996 by Geomaque, producing 300,000+ ounces of gold before being mothballed in 2002 after several years in which the gold price, (at around $275/oz), had fallen below the $300/oz cash cost of the mine.

When Timmins signed the first option agreement with Geomaque in 2005 the board considered that San Francisco showed a lot of potential, despite its neglected state, as it had a lot of infrastructure in place. Grid power, roads, water, offices, a warehouse, assay lab, a primary crusher, gold plant and other equipment were already on site, while a main highway, railway and local community were just 2km away. The property also had a historical resource estimate. One of Timmins' early priorities, completed in January 2007, was to undertake an intensive drilling programme to confirm and expand the estimate and to make it NI 43-101 compliant. By October 2007 Timmins had completed all the conditions and payments required to obtain 100% ownership of the 42,000 hectare (420 square km) claims package at a total cost of $10m, of which $5m was payable in cash and $5m in shares.

The pre-feasibility survey to assess the viability of re-commissioning operations, published in March 2008, concluded that the project had significant economic potential, anticipating a 5 year mine life, a stripping ratio of 2:1 and average cash costs of $412/oz. Development began later in that year and in 2009 Timmins refurbished the gold plant, installed conveyor systems and secondary and tertiary crushers (to reduce the crush size to minus -½ inch in order to increase recoveries), completed and loaded the heap leach pads, completed all permitting, appointed key personnel and signed a mining contract with Peal. The year culminated with the first gold pour on 10th December, producing a 46kg dore bar containing 1,152 ounces of gold and 288 ounces of silver, and worth $1.3m at spot prices.

Production ramped up steadily during the first quarter of 2010. There are now around 150 employees plus 100 contract miners on site, and the mine is running at full commercial production. At 12,000 tonnes per day this is some 10% ahead of budget and plan; the Management team anticipate that the operation will meet the target 80,000 ounces of gold in 2010. First results will be available following the end of the June quarter, but the expectation is that costs for the year will be slightly above the expected life of mine average cost of $412/oz. With the gold price currently at $1150/oz the company should be immediately profitable.

With production being stabilised the next goal for Timmins is to significantly increase the reserves and resources of the project. San Francisco lies on the Mojave-Sonora Megashear gold-silver belt which hosts several multi-million ounce deposits (including the Fresnillo/Newmont JV at La Herradura and New Gold's Mesquite Mine). The board of Timmins believe that the project is highly prospective for further exploration and that the company's 140,000 metre drill programme to date on the 420 square kilometre project area has only just "scratched the surface". Accordingly three drill rigs are currently on site. On 27 April the company announced an updated resource resulting from the first phase - a $1.5M, 270 hole, 22,216 metre reverse circulation step-out drill program which focussed on the areas to the north west and south east of the main orebody and on the south-west flank of the pit. At a 0.15g/t cut-off grade the resource now totals just over 1M ounces with measured and indicated resources of 895,000 ounces plus an inferred resource of 154,000 ounces. The average grade is 0.737g/t.

The next phase, including 50,000 metres of reverse circulation drilling and 20,000 metres of RAB drilling, is ongoing and should be complete by end-September. Results will be published in a further update to the resources. Timmins will also publish a revised mine plan which will incorporate the new resources and optimise production and costs in the light of the higher gold price (which should enable Timmins to use a lower cut off, effectively increasing the resource by increasing the number of mineable ounces). The board hopes in the longer term that further drilling could lead to the discovery of additional satellite deposits on the project; there is already evidence of mineralisation 4km to the North of the pit. Further targets may be generated from old mines on the project area.

Other Exploration Projects

Timmins will also be drilling several of its other exploration projects in Mexico this summer. The company recently staked the 40,000 hectare (400 square kilometre) TIM claims at a great address in Zacatecas, one of the hottest mining districts in Mexico. The claims are contiguous to, and geologically similar to, Goldcorp's Peňasquito project which, when built, will be Mexico's largest open pit mine with proven and probable reserves of 17.8M oz of gold, 1,070M oz of silver, 7.2M lbs of lead and 15.9M lbs of zinc. The TIM claims are also 20 km northwest of the Goldcorp's Camino Rojo project (measured and indicated resource of 3.44 million ounces gold and 60.7 million ounces silver) and close to roads, power, rail, skilled labour and smelters. Assays from selected grab samples taken by the Company's geologists have returned anomalous gold values in excess of 1g/t of gold. Drill targets are currently being developed for a summer drilling program.

A second drilling programme is also planned this summer for the Cocula Project in Jalisco, some 50 km west of Guadalajara. Results from previous channel sampling and a 26 hole, 1,974 meter reverse circulation drill program have suggested that the property has the potential to be a bulk tonnage/low stripping ratio/low cost polymetallic operation so the objective of the work this year will be to identify a resource. Timmins will also be conducting exploration in projects along strike from San Francisco.

2010 and beyond

Timmins has already established a good track record. It is operating in a favourable mining jurisdiction, and in just 3 years from IPO it has successfully brought a project on-stream at relatively low capital cost (US$40m), and despite the difficult economic climate. Its exploration program has been cost-effective, finding gold in the ground at an average cost of $10/oz (compared to a typical cost of $50/oz through acquisition). The latest resource update has increased the life of the mine by over 2 years.

Financial results from the mine are yet to be published but with expected life of mine costs of $412/oz compared with the spot gold price of $1169/oz the mine is likely to be highly profitable, at least in the near-term. Profits will be used in part to fund further exploration. A busy program is planned for 2010 and there is likely to be plenty of newsflow concerning production at San Francisco, exploration results from the various projects and a further resource update and mine plan.

Although the share price has trebled over the last year there has been little movement since the first gold pour in December. Nonetheless the recent Canaccord note on the company suggests that a revaluation could be possible, driven by a narrowing of the valuation gap between Timmins and other junior gold producers, by further expansions of the mine life at San Francisco, and possibly by corporate interest in Timmins as an acquisition target.

Timmins currently holds about C$7m in cash.