Timmins Gold doubles Q2 profits

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Timmins Gold (TSX:TMM; NYSE MKT: TGD), which recently settled a proxy fight with dissident shareholder Sentry Investments, reported a second-quarter profit of US$3.2 million, or US2¢ per share, double the amount earned a year ago, but below the consensus estimate of US4¢ per share.

The year-over-year increase in earnings resulted primarily from higher metal revenues as the junior sold more ounces at a slightly higher average realized gold price.

Revenues climbed 21% to US$42.4 million from US$35.1 million.

Timmins Gold produced 32,932 oz. gold from its sole operation, the San Francisco heap-leach gold mine in Mexico, and sold 33,000 oz. versus 28,024 oz. produced and sold in the same period last year.

Higher production was due to an increase in throughput and implied recovery, offsetting a 20% drop in grade, notes Cowen and Co. analyst Adam Graf.

The higher throughput resulted from new crushing and throughput capacity that Timmins Gold brought online at the end of 2012 and ramped up in the second quarter of 2013. Since the first quarter of 2014, the crushing circuits have been running near the 24,000 tonne per day capacity, Graf writes in a note to clients.

But compared to the first quarter, production fell by roughly 6% mainly due to the lower grade, he adds. The average processed grade in the second quarter was 0.065 per tonne, down from 0.71 per tonne in the first quarter and 0.081 per tonne a year ago.

Averaged realized price during the second quarter was US$1,284 per oz., up US$31 per oz. from the prior year.

Earnings from operations were US$7.2 million, up US$3.8 million due to higher revenue, along with the fact the company didn’t have to take a US$5.5 million impairment charge that it reported in the second quarter of 2013, on the back of lower gold prices.

However, one piece of news that may disappoint investors is the higher production costs. Total cash costs per oz. on a by-product basis were US$730 versus US$705, due to lower feed grades. This is a 4% increase over the prior year while average gold grades fell 20%, the company’s CEO Bruce Bragagnolo said on a conference call.

All-in sustaining cash costs on a by-product basis jumped nearly 8% to US$928 per oz.

The company was processing grades over the average reserve grade by stockpiling lower grade ore, Graf notes. But with the increased capacity, it will be processing more lower grade ore and expects grades to decline to the reserve grade.

“We are predicting cash costs will increase slightly as we operate at the planned reserve grade,” Bragagnolo says.

However, he adds the company is looking at ways to further increase throughput by improving the mining process.

“For another $2.5 million [investment in the crusher], we might be able to get another two to four thousand tonne per day of throughput. We are looking at the cost of that, and any increase in tonnage, will give a decrease in costs.”

The company’s cost-saving initiatives to date plus the higher revenue and sales from the San Francisco mine added nearly US$12 million to the company’s balance sheet this quarter. It ended June 30 with cash and equivalents of US$56 million, up from US$14.4 million a year ago.

“Overall it has been a very successful quarter,” Bragagnolo notes.

The company is on track to reach its 2014 guidance of 115,000–125,000 oz. gold, Graf adds. But he cautions “until expansion activities resume at the mine, TMM shares show little room for growth.” Graf maintains a “market perform” rating.

To conserve cash, the company continues to defer the installation of a third crusher that would boost throughput from 24,000 tonnes per day to 30,000 tonnes per day, he notes.

Timmins Gold closed the day down 3¢ at $2.01 per share.