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Analysis

Timmins Gold to Set Caballo Blanco Back on Right Track

Wed, 10/21/2015 - 08:02

It is a rare honor for a company in any industry to be singled out for praise by Warren Buffett. Yet the Wizard of Omaha named Timmins Gold (Timmins) as one of 20 firms that comply with his criteria for acquisitions due to the high return rate it provides for shareholders. Timmins is a gold mining and exploration company whose primary asset is the San Francisco property in Sonora, Mexico. The property has two open-pit mines, La Chicharra and San Francisco, with the latter of the two already being in commercial production. In 2013, San Francisco produced 85,490oz of gold and 46,665oz of silver, but 2014 saw fortune smile on the gold producer. The first quarter of the year saw it achieve a record-breaking 35,197oz of gold, followed by 32,932oz during the second quarter. This put the company well on the way to meet its production target of 115,000- 125,000oz of gold for the year. Proven reserves for the San Francisco mine stand at an estimate 808,000oz of gold, while probable reserves stand at 464,000oz. Although San Francisco is already in production, La Chicharra has been steadily adding to Timmins’ reserve estimates. Drilling from 2011 to 2013 increased reserves at La Chicharra by 77%, bringing its proven reserves up to 12.4 million metric tonnes with 0.52 g/t, amounting to 205,000 contained ounces of gold. Probable reserves were estimated at 7.5 million metric tonnes at 0.46 g/t, with 111,000 contained gold ounces. With San Francisco currently in operation, Timmins was able to achieve a steady 24,000 t/d throughput up to October 2014, which is set to continue through 2015. Starting in 2016, the mill should achieve an even higher clip with an additional 6,000-8,000 tonnes. La Chicharra should also benefit from a new crushing unit and leach pad around the same time.

In addition to the already producing San Francisco mine, Timmins Gold owns the mineral rights of over 200,000 hectares of claims in the northern region of Sonora. Extensive exploration activities have already been carried out at El Durazno, la Pima, Norma, and El Picacho claims. Mapping and sampling of El Durazno showed gold, silver, and polymetallic minerals, overall drilling in the area returned values of 2.056 g/t of gold and 104 g/t of silver in 2012. A further plan to drill 20,000m was begun in 2013 but was stopped after just 2,340m to save on expenses. However, this aborted program still returned results of 2.8 g/t of gold in one hole, meaning that El Durazno will continue to be a priority for Timmins. Finally, Timmins Gold also has the El Capomo property in the southern portion of Nayarit, near the border with Jalisco, where it holds a surface of 47,511 hectares in six adjacent claims surrounding the old mining district of Cebadillas. Prospecting works were done on the property, identifying favorable geology for mineral discoveries in at least five locations. However, while most results suggest further exploration efforts should continue, this has been marked as a low priority for Timmins.

The most significant action taken by Timmins of late was the acquisition of the Caballo Blanco gold project in Veracruz in December 2014. Timmins bought the mine from Goldgroup for US$10 million in cash and 16,065 Timmins Gold shares currently worth approximately US$15 million. Additionally, the company agreed to pay Goldgroup another US$5 million once Caballo Blanco receives approval for its new environmental impact statement or Timmins Gold undergoes a change of control. These elements combine to make the deal potentially worth up to US$30 million. Caballo Blanco’s two zones combine to provide indicated resources of 575,000oz of gold and a further 419,000oz of inferred resources. Once Timmins brings Caballo Blanco into production, it will almost double the company’s annual gold production to over 220,000oz a year. Nevertheless, the Caballo Blanco project does not have a wholly smooth history. The mining project was shut down in 2012 as it did not fulfill environmental requirements. Environmental organizations, public bodies, and even the governor of Veracruz strongly opposed the project for several reasons. First, there was a major concern over using explosives a mere 3km away from the Laguna Verde nuclear plant. Other complaints included the concern that waste generated from diamond drilling and the use of mercury and cyanide would damage the local ecosystem. The presence of a tailings dam in a region prone to hurricanes also distressed the local population, who filed a complaint with PROFEPA. Finally, Caballo Blanco’s permits for mining operations were revoked on May 2012. To resolve this, Timmins will submit a new environmental impact assessment for the Caballo Blanco project. One of the company’s objectives is to meet and surpass legal and regulatory compliance in all exploration and mineral recovery operations. In addition, environmental sustainability is a core element in its operations, as it recycles the water it uses at all sites and has active on-site programs to replace flora displaced in mining operations. Timmins’ environmental programs earned the company a Socially Responsible Business Distinction award in 2011, and the Mexican Center for Philanthropy (CEMEFI) recognized the company for its efforts.

Despite these obstacles, the acquisition of Caballo Blanco is in line with Timmins’ strategic goal of adding a highly prospective gold mining project at an attractive valuation in Mexico, which the company views as a well-established and low risk mining jurisdiction. Even at current international gold prices, Timmins representatives believe the Caballo Blanco mine to be a highly promising acquisition.