VANCOUVER — Mark Backens may not have anticipated finding himself in the driver’s seat at Timmins Gold (TSX: TMM; NYSE-MKT: TGD) when he joined the board of directors 10 months ago, but he’s now leading a charge to improve the company’s fortunes as its interim CEO.
The challenge is headlined by balance-sheet problems and operational complexities at Timmins’ sole producing asset: the San Francisco heap-leach gold mine, 150 km north of Hermosillo, Mexico.
Backens joined Timmins’ board after the friendly takeover of Newstrike Capital and its Ana Paula gold deposit in Guerrero State in May 2015. He had previously served as director of investment banking in Scotia Capital’s mining division, and has 30 years of industry experience that includes time at Placer Dome and Goldcorp.
A view of the San Francisco open-pit gold mine in Mexico in 2011. Credit: Timmins Gold
Timmins and Newstrike hoped to create a Mexico-focused intermediate gold producer on the back of San Francisco and Ana Paula, plus Timmins’ Caballo Blanco asset, 65 km northwest of the city of Veracruz on Mexico’s east coast. The strategy suffered, however, as gold prices fell and costs rose at San Francisco, due to heavy stripping requirements.
The setbacks culminated with a US$227-million impairment in late 2015, soon after Backens took charge of the company in October.
Timmins followed up by saying it would suspend mining at San Francisco later this year, which remains the plan despite the recent uptick in gold prices.
“Timmins is really asset rich and cash poor,” Backens said during an interview. “To get into a position to settle our debt we have three options: the equity markets, which haven’t been supportive; the sale of the company, which is quite a dramatic move; or monetize some of the asset value we have in our growth portfolio. We’ll pursue all three avenues because we need to take care of the finances, especially if we do not extend operations at San Francisco and become the ‘unfunded developer,’ which can lead to death by a thousand cuts.”
Timmins expects its “mine out” plan at San Francisco to generate material cash flow this year, which should cover its accounts payable and contribute to the treasury. It will not generate enough capital, however, to address the debt.
The company finished 2015 with US$9.2 million in cash, but was also on the hook for US$5.7 million of value-added tax receivables, and a $10.2-million loan it restructured in January. The agreement with Sprott Resource Lending Corp. and Goldcorp extends the maturity date by five months to June 30, and boosts the interest rate to 12% per annum.
Timmins expects to produce between 75,000 and 85,000 oz. gold this year at cash costs from US$750 to US$850 per oz. The company said it may rethink San Francisco’s closure if the gold price gains more ground, which could extend the mine’s life through 2022, based on current reserves.
Pouring a doré bar at the San Francisco gold mine in Mexico in 2011. Credit: Timmins Gold
“We’re taking a hard look at San Francisco because every dollar we can squeeze out of the mine is a dollar we won’t have to raise with our shares. If we go forward with Ana Paula, you don’t want to lever the debt capacity up too high,” Backens said.
“It’s a question of limiting the dollars raised in an equity issuance, and that’s why we’ll explore all our options to extend our operations. We’re pretty early in the gold price rally and we want to see some sustainability there, though obviously we love the return to these levels. I need to see that this market has legs,” he added.
If Timmins can reverse its fortune, Ana Paula will likely play a role. In September the company picked up the process plant and other “auxiliary equipment” from Goldcorp’s El Sauzal mine in Chihuahua state for $8 million. The acquisition cut Ana Paula’s estimated capital costs by US$40 million.
In late March, Timmins released an updated preliminary economic assessment on the project that incorporates the El Sauzal infrastructure into the mine plan. Ana Paula will now cost US$122 million in initial capital, and features a US$248-million after-tax net present value at a 5% discount rate, along with a 43% internal rate of return. The economic base case assumes a US$1,200 per oz. gold price.
The mine would generate 116,000 oz. gold and 239,000 oz. silver per annum over an 8.2-year mine life. Measured and indicated resources at the project total 41 million tonnes of 1.47 grams gold equivalent per tonne for nearly 1.9 million contained oz. gold and 7.1 million contained oz. silver.
“In terms of unlocking value … Ana Paula clearly has superior economics to anything else in the current portfolio … we’re really focused on that asset. If you only have so much money you need to deploy it where you can do the most good,” Backens said.
“We’re being pretty careful with a timeline because we need to make sure we don’t fall on our sword financially. My outlook and approach is probably more conservative then my predecessor. I don’t necessarily want to say ‘under-promise and over-deliver,’ but let’s be sure we can accomplish our goals and avoid any surprises,” he continued.
Timmins shares has traded within a 52-week range of 10¢ to 92¢ per share, and have gained 55% to start the year en route to a 29.5¢-per-share close at press time. The company has 315 million shares outstanding for a $95-million market capitalization. Its equity is 60% institutionally owned.
“Our major shareholders have been supportive, for the most part. Sentry Investments and Goldcorp remain supportive and stepped in to help us with our debt position,” Backens said. “Lukas Lundin and his family funds came onto the registry as part of the Newstrike acquisition, and I speak with him quite regularly. We’re working really hard to reward our shareholders, because there’s a lot of value in our asset base.”
too early to judge, but looks prudent !