Timmins Gold (NYSEMKT:TGD) has announced the Q1 earnings today. Although the company reported EPS of $0.017, which is better than expected, this is not the main reason for optimism. Timmins Gold announced also a revitalization plan for its San Francisco mine, that should improve the production profile rapidly. The news are really great, as they de-risk the Ana Paula project that is crucial for the future of Timmins Gold (soon to be renamed to Alio Gold). The enthusiasm of investors has been probably muted only by the proposed 10:1 reverse split. The shareholders should vote about the proposal on the annual general meeting that will take place on May 12.
In Q1 2017, Timmins Gold produced 26,048 toz gold at an AISC of $848/toz. The revenues climbed to $32.3 million. Timmins Gold recorded operating cash flow of $9.74 million and earnings of $6.04 million, which equals to EPS of $0.017. Thanks to the positive results, Timmins Gold's cash position increased to $39.2 million.
The San Francisco mine revitalization plan is expected to improve the production profile of Timmins Gold's only producing mine significantly. The updated resource estimate includes 1.3 million toz gold in the measured & indicated category. The proven & probable reserves, that were calculated using gold price of $1,200/toz, include 928,700 toz gold. The new mine plan leads to a significant improvement in the production profile. The 2017 production guidance alone was raised by 23% (from 70,000-75,000 toz to 86,000-92,000 toz).
Source: Timmins Gold
Over the rest of the 2017, more than 66,000 toz gold, at an AISC of approximately $1,000 should be produced. From 2018 to 2022, the annual production should cross the 100,000 toz mark. The AISC should move approximately between $850 and $1000/toz, during this time period. Also the expected operating cash flow (including silver by-products) has improved notably. It should amount to $222 million, over the 2017-2024 period, at a gold price of $1,250.
Source: Timmins Gold
The new mine plan should be able to more than double the 2017-2024 gold production. The capital expenses that should enable this expansion equal only to $44.9 million, of which $7.8 million should be expended in 2017, $23.6 million in 2018 and $13.5 million in 2019. Given the projected operating cash flow, San Francisco mine should be able to generate enough cash to cover its own CAPEX and also to help to fund the Ana Paula mine construction.
Source: Timmins Gold
The Ana Paula initial CAPEX should amount to approximately $120 million, according to the PEA. Timmins Gold has no debt, cash on hand worth $39 million and the San Francisco mine is expected to generate operating cash flow of $91.5 million over the next 11 quarters. Although $44.9 million will have to be invested back into San Francisco, it is able to expect that a nice sum of money will be left to finance Ana Paula. Moreover, the profitability of the revitalized San Francisco mine should help Timmins Gold to obtain debt funding at some more favorable terms. The probability that Timmins Gold will be able to finance Ana Paula without the share dilution has increased significantly.
The optimism of shareholders is a little muted by the proposed 10:1 reverse split. The shareholders should vote about this proposal on May 12. The investors are usually afraid of reverse splits, as they expect that the short-sellers will push the share price down, soon after the reverse split is realised. However, in this case, I don't expect the short-sellers to be too active, as Timmins Gold's fundamentals seem to be too good. Shorting the stock right now would be really risky.
Conclusion
The market value of Timmins Gold is $160 million and the enterprise value is only $120 million. Given that the company is profitable and the recent news helped to de-risk the crucial Ana Paula project notably, the company is significantly undervalued. In my previous article, I predicted that Timmins Gold's share value should climb to $1.25 by 2019, when Ana Paula should start production. Given the recent developments, I believe that this price target may be reached even sooner. The Ana Paula PFS that should be completed by the end of this quarter, will tell us more.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TGD over the next 72 hours.
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