RE:Explaining Timmins Gold Game-Changing Transaction !!!
Summary
Timmins Gold has acquired Goldcorp's El Sauzal processing facility for a ridiculously low amount.
That's a stunning move as it will reduce the Ana Paula capex by $40-60M.
This will increase the NPV by approximately $50M, and the after-tax IRR to close to or in excess of 30%, even at $1100 gold.
Introduction
Timmins Gold's (NYSEMKT:TGD) saw its share price fall by almost 90% in just over one year time, and I absolutely feel this free-fall is completely unwarranted as the company has made excellent progress in the past year as it has acquired two new almost development-ready gold projects in Mexico. Last Friday, Timmins has released an extremely important update, and in this article I'll give you all the facts you need.
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What did Timmins Gold buy?
Timmins Gold has entered into an agreement with a local subsidiary of Goldcorp (NYSE:GG) to purchase an existing 6,000 tonnes per day processing plant which is currently located at the previously-producing El Sauzal mine in Mexico.
(click to enlarge)
Source: company presentation
As Goldcorp has closed the El Sauzal mine in December of last year, the processing plant has become useless for Goldcorp, and instead of a cash flowing asset, El Sauzal was faced with closure costs and a useless operating plant. Goldcorp took a wise decision and sold the plant to Timmins Gold for a total consideration of C$8M. C$1M was payable upon closing, an additional C$4M will be payable in one year from now and the remaining C$3M has been settles in 10M new shares of Timmins Gold.
(click to enlarge)
Source: company presentation
On top of that, Timmins Gold has sold 20 million additional shares to Goldcorp at C$0.30 per share ($0.23) and together with the 10M shares as part of the sale of the processing plant, Goldcorp now owns a 9.9% stake in Timmins Gold, and this is a huge vote of confidence for Timmins Gold. I would expect the additional capital raise to be closed by the end of this week (even though both parties have given themselves until the end of this month to finalize the private placement).
Why is this important for Timmins Gold?
Well, Timmins Gold will rebuild the El Sauzal plant at its Ana Paula development project where an economic study outlined a 6,000 tonnes per day production scenario. Yes, that's exactly the capacity of the El Sauzal processing plant. By paying just $6M (of which almost 40% is payable in shares), Timmins Gold will be able to reduce the upfront capital expenditures by $40-60M.
(click to enlarge)
Source: company presentation
This means the remaining capex at Ana Paula will be just $100M, and this will make it easier for Timmins Gold to secure funding for the remaining portion of the capital requirements as financiers will be more keen to provide funding for a less capital-intensive project.
(click to enlarge)
Source: company presentation
On top of that, the economics at Ana Paula will improve dramatically. The $40-60M in capex savings will be felt immediately in the net present value of the project which could easily increase from $140M (at $1100 gold) to $175-200M. Additionally, the after-tax internal rate of return at $1100 gold will increase from 23.1% to probably in excess of 30%. So yes, the acquisition of this processing plant is a major step forward for Timmins Gold and the company plans to take the plant apart soon and put all the equipment in storage.
Investment thesis
This is an important step forward for Timmins Gold because it will have to pay just $6M for a processing plant which could reduce the capital expenditures by $40-60M. This will have an extremely positive impact on the net present value of the Ana Paula development project and this makes the project more viable.
This reinforces my confidence in Timmins Gold, and the sum of the parts is much, much higher than the current share price.