Summary
Timmins removed its CEO in a very surprising fashion.
It seems Sentry Investments got their wish from their proxy battle over a year ago.
A big write-down looms in the third quarter and a new mine plan so investors need to stay tuned to this fluid situation.
Timmins Gold (NYSEMKT:TGD) recently announcement in a very abrupt fashion that it was undergoing a leadership change. It announced that Bruce Bragagnolo has ceased to be the Chief Executive Officer and a Director of Timmins, and that Mark Backens has been appointed as Interim Chief Executive Officer of the Company effective immediately.
We say this was a surprise because Mr. Bragagnolo himself was surprised and commented the following in an interview:
"I wasn't given a reason" for the board decision to end his nine-year tenure as CEO, Mr. Bragagnolo, 58, said in a telephone interview from Vancouver. "Nothing was really explained to me."
First Takeaway: CEO Resignation May Not Be a Negative
This is highly unusual as a CEO usually resigns in a more planned fashion, the fact the board got rid of him in such a mysterious way suggests that there was plenty of unhappiness with the company's performance internally.
Normally when we see CEO step down abruptly it's a negative sign for the company because it suggests that the future is not particularly bright and the CEO wants to get out before things fall apart or get even more difficult. In this case, Mr. Bragagnolo didn't resign voluntarily but instead was essentially booted by the board - so this isn't necessarily a negative but, as we said earlier, is probably due to internal fighting at the company.
Long term investors in Timmins will remember that a little over a year ago one of the company's largest shareholders, Sentry Investments, launched a proxy fight against management due to the company's underperformance. The problem seemed settled when the two sides came to a agreement a few months later, but we think the issue wasn't really resolved in Sentry's opinion and the plummeting share price has probably pushed them to lose confidence once again in management.
Thus we feel that ultimately the resignation of the CEO, which is usually a negative, is not a negative in this case.
Second Takeaway: A New Direction
Investors should recall that Sentry's biggest gripe with Timmins' management a year ago was that it didn't feel like Timmins was truly considering other options such as opening itself up to a possible sale. They claimed that "stronger" companies with "superior technical skills and superior operating performance" were interested but that the board did not provided due diligence access.
Since we assume Sentry was behind the push to force out the CEO, we have a feeling that the company will now embark on a new direction that is more aligned with what Sentry wanted to do a year ago. That means engaging other companies to do their due diligence for a potential sale of the company, which may be made stronger since Timmins is much cheaper than it was and now includes some quality development assets such as Ana Paula and Caballo Blanco.
All in all, this is probably the most positive thing to come from this announcement. We have said previously that Timmins is very cheap, and we think that if Sentry pushes the board to allow Timmins to be truly on the market, there will be interested parties with the most obvious being Goldcorp (NYSE:GG) who only two weeks ago took around a 10% stake in the company.
Third Takeaway: Updating the Mine Plan
The forced resignation of the CEO was the portion of the announcement that got the most attention, but the news of an updated mine plan is a very important portion of this announcement. The company expects to update its mine plan in its third quarter results and it expects a significant impairment in regards to the carrying value of its assets.
This is quite obviously a negative but it shouldn't be too surprising to investors as the company's current mineral and resources is stated on its website "as of July 1, 2013", which is obviously a bit dated and is calculated at a higher gold price.
Moving forward, we're very curious to see what the "update of the mine plan" entails. Is it simply an issue of changing the way the open pit operates with a focus on higher grade portions? Or will the company engage in a completely new direction and turn San Francisco into an underground mine as per itsrecently announced underground pilot program? That would be a big risk but it also might make operations much more profitable especially if the program (which we haven't heard about since July) has demonstrated success.
There is a lot of uncertainty in what this portion of the announcement means and the fact that the company knows it will encounter a "significant impairment" quite clearly makes this a negative.
Conclusion for Investors
There's still plenty to learn about this stunning move by the Timmins board, but initially we see both the positives and the negatives in this announcement. On the positive side, Sentry Investments seems to have gotten its previous wish and removed the founder and CEO of the company which leaves the company open to a direction more amenable to Sentry Investments. In the past this has meant considering acquisition options and we wouldn't be surprised if that is the case now.
On the negative side, the company will be taking a large impairment on its assets and will announce the details, as well as a new mine plan, in its third quarter earnings.
Investors will have to decide whether the positives outweigh the negatives here. In our opinion, notwithstanding a complete negative revaluation of San Francisco, the value of the company's assets is cheap enough to take the risk here. The fact that the company's largest shareholder is behind the move is another positive though as they have significant skin in the game and are much more likely to work to maximize shareholder value here. A lot of risk and many unanswered questions left, but it should certainly be interesting - investors should stay tuned.
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