CAPScall of the Week: Timmins Gold
November 20, 2012 |
For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.
For this week's round of "Better Know a Stock," I'd like to take a closer look at Timmins Gold (NYSEMKT: TGD ) .
What Timmins Gold does
If you assumed that Timmins Gold is a gold miner since it has "gold" in its name, you'd be 100% correct! Who said jumping to conclusions didn't pay off once in a while? Timmins Gold is a miner of gold and silver exclusively in Mexico. Its current production comes from the San Francisco mine in the state of Sonora that it estimates will produce in excess of 100,000 ounces per year.
In Timmins' most recent quarter, the company reported a 48% increase in metal revenue to $41.7 million, an 85% jump in cash flow to $14.5 million, and a 77% pop in profits from operations as its EPS tripled to $0.09 from $0.03 in the year-ago period. Timmins also produced 46% more ounces of gold than it did last year at this time.
Whom it competes against
One of the great things about gold miners is they really aren't in direct competition with one another (i.e. you won't see one undercutting prices on another). Really, the biggest competitor for Timmins and other gold miners is labor, fuel, maintenance, and mine build-out costs, as well as political pressures.
In terms of the cash costs of production (labor, fuel, and maintenance), they are on the rise for practically every miner, both big and small. Timmins' results showed that cash costs are up to $715 per ounce from $580 per ounce at this time last year, although operating efficiencies reduced its cash cost from $758 per ounce in sequential quarters. Barrick Gold (NYSE: ABX ) has seen similar issues, with its cash cost per ounce seen rising to a range of $575 per ounce-$585 per ounce from a previous forecast of $550 per ounce-$575 per ounce due to increased costs at its African and Australian operations.
Mine development costs are also a concern. Timmins is currently in the process of expanding its San Francisco gold operations as well as continuing to drill in La Chicharra, just west of its San Francisco mine. It also began drilling at San Onesimo in July. Luckily for Timmins, this drilling is funded wholly with positive free cash flow. Other developments, like Kinross Gold's (NYSE: KGC ) Tasiast Mine in Mauritania, were stopped dead in their tracks because of rising construction costs.
Finally, there are the political costs of operating in foreign countries. For big and small players alike, miners have found Mexico to present a relatively stable and supportive government conducive to mining. Goldcorp (NYSE: GG ) boasts the largest mines in the region, with its Penasquito mine alone producing roughly 500,000 ounces of gold. Not only that, but Goldcorp's cash costs are among the lowest in the sector. Even Foolish metals guru Christopher Barker's "precious" Primero Mining (NYSE: PPP ) calls Mexico home with its San Dimas mine putting it on pace to deliver 85,000-95,000 ounces in gold this year.
After carefully reviewing the prospects for Timmins Gold, I've decided to make a CAPScall of outperform, even after a doubling in its share price since the year began.
Timmins has a lot to offer value-driven, long-term, gold investors. To begin with, it's funding its mine expansions and drilling solely with positive free cash flow. That means total mine ownership and all the profits stay internalized. It also gives Timmins greater flexibility when it comes to the potential for future dividend payments and operations cost controls.
Second, as I just discussed, it's all about location, location, location. Historically, miners operating in Mexico have run into far fewer political and labor issues than mining companies operating in Africa or South America. Having a stable environment conducive to production will help Timmins meet or beat its gold production goals.
It also helps that Timmins isn't solely reliant on gold either. In its most recent quarter Timmins produced 13,857 ounces of silver, which is a 60% improvement over the year-ago quarter. While it remains focused primarily on gold, Timmins is the type of company that could use its silver as a bargaining tool with a royalty interest company like Silver Wheaton to draw a hefty upfront payment if it finds a mine it simply can't resist getting its hands on.
Valued at just eight times forward earnings and with a mixture of rapidly expanding operations that are being funded solely by positive cash flow, I see little reason, barring a major collapse in the price of gold, why Timmins wouldn't head higher.