A subscriber recently prompted us to look more closely at Timmins Gold and its valuation relative to other gold producers. When performing comparative analysis, ideally you want to look at peers that are as similar as possible in order to limit the influence of confounding variables and non-quantitative factors. In this respect, Argonaut Gold works quite well as a comparable for Timmins Gold since it’s also a unhedged, zero debt, similar operating cost, mid-tier gold producer with heap leach open pit operations in Mexico. It doesn’t get too much better than that!
Consider the following dashboard (click to interact) a glimpse into what we hope to accomplish for the entire universe of gold, silver, copper, etc. producers, developers and explorers eventually:
Looking at the “Valuation Comparison” chart in the above graphic, we see that Timmins Gold trades at about 0.8x the net present value of its calculated after-tax cash flows versus about 0.9x for Argonaut given the assumptions shown on the left-hand side of the dashboard (mainly, gold price of $1,600).
The fact that Argonaut Gold has longer mine lives and a significant increase in production during 2013 and 2014 is all already factored into the net present value calculation, but the production profiles do tell us something noteworthy… namely that in spite of the short “official” remaining life of the San Francisco mine, Timmins is still a good quantitative value. If Timmins can extend operations at San Francisco beyond 2017 (likely) at a reasonable cost (that is the question mark), then its valuation has the potential to increase significantly and intensify the valuation gap between it and Argonaut Gold. In the interactive graphic we have built, you can choose “Yes” for the question of extending the mine life using our custom parameter and after doing so, the Market Cap/NPV ratio for Timmins will adjust accordingly.
It also bears noticing that Argonaut Gold’s valuation is heavily reliant on its La Colorado and San Antonio development projects based on the degree to which these mine projects are expected to contribute to future earnings and cash flows. Since the market isn’t exactly paying big premiums for gold development projects these days, the valuation gap between Timmins and Argonaut is more stark than it otherwise appears. We’ve also somewhat generously assumed gold production growth at Argonaut Gold’s flagship El Castillo mine to 100,000+ ounces beyond 2014 despite the company not having revealed specific plans for accomplishing this goal. The increase in the gold reserves at El Castillo since Argonaut Gold took over the operation indicates that room exists to increase the production rate, but this is not a foregone conclusion.
Finally, we’d point out that Timmins Gold appears to have the advantage of higher operating profit expectations for 2012-2013, which if achieved should garner some appreciation from the market. And Timmins Gold doesn’t have to worry about funding a significant development project (e.g., the negative $71 million cash flow for Argonaut Gold’s San Antonio project in 2013). Overall, Argonaut Gold is probably fairly valued at this stage all things considered with some possible upside if expansion at El Castillo can be achieved inline with analyst expectations and if the two development projects are built and started up without too many hitches. On the other hand, Timmins Gold appears somewhat undervalued and much more so if its San Francisco mine can be successfully expanded to a ~130,000 ounce production level and mine life extended beyond 2017.
Please feel free to play around with this new interactive model by trying out different assumptions. In the future, we will be adding more variables that can be adjusted (operating cost, mine life, etc.) and also including more companies. Eventually this interactive model will be the basis of our comprehensive mining company valuation reports (see previous reports here, here, here, etc.).
Disclaimer: This commentary is for illustrative purposes only. We do not own shares in either Argonaut Gold or Timmins Gold and we do not intend to buy or sell shares in either company at the present time. No compensation has been received from any party for this analysis. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.
Do you not think that an acquisition would be accretive for Timmins Gold?
I a good geographic fit with NWM.
Any thoughts?
An accretive acquisition is always going to be difficult if not impossible in a share deal if the the acquirers’ shares are undervalued. Perhaps a cash deal as we’ve been seeing lately elsewhere, but realistically that probably costs $60 million and Timmins doesn’t have the dough even if they were interested … at least not yet.