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Friday, September 9, 2016

Ana Paula - the figures

In my last post on AP I looked at the geology (with some great feedback from Rick Walters (I'm guessing that you aren't the legendary tattoo artist from California).

For the discerning investor it is hard to push beyond the huff and puff in the PRs as every gold project seems to be brilliant. they all have very low costs (cash, AISC), great returns (IRR and NPV), Ana Paula looks to be different, Timmins tell us, AP is:
  • Cheap to Build - $121.7M
  • Great Grades - 2.24 g/t Au over the life of the mine
  • Short payback period
I worked through the figures to see if I could understand a bit better why the figures for AP are so good, after seeing some nice 'tricks' in the Corvus PEA, I wanted to see if anything untoward was happening with AP.

The short answer - No, but the economic model is probably a little over optimistic. AP is a good project, and IF Timmins don't mess it up, they could have a nice long line of suitors looking to acquire them (e.g. Torex, McEwan, maybe even Tahoe?).

I found some minor issues with the economic model:
  • Milling rates - they assume that they will be operating at full capacity for the entire year 
  • No commissioning period - they are operating at 100% from year one.
  • 5% discount rate is fashionable, but 7-8% would be more realistic
  • $0 working capital
One question you have to think about is how will Timmins fund the development of AP? 

It looks like they can do it just from the revenue from San Francisco, which is generating ~$12M/quarter (at current metal prices), and they have ~$82M in equity (only ~$12 as cash), so if they are careful and don;t have any issues at SF, then they won't need to raise money by either  diluting the crap out of their shareholders or borrowing money at crippling interest rates.

Let's run through the AP Economic model.

Capex

Timmins have worked hard on reducing the Capex for AP by:

  • Buying the El Sauzal mill from Goldcorp for $8M (cash and shares)
  • Using contract miners so they don't need to spend capital on buying a mining equipment
    • this will lead to slightly higher operating costs
I went through and checked the numbers, and compared them against a couple of other operations and CAPEX values for open pit gold mines in Mexico, and they are inline with other operations.
  • Penoles built Velardena, a 6000 tpd underground mine for US$203M
  • Torex built El Limon, 8000 tpd for $790M
  • In comparison - Ixtaca (Almaden) CAPEX of $100M for a 8000 tpd operation looks to be unrealistic.

Working Capital

The only minor issue I found was the way working capital is handled. They have a small amount ($6.9M in year -1), but that is all returned in year 9 (when the mine closes), so it balances out. However it should mean that AP capex should be $6.9M higher at $128.6M.

I also feel that the working capital should cover 2-3 months operating expenses, around $15M especially to cover that tricky start-up period.

Mining Costs

Lets check the costs that Timmins are using - how do they compare to operating mines?


And visually
Ana Paula - PEA values, other = actual values from MD&As
They look OK, there are some differences because:
  • El Limon has a higher mining cost due to its higher strip ratio
  • Los Filos is an open pit mine and they recover the gold via heap leach (no milling)
  • El Sauzal costs are from 2013 and don't have values for G&A.
Nothing major, these costs are good and inline with current (and recently operating) mines.

Possible Issues

I've worked in some possible issues into an updated Economic Model to see how they could impact the NPV and IRR for AP.

1. Mill throughput

They bought a second-hand mill from El Sauzal, I know that it will be nicely rehabilitated and probably painted a beautiful shade of yellow and blue (or red or utilitarian grey), and they are expecting to:
  • process 2,160,000 tonnes/year at 6000 tpd plant
  • 2,160,000/6000 = 360 days/per the plant is operating at full capacity
  • or the pant will be operating at 5918 tonnes per day, every day.
So they are expecting to use the plant at full capacity for 360 days a year (I'm assuming it will get days off for Christmas, New Year, Easter, Independence day, and either Revolution Day or Benitio Juarez's birthday. That sounds a bit to perfect, was the plant that good when it was at El Sauzal?
not quite, but close
It wasn't bad, it average 350 days of operation per year at peak capacity, so if they maintina the same standard at AP, you would expect them to 2.1 Mt/year.

2. Commissioning

Mines and mills take time to start operating at peak capacity. At El Limon, they still haven't quite reached full capacity (they are up to 83% of design - link), so will you get a similar 6 month commissioning period at AP?

3. Discount rate.
5% is cute, I like to check the discount value against the interest rates that various loan/financing are being arranged at.

  • Premier Gold - loan from Orion mine finance at 6%
  • Lydian - Libor + 6.5%
  • Red Eagle - Libor + 7.5%
So if you are borrowing money at libor (currently at 1.5% for USD) + 6.5%, then a 5% discount rate seems low, a rate of 7-8% looks a bit more realistic.

4. Working Capital
In a nice stroke of excel, AP has no working capital in its advertised CAPEX.

who needs working capital? 
So how are they going to pay for the operating expenses for that tricky start-up period while they are waiting to receive revenue from their first shipment of dore? A study done of gold Australian mines shows that it took on average 47 days to receive payment (link), maybe in Mexico it will be quicker, but it would be nice to see Timmins include ~$10-15M to cover this.

My mistake, they do, they have $6.9M in year -1, but like the deposit you give to the bottle shop/off-license/liquor store, when you buy a beer (or IRN BRU) in a glass bottle. When you return the bottle (or in this case - close the mine), you get that money back, errr, 9 years later. 

So, the real CAPEX is actually $128.6M.

All this data when into an updated Economic Model with the following assumptions:

  • Mill operating at 6000 tpd for 350 day/year or annual throughput if 2,100,000 tonnes
  • 7.5% discount rate
  • 6 month commission period (using El Limon as a guide)
    • mill operating at 75% capacity, increasing to 100% afterwards
  • Working capital of $15M (to cover 3 months operating expenses)
The results are:
  • CAPEX increases to $136.7M
  • Pre-tax
    • NPV decreases to $296.6M
    • IRR decreases to 45.13%
  • After Tax
    • NPV decreases to $180.3M
    • IRR decreases to 21.98%

This isn't my area of strength, but it still shows that Ana Paula is a good project, just not quite a spectacular as advertised, but robust enough to pass the stress test and I do like the fact that Timmins have been conservative with the metal recoveries.

I think this is a good project for Timmins