A Cash Flow Machine: Timmins Gold

Dear Readers,

The world is about to change.

Events have taken place that’s going to transform the way we view the world’s financial system.

The U.S. Republican Party has just called for a commission to examine the possibility of returning the American currency to the gold standard.

A draft of the Republican Party’s platform to be unveiled at the party’s convention in Tampa, Fla. will now include the creation of a “gold commission” tasked with examining the feasibility of tying the value of the U.S. dollar to a fixed price of a unit of gold in the country’s official reserves.

This hasn’t been done in over thirty years.

We’re about to see a dramatic shift in the world’s financial system.

As a result, the funds have awaken and central bank buying may be on pace to reach levels not seen for over 40 years.

According to World Gold Council managing director for investments, Marcus Grubb, if this trend continues over the remainder of 2012, central banks will be entering a “new territory” of gold buying that has not been seen since the early 1960s and since the end of the Bretton Woods System in 1971.

As a result, many of the gold producers are finally breaking out. Only this time, their move upwards will be much more aggressive.

The stronger companies within the sector have already bounced from their 52-week lows. And I think we’re barely scratching the surface.

It’s no wonder why one of my latest gold recommendations has gained nearly 100% in less than two months. But I don’t think the real move upward has even begun.

That is why I am about to introduce you to another opportunity that many analysts believe is, “poised for considerable growth in both production and earnings over the coming quarters.”

I am expecting this company’s upcoming quarter to be the best they have ever had.

Combine that with events that are about to take gold into new territory and we could see this company rocket to a whole new level.

Let me tell you why in a bit.

Central Banks Race Toward Gold

According to the WGC’s quarter-end data, official sector institutions purchased 158 tons of gold in the second quarter – or about 16 percent of the quarter’s total gold demand. During the first half of 2012, central banks have acquired 254 tons of the metal, which is about 25 percent higher than the same period last year.

The central banks from developing markets led the buying trend once again. This should come as no surprise as they continue to defend themselves from the competitive devaluation of the three super powers: the European Union, the United States, and the People’s Republic of China.

Unprecedented Change

The stage has been now been set for gold to reach new highs unlike anything we have ever witnessed.

The Fed has once again hinted at yet another round of stimulus and central banks are on trend to shatter new gold buying records. For the first time in more than thirty years, the U.S. Republican Party is calling for a commission to examine the possibility of returning the American currency to the gold standard.

It’s no wonder why the new Basel III Accord is forcing banks to keep more gold in their vaults. Countries around the world are protecting themselves with the only thing that has kept them alive throughout history’s currency battles: Gold.

The Real Leverage

While gold will reach new highs, I expect the rise in the share prices of quality gold producers and explorers to be much more violent.

But this rise isn’t without its hurdles.

Rising Costs

Numerous gold exploration projects and mines are being shut down as we speak due to the rising costs of production and exploration.

It is difficult to emphasize just how much the world has changed for the miners in the last eighteen months. Things that were being contemplated are now obsolete, shelved or reversed. It’s rare to see such a rapid shift.

All around the world, costs are rising.

The result has left many producers and explorers with little room for growth. The only ones left standing are those with strong production growth, positive cash flow, and exploration upside.

That is what makes the company I am about to introduce so special…

A Cash Flow Machine with Blue Sky Potential

In this environment, it’s important to focus on the cash flow of producing gold companies because that is where the big money will flow first. When the big money reaps the rewards of these companies, they will take their profits and pour money into the more speculative side of the gold market.

The company I am about to introduce is a double-whammy because not only are they making lots of cash, they also have a significant speculative upside in exploring 200,000 hectares of claims contiguous to their mine along a highly prolific gold district.

Not only that, a rise in gold from $1600/oz to $2000/oz will increase the Company’s profit margin by 50% and doubles its net present value.

It’s no wonder why so many analysts have strong buy ratings and high target prices for this company.

Union Securities says this company is likely “poised for considerable growth in both production and earnings over the coming quarters.”

MPartners says this company should continue to generate substantial operating cash flows throughout the remainder of the life of mine…and it could also attract the attention of more senior project-rich but cash poor producers.

Casimir Capital believes the Company’s current valuation “offers investors an excellent entry point in the stock. The Company offers the appeal of a potential takeover target, and appears undervalued when compared to its peers.”

The list goes on. But all-in, the overall consensus for this company remains the same: it’s a strong buy.

The majority of analysts, on average, call for at least a 50% rise in share price.

The Company currently trades at CDN$2.21 in Canada and US$2.28 in the U.S.

If you’re looking for a cash flow machine with numerous independent investment firm coverage and significant blue sky exploration potential, you’ve found it with:

Timmins Gold Corp.

(TSX: TMM

(NYSE MKT: TGD)

We’re not the only ones who think so:

Dahlman, Rose, and Co says the Company “provides investors with exposure to a low risk, growing gold operation in a stable mining jurisdiction. We believe the company has potential to provide investors with significant upside by achieving continued exploration success and production expansion.”

Jennings Capital views this company as “a compelling investment for investors wanting to play a junior gold stock with a near-term growth profile and tangible exploration upside.”

I expect Timmins Gold to not only decrease costs and increase production, but also significantly expand their resources. As a result, analysts covering Timmins may soon have to raise their target prices…

Timmins’ upcoming quarter may be their best one ever.

More on this later.

A New Junior Gold Producer

Timmins Gold Corp. (TSX: TMM) (NYSE MKT: TGD) is a relatively new junior gold producer with a broad range of projects in Mexico. The Company’s flagship asset is the San Francisco, open pit heap leach operation in Sonora State, Mexico.

The Company should be producing nearly 100,000 oz of gold before this year is over and should reach 130,000 oz soon after that; that’s well over $217 million worth of gold (at current prices) every year, for at least seven more years.

And that’s not factoring further production increases and major exploration upside.

Their goal is to become a 200,000 oz/year producer. If their track record is any indication of their future, I believe they will achieve their goal.

Management, led by CEO Bruce Bragagnolo and President Arturo Bonillas, has taken Timmins from an exploration/development project to a near-100,000 oz per year producer in a very short period of time.

Despite market conditions in 2008, management was able to raise money and move the project from a feasibility stage to a 10,000 tpd operation in just a few short years.

While that means a lot of money was raised at lower levels, it also means the company can now expand without much dilution to shareholders. The Company has been cash flow positive since commerical production in April 2010.

Timmins has shown strong fiscal discipline, turning an $85 million dollar share capital raise into a company with a market cap of over $300 million.

It’s been over three years since their last financing and, less than a year ago, the stock was at CDN$3.45. I expect that much of the shares financed at the lower levels are now in very strong hands.

Timmins is held by a wide range of institutional owners from all over the world; from Sprott, Sentry Select, Oppenheimer, and Van Eck, to RBC Global Asset Manager, the Canada Pension Plan and Baker Steel.

As a result of the support from numerous financial institutions, Timmins’ share price has held up – even through phases of production hurdles.

Timmins continues to grow organically (without financing) year-over-year and this is clearly reflected in the company’s share price.

Take a look:

Timmins 3-Year Performance

But their growth is just beginning.

Let me explain.

The San Francisco Mine

Timmins flagship, the San Francisco Mine, is situated within their 200,000 hectare land package at Sonora, Mexico along the Mojave-Sonora Megashear. This belt of metamorphic rocks hosts several multi-million ounce deposits along with many producing mines.

The mine site is easily accessible by highway as it is located within 2km of both interstate highway and rail. They have enough water for a 50,000 tpd operation and more than enough power.

Timmins also has extremely strong community relations, participating in health, education, atheletics, and social programs and a very strong environmental record.

Last year, Bruce told me they expected to bring their resource up from 780,000 ounces of gold, all the way up to 3 million ounces. And they delivered exactly that.

San Francisco currently hosts a measured & indicated resources of 1.6 million ounces of gold at 0.60 g/t gold, and inferred resources of 1.4 million ounces of gold at 0.45 g/t gold, for a total resource of nearly 3 million ounces.

Exploration success has significantly increased gold resources and reserves in all categories and ongoing drilling around the mine is expected to further increase reserves and resources.

That means exploration upside at San Francisco is huge; they have yet to find the limit of mineralization either along strike or at depth.

Geology shows that gold mineralization has the potential to expand at depths greater than the 240 meter planned pit bottom.

Their original mine plan only incorporated about 1.3 million of the 3 million ounces in their current resource. That means resource definition has brought the life of mine from 5 years to beyond 7, with much more room to grow.

Mine Operations

Operational-wise, San Francisco is a conventional open pit heap leach operation consisting of a three-stage crushing circuit, which includes one primary crusher, three secondary crushers, and two tertiary crushers.

Material crushed is stacked on the leach pads where irrigation pipelines distribute the leach solution over the entire surface of the pads.

The leach solution percolates to the bottom and flows to the canal that carries the pregnant solution to a storage pond, from which it is pumped to the ADR plant, which subsequently is processed to produce gold doré.

Heap leach mining is a low cost method of recovery that is mainly exploited in lower grade mines. Because of this operation, Timmins is able to consistently produce strong cash flows despite the lower grade.

Production Expansion

By the end of this year, Timmins is expected to produce nearly 100,000 ounces. Their efforts moving forward will be focused on expanding production to 130,000 oz in 2013 by adding more crushing and heap-leach capacity.

The Company continues to fund all of its operations, expansion and drilling from existing cash flows.

It has already added secondary and tertiary crushers, as well as a jaw crusher, and has doubled throughput from the original 10,000 tpd to more than 18,000 tpd now.

Operations should be at 22,000 tpd by the end of September, and up to 30,000 tpd by early next year – that should take them to an annual production of 130,000 oz.

This should no doubt significantly raise their EPS (earnings per share), making them even more undervalued when compared to their peers.

The company has also purchased a new portable crusher to process the stock pile of lower grade ore that had previously been expected to be processed at the end of the mine life, but is now being processed. This should also add more value to Timmins as the stockpile of lower grade ore is moved away.

This portable crusher could then be moved to San Francisco’s adjacent La Chicharra deposit once that pit is ready for extraction later this year. More on La Chicharra in a bit.

The Company’s cash position looks great. They have a current cash balance of $21m plus, an $18m debt line from Sprott, and cashflow from operations are ~$15-20m per quarter. This should get them through the ramp-up (~$13m) and drilling program ($5m) with plenty of room to spare.

Exploration Potential

The company possesses several exciting exploration targets that could be the source of further expansions and/or mine life. – Dahlman, Rose & Co.

Timmins has over 200,000 hectares of properties in Sonora, Mexico, including numerous robust gold-bearing projects such as their San Francisco property.

The company continues to expand the San Francisco deposit with over 50,000 metres of drilling already planned and on-going.

Even with the hundreds of thousands of meters they have drilled, they have yet to find the limit of mineralization either along strike or at depth.

They have already added 2 million ounces of resources in short time and it’s clear that exploration potential remains at the San Francisco mine.

But there’s more.

Situated just 1.5km away is their past producing pit operation, La Chicharra.

La Chicharra Pit

Like the San Francisco mine, the previous operator at La Chicharra halted production as a result of low gold prices in 2001.

If management can further drill this target to further de-risk their asset, we could see this pit add significant value and resources to Timmins’ already expanding production operation.

It possesses similar geology and mineralization as San Francisco, but mineralization primarily exists within the veins and veinlets of an intensively fractured and oxidized gabbro.

In short, the oxidation of this gabbro allows for better recovery rates than at San Francisco and is expected to be in the 80% range.

Timmins initiated drilling at the La Chicharra deposit last year, and this year is undertaking infill drilling to explore the potential to develop it as one large deposit and to test the extension of the mineralization.

The objective with the current drill program is to continue drilling at La Chicharra and the southern part of the San Francisco pit at a rate of 10,000 meters per month for a total of 100,000 metres.

The aim is to increase the size of the La Chicharra pit and to define a new ore body at the southern part of San Francisco.

Pre-stripping could begin in November with ore processing at a rate of 8,000 tpd anticipated by March, 2013. A mine plan should be released shortly.

Other Property Assets

The focus for Timmins has thus far been the development and expansion of the San Francisco mine. As a result, it has been easy for investors and analysts to forget the Company’s other projects in Mexico.

(The majority of analysts covering Timmins have given zero value to any of their other properties. Should Timmins drill these targets and return positive results, I am sure a re-rating and higher price targets would ensue.)

In fact, the Company actually has eight other exploration projects in Mexico spread over Sonora, Zacatecas, and Nayarit, which in aggregate represents over 140,000 hectares of land, in addition to the 200,000 hectares already at San Francisco.

Several of these land titles are near the San Francisco mine while others are spread throughout Mexico.

One of the standout land claims is a 50,000 hectare package contiguous to Goldcorp’s Peñasquito gold mine and the Camino Rojo deposit. Within this claim is the San Onesimo, a 5,603 hectare land package in Zacatecas

San Onesimo is situated 16 km to the northeast of the Camino Rojo gold deposit (a 3.2 million ounces of gold deposit with 58.5 million ounces of silver) and 45 km southeast of the Peñasquito mine, which produces 500,000 ounces of gold, 28 million ounces of silver, 450 million pounds of zinc, and 200 million pounds of lead per year and has a 22-year mine life.

Timmins Gold has already commenced drilling on their San Onesimo property and we should expect to see results shortly.

Undervaluation

I love what management has done. They have effectively made the jump from an exploration/ development company to a producer in a very short time frame.

As a result, the market may be factoring its new producer status; hence a lower share price when compared to its peers.

However, Timmins should no longer be considered a new producer as their minor operational hiccups are mainly behind them and they are ramping up operations fast.

That means we should expect to see Timmins progress closer to its peers.

With continued demonstration of operational improvements through 2012 we expect Timmins should begin to close the valuation gap with peers. – National Bank

On August 2, 2012 Stonecap securities calculated that, on average, junior Mexican producers are trading at an enterprise value of $116 per gold equivalent ounce (oz Au eq ), whereas Timmins was trading at $87.oz Au eq.

That is a significant discount relative to its peers.

Furthermore, for producers, a more important metric to focus on is P/CFPS (price / cash flow per share) where Mexican gold producers are currently trading at 8.1x their 2012 CFPS and 6.0x their 2013 CFPS.

Timmins is currently trading at 4.0x its 2012 CFPS and 2.9x their 2013 CFPS.

By this metric, Timmins is significantly undervalued in comparison to its peer average.

The spotlight is beginning to shine on this undervalued junior and, as a result, there are now 10 independent research firms covering the company.

This means added market exposure and liquidity to Timmins as they embark on what I believe will be their best quarter yet.

The Best Quarter Ever

Timmins just announced their Q2 results and they have once again increased production and growth.

Metal revenues were $38.2 million, compared to $27.0 million during the same prior year period, representing a 41% increase over the prior year.

Profit from operations was $13.6 million, compared to $10.4 million during the same prior year period. This represents a 31% increase over the prior year.

The Company produced a record 23,203 ounces of gold and sold 23,499 ounces of gold, compared to 16,676 and 17,965, respectively, during the same prior year period.

By nearly every metric, Timmins has grown their operations year-over-year.

During the quarter, the company began implementing a comprehensive cost reduction program, and the results of which should be seen in the upcoming quarters.

That means we should see even better numbers as management has a clear plan to reduce costs by as much as $50/oz for every ounce mined. These include cost reductions in labour, explosives, and cyanide, which accounts for roughly 33%, 9%, and 10% of the cash costs, respectively.

They’re currently negotiating a new contract with the mining contractor that could reduce labour costs by up to 5% and have already obtained better pricing on a new four-year supply of cyanide.

Cash is King

Many juniors, and even mid-tier, gold companies are being swept away in the current market environment.

Despite high gold prices, rising costs have destroyed many projects around the world. The current risk-adverse market environment is also making financing extremely difficult for companies – even those with strong projects.

Many of these companies will either go bankrupt or end up having to put their projects on sale at extremely discounted prices just to survive.

But that means phenomenal opportunities for a cash flow king like Timmins.

I suspect management is aggressively looking for near-term growth opportunities that will help propel Timmins to the 200,000 oz producer they plan on becoming.

As I said before, management has done everything they said they will do:

They said they would put San Francisco into production, even in the midst of a financial crisis, and they did.

They said they would increase production every year, and they have.

They said they would increase their resources by more than 2 million ounces, and they have.

Their track record speaks for itself. I have no doubt that Bruce and his team have the capacity to take Timmins to the next level.

Time to Take Notice

There are currently 10 independent investment firms covering Timmins which means more liquidity and market exposure as they continue to expand their operations.

The combination of steady production, cash flow and exploration success positions Timmins Gold for strong growth and increased shareholder value.

Gold is clearly breaking out. Even the U.S. government is finally publicly admitting for a revival of the gold standard. If that is the case, gold will be far above where it is today.

China is also well along an ambitious plan to recast large gold bars into smaller 1-kg bars on a massive scale. Does that mean the big gold recast project points to the Chinese preparing for a new system of trade settlement? The Country has already struck deals with other nations to bypass the dollar in trade settlements and now it may be looking at gold to back their currency.

Every fiat currency since the Romans first began the practice in the first century has not only ended in devaluation but eventually in collapse. Not only did currencies fail, but the economies that housed them failed as well. Is our modern civilization on the same path?

If you compare the fall of previous fiat currencies, they all have a similar cycle and consequence. In almost every case, so much money was printed that they became useless and lost nearly all of their value as serious inflation took over.

The fall of civilizations, economies, and currencies don’t happen overnight. Some of these currencies failed within years, some within decades, and some within a century. While the US implemented fiat currency since the late 1800’s, its current currency issued by the Fed (and no longer by the US) is just over 40 years old. How much longer do you think it will last?

While it may seem farfetched today, this point of failing fiat currencies will eventually make sense

We’re already seeing this in gold’s slow and steady rise over the last ten years, right alongside our monetary base.

In one way or another, every failed currency led to a rush back in gold. Slowly, but surely, gold will continue to rise. There will be a point where gold will show its force and turn speculative. That point is coming soon.

I believe Timmins Gold will have its best quarter ever in the next few months. I also believe that their activities over this past year have turned them from a new producer to an experienced gold producer that is rapidly expanding and cutting costs. The institutions are taking notice and I bet there is more to come.

Timmins Gold could soon be taken to a new whole level.

I am buying shares.

Timmins Gold Corp.

Cdn Symbol: (TSX: TMM)

US Symbol: (NYSE MKT: TGD)

We’re biased towards Timmins Gold Corp. because they are an advertiser, we own options, and we will be buying shares. You can do the math. Our reputation is built upon the companies we feature. That is why we invest in every company we feature in our Equedia Reports, including Timmins Gold Corp. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will. Furthermore, Timmins Gold Corp and its management have no control over our editorial content and any opinions expressed are those of our own. Analyst comments and analyses are those of their own and we take no responsibility for their claims. You should further refer to the firms directly to obtain their full disclaimer and disclosure policies.

Until next time,

Ivan Lo

Equedia Weekly

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Forward-Looking Statements and Mineral Reserve Estimates

Certain statements contained in this presentation may constitute forward-looking statements and are made pursuant to the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995 and Canadian securities laws. Forward-looking statements are statements which relate to future events. Such statements include estimates, forecasts and statements as to management’s expectations with respect to, among other things, business and financial prospects, financial multiples and accretion estimates, future trends, plans, strategies, objectives and expectations, including with respect to production, exploration drilling, reserves and resources, exploitation activities and events or future operations. Information inferred from the interpretation of drilling results and information concerning mineral resource estimates may also be deemed to be forward-looking statements, as it constitutes a prediction of what might be found to be present when, and if, a project is actually developed.

In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans, “anticipates”, believes”, “estimates”, “predicts”, “potential”, or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggestions herein. Except as required by applicable law, Timmins Gold does not intend to update any forward-looking statements to conform these statements to actual results. Mineral Reserve Estimates

Timmins is subject to the reporting requirements of the applicable Canadian securities laws, and as a result we report our mineral reserves according to Canadian standards. Canadian reporting requirements for disclosure of mineral properties are governed by National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”). The definitions of NI 43-101 are adopted from those given by the Canadian Institute of Mining, Metallurgy and Petroleum. U.S. reporting requirements are governed by the SEC Industry Guide 7 (“Guide 7”). These reporting standards have similar goals in terms of conveying an appropriate level of confidence in the disclosures being reported, but embody different approaches and definitions. For example, under Industry Guide 7, mineralization may not be classified as a “reserve” unless the determination has been made that the mineralization could be economically and legally produced or extracted at the time the reserve determination is made. In particular, we report “resources” in accordance with NI 43-101. While the terms “Mineral Resource,” “Measured Mineral Resource,” “Indicated Mineral Resource” and “Inferred Mineral Resource” are recognized and required by Canadian regulations, they are not defined terms under standards of the SEC and generally, U.S. companies are not permitted to report resources in documents filed with the SEC. As such, certain information contained in this press release concerning descriptions of mineralization and resources under Canadian standards is not comparable to similar information made public by United States companies subject to the reporting and disclosure requirements of the SEC. In addition, an “Inferred Mineral Resource” has a great amount of uncertainty as to its existence and as to its economic and legal feasibility, and you cannot assume that all or any part of an “Inferred Mineral Resource” will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. You are cautioned not to assume that all or any part of Measured or Indicated Resources will ever be converted into Mineral Reserves, and not to assume that all or any part of an “Inferred Mineral Resource” exists, or is economically or legally mineable. In addition, the definitions of “Proven Mineral Reserves” and “Probable Mineral Reserves” under CIM standards differ in certain respects from the standards of the SEC.

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