Value Microcaps Junior Miners

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Analysts see Timmins, Argonaut, B2Gold as "survivors" of the current gold price (ONLY LOOKING AT THEIR COVERED COMPANYS)
Mon 12:00 Pm By Deborah Bacal
The analysts, Ali Kahn, Brian Szeto and Christos Doulis, reviewed their coverage universe by stress-testing companies' valuations using gold prices as low as US$1,000 an ounce, and concluded that companies that are focused on open-pit heap leach operations are "well positioned" relative to their peers.
Stonecap Securities analysts have issued a mining report this morning outlining "the survivors" of the industry given the recent fall in the gold price that has called into question the ability of some gold producers to generate free cash flow in this lower gold price environment.
The analysts, Ali Kahn, Brian Szeto and Christos Doulis, reviewed their coverage universe by stress-testing companies' valuations using gold prices as low as US$1,000 an ounce, and concluded that companies that are focused on open-pit heap leach operations are "well positioned" relative to their peers.
"Due to the low sustaining capital expenditures associated with these types of operations, the majority of the cash flow generated directly contributes to the health of the company’s balance sheet," they said in the report, when comparing to mining operations that require a milling circuit or most underground miners that need substantial amounts of sustaining capital year after year.
The analysts took note of both Timmins Gold (TSE:TMM) and Argonaut Gold (TSE:AR), both of which they looked upon favourably, with outperform recommendations.
They said Timmins is the only company in its coverage universe that shows a positive three-year cumulative free cash flow of US$11.5 million, and an actual increase to its funding surplus over the same period of US$35.7 million when using reduced gold prices.
"Timmins’ open-pit heap-leach operation in Sonora, Mexico is profitable at any gold price environment that we have looked at. Under our current assumptions, we expect that the company will free cash-flow in excess of US$50 million in 2013 and reach US$64 million in 2014 once the La Chicharra satellite deposit is up and running.
"Even at a US$1,000/oz gold price environment, Timmins’ operations continues to produce positive cash flow which cannot be said for a number of other companies within our coverage universe," the analysts wrote, citing the key reason for this feat as the low sustaining capex nature of its operations.
Meanwhile, Stonecap's analysis suggests that Argonaut is estimated to have a funding surplus exceeding US$100 million over a three-year period, even when the brokerage runs its valuations using a gold price of US$1,000 an ounce. "In our opinion, Argonaut is very well positioned to weather a period of low precious metals prices."
Argonaut’s two producing assets are relatively low cost, the analysts said, and generate free cash flow at prices well below US$1,400/oz gold. All-in costs, which includes capex, exploration and taxes, of around US$900/oz gold are expected for El Castillo while costs of US$1,000/oz gold are anticipated for La Colorada over the next five years.
Over the last two weeks, gold prices have declined approximately 12 per cent from US$1,597 an ounces to US$1,404 an ounce. During this period, gold equities have also declined dramatically, with many now trading at multi-year lows.
Indeed, the analysts said that with gold trading at around US$1,400/oz, many gold equities (represented by the GDX index) are trading at levels that have not been seen since January 2009, when gold prices were in the US$825/oz range. The Stonecap analysts cited rising input costs for the mining industry over the last several years as one of the key reasons precious metal prices are so low relative to the last time gold was in the US$1,400 an ounce range.
Stonecap's report looked at nine gold producers in its coverage universe, including Timmins, Argonaut, B2Gold (TSE:BTO), Lachlan Star (TSE:LSA), Orvana Minerals (TSE:ORV), Rio Alto Mining (TSE:RIO), San Gold (TSE:SGR), SilverCrest Mines (CVE:SVL), and St. Andrew Goldfields (TSE:SAS).
Other survivors of a US$1,400 an ounce gold price, albeit with some possibly needing to reduce discretionary expenses, include B2Gold, SilverCrest and St. Andrew Goldfields.
However, while some companies can fund their capital spending initiatives through existing cash and cash from operations at a price of US$1,400 an ounce of gold, other companies face significant challenges in the form of funding gaps, the report found.
Those that see "rough seas" ahead at the current gold price, according to the analyst research report, include Rio Alto, whose estimated funding gap is derived from its planned build-out of phase 2 in 2015/2016 for its La Arena project, with capex estimates of roughly $300 million.
Another listed in this category is San Gold - for which Stonecap has an underperform rating - whose estimated funding gap of around $55 million stems from its "ambitious capital spending program". The analysts estimate around $137 million between 2013 and 2015 at Rice Lake over the next several years.
Should prices remain at or below US$1,400 an ounce for the next three years, these companies, like several in a similar position, would likely defer development of new projects or capital spending initiatives, or seek additional sources of capital.

Read more at http://www.stockhouse.com/bullboards/messagedetail.aspx?p=0&m=32499376&l=0&r=0&s=TMM&t=LIST#gk79CZzZERwLHtsg.99