TIMBERLINE RESOURCES CORP TLR
December 23, 2011 - 7:43am EST by
john771
2011 2012
Price: 0.58 EPS -$0.04 -$0.03
Shares Out. (in M): 61 P/E NA NA
Market Cap (in $M): 36 P/FCF NA NA
Net Debt (in $M): 0 EBIT -3 -2
TEV ($): 27 TEV/EBIT NA NA

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Description

Timberline Resources has a strong balance sheet, a 50% carried to production interest in a very attractive small underground gold mine in Montana that will begin generating cash flow in 2012, and a potentially attractive open-pit gold mine project in Nevada.

 

BASIC FACTS

 

 

Symbol

AMEX:TLR

TSXV:TBR

Basic Shares Outstanding

61.2 million

Options

6.4mm with average strike price of $1.01

Warrants

None

Market Cap

US$37mm ($0.60/share)

Average Daily Volume

175,865 shares (Amex)

Net Cash

$9mm (after November sale of drilling business and debt repayment)

Enterprise Value

$28mm

Steady State Annual Cash Flow

$11-30mm Montana

$14-42mm Nevada

Major Shareholders

Insiders 10.3%

Website

http://www.timberline-resources.com/

 

Investor Contacts

CFO – Randy Hardy

Tel: 208.664.4859

info@timberline-resources.com

 

CEO – Paul Dircksen

Tel: 208.664.4859

 

 

MONTANA - BUTTE HIGHLANDS JOINT VENTURE

 

Timberline's core asset is the Butte Highlands gold mine in Montana. Timberline's partner, the mining contractor Small Mine Development (SMD), is earning a 50% interest by funding all capital expenditures required to bring the mine into production (estimated to be $24mm). A contractor's business model is based on earning fees for work while others bear all the economic risks of mine ownership. SMD's participation in Butte Highlands is highly unusual and a strong expression of confidence in the mine's prospects. SMD's investment of $24mm for 50% could be a conservative starting point for valuing TLR's share of the mine.

 

Key facts about the Butte Highlands mine:

 

  • Small Scale. 600-750 tons per day

  • High Grade. Estimated ore grade of 0.27 ounces/ton. Note that this is supported by 15 years of exploration, but has not been documented in an independent 43-101 study. A mapping of recent drilling results suggests the estimate is not unreasonable.

  • Toll Milling. Ore will be trucked to Barrick's Golden Sunlight mill for processing.

  • Mine Life. Management estimates eight years, although the limits of the deposit have not yet been defined.

  • Production Start. I estimate formal production from April 1 with trial mining beginning in February 2012.

  • Profit Sharing. SMD receives 80% of cash flow until its excess contribution (capex of $24mm minus $2mm) has been recovered, then cash flow will be shared 50/50.

 

Management has been reluctant to provide precise guidance in the absence of an independent 43-101 study. They suggest the mine will produce 60000 ounces per year at a cash cost of $600/ounce, but $/oz calculations aren't very informative because they are derived from multiple inputs. In order to better understand the mine's economic potential I prepared these two examples based on TLR's limited information and operations of other companies in the region like RX Exploration:

 

 

Low Case

Target

Daily Throughput

600 Tons

750 tons

Annual Throughput (based on 350 days)

210000 Tons

262500 tons

Ore Grade

0.2 oz/ton

0.27 oz/ton

Mining Cost/Ton

$60

$50

Transport Cost/Ton

$22

$18

Milling Cost/Ton

$80

$70

G&A Cost/Ton

$13

$10

Total Costs/Ton

$175

$148

Price of Gold

$1600/oz

$1600/oz

Mill Recovery

88%

88%

Revenues/Ton

$282

$380

Cash Flow/Ton

$107

$232

Annual Cash Flow

$22mm

$61mm

Timberline's 50% stake

$11mm

$30mm

 

Even the conservative assumptions are quite attractive to a company with a $28mm enterprise value. Small Mine Development is an experienced operator, but mine startup almost never goes exactly according to plan. I estimate the Target case is achieved from January 2013. Management intends to mine high grade zones early and the extra revenue is likely to offset the cost impact of initial operational inefficiencies, but it's difficult to model the impact of higher grades without a publicly released mine plan.

 

The mine's environmental impact will be quite low and is documented in some detail in the Air Quality Permit granted in October. Timberline's Exploration Permit granted in 2009 already authorized mining of a large 10000 tonne “bulk sample”. The key requirement to transition from sampling to commercial production will be receipt of a “Hard Rock Operating Permit” which is expected soon. There do not appear to be any significant impediments to approval which has lagged Timberline's early expectations solely due to delays in preparation of required supporting documents. There is no organized community opposition to the mine and public comments during the permitting process have concentrated on the increased road traffic.

 

NEVADA – LOOKOUT MOUNTAIN

 

Timberline's second major project is a large package of claims near Barrick's Ruby Hill mine in Nevada. Key facts about a potential Lookout Mountain mine:

 

  • Simple. The mine would be a “run-of-mine” heap leach operation. Blast the rock, stack it on a pad, leach it with cyanide, extract the gold. No crushing and no mill.

  • Economic grade. Last Spring's technical report calculated a Measured and Indicated resource at a grade of 0.73 grams/tonne. At $1600 gold, that's $37 of gold in each tonne of rock. Recent results from drilling at the south end of the project included substantial near surface intersections over 1 g/t.

  • Good Recoveries. The average gold recovery at run-of-mine heap leach operations in Nevada is about 70%, but can vary significantly depending on characteristics of the rock. Limited historic operations at Lookout Mountain achieved recoveries over 80% and ongoing testing of Timberline's drill samples suggests high recoveries are likely.

 

Management has been reluctant to provide precise guidance in the absence of an independent 43-101 study, but I prepared these two examples based on TLR's limited information and operations of other companies in Nevada like the operating Briggs mine and Reward projects owned by Atna and the Hycroft Mine owned by Allied Nevada:

 

 

 

Low Case

Target

Daily Mining Rate

20000 Tonnes mined

20000 tonnes mined

Strip Ratio

3:1

2:1

Daily Production

5000 tonnes ore

6667 tonnes ore

Annual Production (based on 350 days)

1750000

Tonnes

2333333

tonnes

Ore Grade

0.6 g/t

0.73 g/t

Mining Cost/Tonne

$8

$6

Processing Cost/Tonne

$3

$3

G&A Cost/Tonne

$3

$3

Total Costs/Tonne

$14

$12

Price of Gold

$1600/oz

$1600/oz

Recovery

70%

80%

Revenues/Tonne

$22

$30

Cash Flow/Tonne

$8

$18

Annual Cash Flow

$14mm

$42mm

 

The economic potential is most sensitive to the strip ratio, grade, and recovery. Recovery potential looks good. Grade and strip ratio will be better defined by continued drilling over the next year. Preproduction capital expenditure requirements are likely to be $15-$20mm and could be financed in 2013 using cash flow from Butte Highlands. These examples were based on the existing small resource, but Timberline's hope is that drilling continues to expand the resource which will improve the efficiency of the future mine. The company will probably not be in a position to make a decision about moving into production until this time next year.

 

POTENTIAL RETURN

 

Timberline's current enterprise value of $28mm appears to be a bargain compared to potential 2015 cash flow in a range of $25-$72mm from two projects. Production in Montana is imminent while a potential mine in Nevada would be a very simple operation. Given the small size and unknown growth potential of each operation, I think they would be fairly valued at 4X cash flow.

 

CORPORATE

 

Timberline sold its underground drilling unit in November 2011 in order to pay off a $5mm debt and fund continued Nevada exploration. I believe this was an excellent decision because the unit tied up $12mm of capital and was only going to generate $1-2mm of free cash flow in a normal year.

 

A small company that's not raising capital can find it very difficult to attract attention in the market, but I expect that cash flow from Butte Highlands will broaden the range of potential Timberline investors in 2012.

 

RISKS

 

Screw-ups

Delays in Montana

Disappointing drill results in Nevada

 

CATALYSTS

 

Commencement of Montana gold production

Nevada exploration results that clarify the project economic potential

Catalyst

 

1) Commencement of Montana gold production

2) Nevada exploration results that clarify that project's economic potential

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