December 23, 2011 - 7:43am EST by
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

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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 Shares Outstanding

61.2 million


6.4mm with average strike price of $1.01



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


Steady State Annual Cash Flow

$11-30mm Montana

$14-42mm Nevada

Major Shareholders

Insiders 10.3%




Investor Contacts

CFO – Randy Hardy

Tel: 208.664.4859



CEO – Paul Dircksen

Tel: 208.664.4859





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


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



Transport Cost/Ton



Milling Cost/Ton



G&A Cost/Ton



Total Costs/Ton



Price of Gold



Mill Recovery






Cash Flow/Ton



Annual Cash Flow



Timberline's 50% stake




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.




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


Daily Mining Rate

20000 Tonnes mined

20000 tonnes mined

Strip Ratio



Daily Production

5000 tonnes ore

6667 tonnes ore

Annual Production (based on 350 days)





Ore Grade

0.6 g/t

0.73 g/t

Mining Cost/Tonne



Processing Cost/Tonne



G&A Cost/Tonne



Total Costs/Tonne



Price of Gold









Cash Flow/Tonne



Annual Cash Flow




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.




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.




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.





Delays in Montana

Disappointing drill results in Nevada




Commencement of Montana gold production

Nevada exploration results that clarify the project economic potential



1) Commencement of Montana gold production

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

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