Timberline Resources is an emerging gold producer and a junior gold exploration company with a business model that includes a predictable cash flow, David Hendricks reports.
Randy Hardy is leading his team as they position Timberline Resources as an emerging junior gold producer with an existing cash flow. “In 2005, Timberline was essentially a shell company,” he says. “The business model was to not have to go back to the markets all the time and dilute the shareholders, but to provide cash flow internally for exploration. That was the impetus for buying the contract core drilling company in Coeur d’Alene, Idaho, in the spring of 2006. We’ve grown it gradually and continuously since to be a cash generator for what we are now: a multi-faceted, vertically integrated company.” Hardy is CEO, CFO and a director of Timberline, and he has industry credentials that emphasize managing the crucial financial side of the business.
The first facet of the company is ownership of a gold mine now in development and soon to be in production. The Butte Highlands Gold Project is a joint venture with Small Mine Development LLC (SMD) on an underground gold mine south of Butte, Montana, being developed for production a year from now. SMD is an underground mine contractor and developer that has done a lot of work, particularly in the western US, for mining giants like Newmont and Barrick, as well as smaller mining entities. Hardy says he’s confident of SMD’s ability, since it has done work in a similar area in Montana and is running the operation of the joint venture.
“Timberline’s chairman and vice president of exploration, geologist Paul Dircksen, worked on this property previously when he was with Orvana Minerals, so he’s very familiar with the geology and the mineralization,” says Hardy. “Paul has also discussed the Butte Highlands project for several years with mining engineer Ron Guill, the owner of SMD; they’ve been buddies since college and have a great deal of mutual respect. Actually, in 2008 Timberline was quite a way down the road toward acquiring SMD. We had the financing identified, but then the global recession began and we decided it would be prudent to put the deal off. From Guill’s perspective, one of the major advantages of having his company acquired by Timberline was to get an interest in the potential of this Butte project.”
So they arranged an innovative way to finance the development of the mine, which was to have SMD pay for all development up to production, estimated at $15–17 million. For that, SMD will receive a 50 percent interest in the project, an accelerated payback of its investment once the mine begins generating cash flow until that investment has been repaid, then it will receive its 50 percent stake in the project as production continues. “It made sense since it was a difficult time in the market to try to finance the project, so it ended up being a good deal for all of us, including SMD and our Timberline shareholders,” Hardy explains.
Timberline is operating under an exploration permit that allows it to do an underground ramp about 6,700 feet long and about 60,000 feet of drilling, both core and reverse circulation; then to extract a 10,000-ton bulk sample. The site facilities are complete, including offices, shops, generators—everything needed to perform the exploration and just about all the infrastructure, equipment and facilities needed for mining. The company is currently driving a tunnel underground, and in a few months it will begin underground drilling to delineate the mineralization. It has submitted its application for a hard-rock operating permit, a process that normally takes up to a year, and it is expecting the mine’s development to be complete by then, so it will be ready to go into production in 2011. “With the exploration we’ve done there in the last few years,” Hardy says, “we’re confident in our internal estimates of about 750,000 ounces of high-grade gold in the mineralization that we’ve identified.”
Butte has some distinct advantages. One is that it’s located primarily on patented mining claims, so Timberline owns the property, there are no royalties, and permitting is an easier process, dealing only with state agencies. Another advantage is that instead of financing, building and permitting an on-site mill, Timberline intends to use the services of a nearby mill with a cyanide processing facility that has agreed in principle to buy Timberline’s ore. “It’s a toll milling operation,” Hardy explains, “and we plan to truck the ore directly to the mill.”
Another facet of Timberline’s business is its recent acquisition of Staccato Gold Resources, a Canadian company that was based in Toronto, with offices in Vancouver, British Columbia, and Elko, Nevada. The main reason for the acquisition, Hardy says, was to take control of a Nevada property called South Eureka, which includes the Lookout Mountain project. “It has already had some drilling, a resource has been defined by Staccato, and we’re looking at updating the resource model. We’re confident, however, that there’s a decent-size resource, and we’ll do more drilling to confirm and hopefully expand the mineralization. The resource was originally identified in a 43-101 report by Staccato as being over 800,000 ounces, a substantial resource with room for growth. We’ll drill it later this year with the intention of making a production decision about a year later. Our team includes some knowledgeable people who have worked on this property previously, and some metallurgical analysis has been done on the ore that indicates that it is amenable to cyanide heap leaching, a low-cost process. It’s a low-grade, high-tonnage, widely disseminated deposit, and we hope to be able to put that into production as well.”
The third facet of Timberline is its drilling services companies: Timberline Drilling, which works in the western US, and World Wide Exploration, which works in Mexico, mainly on silver and base metal mines. Both are wholly owned subsidiaries that provide mainly underground diamond drilling services to mining and exploration companies. “We’ve done a good job recently of streamlining those operations,” says Hardy. “Our teams there have worked hard to keep costs under control, focusing on customer satisfaction, safety and profitability, and those efforts have paid off. The drilling companies are operations that provide us with a source of cash flow and revenue—last year it was just over $17 million, and we expect over $20 million this year—to use in exploration. Then, when our production at Butte Highlands provides us with additional cash flow, our business plan is to invest it in more exploration and make further discoveries, and we’ll continue to build shareholder value.”
Hardy concludes, “We understand we’re in a risky, costly industry, and we try to remove as much of that risk and cost as we can for our shareholders. We do prudent exploration, and by having backstops like our drilling services and producing properties, we reduce the risk of our exploration where it is common to explore multiple properties before making a viable discovery.”www.timberline-resources.com
