Timberline Permit Delay Last Good Buying Op?
Please note, this update was part of the Got Gold Report shared with subscribers on Sunday, February 12. Subscribers may note some minor editing from the original, mainly to provide context for a wider audience.
HOUSTON – Timberline Resources (AMEX:TLR, TSX:TBR.V), our favorite soon-to-be low cost gold producer is close to the point where they can begin mining some high-grade Montana gold ore via a 50-50 joint venture with Highland Mining. The JV has driven a drift or ramp thousands of feet down into the Butte Highlands future gold mine, about 15 miles south of Butte. Internal studies indicate a roughly 750,000-ounce gold resource there with an average grade just under .25 ounces per ton of rock.
That’s high-grade gold material by anyone’s standard and new underground drilling in 2011 discovered additional Bonanza core grading as high as 27-ounces per ton.
In late 2011 the underground mine was in the final approval stage, very close to receiving the final hard rock operating permit from the Montana environmental authorities, but on January 12 Timberline announced that recent water well testing conducted by the company indicated the development of the underground mine would likely produce more water than originally thought. The water treatment and discharge regimen would have to be redesigned and the approval was therefore delayed.
Already battered to its lowest level in three years by a rough market for junior miners in 2011, shares of TLR dipped from near $0.60 to as low as $0.45 shortly after the permit delay announcement.
This is exactly the kind of “non-fatal disappointment selling” we Vultures enjoy gaming.
TLR, 4-month, hourly volume candle chart. If any of the images are too small click on them for a larger version.
As long-time readers and Vulture subscribers already know we have a sizable stake in TLR, so we are keenly interested in the Butte Highlands development. The following are notes we shared with our Got Gold Report subscribers regarding that disappointing, but understandable and non-fatal development for the company.
Our take is that this could very well be our last, best “buying op” for TLR shares, which by our reckoning were already woefully undervalued before the permit delay surfaced. As will become apparent in a moment, we deem shares of TLR as entering the top of the “Vulture Road Kill Bargain” zone.
In a phone conversation Thursday, Feb 9, Timberline Resources (TLR) president and CEO Paul Dircksen and CFO Randal Hardy confirmed that the recent delay in obtaining the final permit to begin mining the high-grade ore at Butte Highlands in Montana stems from test wells drilled down below the current underground workings and are not related to the amount of water encountered by the development ramp. The development drift or ramp is already down very close to the “pay zone” thousands of feet into Nevin Hill about 15 miles south of Butte Montana.
TLR’s Randal Hardy and Paul Dircksen at Butte Highlands in 2010. All photos Gene Arensberg
Essentially the amount-of-water issue has to do with what might be encountered as the mine probes deeper into the mineralization in future years. Although the amount of water that would be generated today is consistent with the original application, the new well tests indicate that a larger water volume would enter as they moved lower (further from surface). The plan for the mine operating permit needs to include this larger than expected water removal, its pumping, containment, treatment and how and where it will be discharged in the beginning so that it won’t become a problem in the future.
The water well tests measured the amount (volume and time) of “recharge” back into the test holes once they were drawn down. From that new test data an engineer can make a reasonably accurate estimate of the volume of water to be expected in the water-bearing portions of the development workings.
The new water well tests indicated the amount of water would be high enough to cause the need for a new hydrological study, and it also requires the need for a different kind of discharge permit, which allows for the water to be fed into one or more of the three different watersheds that leave the mine portal area.
Butte Highlands sits atop the Continental Divide and there is some optionality as to which of the drainages to send the water into after treatment. Mr. Hardy says that TLR engineers are working closely with Montana environmental staff as they go. Mr. Dircksen says there is little in the way of difficult to treat metals or substances expected from the water there.
Butte Highlands Drift Portal
In the original permit application the company relied largely upon water dispersal via evaporation, snow making in winter and drip-emitters to handle the water flow. Given the expected larger amount of water to be discharged once development gets farther down into the mountain, that process would likely no longer handle all of it.
If the volume of water ended up being more than the original system could handle, then they would have had to shut down and submit a new plan then. It is much better to design for it in advance and to design water treatment facilities to accommodate the higher expected flows before they encounter a problem.
So, as we understand it, dispersal and evaporation methods of water removal need to be scraped in favor of a water treatment plant and ordinary water discharge permit. The technology to treat the “effluent” from this kind of underground mine is not cutting edge science and although it requires continuous testing, it is not something Montana officials would have to study very hard. In our own development background we are familiar with scalable, modular so-called “package” water treatment plants that are used for this volume of water treatment and they are neither difficult to obtain nor are they prohibitively expensive.
We know from our own experience that the modular design allows for rapid and predictable adjustments to volume of the water to be treated and the systems and circuits are not complicated. Odds are there are several of them operating at sewage treatment substations near you as we write.
In Montana, as it is here in Texas, water treatment plants are required to release water into the streams at a much higher quality than what already exists in the receiving stream. These typical package water treatment plants are designed with that in mind and they operate in all kinds of extreme weather conditions.
Bottom line is that we expect that the settlement pond in the picture below is about to get larger and instead of using “evap” and drip dispersal for the water coming out of the new mine, the company will be installing a package water treatment plant and larger pumping capacity.
Butte Highlands settlement ponds in June of 2010.
Mr. Dircksen estimates that the revised plan will be submitted to the Montana DEQ within a month (sometime in February or March), with about two months thereafter being the best case to expect a final go-ahead for the underground mine. As with any new submission there could be staff comments that have to be addressed prior to a final-final approval.
“This isn’t a roadblock to the project,” Dircksen said. “I’d call it a speed bump. And we want to get it right going in with Montana rather than having something jump up once we are in there mining,” he added.
Both Mr. Dircksen and Randal Hardy lamented the delay in getting the permit, but they are pretty confident they will be mining the high grade ore at Butte Highlands sometime later this year.
After our telephone conference, we reiterate our confidence in the project.
As just a reminder of what some of that high grade Montana rock looks like, just below is a photo of some of the drill core that was on display when we visited the future mine in June of 2010. Hopefully the labels of the very high grade material are legible in this photo. If not, they range from about a quarter of an ounce of gold to about six tenths of an ounce of gold per U.S. ton.
Other, more recent drilling from underground drilling discovered zones containing up to 27 ounces per ton, remember, so there is a great deal of motivation to start mining and processing that Butte Highlands rock. The cash flow it will generate will enable TLR to continue its exploration at the company Flagship prospect in Nevada at Lookout Mountain, which Mr. Dircksen sees as a district-sized discovery. We may have more about Lookout Mountain in a future update, but for now, another look at some of the historic core that came from Butte Highlands.
Six feet of just under 3-ounces per ton rock is mighty good-looking rock and therefore worthy of our continued support of Mr. Dircksen, Mr. Hardy and the entire TLR team as they get past this permitting speed bump thing.
This seems like a good time to share our long-term “Vulture Road Kill Bargain” chart, the one we shared in our presentation at the New Orleans Investment Conference in October, 2011. This event has the shares just kissing the top of the “back up the truck” level, in the blue.
TLR chart from New Orleans in October of 2011, updated through Feb 10.
As always we have a choice when a non-fatal disappointment arrives for one of our “Faves.” We can either succumb to the disappointment, become disgusted and hit the red button, or we can choose to take advantage of other exhausted and disgusted gamers doing that very same thing. We have already noted our intentions directly in the TLR charts and will continue to keep our current super-cheap bid ladder in play. We plan to ride our now 5-full unit oversized position with TLR until they earn the cash-flow respect of a currently disappointed and under-appreciative market.
So, we’re holding and adding to our TLR stake if the disappointment selling drives the price down to the third rung of our “blue panic level buying op” target ladder. (The first two rungs already connected as previously disclosed on the private Vulture chart.) Of course everyone can make up their own minds about such things.
We’ll close this brief with one last photo of a guy who is unquestionably “The Real Deal,” and one of the reasons we intend to stick with the story to Pay-Day. And remember, Vultures, when we say “our timing is simply as long as it takes,” you’d better believe we mean it for the issues we have very high confidence in.
Highland Mining’s Ron Guill describes the mining plan for the underground Butte Highlands project and how the material will be removed safely and profitably for TLR shareholders. Mr. Guill is not only the owner of Small Mine Development, the mining company that has built the big ramp down very close to the pay zone under Nevin Hill at Butte Highlands, he is also TLR’s largest single shareholder.
Mr. Guill’s Highland Mining company has expended roughly $25 million in development of the ramp and mining headquarters for the Butte Highlands project (to be recouped from future production) and will in turn receive one-half the gold produced for the life of the mine.
Butte Highlands is expected to produce between 50,000 and 70,000 ounces of gold per year at cash costs of roughly $500 the ounce for about a decade. By our own back-of-envelope calcualtion, at current gold prices that represents net revenues of perhaps $72 million per annum for the JV; roughly $36 million per annum to TLR’s account after payback, some great long-term jobs for the Butte area miners, and some decent tax revenues for the government.
As we send this note off to be posted, shares of TLR are changing hands near 50-cents a copy in very light volume in New York. Gold $1,722.10, Silver $33.68.
Disclosure: Timberline Resources is a Vulture Bargain Candidate of Interest (VBCI) and is our fully fledged Vulture Bargain #4. Members of the GGR team are actively accumulating shares of TLR and continue to hold a speculative long position in the company.