Timberline Partner Sells Half Interest in Butte Highlands

Company Welcomes New JV Partner at Soon-to-be High Grade Gold Mine in Montana 

HOUSTON -- On Monday, September 17, Timberline Resources (NYSE MKT: TLR; TSX:TBR.V) announced that its 50% joint venture partner in the Butte Highlands Joint Venture project (Highland Mining, LLC) had sold its one-half interest in the soon-to-be underground gold mine to Montana State Gold Company (MSGC), a private Montana firm with a focus on creating jobs via mine development funding. (Read press release here.) 

The announcement effectively ended a bid by Timberline to acquire the half interest in the Butte Highlands Joint Venture (BHJV) it did not already own from its then JV partner, headed by former Small Mine Development owner, Ron Guill.  Mr Guill remains Timberline’s largest shareholder and a Timberline director. 

Currently in the advanced permitting stage with final permits expected sometime next year, the Butte Highlands project will soon be a high-grade underground gold mine, with gold mineralization averaging roughly a third of an ounce per ton of rock.  The BHJV has completed a large fraction of the work necessary to begin production. 

Continued...

Earlier this year, Timberline announced a non-binding letter of intent (LOI) with Mr. Guill to purchase his half interest, which, had it closed, would have resulted in the company being responsible for all the remaining costs to get the mine into production.  (Read our previous coverage of the LOI here.)  The LOI was later amended to, among other terms, eliminate an upfront $5 million cash requirement. (See our coverage of the amendment here).  All for naught as Mr. Guill apparently decided to sell his interest to an unrelated third party instead and has done so. 

Commentary: 

The new transaction announced today effectively “returns” Timberline to its original ownership of the Butte project before the announcement of the LOI;  a 50% carried interest in the Butte Highlands project, with Timberline’s new partner (MSGC) assuming the BHJV obligation to fund the development of the mine through to commercial gold production.  The net effect is that TLR now has a new, well funded JV partner at Butte Highlands. 

Sources close to the matter said recently that in addition to the approximately $24 million already expended by the joint venture to build all the mining infrastructure, including headquarters, equipment barns, sediment ponds and excavating about 4,000 feet of development ramp into Nevin Hill (to within feet of the gold deposits), along with extensive technical and hydrological studies required by Montana regulators, it is estimated that $10 to $15 million in additional capital expenditures will be necessary before the mine will be in production.

 
 
(Image Timberline Resources, showing the Butte Highlands project 15-mi. south of Butte Montana. The pink lines are the path of the development ramp already constructed underground.)

In our view this transaction, in which the new partner essentially assumes Mr. Guill’s position in the original BHJV, removes a source of financing uncertainty that has surrounded the issue since the April, 2012 announcement of the LOI. 

Today’s press notice included this comment from Paul Dircksen, Timberline's Chief Executive Officer.

"We are pleased to welcome MSGC as our partner at Butte Highlands. While we had earlier anticipated gaining 100-percent ownership of the project, Ron Guill's decision to sell Highland Mining to a well-funded organization with a mandate to create jobs through commercial production provides Timberline and its shareholders with an attractive alternative. We now envision the achievement of production at Butte Highlands without assuming the development risk and without dilutive equity financing, burdensome debt financing, or the sale of valuable royalties that would have inevitably been required had we funded mine development ourselves. Rather, we are effectively in the same position as we were with Ron; we have a 50-percent carried-to-production interest at Butte Highlands while we advance our Lookout Mountain gold project in Nevada toward production." (Emphasis ours.)

The financing uncertainty was exacerbated by a very tough market environment for junior miners and mine developers, especially from March to June of 2012, and was in no small part responsible for price pressure on shares of TLR.  Investors and shareholders worried that TLR would be forced to finance using equity – when the share price was abnormally low - which would have been dilutive, or perhaps by using forward sales of the gold at what might be unattractive terms. Now that won’t be necessary. 

Bottom Line:  Mr. Guill’s decision to sell his half interest to an unrelated third party, who has agreed to assume the future development costs, effectively removes the Butte development financing uncertainty. 

We have prepared a chart below to illustrate the notion. 

 
The chart shows the relationship of Timberline to three mining share indexes, the Market Vectors Junior Gold Miner Index ETF or GDXJ, the Canadian Venture Exchange Index or CDNX and the Global X Explorers Index or GLDX during the 2011-2012 Bear Market for junior miners (which we have dubbed “The Junior Bear Market From Hell” ).  Shares of Timberline were changing hands near an already heavily discounted $0.50 at the time of the LOI announcement in April.  A combination of financing uncertainty on the part of investors if TLR was to be funding BHJV development, a delay in permitting of the Butte project to mid-2013 and the brutal second leg of the 16-month bear market/buyer’s strike for junior miners, all conspired to further cut the TLR market cap by half by early July.    

As we see it, Timberline is now free to focus on the important permitting and development of Butte Highlands while they also advance their South Eureka prospects in Nevada, including their flagship Lookout Mountain project, toward a production decision.  Lookout Mountain is not part of the BHJV.  TLR controls 100% of it, by the way.

While those who are not closely familiar with Timberline may find the new announcement confusing, it is actually very simple.  TLR is no longer attempting to “stretch” to buy out their JV partner in Butte Highlands and instead now has a deep-pocketed and motivated new partner able and willing to fund the project to production, which is expected within a year or less.

Below is a longer term monthly chart we have shared with subscribers in the past, updated through Friday, September 14, for reference.  We believe it indicates that there is a great deal of upside potential in shares of TLR.

The purple line shown is the performance of the Canadian Venture Exchange Index for comparison.  Clearly TLR is currently in “The Green” which marks where TLR has consistently found overwhelming support in the past, including during the 2008 Panic.

That is all for now except to say that in the event shares of TLR are driven irrationally lower, we will almost certainly add to our already oversized position. Of course everyone can and should make up their own minds about such things.

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.