Timberline Resources (TLR) has been a very frustrating stock for shareholders the past few years. Trading well over a dollar as recent as early 2011 and over $5 in 2007, the stock has been in a grinding decline to recent lows near 14 cents per share. Recently, investors finally had a blip of hope when shares surged swiftly to 35 cents, more than doubling off lows. However, that hope turned into another gut punch when TLR announced a tiny $1 Million stock offering at 20 cents on September 4th. In July, Gold Investment Letter added Timberline to a very short list of stocks that we believe can trade from 20 cents to $2 within 2 years. The stock quickly doubled after that alert but now we want to take a moment to dig into why we believe there is so much upside in the face of continual disappointment.
As a matter of background for new readers, our first 20 cents to $2 call was a graphite stock called Zenyatta Ventures ($ZEN:CA) (ZENYF) . In the last 13 months, the stock hit a high of $5 (2500% gains or 25 fold returns…however you prefer to phrase it!) and still trades just under $4. Many of our subscribers have made a fortune in Zen. Our second 20 cents to $2 call is/was Medallion Resources ($MDL:CA) (MLLOF) in early June at 19 cents. The stock has doubled and today closed at 37 cents. This is a rare earth company and next we wanted to isolate a junior gold miner to add to this highly selective and aggressive list. In this terrible over 2 year cyclical bear market in gold mining stocks, we have the pick of the crop to choose from current depressed prices. Timberline is a hybrid junior that has both exploration upside and is a near term producer. We’ll focus on why CASH FLOW will be the main driver of share prices in 2014 and beyond.
Timberline has had their share of costs carried by their partner in Montana at Butte Highlands as they approach production in the next 6 months. I estimate the ‘all in’ investment to get into production will fall somewhere around $40 Million (give or take a few million). The company estimates that they will be able to produce 40,000 ounces of gold per year at a cash cost of around $750 per ounce. There is definitely upside to the ounces of production number in my opinion and would not be surprised with further underground drilling, that they may be able to extract 50-55,000 ounces per year. But, for the sake of analysis, let’s say its 40,000 ounces per year at an $800 cash cost with a $1400 average gold selling price. This is a 50/50 JV for TLR but the way it is structured is that they get 20% and the operator 80% until the development investment is paid back, then it flips to 50/50.
So, Timberline at 20 cents has a $14 Million market capitalization. 40k ounces per year in production with a $600 profit equates to $24,000,000 per year, of which, TLR will get $4.8MM for approximately for the first 2 years of production. Besides typical exploration expenses/overhead, the rest goes to the bottom line. Let’s say they spend $1.8MM of that cash, you’re still looking at $3MM in net income on an annual basis. At 10x earnings we’re looking at approximately 45 cents per share. Now, I think it’s very important to realize that in year 3, the cash flow flips to 50/50, bringing $12 Million to TLR in the example above, which is almost the entire market capitalization of the company currently! 10X that number takes us to very close to $2 per share.
Now, I believe the example above is obviously bare bones but also quite conservative. They have some seriously high grade gold at Butte Highlands and if they have lower cash costs, produce more gold, or we see gold prices go higher, there is a ton of leverage in TLR stock. This valuation does not even include ANY value assigned to their nearing 1 million ounce proven resource in Nevada, Lookout Mountain. In a normal gold mining stock market, you can see $70 to $100 an ounce in value assigned to a proven resource. Now, we’re seeing that closer to $20 an ounce across the board and essentially zero value for Timberline’s gold in the ground. Yet still, this would assign another 20 cents per share in TLR’s stock price even at these very depressed valuations (they do not have 1 million in the proven category yet but I expect them to get there in the first half of 2014, as well as, make some decisions to move towards production in Nevada also). We’ve seen $20 Million spent for Timberline’s share of developing Butte Highlands which is garnering basically no value in the market at current prices. On a bullish/upside potential outcome where gold goes to $1800 in 2014 and they produce 50,000 ounces, we would be looking at $10 Million in cash flow for TLR the first 2 years and $25MM per year thereafter. I think this is likely in year 2 of production, paying off the 20/80 split much faster and on a $20MM net income run rate at 15 times earnings, we would see a market capitalization of $300 Million for TLR. That would be $4 per share with the current capital structure. As you can see from the chart below, Timberline actually traded well above $5 a share in 2007 with significantly lower gold prices and with far less assets/progress:
This blue monthly trend line, once penetrated on the upside with a monthly close above it, will be like allowing a ball held underwater to burst to the surface. For long term investors, breaching and closing above this trend line would be extremely bullish and it’s frankly not that far off. At this point, a closing level above 35 cents would do it and if this mining rally is for real (I think it is), we could easily see this benchmark achieved in short order. Notice the higher highs and higher lows occurring currently. After the 2009 trip to the wood shed, Timberline violently rose from under 25 cents to over $1.50 in less than 12 months and history may very well repeat itself in this case.
In summary, many Timberline investors are either “tired” and/or “disgusted”. For new investors, you can swoop in an exploit this malaise with probable exceptional timing. I don’t have a concern on “if” they will receive a final permit at Butte, it’s just “when”. By year end is still a likelihood but even if it went into Q1…who cares. Significant cash flow for this tiny miner is very close and patience for people who have been involved for a while is about to pay off.
If you are in the camp of the tired or disgusted, I would implore you to hit the reset button and remind yourself why you invested in Timberline specifically, gold stocks, and gold in general in the first place. Look around….likely all of those reasons are now even more magnified with cheaper, may I suggest fire sale, valuations on gold stocks. Buy low and sell high! TLR is dirt cheap, are you going to take advantage of 10 year lows in the stock price when they are on the brink of a production benchmark? There is not much analyst coverage on Timberline. However, it is one of our core recommendations even for our free list of subscribers. So, I invite you to put your name/email into the yellow box on the top of our website for regular updates on Timberline and other unique ideas in what will eventually be an incredibly profitable gold bubble and frenzy to come!
Finally, below is one more chart-the daily.
Notice the blue circle near 27 cents from early September when the financing was announced. Minimally, for traders, that gap will get filled, which is a 40% gain from 19 cents. That could take a few weeks or a few hours to hit and I feel it is a likely scenario quite soon. Look at the MACD circled on the bottom, which is stretched and about to reverse higher. Momentum is turning right now, hence the timing of this report.
Disclaimer: I am long TLR and wrote this article myself. I am offering ideas for your consideration and education. I am not offering financial advice. I am not a financial or investment advisor and am acting in the sole capacity of a newsletter writer. I am a fellow investor and trader sharing his thoughts for educational and informational purposes only. This publication is a 100% subscriber supported. No compensation is received by the author from any of the companies mentioned for the recommendation of a stock in this service (if this changes or there is exception-it will be clearly disclosed to our readers). *Medallion Resources is a sponsor of GIL. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided on the Website is based on careful research and sources that are believed to be accurate, Mr. Muschinski does not guarantee the accuracy or thoroughness of the data or information reported. The opinions published on the Website belong to Mr. Muschinski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Muschinski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published on the Website have been prepared for your private use and their sole purpose is to educate readers about various investments. By reading Mr. Muschinski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Muschinski, Gold Investment Letter's employees and affiliates, as well as members of their families, may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.