Cashed-up Lake Shore speeds ahead at Timmins West (October 06, 2008)

With capital scarce and share prices in the dumps, many juniors are struggling to raise the money they need to advance their properties — no matter how promising they are.

Cashed-up Lake Shore Gold (LSG-T, LSGGF-o), however, is in clover by comparison, with plenty of money to spread around its Timmins, Ont.-area projects.

The company has eight rigs turning at four of its properties and is moving full tilt at the Timmins West gold project, 18 km west of Timmins.

“We’re currently fully financed to advance this project right through to production, so we don’t need to raise any more money,” says president and CEO Anthony Makuch. “That’s one thing that sets us apart from a lot of other junior mining companies in Canada and North America.”

Initial production at Timmins West — which hosts 1.2 million oz. gold in uncut reserves — is expected by early next year, with commercial production coming as soon as the second half of 2010, Makuch says. Refurbishment of the Bell Creek mill, 40 km west, is under way, as are plans to sink an exploration shaft and ramp at Timmins West.

And Lake Shore can afford it all thanks to an agreement with Peruvian gold and silver miner Hochschild Mining (HCHDF-O, HOC-l), that gave the London-listed company a 35% stake in the company for $144.3 million earlier this year, via two private placements.

“Not only were they going to give us money at a premium, they believed in the story and understood the value of what we were bringing,” Makuch says, adding Lake Shore researched the company thoroughly before going ahead with the deal. “We felt that as a shareholder, not only would they be very supportive, but they also have the same ethics and operating standards that we have.”

In February, Hochschild acquired just under 20% of the company, buying 28.2 million shares at $2.30 apiece (a 30% premium to Lake Shore’s five-day volume-weighted price). In June, it bought another 33.2 million shares at a predetermined price of $2.40 per share (a 44% premium to Lake Shore’s April 15 closing price), giving Hochschild 35% of Lake Shore. Currently, the company is trading at around $1.22 in a 52-week window of 90-$2.26.

A subsequent private transaction with a subsidiary of FNX Mining (FNX-T, FNXMF-o) boosted Hochschild’s stake to its agreed-on maximum of 40% of Lake Shore’s fully diluted shares. The companies have a standstill agreement that expires in November 2010, but Makuch doesn’t seem worried about what will happen once Hochschild is free to do as it pleases.

“At that point in time, they have the ability to choose what they want to do, whether they want to remain as forty per cent shareholders or something else. Time will tell, as we build this.”

Makuch adds: “We basically asked them to be a forty per cent owner, too, as part of our way to capitalize the company, as our way of advancing the story.”

Hochschild’s investments have certainly put Lake Shore in a better position to develop its projects, said Haywood Securities analyst Andrew Kaip, in a note to clients in May, and “the significant premium to market provides a positive endorsement of development strategies that minimizes shareholder dilution. . .” Kaip noted, however, that the investment could be viewed as a creeping takeover that could cap the stock’s upside.

For its part, Hochschild, which owns six operating mines in Latin America and Mexico, described the deal as a strategic investment that gives the company exposure to a high-grade, long-life asset in a mining- friendly jurisdiction.

According to an October 2007 prefeasibility study that looked at production of around 80,000 oz. gold per year from throughput of 1,000 tonnes per day, Timmins West would be a low-cost mine — on the verge of being in the lowest-cost quartile of gold producers. Capital costs were pegged at $142 million, and cash operating costs at US$319 per oz. (cut) using a gold price of US$600 per oz. The study gave the project an internal rate of return of 34%, a mine life of 11 years and a payback period of three years. Gold recovery was projected at 95%.

But Makuch says an updated prefeasibility, due out by the end of the year, will look at ways to improve the economics of the project further, by increasing throughput to 1,500 tonnes per day and gold production to 150,000 oz. per year, considering early production from shallow, high-grade mineralization from the Vogel property (next to Bell Creek), and by improving head grades by cutting dilution.

Lake Shore is already ahead in terms of cutting costs because of the available infrastructure at Bell Creek and Timmins West. It acquired the Bell Creek complex, including a 1,500-tonne-per-day mill and a permitted tailings facility, from Goldcorp (G-T, GG-n) in late 2007, and at Timmins West, has access to electricity and a highway within half a kilometre of the property.

The company is anticipating that production will eventually come from at least three different properties, with the Bell Creek mill — which should be operational by end of the year — serving as the central processing facility.

Lake Shore is looking at processing material from the Timmins West exploration ramp in the first quarter of 2009, from the Timmins West exploration shaft in the first quarter of 2010, followed by the Vogel ramp in the following quarter, then from underground at the Bell Creek mine in next year’s final quarter.

Although Lake Shore won’t complete a feasibility study until the end of next year, it says it’s anticipating production of 20,000 oz. gold next year, 100,000 oz. in 2009, and around 200,000 oz. in 2010.

In addition to probable reserves at Timmins West of 3.4 million tonnes grading 10.4 grams gold per tonne (uncut) for 1.2 million oz. (or 830,000 oz. at a cut grade of 7.62 grams gold), the project hosts 3.3 million indicated tonnes grading 8.62 grams gold at a cutoff grade of 3 grams gold per tonne for 905,000 oz., plus 968,000 tonnes grading 5.62 grams gold (cut) for 174,700 oz. The deposit is open downplunge.

Indicated resources at the past-producing Bell Creek underground mine, as outlined in a 2004 National Instrument 43-101- compliant estimate, come to 190,000 tonnes grading 8.25 grams gold for 50,640 contained ounces, with inferred resources at 346,000 tonnes grading 7.7 grams gold for 85,890 oz.

The Vogel and Schumacher projects, adjacent to Bell Creek, have historic resources that could add in the neighbourhood of 570,000 oz. of high-grade gold.

Mineralization at all four properties is amenable to cyanide leaching and carbon-in-pulp recovery at the Bell Creek mill.

And although Lake Shore has its hands full building its first mine, it is already looking well into the future.

“Our goal, as part of our strategic alliance with Hochschild, is not only to build a mine in Timmins, it’s actually to build the next mid-tier gold producer in North America to fill that space,” Makuch says.

Lake Shore has access to a proprietary GIS database — compiled by majors over 50 years and covering northeastern Ontario and northwestern Quebec — that will generate future targets to help grow the company.

For now, the junior has other exploration projects in Ontario, including the Blakelock and Little Abitibi properties, 140 km northeast of Timmins, and a 50% option on land surrounding Aurizon Mines’ (ARZ-T, AZK-x) Casa Berardi mine.

The company recently started a 26-hole, 3,700-metre drilling program at its 50%-owned joint venture with Northern Superior Resources (SUP-V, NSUPF-o) at the Tipahaakaaning gold property in northwestern Ontario. It’s also got two drill rigs completing a 36- hole, 22,000-metre diamond drilling campaign at its Thunder Creek property, located next to Timmins West. Results released from drilling earlier this year assayed up to 9 metres of 8.57 grams gold and 7 metres of 24.61 grams gold. The property is 60%-owned by Lake Shore, with the remainder held by West Timmins Mining (WTM-V, WTMNF-o).

Lake Shore Gold has a market cap of $217.3 million with 175.3 million shares outstanding.