Lake Shore Drives Toward Production

VANCOUVER — A busy October ended well for Lake Shore Gold (LSG-T, LSGGF-O)when news of more high-grade drill results from the company’s flagship Timmins mine property lifted its share price 10% in a day to close at $3.40.

Lake Shore is developing an underground mine at Timmins and in 2009 successfully sunk a shaft to 710 metres depth. Underground drilling and bulk sampling are now under way, with drilling focused on probing the ultramafic (UM) zone between the 650-and 525- metre levels.

The latest 21 assay results from those underground holes returned grades and thicknesses consistent with previous surface drilling. In addition, drills intersected new zones of mineralization outside of the current resource on both the 525-and 650-metre levels.

The best results from within the known resource included 16.41 grams gold per tonne over 14.2 metres in hole 650-004, 13.26 grams gold over 12.7 metres in hole 650-005, and 52.89 grams gold over 5.8 metres in hole 650-007. The 650-level holes are specifically targeting a 50-metre-wide horizontal slice of mineralization that will be part of the first test stope.

On the 525-metre level, hole 525-005 returned two intercepts — 7.19 grams gold over 14.2 metres and 4.99 grams gold over 15.5 metres — from outside of the known resource. On the 650-metre level, new high-grade lenses were identified between the UM and footwall zones when hole 650-023 returned 10.79 grams gold over 4.1 metres and hole 650-025 cut 14.67 grams gold over 3.8 metres.

Mineralization at Timmins occurs as a series of east-west-trending lenses surrounding a steep, west-plunging fold nose formed at the contact between ultramafic and volcanic rocks. The bulk of the known resources occur within the UM1 zone, which occupies the core of the fold and the footwall zone to the north. The UM1 zone has a 125-metre strike length and varies in width between 10 and 15 metres.

The Timmins mine project hosts 3.2 million indicated tonnes grading 8.56 grams gold and 890,000 inferred tonnes averaging 5.74 grams gold. The project sits at the southwest end of the Timmins gold district and Lake Shore is aiming to produce 120,000 oz. gold annually. Cash operating costs are expected to come in at US$322 per oz. gold.

Ore from the Timmins mine will be processed at the Bell Creek mill, 42 km northeast. Lake Shore bought the mill in 2007 and brought it back into operation by the end of 2008, at a daily throughput of 800 tonnes.

The company is currently refurbishing the secondary ball mill at the facility, an effort that will increase the mill’s maximum daily throughput to 1,500 tonnes. At 1,500 tonnes per day, the Bell Creek mill will be able to support Lake Shore’s 120,000-oz. annual production target.

Lake Shore bought Bell Creek primarily for its mill but the surrounding property also hosts considerable gold potential. In April, the company kicked off an advanced exploration program at the property that includes dewatering and rehabilitating the existing Bell Creek shaft and developing a ramp that will first be driven to the Bell Creek mine workings and then onwards to the mineralized zones at Schumacher and Vogel, which are adjacent properties. Lake Shore expects to begin bulk sampling Bell Creek in mid-2010.

Drill results at Bell Creek have been encouraging, outlining a gold system that strikes for 500 metres and boasts a 1,150-metre plunge extent. The strongest intercept from a recent set of results came from hole 53, which returned 12.67 grams gold over 14.4 metres. Other good results included 7.35 grams gold over 7.1 metres, 6.04 grams gold over 4.1 metres, and 4.76 grams gold over 14.2 metres.

Along with developing the Timmins mine, refurbishing the Bell Creek mill, and exploring several properties, Lake Shore has been finalizing its friendly takeover of West Timmins Mining (WTM-T, WTMNF-O). The merger still needs the stamp of shareholder approval, which it was likely to get during a Nov. 4 shareholder meeting. Under the deal, West Timmins shareholders will receive 0.73 of a Lake Shore share for each West Timmins share held. The deal values West Timmins at roughly $320 million.

The merger is a natural fit, as Lake Shore and West Timmins are already joint-venture partners at Thunder Creek, which is adjacent to the Timmins mine project, and hold other neighbouring projects in the Timmins district. The combined company will hold 130 sq. km of prospective ground in the area.

Once the merger is complete, Lake Shore plans to begin what it calls an “aggressive underground exploration program” at Thunder Creek. Key to the program will be the development of a ramp from the Timmins mine area to Thunder Creek, which is only 800 metres away. The first ramp will be at 240 metres depth; the best results at that depth from Thunder Creek include an intercept grading 24.61 grams gold over 7 metres. A second ramp will connect the two areas at the 650-metre level, where Thunder Creek has provided intercepts as good as 12.75 grams gold over 83.4 metres.

Foreseeing the possibility of a combined operation, Lake Shore designed and built a shaft at Timmins that can support a considerably larger operation than envisioned for the Timmins mine alone. The company is also considering deepening the shaft to 1,200 metres in the future.

Lake Shore expects to spend $89 million on exploration and development in 2009. The company’s shares, which closed at $3.41 after gaining 33¢ on the latest Timmins drill results, have a 52-week range of 60¢-$3.52. The company has 214 million shares outstanding, but that count will rise to 337 million following the West Timmins merger. The combined company will have more than $100 million in cash and no long-term debt.