Lake Shore And West Timmins Merge

Analysts say a merger between Timmins, Ont.-focused Lake Shore Gold (LSG-T, LSGGF-O) and West Timmins Mining (WTM-T, WTMNF-O) puts the combined company in line to become a mid-tier gold producer.

Under the agreement, Lake Shore will absorb West Timmins in a friendly, all-stock deal worth $319 million.

Tara Hassan, an analyst with M Partners in Toronto, says joining forces makes sense for both companies.

“It confirms both our valuation of West Timmins and our long-term view that Lake Shore has the ability to break into the mid-tier ranks in a short timeframe,” Hassan said in an Aug. 28 note to clients. Her 12-month target for Lake Shore is $4.50 per share. Shares were $2.94 at presstime.

Lake Shore and West Timmins already have a 60-40 joint venture for the Thunder Creek project, where some exciting drill results have been announced recently, including an 83.4-metre intercept grading 12.75 grams gold per tonne.

Merging will allow them to consolidate Thunder Creek and Lake Shore’s fully permitted Timmins mine and 1,500-tonne-per-day Bell Creek mill into one wholly owned mining complex. The Timmins mine project hosts reserves of 830,000 oz. gold and Lake Shore expects to start production next year.

Lake Shore president and CEO Tony Makuch says the company will do a bulk sample at the Timmins mine before the end of this year with preproduction starting in 2010.

“We are targeting to achieve 200,000 oz. by 2011,” Makuch said during a conference call.

Lake Shore is also looking into accessing Thunder Creek via an underground drift from the Timmins mine, which is just 800 metres away.

Wellington West Capital Markets analyst Paolo Lostritto says that although the transaction is dilutive — Lake Shore will have about 337 million shares fully diluted but with a strong balance sheet of $119 million in cash and no long-term debt — consolidating Thunder Creek with the Timmins mine makes up for it.

“We believe (Lake Shore’s) management has been buoyed by drilling data that has confirmed the company’s deposit model at Thunder Creek,” Lostritto wrote in an Aug. 28 report. “Once steady state production is reached, we believe Thunder Creek could deliver 190,000 ounces of gold per year.”

Makuch says the company will now be able to expedite production from Thunder Creek by at least three years, taking advantage of synergies through the use of the Timmins mine, infrastructure and permits. Also, the Bell Creek mill was overbuilt so that it could be upgraded to handle around 3,000 tonnes of ore per day.

“It’s a company starting with a billion (dollar) market cap, a strong treasury, and as you see with the Timmins mine complex and exploration properties, a company that has near-term production,” Makuch says.

A report by John Kiernan, an analyst with PI Financial, was also positive about the transaction, expecting production from Thunder Creek to begin sometime in 2011.

“We now have little doubt that we will see production from this property,” Kiernan says. “With the addition of the Thunder Creek ounces, we see the potential for (Lake Shore) to become a 300,000-plus ounce producer.”

By joining forces with West Timmins, Lake Shore will have a land position that covers 130 sq. km along the Timmins gold structure west of the Mattagami River fault, as well as additional exploration projects in Quebec and Mexico.

The geology at the Timmins project is similar to that of the past-producing mines in the Timmins gold camp where some 70 million oz. gold have been produced.

Under the terms of the deal, which must be voted on, West Timmins shareholders will receive 0.73 of a Lake Shore share for each share held.

In the end, Lake Shore Gold will be 67%-owned by current Lake Shore shareholders and 33% by West Timmins shareholders.

Three of Lake Shore’s 13 board seats will go to West Timmins directors.

The company says the large board costs about $500,000 a year.

West Timmins will have to pay a break fee of $9 million if the deal doesn’t go through.

Peru’s Hochschild Mining (HCHDF-O, HOC-L) has a 40% interest in Lake Shore, but once the merger goes through its interest will decrease to 26%. Hochschild supports the deal and has said that it would be interested in raising its stake back up to 40%.