Donner Metals: The market is missing the true potential of Matagami minerMonday, February 11th, 2013
If you believe the markets are rational, then think again. The recent meltdown in the small-cap sector is a case in point. Fear, rather than clear-headed logic, has seen an exit of risk capital from the arena.
This has had a tremendously negative impact on some of the market’s most promising growth stocks which have been hit by the indiscriminate sell-off.
However, it is also creating opportunities for investors with a strong constitution willing to take a long-term view.
Among the junior miners, the valuation of Toronto-listed zinc and copper specialist Donner Metals (CVE:DON) stands out as anomalous.
Its Bracemac-McLeod mine, in the Matagami mining camp in Quebec, has been systematically de-risked and taken to the brink of production.
This has been done on time and on budget, yet the company has received very little recognition for this from the market. In fact quite the reverse: if you look at the share price over the last two and half years it seems to have been penalised.
Donner’s partner and 65% shareholder in the project is Xstrata Zinc (LON:XTA), which may explain why it has been successfully taken to the brink of production with remarkable efficiency. So far it has cost $111mln out of a total budget of $160mln.
Bracemac-McLeod has a proven and probable resource of 3.7mln tonnes at 9.6% zinc, 1.3% copper 28 grams per tonne of silver and 0.43 grams of gold.
With an initial four-year mine life the operation won’t set too many pulses racing.
And this perhaps is where the market misunderstands the Donner proposition.
For there is more to the company and the Bracemac-McLeod Mine than meets the eye.
Work is getting underway to prove up the McLeod Deep target, which has the potential to add a further seven years or more to the initial mine life.
It is hoped this year’s 63,000 metre drilling programme will follow up on high priority targets regionally in the Matagami Mine Camp, as well as giving an idea of the base and precious metals content of this deeper lying ore body.
A total of 35,000 metres of drilling is planned at McLeod Deep for 2013.
Earlier, exploratory holes pointed to a gold grade at an anomalous 1.1 grams per tonne, which is almost three times the average grade of the main deposit.
“Something is going on at McLeod Deep that hasn’t been seen in the rest of the camp,” said chairman David Patterson.
“We have this higher grade that points to something happening down there. It might be the heat source, but until we mine it out we won’t know.
“The geologists are pretty excited about drilling McLeod Deep. If it holds up to drill testing, then their excitement will be justified.”
The local infrastructure of the region is good, while Xstrata owns the Matagami Lake Mill, just two kilometres from the mine portal, that will crush 3,000 tonnes of ore a day.
All of this adds up to a very cheap project.
In an industry where the vast majority of miners fail to break even at 90 cents a pound of zinc, Donner and its partner have a huge advantage with costs somewhere in the order of 42 cents a pound.
“There is one thing about Xstrata, it’s their market discipline, where they don’t produce something that won’t be making money” said Patterson.
“I would surmise that a majority of zinc companies do not make money at 90 cents per pound.
“Here we are looking at zinc at around 96 cents. So the vast majority of zinc companies are not making money on their zinc.”
Donner has been forced by necessity to be creative in raising its share of the cash required to get Bracemac-McLeod to production. While lenders were willing to advance the money, the terms were far from attractive when Patterson and his team drilled down into the term sheets, so they looked outside of the usual methods.
It has received a total of US$32.75mln as part of an innovative financing deal that Sandstorm Metals & Energy delivered for the copper and precious metals portion of Donner’s share of production from the mine.
Donner reckons the agreement values its copper at around US$2.75 a pound. This is a 24% discount to the spot price, but a significant premium to similar transactions in the market, where companies received closer to US$2.20.
“The reason we were able to negotiate favourable terms with the Metal Purchase Agreement with Sandstorm is because the risk of mine completion was greatly reduced,” said Patterson.
“The mine was already half built. Sandstorm stays with us for the life of mine: if we do go deeper and expand, it remains.”
If, as expected, Bracemac goes into production by the end of May, then Donner becomes cash flow positive two months later.
Analysts reckon it will generate US$15-20mln, or the equivalent of 7-10c a share per year, at the current zinc price.
The countdown is underway to first production with Xstrata Zinc clearing the site of the nearby Perseverance Mine and moving the site accommodation and equipment over to Bracemac.
The mining giant’s final task before finally decamping is to take out the crown pillar of the mine, which has happened, and is in the process of removing the last of the ore from there.
“Depending on how much ore and waste that comes with it, we might expect two months of removal and then over to us at Bracemac-McLeod, where 25,000 tonnes were already stockpiled on surface in December of 2012, and growing along with continued development at the mine,” said Patterson.
The company raised US$5mln from investors in November and received US$10mln from Sandstorm along with a US$4mln line of credit, which provides it with the funds needed to complete the final preparations for the mine, as well as bankrolling the upcoming drilling programme.
Haywood Securities values the stock at 30 cents, or 4.5 times cash flow per share, a discount to its established peers but a significant premium to the current share price of 16 cents.
“Our story hasn’t changed. In 2010 we said we were going to build a mine – and it has been delivered on time and on budget. Now is the time for the market to give us credit for this accomplishment,” said Patterson.