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Junior Mining – A Shining Example

June 4, 2013 | Filed under: Breaking News,Presidents Blog | Posted by: admin

Junior Mining – A Shining Example

Here at the Mining Letter we are always keen to bring forward great success stories from the Junior Mining space. The last couple of years have been very difficult for our sector, and to be able to bring you success stories helps remind us that what we do is important and has real value. Metals exploration, development and mining are a tough business even when markets are hot. Companies have to do months or years of exploration, make a discovery, drill the property to outline a resource, constantly finance to pay for drilling and mountains of professional reports costing millions, bring the resource to a preliminary economic assessment, then pre-feasibility study, maybe a bankable feasibility, then look for government and environmental approvals, then look to finance potentially a multi-billion dollar mine construction project. One such company that has successfully run this difficult gauntlet is Donner Metals (TSX VENTURE: DON), a shining example of success. I had the great opportunity to interview Donner Metals’ Chairman David Patterson recently.

“Donner has just begun production, bringing a new discovery made in 2007 all the way to production in 2013, how do you feel right now?”

David said “People told me to expect a marathon; I just didn’t know we’d have to sprint the whole way.”

So it’s relief, elation and exhaustion. Extreme exhaustion I would imagine, but you couldn’t tell from my interview with Mr. Patterson.

David Patterson is from Vancouver. He pursued and received an MBA at Simon Fraser University and was a football player. With the mining business being such a big part of the Vancouver landscape, he was eventually introduced to it and decided to pursue it. Most recently, David has risen $80M over the last 3 years for Donner.

I interviewed some long-time market professionals about David Patterson for this article. Some of the things they said about him…

“Hardest working guy I know…”

“Sheer determination when odds are against him…”

“Will push, pull or drag it across the line…” (football background shows here)

“Assembled an incredible team…”

“He seems to be at the right place at the right time. This is not by chance it’s by design…”

And finally

“The (TSX) Venture’s golden example…”

On top of his tireless work with Donner, David is an active member of the SFU Alumni and has been helping raise funds for years.

Donner Metals

One of the things that David was most keen to let me know about Donner is the strategy that he feels has been all important. He cites a three pronged approach in this order:

  1. People
  2. Project
  3. Zinc as investment proposal

People

David has assembled an amazing group of people. I really enjoyed finding this chart in Donner’s current presentation. Each team member’s unique experience adds to, and completes the package.

More often than not, mining executives will tend to trumpet that they know everything about everything in the mining business. In Donner’s case, the executive team freely admits where their strengths and weaknesses lie, allowing the Company to successfully fill those gaps. When Donner’s people sit down with Glencore Xstrata’s people to talk, they can work together as equals. A true peer review can happen, and with so many cost overruns in mine development these days, this is key.

Glencore Xstrata is a very disciplined company and Bracemac-McLeod is one of the few new mines that have been built on time and on budget. Many examples of grossly under budgeted juniors looking to go to production have launched horror stories in the press. Donner is not one of those stories.

The Project

Donner acquired the Matagami Project in Quebec in 2006 with then partner Falconbridge. Excerpt from Project feasibility report.

In 2006, a joint venture between Falconbridge and Donner Metals Ltd. reactivated exploration on properties in the Matagami Camp, including the two properties. Later that year, Xstrata bought Falconbridge… A recompilation of downhole geophysics results and additional pulse EM work resulted in the identification of a “discovery hole” on each property. This led traditional work (electromagnetic surveys and diamond holes drilling).

Between 2006 and 2008, 116 drill holes were implemented, and the results led to the preparation of a February 2009 Mineral Resources Statement (Table 1-2-1) of 3.6 Mt of Indicated resources (11.52% Zn and 1.6% Cu) and 0.5 Mt of Inferred resources (1.28% Zn, 1.85% Cu).”

Bracemac-McLeod project reached feasibility stage in Oct 2010. The life of mine was projected to be 4 years with production started May 15, 2013 at an average rate of 2,500 tonnes per day, but is running at mill capacity of 3,000 tonnes per day. Bracemac-McLeod has measured and indicated resources of 3.39 million tonnes grading 11.31% zinc, 1.47% copper, 34.27 g/t silver and 0.50 g/t gold.

Positive changes to the development schedule of the mine and a project to increase grinding capacity in the mill increased the average production rate for the Bracemac-McLeod mine to 3,000 tonnes per day without impacting capital costs. There is a strong potential to expand the mine beyond 2016 on the basis of inferred mineral resources of 2.63 million tonnes at 8.9% zinc, 1.3% copper, 38.8 g/t silver, 1.1 g/t gold and excellent exploration targets immediately surrounding both existing reserves and resources. Following production start up, exploration news on May 22, 2013 included more high-grade results drilled around the McLeod deposits, increasing confidence in the potential for mine expansion so the initial 4 year life of mine could become 7-8+ years, with many areas still open around the deposits.

As a bonus…there are 70M tonnes of high-grade ore sitting at surface, stockpiled from footwall excavation, ready to be processed.

The Bracemac-McLeod is the 2nd largest mine in the Matagami camp after 50 years of intense exploration and is the 12th mine in the Matagami region.

Company Awards include:

Prospector of the Year – 2007, Quebec
Outstanding Exploration Award – 2008, Mines and Money London
Development of the Year – 2010, Quebec

The next big step for Donner is to look to expand the Bracemac-McLeod with the ‘McLeod Deep’, a mineralized zone currently in the inferred category. Donner will do 35,000 metres of drilling in 2013 to prove bring this inferred resource into the measured and indicated categories. If this resource can be proven up, it would likely double the mine life at Bracemac-McLeod.

Remember, exploration and price appreciation can extend the life of a mine indefinitely. Take the Kidd Creek mine for example, also run by Xstrata, which had a 10-year mine life… 30 years ago.

Financing Challenges

Donner dealt with 9 bank term sheets for project financing. A challenge for Donner was that they were only getting valuation on the initial 4-year mine life and not the McLeod Deep inferred resource that could double the mine life.

An alternative approach emerged from gold royalty company Sandstorm Gold that immediately stood out against the conventional financiers. There was minimal execution risk compared to other financing possibilities, and would be less dilutive for shareholders. David credits Sandstorm CEO Nolan Watson for understanding of the opportunity to do the first base metals stream, and his professionalism throughout the financing process

This transaction was the first base metals royalty financing Sandstorm had even done. Also the first metal purchase agreement for Donner and Glencore Xstrata. Then came the jurisdictional issues. Donner is a Quebec company, Glencore Xstrata is a Swiss company with an office in Ontario, and Sandstorm is a BC company. Imagine papering up this transaction! There were 9 lawyers…my mind shudders at the thought. After months of intense work, the result is an arrangement that both Sandstorm and Donner are happy with, which helped bring the mine into production.

Donner completed an equity financing in November of 2012, to complaints by various brokers and shareholders. 6 months later, it is likely that those same people believe the move to be genius. David realized that the junior markets were not improving, and to take money in the fall was wise.

Zinc as Investment Proposal

Analysts agree zinc is due for a pop in the next couple of years. Zinc is the fourth most commonly used metal in the world after iron, aluminum and copper. Scheduled closures are a serious problem for Zinc supply. Over the next 3 years 9 major mines will be exhausted and closed, representing 13% of global supply (Fraser Mackenzie Report – Nov 2012)

Zinc hit a high of $2.14 in 2007, it is currently trading at about $0.84. If supply tightens (closures and few new mines opening) we could hit that high again.

Some reports suggest that Glencore Xstrata is losing 50% of its zinc credits over the next year and with very little new zinc exploration and development happening, zinc could be the “Cinderella” metal of 2014-15. Another factor that could increase the price of zinc over the coming years is the now finalized Glencore Xstrata merger, which could potentially corner and control zinc prices.

The Future

When I asked David about the future he replied “Ongoing production, developing McLeod Deep, and ideally replicating Donner’s success in other areas.” Once production cash starts coming in from Bracemac-McLeod, Donner will be earning approximately $15-20M per year based approximately on current metals prices. Donner will also own 50Mlbs of unhedged zinc every year, keeping the company well financed to work on both of these goals.

Conclusion

I want you to put Donner (TSXV-DON) on your watchlist. Keep an eye on this company. This junior is about to become a serious earner. Donner’s tiny $30M market cap ($10M in cash) will not stay that way for long. If the company can prove up the McLeod Deep deposit, it will potentially double the life of the Bracemac-McLeod mine. Using its considerable income, Donner can make larger investments, and potentially joint venture with other juniors working on projects that fit their model. With a proven team like Donner’s I’m keen to see what they come up with next.

Congratulations David Patterson and the whole Donner Metals Team! Thank you for showing our sector and the world what is possible for junior exploration companies, a shining example of success, even in one of the toughest markets of all time.

Disclaimer: At the time of this publishing Trident Financial nor its owners or employees owned any shares or options in DON. This article is by no means an offer to sell securities. When making trading decisions you should always consult your financial advisor/broker.

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