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Xstrata and Donner Team Up to Exploit Matagami

By James West
MidasLetter.com
Wednesday, March 11, 2009

Unfortunately, the market can be a dumb beast incapable of differentiating value from risk. In the current climate, everything has risk and nothing has value. So what does that mean for sidelined investors? Opportunity abounds for those who don’t succumb to the herd mentality, and have the foresight, discipline and appropriate risk profile to accumulate low-priced companies with intrinsic value.

Donner Metals (TSX.V:DON) is a case in point.

The company has a unique relationship with Xstrata Zinc Canada, a subsidiary of Xtrata PLC (LSE: XTA) in the Matagami Mining Camp. Xstrata is already producing zinc from its Perseverance Mine at Matagami – the 11th mine in the camp since it opened in 1964.

But Perseverance, a 2,600 tonne per day mill commissioned in 2008, only has 4 years of reserves left. Xstrata needs to develop further zinc resources in the area to maximize its investment.

What’s unique – and is the beauty of this arrangement for Donner investors - is the fact that Donner’s sole function is the exploration of additional stratigraphic horizons for zinc mineralization in an area that is extremely prolific for high grade zinc and copper.

It’s so prolific, Donner actually had to win a competition for the right to be Xstrata’s joint venture partner. Matagami is a world-class mining district, with 18 known Volcanogenic Massive Sulphide (VMS) deposits with 10 past producers of varying sizes, including the giant Matagami Lake Deposit (25.64 million tonnes of 8.2% zinc, 0.56% copper, 20.91 grams per tonne silver and 0.41 grams per tonne gold) The area is host to historical production of 8,600 million pounds of zinc and 853 million pounds of copper.

Donner quickly moved up the value scale by making several high grade zinc and copper discoveries, resulting in the commencement of a scoping study by Xstrata on the high grade Bracemac-McLeod (BM) zone discovered by the Donner/Xstrata JV in 2007.

BM now has a 43-101 compliant resource of 3,623,000 tonnes grading 11.52% zinc, 1.60% copper, 31.55 grams per tonne silver and 0.49 grams per tonne gold, with additional inferred resources of 512,000 tonnes grading 1.28% Zinc, 1.85% copper, 12.17 grams per tonne silver and 0.18 grams per tonne gold, calculated separately for the less well defined McLeod West Zone and the Copper Zone.

But investors are pricing the stock – at 16 cents - as if Donner was all about risk.

It’s a novel situation where the mill and concentrating infrastructure are already in place, and Donner has a partner who is spending the next $20 million at BM. Donner has a free ride on the next $20 million spent at BM.

Donner has the option to earn a 50% participating joint venture interest in the Matagami Project by incurring a total of $25 million of expenditures on exploration and related work on or before May 31, 2011. Upon earn-in by Donner, five separate joint ventures will be formed, covering the property and the area of interest. In each of the five joint venture areas, Xstrata Zinc has the option to earn-back a 15% interest in each area by incurring up to $20 million on a bankable feasibility study.

So that’s where Donner and Xstrata are with BM now – Xstrata is starting to spend their $20 million, leaving Donner with 35% interest. Donner will have to pay 35% of the capital costs to get that ore to the mill – a decline in which trucks drive back and forth - but it will only be a fraction of what a new mine would cost.

Although zinc is hovering near its recent low of $0.50 per pound, stocks of zinc at the London Metals Exchange have dropped dramatically as less profitable operations around the world for whom zinc is a byproduct shut down, squeezing supplies.

In addition, the massive stimulus investments by virtually every G10 nation will guarantee continuing demand for zinc that could see it moving upwards in price relatively soon.

But one thing is certain – with the mining and milling infrastructure already in place at Metagami, and considering the high grades of zinc and copper that characterize the Metagami VMS deposits, its Donner shareholders who will likely benefit from the “carried interest” the company enjoys as Xstrata’s exploration partner on the project.

Within the mining world, this explorer-producer model is receiving great acclaim and interest.

Donner Metals and Xstrata Zinc won the international Outstanding Achievement Exploration Award from the Mining Journal at the Mines and Money World Congress in London, December 3rd, 2008 for achieving the most notable exploration success during the past year.

A total of 90,185 metres of diamond drilling in 180 drill holes has been completed on the Matagami Project since the activity under the Option and Joint Venture silverreement began in late 2006. Approximately 80,000 metres of diamond drilling have been focused on, and in the vicinity of, the Bracemac-McLeod Discovery.

Donner’s overall strategy is to explore for and discover zinc-copper deposits in the Matagami Camp and to leverage the general infrastructure and existing processing facilities within a known and well-established cost structure for developing VMS deposits.

Within the extensive project area there are numerous exploration targets with excellent potential for additional discoveries.

SOURCE: http://www.midasletter.com/news/0903...