March 04, 2011

Donner Metals Holds Its Own In The Development Of Bracemac-McLeod, Which Is Now Just 21 Months From Production

By Charles Wyatt

When we last wrote about Donner Metals during last summer, chairman Dave Patterson had just been informed by Xstrata Zinc that it intended to press the development button on the jointly-held Bracemac McLeod zinc–copper project in the Matagami mining camp in central Quebec. A feasibility study was expected to be completed in a couple of months’ time and this would mean that the share of interests in Matagami would become 65:35 in favour of Xstrata. Not a bad place for a junior to be, and the results of the feasibility study were duly announced last September and looked encouraging enough.

The study was based on a proven and probable mining reserve, including dilution, of 3.73 million tonnes grading 9.60% zinc, 1.26% copper, 28.25 grams per tonne silver and 0.43 grams per tonne gold, although Dave Patterson points out that there is plenty of potential to increase these reserves. An initial four year life was predicted for the mine, at a production rate of 2,500 tonnes per day, which is well within the capacity of the Perseverance plant. Construction of the Bracemac-McLeod mine has already started, and production should start before the end of next year, by which time Perseverance will be closed. It is expected that the operation will produce 606 million pounds of zinc, 83 million pounds of copper, 1.5 million ounces of silver and 13,090 ounces of gold over its initial short life, for an estimated capital cost of US$163.7 million.

It is here that questions come in, as this seems a very high figure for a project where most of the plant is just down the road. In fact, you could scarcely ask for a better place to go mining - the Matagami mining camp is a world class mining district, containing no less than 18 volcanic massive sulphide deposits. This total includes past producers of varying sizes, including the giant Matagami Lake Deposit, with resources totalling 25.64 million tonnes at 8.2% zinc, 0.56% copper, 20.91 grams per tonne silver and 0.41 grams per tonne gold. And it’s in this same neighbourhood that Xstrata Zinc is on the last knockings of production from the Perseverance deposit, which provides feed for the refurbished 2,600 tonnes per day Matagami mill complex. Its zinc concentrates are refined at the Valleyfield refinery, while its copper concentrates are smelted at its own smelter in Rouyn-Noranda on Osisko Lake in northern Quebec, and refined at its refinery in Montreal.

So what’s with the high price tag? Under the current estimate poor old Donner will have to raise US$57.2 million if it is to maintain its 35 per cent interest, and that could be hard going. Not impossible, mind you, as Donner has already spent C$24.1 million out of a total of C$25 million requirement for its earn-in to a total of five project areas at Matagami, including Bracemac McLeod, and has the balance in the bag for payment by the end of May. Dave Patterson has an enviable record for raising money, but in this case he will not have to raise the whole of that sum before 2012 as only a total of US$115.6 million, of which Donner will be liable for US$40.5 million, is required for capital development over the next two years. The balance will be incurred concurrently with production and cashflow from Bracemac as the McLeod zone is developed.

This alleviates the problem to an extent, but it has to be appreciated that the operating costs per tonne mined are expected to average US$73.00 and this sum includes a capital recovery charge of US$6.48 per tonne payable to Xstrata Zinc for use of the tailings facility a mill. Doubtless lawyers can find an agreement in the joint venture contract about this, but to an outsider it looks a little as if there could be a conflict of interest. In fact the whole feasibility study is really of little use to anyone trying to put a value on the project as the prices for metals are ridiculously low, and this means that the net present value is only US$3.4 million and the internal rate of return (IRR) after tax a measly 8.1 per cent which is of no help to Donner.
But, says the Genivar Limited Partnership, which was paid by Xstrata Zinc to carry out the study, the whole thing is sensitive to metal prices, and a 10 per cent increase in them translates to a twelvefold increase in NPV and a twofold increase in the IRR. Current prices for the relevant metals stand at US$1.13 per pound for zinc, US$4.32 per pound for copper, US$34.5 per ounce for silver, and US$1,424 per ounce for gold. That list makes the prices used in the study seem almost antediluvian, at US
.80 per pound for zinc, US$2.50 per pound for copper, US$12.00 for silver and US$1,000 for gold. What’s more, Xstrata is now preparing to re-work certain elements of their studies.

It is clear when talking on the telephone from Vancouver that Dave Petterson has struggled at times to keep his cool when faced with these shenanigans, but he makes the positive point that he has learned a lot. In fact, he relates that when a friend said to him that the way Xstrata produced its figures was more like a potential acquisitor than a partner, he couldn’t help but agree. And he accepts that a takeover is a possibility, which would be no bad thing for Donner, “providing the price is right.”

He goes on to say that he is well on his way to raising the debt component, as bankers are queuing up knowing that the idea of a four year mine life is ridiculous. “With what we have our hands on now it is nearer six years”, says Dave, “and as we have an excellent record of promoting inferred resources to measured and indicated, I would not be surprised to see it approaching nine years. The bankers are aware of this and they are also aware that as production is only 21 months away current metal prices are being de-risked.” His conclusion is that gross cash flow for Donner’s share, after everything that Xstrata can throw at it, will be around US$40 million a year, which is pretty remarkable for a company capitalised at around C$30 million. Doubtless he will be besieged at PDAC to flesh out these figures further.