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Donner and Xstrata in Straight Line to Production

Few junior mining companies make the jump from explorer to producer. Being a producer requires not only a different skill set in management, but in shareholders as well. But it means a big increase in valuation. Producers generally trade close, at, or slightly above their net asset value. Explorers and developers usually get 0.1 - 0.4x net asset value.

But for Donner Metals, (TSX.V:DON) the path to production is a straight line that's easy for investors to follow. And they will be able to see this line in real life - down the proposed 2.5 km ramp from the surface to their high grade zinc deposit in Matagami Quebec, called Bracemac McLeod.

The mill and all the infrastructure required to make Bracemac McLeod a producing deposit is in place. Donner's JV partner, Xstrata, is already producing zinc at its Perseverance Mill only 4 km away.

So the main capital expenditure needed to transform Donner into a cash flowing company is a straight line decline - a ramp.

Donner and Xstrata have developed the Bracemac McLeod faster than anyone expected. Donner won the right to explore around Perseverance in 2006, and in 36 months they have discovered a deposit, outlined it, completed a scoping study and started a full feasibility study, with production planning already underway.

That can normally be a 7-10 year process.

Construction on the straight line ramp down to the bottom of Bracemac McLeod is scheduled to start in July 2010 - assuming that the current feasibility comes back with a positive recommendation.

Xstrata is very keen to get this deposit into production ASAP - this new deposit provides a new source of much needed ore. They spent $130 million refurbishing their Perseverance Mill in the Matagami camp, restarting production there in 2008. But their lone deposit has a very short life - it is scheduled to be depleted in 2012.

So they are have lots of incentive to get Bracemac McLeod into production fast; i.e. by the time Perseverance runs out of ore. And under their current timeline, they are already under the gun. Feasibility should finish mid-2010, and if the decision to move ahead is positive, then construction on the ramp would commence immediately.

It will take over a year to dig the straight line ramp, and several months to develop the mine faces before actual mining can begin.

There's a lot of work to do, and Xstrata will be doing most of it as operator. Donner has a 35% non-operating interest in the project.

But investors can easily see the path to production - it's a straight line.

SOURCE: http://www.midasletter.com/news/09092406_Donner-and-xstratas-straight-line-to-production.php


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