David Patterson is the CEO of Donner Metals (TSX.V - DON). Donner Metals is a Canadian based junior resource company currently building a zinc, copper, silver and gold mine with Xstrata Zinc (LSE - XTA) in Qu'ebec, Canada.
A presentation on Xstrata's website from the London Metals Week shows their outlook for zinc demand and plans for the new mine in Qu'ebec. At full production beginning in Q1 2013, the Bracemac-McLeod mine will produce 80,000 tonnes of zinc and 10,000 tonnes of copper annually. One page, shown below, of Xstrata's presentation highlights Bracemac-McLeod's mine plan.
In this discussion with AheadoftheHerd.com David talks about working with Xstrata and Donner Metals plans for the future.
AOTH: Donner Metals has a market cap of $30 million. Yet Donner is currently building a mine with Xstrata - a planned mine life of four years with potential to expand to six years on resources not currently in the mine plan - how did that happen?
DP: We've been partners with Xstrata on six different joint ventures in Newfoundland, Quebec, Manitoba, and the Arctic. So we have a long history with Xstrata. That speaks to an excellent working relationship and there are three reasons we work well together. One - synergy between our technical teams; two - we understand senior companies; three - financially, we have always kept our end of the arrangement.
AOTH: Meaning you succeed in raising money.
DP: Yes, but most importantly we've proven that we can do it in all market conditions. In 2006, when zinc was on its way up, everyone was able to raise money for zinc projects. Then the market tanked in 2008 and 2009, we were able to keep up with our funding commitments.
AOTH: Where do those commitments stand now?
DP: We're six months away from earning our interest, we have less than $1 million worth of expenditures and $3 million in the treasury.
AOTH: In the last six months zinc prices have risen 25% - and yet zinc mines are closing, can you explain this?
DP: There's been a lack of capital put into developing new mines and a lack of economic discoveries. Many existing mines were discovered 50-60 years ago. They've been in constant production. The deeper you go, the more it costs. Eventually, it becomes uneconomic. In 2006, Xstrata was the number eight zinc producer in the world. Now they are number one.
AOTH: As a required ingredient in galvanized steel, zinc is tied to the construction industry which is growing at an annualized rate of 11% in China and India. How important are these markets to Donner?
DP: Very important. China accounts for about 30% of the global demand for zinc. Zinc is also used in the production of cars. And last year China built more cars than the USA. So China is just getting started.
AOTH: What about India?
DP: Even bigger. India has a market economy whereas China has a controlled economy. But when that tiger gets going, it will outpace China. You have 1.3 billion people in India and another 1.3 billion people in China. You throw in Brazil, Indonesia, that's close to 3 billion people.
AOTH: So zinc is riding a big wave.
DP: Absolutely - you've got half the population of the world moving from an agrarian to an urban existence. That puts enormous upward pressure on metal prices - particularly those linked to infrastructure.
AOTH: The Fraser Institute has declared Quebec to be the most attractive mining jurisdiction in the world. You've developed assets internationally. What are the advantages in operating in Quebec?
DP: First of all, you have a mining work force that is highly experienced and motivated. They are sought after around the world. I've run into Qu'ebec drillers in the Andes. When you have a project in Quebec, you are able to get the best people in the world.
AOTH: Explain the role of the Quebec government?
DP: The province will support responsible mining. Permitting moves quickly through an established system of approvals when a company can demonstrate responsible practice.
AOTH: How quickly?
DP: In the case of Bracemac-McLeod, 12 weeks, compared to a recent case in British Columbia where permitting is measured in years.
AOTH: That is a big difference.
DP: It's huge - but let me be clear: an exploration company is not going to be doing anything foolish in Quebec. You will live by the law of the land. But it's a positive business culture. The government is not there to stop you from working. They are there to ensure that you are working correctly.
AOTH: Can you describe the Quebec tax landscape?
DP: The tax laws are competitive and designed to draw investors to the Province and incentives are in place to support exploration.
AOTH: How much of Donner is owned by retail investors?
DP: The original $12 million funding was 90% institutional investors. It's now somewhere close to 50%. I can make a dozen phone calls and talk to 40-50% of our shareholders.
AOTH: What is the ideal ratio of retail to institutional investors?
DP: There isn't one. Exploration is retail and development is institutional. Companies in transition from exploration to production change from having majority retail holders to majority institutional holders. Always remember; liquid markets are good for both institutional and retail shareholders.
AOTH: How much of your $25 million commitment to Xstrata have you spent?
DP: $24.1 million as of our last quarterly statement.
AOTH: Bracemac-McLeod is a Volcanogenic Massive Sulphide deposit.
AOTH: Can you explain the geology of these deposits?
DP: Essentially, a VMS deposit occurs when a volcanic hot spring develops on the ocean floor. At Matagami, this happened a couple of billion years ago. Under enormous heat and pressure, hot fluids come piling out from deep underground carrying valuable metals like zinc, copper, silver, and gold. The metals come out of solution as massive sulphides and condense at or near the paleo sea floor. And then over millions of years other volcanic rocks are laid down on top of the mineral deposits and the whole sequence starts again.
AOTH: And this is how you get multiple deposits stacked on top of each other.
DP: That's right. The upper Bracemac is virtually at surface, and beneath it we have the Bracemac Tuffite zone and then the Key Tuffite zone, and we think this multiple formation may be duplicated elsewhere on the property.
AOTH: As well as the zinc, you have a significant amount of copper, silver, and gold. Your base cost was done at $0.80 zinc and $2.50 copper. Economic modeling suggests that a 10% rise in metal prices would create a 1,200% rise in the NPV of this mine.
DP: Yes, at today's spot prices, we are already looking at a project value in excess of $200 million.
AOTH: What is the next challenge for Donner?
DP: We need to raise $40 million for Donner's share of the mine.
AOTH: How difficult is that in the current financial climate?
DP: Well, it's harder than going out to your local bank and borrowing money to buy a house. The fact is, major Canadian banks love to finance billion dollar mining projects. Smaller operations like ours are
sometimes out of their business scope.
AOTH: So where are the potential lenders?
DP: In Europe.
AOTH: How do you pitch them?
DP: It's very simple: we invite them to Matagami. They meet the engineers and the geologists. We show them, "This is the mill. This is the Perseverance mine which will be depleted in 2012. This new portal to the ramp is going to be our mine. How do I know this? Because Xstrata says it's going to be a mine. Xstrata will not build 65% of the mine. They will build 100% of the mine."
AOTH: What is your deadline for raising the $40 million?
DP: Our first contribution to the capital requirements will be May 31, 2011, then monthly cash calls of approximately $1.5 million.
AOTH: How would you rate your level of confidence?
DP: High. And I'll explain why: Donner has until May 31 to earn its interest, but Xstrata started construction a year earlier. So, from the bank's point of view, you've taken a year out of the process, which means you've reduced a lot of risk by shrinking the time to the first loan repayment.
We're asking the banks for $40 million in debt financing. We are advancing our agenda with a number of different lenders and we think we'll be able to reach an agreement that's advantageous to Donner. In fact, I expect to have competing bids.
AOTH: Assuming no further increase in the price of zinc or copper, what would be the annual earnings?
DP: About $40 million.
AOTH: For a company with a $30 million market cap, that's considerable cash flow.
AOTH: And at $5 copper and $2 zinc - which many are predicting.
DP: The numbers get crazy.
AOTH: What does the market not understand about Donner?
DP: People see what's right in front of them. That we've made a discovery. That we're constructing a mine. That production will start within 26 months. That PD-1 is supplemental feed. But they haven't grasped the wider vision. This company is built by explorers. Harvey Keats, 25 years with Falconbridge; Robin Adair, 25 years with Falconbridge; Ken Thorsen, 35 years with Teck.
Look at our rate of discovery: about one a year. These men have built careers on exploration. It is in our DNA. And we're going to continue to make discoveries for another generation in this huge project area that exceeds 4,700 square kilometers over one of the most productive regions in Canada.
AOTH: Thank you for your time.
DP: You're welcome.
David Patterson has been involved with exploration companies for over two decades. He has an MBA from Vancouver's Simon Fraser University. Mr. Patterson has an extensive European and North American network which has enabled him to raise in excess of CDN$100 million for mineral exploration companies, including Donner Metals Ltd.
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.
To date, Donner has provided $24.9 million towards exploration and has the balance of the funds at hand required to exercise the option.
Following earn-in, five separate joint venture (JV) areas will be formed with initial interests of 50 per cent Xstrata Zinc and 50 per cent Donner.
The JV areas are:
- South flank JV area (includes Bracemac-McLeod, McLeod Deep, Orchan West)
- North flank JV area
Central camp JV area
- West camp JV area which includes the PD1 deposit
- Regional JV area
Following earn-in, Xstrata Zinc has a right in each of the five JV areas to earn back a 15% interest by completing a bankable feasibility study or incurring a maximum of $20-million toward a bankable feasibility study. The area of mutual interest remains in effect for two years following earn-in.
In between this discussion being conducted and its publication Donner Metals Ltd. has received a National Instrument 43-101 compliant resource calculation for the PD1 deposit from partner Xstrata Canada Corp. The combined mineral resource (measured and indicated) is 1.74 million tonnes grading 4.55 per cent zinc, 1.16 per cent copper and 19.88 grams per tonne (g/t) silver.
Is Donner Metals and its Matagami joint venture with Xstrata on your radar screen?
If not, maybe it should be.
Richard (Rick) Mills is president of Northern Venture Gorup and host of aheadoftheherd.com. He can be e-mailed at email@example.com.
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