Donner up on Xstrata go-ahead at Matagami

Vancouver – Donner Metals (DON-V) received a big stock price boost after Xstrata (XSRAF-O, XTA-L) announced it would begin construction on the Bracemac-McLeod zinc mine near Matagami Quebec.

“There have been a lot of doubters,” said Harvey Keats, chief executive of Donner in a phone interview. “People have said, oh well you’ll get this thing and Xstrata will drag their feet and they won’t want to put it into production. But there’s nobody saying that anymore.”

Xstrata plans to have the mine running at full production by early 2013 in time to fill the mill-feed gap that will be left by the closure of the Perseverance Mine in late 2012. The Bracemac-McLeod combined open-pit and underground mine is being built a scant 4 km from Xstrata’s Matagami concentrator.

The international major decided to build the mine even though it has not yet released a feasibility study on the project. A resource in early 2009 outlined 3.62 million indicated tonnes grading 11.52% zinc, 1.6% copper, 31.55 grams silver per tonne and 0.49 gram gold per tonne.

The decision was not a surprise for Donner Metals, but it did come about quickly.

“It’s a little unusual in that we haven’t exercised the option yet, we’re still in the earning period,” said Keats. “We’ve been successful in making a discovery, getting a resource out, a feasibility done and a production decision made and we haven’t exercised the option yet. I don’t know about you but I haven’t seen that happen before.”

Donner still has to spend close to a million dollars to complete its required $25 million in spending before earning its interest in the Matagami project. Keats said all the company has to do is write Xstrata a cheque for the remainder, but there are a few minor procedural matters that need to be cleared up first.

When the final funds are paid, Donner will have earned a 50% interest in five different joint venture areas on the 4737-sq.-km Matagami camp. Xstrata, in turn, can earn back 15% on each area by spending $20 million towards a feasibility study. The company has already done that at Bracemac-McLeod, leaving Donner with a 35% interest in the deposit.

Donner’s stock price jumped 10¢ or 55.6% to close at 28¢ with 3.4 million trades on the Friday the news was announced. On Monday, however, it fell back 5¢ on a further 2.6 million trades.

“When you have that much volume there’s an awful temptation for people to sell into the volume and it appears that’s what happened,” said Keats. As to the gain on Friday Keats said he was expecting more of a reaction.

Xstrata reports that the mine will cost roughly $158 million to build, of which its share will be about $104 million. The company has given Donner until May 2011 to begin contributing its share.

“We’re quite pleased about that because we were concerned they were going to get the complete feasibility study and we weren’t going to have time to do the financing,” said Keats. The company plans to finance through both debt and equity.

While Xstrata begins construction on the mine, Donner continues to explore elsewhere at Matagami.

Following Xstrata’s announcement Donner released drill results from McLeod Deep, down dip from the McLeod portion of the Bracemac-McLeod mine. Results included estimated true widths of 14.8 metres grading 10.4% zinc, 0.58% copper, 30.77 grams silver and 1.41 grams gold; 11.3 metres averaging 15.17% zinc, 1.06% copper, 39.73 grams silver and 1.09 grams gold; and 7.95 metres carrying 8.57% zinc, 0.92% copper, 30.09 grams silver and 0.68 gram gold, all from roughly 1.2 km depth.

The company only plans to establish an inferred category at McLeod Deep for the near future. When the main McLeod deposit starts being mined in 2015 the company can explore from underground at significantly reduced costs. Keats said for now they are just trying to demonstrate the upside potential of the site.

Donner has two drill rigs on McCloud and one on regional exploration, with plans to shift a second rig away from McCloud later this year. Keats said he expects to see $4 – 5 million spent on exploration annually at Matagami.

“Obviously the objective is to find the next [deposit] now because we’re only looking at 2016 when Bracemac-McLeod is mined, unless we continue down dip but even so you know, six, seven, eight years goes pretty fast in this business.”

Keats said there is strong support in the community for continued mining, and the extensive infrastructure allows the development of smaller deposits. He sounded optimistic about the future at Matagami.

“Don’t forget the first discover was made in the Matagami camp in 1957 and here we are 2010 and there’s a new mine going into production and we just made a new discovery down dip from it. Old camps are like that, sometimes they die but they’re pretty hard to kill.”