Donner rises as Xstrata advances zinc mine

VANCOUVER — Donner Metals (DON-V) shares received a big boost after Xstrata (XTA-L, XSRAF-O) announced it would begin building the Bracemac-McLeod zinc mine at the joint-ventured Matagami project, near Matagami, Que.

“There have been a lot of doubters,” says Harvey Keats, chief executive of Donner, in a phone interview. “People have said ‘You’ll get this (mine) 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 zinc 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 earn-in period,” says 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, but I haven’t seen that happen before.”

Donner still has to spend about $1 million to complete its required $25 million in spending before earning its interest in the Matagami project. Keats says 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 resolved first.

When the final funds are paid, Donner will have earned a 50% interest in five different joint-venture areas on the 4,737-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 July 9 — the day the mine-building news was released. On July 12, however, it dropped to 23¢ 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,” says Keats.

As for the 10¢-gain, Keats says he was expecting a stronger market reaction.

Xstrata reports that the mine will cost roughly $158 million to build, of which it will provide $104 million. Xstrata 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 complete the feasibility study and we weren’t going to have time to do the financing,” says Keats. The company plans to finance through both debt and equity.

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

Following Xstrata’s announcement, Donner released drill results from McLeod Deep, downdip 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.

Donner only plans to establish an inferred category at McLeod Deep for the near future. When miners start mining the main McLeod deposit in 2015, the company can explore from under-ground at significantly reduced costs. Keats says, for now, the company is trying to demonstrate the upside potential of the site.

Donner has two drill rigs at McLeod and one for regional exploration, with plans to shift a second rig away from McLeod later this year. Keats says 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 downdip. But you know, six, seven, eight years go pretty fast in this business.”

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

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