Winston’s Growth Stock Report

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Issue 4, February 1, 2011

Donner Metals (DON, TSXV) Countdown to Production

2011 will be a pivotal year for Donner Metals. With their joint venture partner, Xstrata fast tracking the development of the Bracemac McLeod mine, a number of major milestones are set for this year which Donner must complete. Today I’ll review how I see DON moving from a pure junior exploration company to a growth oriented production company within the world-class VMS Matagami Lake mining camp in Quebec.

Summary

The Matagami mining camp is already a proven world class mining district where historically 18 VMS deposits have been discovered and 10 mines have been in production.

In 2000, Xstrata Zinc discovered their Perseverance deposit which was the 11th mine put into production back in 2008 and is scheduled to be mined out and closed in 2012. Just 6 km away Xstrata has their Perseverance Mill which they spent $130 million refurbishing. So with ore running out, they needed to quickly move toward developing another mine to feed their mill.

Fortunately for everyone involved, Donner already made a discovery in close proximity to the mill and their drill results showed that the Bracemac McLeod project had a huge upside potential. In fact this discovery was so good that it won the Quebec Mineral Exploration Association Prospector of the Year Award in 2007 for their outstanding exploration success. In December of 2009, Donner won the International Exploration Award at last year's Mines and Money black-tie Awards Dinner in London, England that celebrates the highest achievements in the global mining industry.

Xstrata felt this was the discovery that would anchor their operations going forward and so they fast tracked a mine feasibility study, foregoing the usual pre-feasibility stage. Xstrata after all knows this mining camp intimately and no big surprises were expected.

And none were.

By July 9th of 2010, Xstrata publically announced they were moving ahead with the construction of the Bracemac- McLeod mine stating very clearly that “Xstrata Zinc’s expedient decision to develop Bracemac-McLeod was made in order to meet a timeline that is expected to enable production from Bracemac-McLeod to replace production from Xstrata’s wholly owned Perseverance mine without a gap in feed to the Matagami mill.”

As it currently stands, Xstrata believes they are on schedule to start production in late 2012 to early 2013.

This will be the third largest deposit that's been mined in Matagami and Donner stands to earn 35%.

Donner’s Challenge

The Bracemac McLeod Feasibility Study tells us that there is 3.73 million tonnes of proven and probable mining reserves. This works out to 606 million pounds of zinc, 83 million pounds of copper, 1.497 million ounces of silver and 13,090 ounces of gold. This in turn will provide enough ore to the mill for another 4 years.

Now that may seem like a lot to you and me and it is but usually companies need to prove up about 7 years of mine life. This is because the banks that finance the building of mines need to know that they are going to get paid back with interest and are able to hedge metal prices.

However we are talking about Xstrata here, a major blue chip mining company a market cap of $53 Billion. They don’t care what some suits in Toronto or New York think. They know they’ve got a fantastic resource here – much better then what the numbers imply. As stated, they are in a hurry. Yes they could do more drilling and get the numbers up but they know the Matagami district and they have enough information to spend tens of millions of dollars and get on with the job of building a producing mine to feed the Matagami mill.

This leaves little Donner Metals who have a market cap of just over $30 million in a bit of a pickle. You see in order to cash in with Xstrata, Donner is going to have to come up with some big bucks this year.

Donner needs to raise $40 million dollars.

Like Xstrata, Donner knows in 24 months, the Matagami mill will be feed on Bracemac-McLeod ore at 2,600 tons per day. DON can earn 35%. This is serious cash flow. The mine is being built. The mill is there, just a short distance away, it’s going to be great…

BUT in order for Donner to cash in, a number of significant steps must be completed this year.

1. The first step is the easiest. To earn in Donner must spend $25 million on exploration by May 31, 2011. With $4 million in the bank and no debt, they must spend another $200,000 to earn in, this is not a problem.

2. Once the $200 K is paid, a much bigger financial obligation will be necessary. Donner will need to contribute $15 million to Xstrata, again payable by May 31, 2011.

3. Starting in June of 2011, monthly $1 million payments will need to be made until production begins.

In a perfect world, Donner could get support from a bank in order to finance their earn in money. However there are two issues here. One is that the Bracemac McLeod deposit has only a 4 year mine life and the banks generally require at least a 7 year mine life in order to approve financing. The second issue is that bank financing for mines isn’t usually available until the project is within a 15 month timeframe from production. This allows banks to require a hedging provision on metal prices to ensure loan payback. That means September of this year.

So let’s cover off the mine life issue first.

Actually, Donner’s ultimate goal is to find at least 15 years worth of ore to feed the Matagami mill. To that end, exploration work at the nearby McLeod Deep and PD 1 deposits have added 3 years and another 1.5 – 2 years respectively to the mine life of the project. And with two drills currently working these numbers will continue to get better. In fact, I’m thinking they may take ore out of PD 1 first as it is amenable toward open pit mining.

At any rate, with Xstrata’s help, I’m sure they can convince the bankers the ore is available.

The next catalyst is getting enough cash to get from May’s $15 M obligation and through the $1 M payment requirements due in June, July, and August.

The big nut to crack is this $15 M obligation. There’s been a lot of talk on the street on how Donner is going to get this done.

To me it makes sense that they will do a convertible debenture. If they pay a decent percentage return, which isn’t hard with today’s low prime rate and have the conversion rate pegged at say 45 cents, they could raise at least $10M. This would create some dilution of shares, probably 22-25 million shares but given the cash flow prize, it’s no big deal.

Now if they still need some cash in addition to the convertible debenture idea then that will likely come from the warrants they have outstanding. Alot of their warrants are at, or just out of the money; they have 18.5 million warrants at 25 cents which expire between March and April of 2011. Plus they have 8 million warrants at 30 cents which expire in May 2011, 7.8 million warrants at 35 cents which also expire in May 2011.

Most of the warrants are held by large institutions in the Province of Quebec. It makes sense that these institutions will step up to the plate and make sure Donner is successful in getting this deal done. That would insure their investment today and profit from future production like the rest of us. If all of these warrants are exercised that is an additional $10 million in Donner’s treasury.

This should be enough to get them to that $15 M obligation and bridge the financing requirement of $1 million pe r month until September when the debt financing from the bank would kick in.

Conclusion

Donner has a very rare opportunity here to ride the coattails of one of the world’s biggest mining companies toward a 35% split in a producing mining operation with an industry award winning project.

However, it’s not all that easy. Donner will need to jump through some financial hoops that the bankers just love to throw at you. With the long standing support that Donner has received over the years from the financial institutions in Quebec, I do believe that all interested parties will make their dreams, Donner’s dreams and our dreams a reality.