FINANCING REVIEW

In my last update I discussed with Donner’s Chairman, Dave Patterson their requirement over the short term of raising $15 million to earn in with Xstrata by May 31st of this year and then make $1 million payments each month going forward until production starts in January of 2013. This money is to cover DON’s share of the costs incurred by Xstrata for the mine construction at Bracemac McLeod.

It’s nice having a joint venture partner like Xstrata. They don’t mess around. When they see a good opportunity they literally run with it. From the discovery of the Bracemac-McLeod deposit in 2007 to Xstrata’s 9 month accelerated feasibility study which concluded with the start of mine construction last July, Donner’s management has been working flat out to keep up.

Xstrata is moving ahead with or without Donner. Cash flow will start in early 2013. Donner is in an enviable position as having a blue chip partner with deep pockets, a second feasibility study underway at C pit, numerous high potential drill targets throughout the camp yet Donner’s share price holding in the low 30 cent range.

This doesn’t surprise me. Despite the bullish record breaking commodity market, investors want absolute verification that a company is going to cash in with their discovery. It seems clear to me that there is a high degree of fear in the market place generally but specifically concerning Donner, investors do not yet have the faith that their management team can come up with an economic and viable financing arrangement.

Today’s shareholders, including the 60% ownership by the institutions, think otherwise. To date an impressive $6 + Million is in the bank with money coming in as recently as the last few days from the exercise of warrants. Many of the institutional shareholders have been involved since the discovery.

So, on that front they are doing quite well. However they still need $19 Million by the end of May plus equal payments of around $1 million per month going forward to production.

As Dave Patterson pointed out, that process is not something you do overnight. It’s been a long process. Ultimately, all the options must be weighed with the investors’ best interests in mind. Possibly there could be a combination of financing options chosen.

Last I heard, they’ve narrowed it down to five banks they really like. One of those banks will be the one that comes up with the financing Donner needs. With zinc and copper prices trading strongly, and the fact that cash flow is expected to start in 19 months, the banks are interested.

Given today’s high commodity prices, this allows Donner to come up with some different financing options. One is Volumetric production payments.

This is a type of structured investment that allows producers to get a piece of their future cash flows today. The investor receives a stated monthly quota – often in raw output, which is then marketed by the VPP buyer – or a specified percentage of the monthly production. A VPP interest is considered a non-operating asset, akin to a royalty-payment system.

“There are a number of companies that are now doing it” said Patterson. You have a non- income, non-taxable event and they will give you a certain sum of cash up front as a pre-production payment against future production.”

Once Donner is in production, the banker then participates in that production. Patterson explained it this way: “As the volume comes in, for every pound, they will pay the company a further payment for that final pound. Let’s say copper is at $4.50 right now, if you sold at $3.50, you get $1.75 up front and $1.75 per pound when you sell the copper. They will take a significant proportion of the upside but you don’t have to sell all your production. So this is one option that is not your traditional financing tool. That’s one possibility.”

Another possibility is convertible debt.

“Amazingly, once we got the bankable feasibility study, other groups who are not banks started approaching us saying, we will offering you x amount of dollars on this kind of schedule. Such as a convertible debt, with coupon and a conversion feature tied to the current price of the stock.”

And naturally there’s the tried and true, good old fashioned equity raise.

“Of course we have the opportunity to raise straight equity. Again, since we have a bankable feasibility study there’s a number of institutional investors that don’t invest in junior mining companies normally but they are interested in those companies who are near-term producers. And it’s those that Donner is starting to see a lot of in the equity portion raising side.”

So what is the optimal solution?

“I have kind of jumped all over the place but I wanted to give you a feel that we have a quiver and in that quiver we have four or five arrows that would do the job. But we want to do a blend. Every one of the financing options has an upside and a downside.”

“We would like most of the money to come from a senior lender. To me that is the optimal combination; a senior lender, maybe a small portion of the volumetric production payment tied to copper and then some equity.”

You have been quoted that you believe Donner should earn $40 million a year going forward?

“Based on the current price of zinc and copper, based on the feasibility study plugging those numbers in, it’s roughly $40 million dollars. That would be $40 million net to Donner EBIT – revenue less operating expenses.”

We’ll know the outcome of their financing arrangements in just a few short weeks.

The management remains confident their financing goal will be met on time. To that end, actions speak louder than words. Earlier this month, Dave Patterson picked up an additional 100,000 shares for himself. And the pro investors from the institutions are acquiring millions more.

CONCLUSION

We’ve done well with our Donner investment but the big payoff will be when production starts. With cash coming in, Donner can then focus on their many other targets which can provide a long term blue sky opportunity rarely found from penny stock mining plays.