Winston’s Growth Stock Report

Your Source for High Potential Stocks

Issue 27 July 13th, 2011

Donner Metals (DON, TSXV)

Sandstrom Provides US $25 M Financing

Donner shares perked up today based on the much awaited news on how they would be financing their 35% share of the Bracemac-McLeod mine construction costs. With production set to start in early 2013, DON has been working on finalizing a financial arrangement to pay Xstrata $15 million of DON’s portion of the mine construction costs to May 31st, 2011 plus estimated monthly payments of $1 million until production starts.

After considering several financing options, Donner has chosen a Metals Purchase Agreement with Sandstorm Metals and Energy Ltd. (SND, TSXV).

The terms of the agreement calls for Donner to receive an upfront deposit of US$17.75 million on or before July 18th, 2011. A second deposit of $5 million is expected on or before June 30th, 2012 subject to conditions (see below). Additionally, Sandstrom is subscribing for 6,200,000 shares at $0.35 cents (a 25% premium to the market) for proceeds of an additional CDN $2.25 million.

Donner currently has $7.5 million in the bank. In a few more days they will have another $20 million plus the expected $5 million in about a year.

The $15 M payment to Xstrata is due on July 21st and includes cash calls for June and July 2011. This will leave them with $12.5 M or about 10 – 12 months of cash calls given their share of the mine construction is about $1 M per month.

The Bracemac McLeod Feasibility Study estimates $41 million will be required for pre-production capital attributable to Donner. So with their $ 7.5 M in the bank and the $20 M from financing, there is a $13.5 M shortfall. Donner will be required to raise a minimum of $10 million between now and June 2012 which will result in Sandstorm releasing their final $5 million payment.

The next financing shouldn’t be a problem now that Sandstrom has stepped up with their financing package. I would also expect the next financing to be done somewhere north of 35 cents.

Sandstorm’s management team have a successful track record in the royalty and metal streaming business dating back to 2005 with Silver Wheaton which they helped build into the largest metal streaming company in the world. The company looks for advanced stage projects whereby they make upfront payments for the right to purchase commodities at a fixed price for a percentage of a project’s production for the life of the project.

The Metal Purchase Agreement provides for the sale of copper, gold and silver from Donner to Sandstorm equal to 17.5% of the production of these metals. At current metal prices Donner will receive US$0.80 per pound of delivered copper and once Sandstorm has purchased 14.8 million pounds of copper, Donner will receive US$1.05 per pound.

For the gold and silver sales, Donner will receive for gold or gold equivalent ounces the lesser of US$350 per ounce and the prevailing spot price for gold.

Donner has the option for 24 months to purchase back from Sandstorm half of the metal to be sold to Sandstorm for US$17.5 million. Donner has also agreed to issue to Sandstorm US $1.4 million worth of common shares on the date of the second purchase deposit.

As for the primary revenue generation of the mine, Donner will retain 100% of their portion of the zinc sales.

At full operating capacity, production is estimated to be 175 M pounds of zinc, 20 M pounds of copper over a minimum 4 year mine life.

Additional production potential is projected to come from McLeod Deep and McLeod West which are not part of the current mine plan. Going forward, underground definition drilling followed by a feasibility study is the works for these zones.

To the west of the Bracemac-McLeod mine is the PD1 open pit resource which is currently undergoing a feasibility study to be completed later this year. With this ore just 25 to 100 meters from the surface, mining could start rather quickly. This could add another 700 tonnes per day (t/d) of ore to the mill which would help to reach its capacity of 2950 t/d. The Bracemac-McLeod mine is estimated to produce 2300 t/d over the first two years before ramping up to 2800 t/d.

Conclusion

I like this deal as it presents the least dilutive means of financing for DON shareholders and will get the company over the big financial hump they were facing.

It looks as though the mine is on pace to start production in early 2013, just as ore is running out for the Perseverance mill in December of 2012.

It should be noted that Bracemac-McLeod mine is within one of five joint venture areas. Ongoing exploration could add an additional 6-8 years of ore feed.

I see today’s news as being the successful completion of the biggest hurdle before production starts.

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