Donner Secures Metal Purchase Agreement

Richard (Rick) Mills
Ahead of the Herd

As a general rule, the most successful man in life is the man who has the best information

Donner Metals TSX.V – DON shares perked up based on the much anticipated financing news on how they would be paying for 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 $15million for Donner’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. TSX.V – SND as the least dilutive financing option available.

The terms of the agreement called for Donner to receive an upfront deposit of US$17.75 million on or before July 18th, 2011 (received). A second deposit of $5 million is expected on or before June 30th, 2012 subject to certain conditions (see below). Additionally, Sandstorm is subscribing for 6,200,000 shares at .35 cents (a 25% premium to the market) for proceeds to Donner, of an additional CDN $2.25 million, this financing has been closed.

The Bracemac McLeod Feasibility Study estimated $41 million will be required for pre-production capital directly attributable to Donner. Donner had $7.5 million in the bank - they received $20 million from Sandstorm.

After the required payments to Xstrata (due on July 21st - made) and making the cash calls for June and July 2011 (paid) Donner is left with 10 - 12 months of cash calls given their share of the mine construction is about $1 M per month.

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. Donner is currently raising $3 million of the needed $10 M. Raising the additional $7 M shouldn’t be a problem as Donner will be that much closer to production and cash flow.

Sandstorm’s management team has a successful track record in the royalty and metal streaming business dating back to 2005 with Silver Wheaton who they helped build into the largest metal streaming company in the world. Sandstorm looks to make upfront payments into companies developing advanced stage projects. In return, they receive the right to purchase a percentage of a mines production, at a fixed price, for the life of the project.

The Metal Purchase Agreement between Sandstorm and Donner provides for the sale of copper, gold and silver from Donner, to Sandstorm, equal to 17.5% of the production totals of these metals.

At current metal prices Donner will receive US .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 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.

Donner will retain 100% of their portion of the zinc sales - the primary revenue generator of the mine.

At full operating capacity, production is estimated to be 175 M pounds of zinc and 20 M pounds of copper over an initial four year mine life. Ore will be processed at the Xstrata-operated Matagami mill which is currently processing ore from Xstrata's wholly owned Perseverance mine.

The Matagami mill has been in operation since 1963 and underwent a recent upgrade that was completed in 2008. Historically, it has processed similar types of ore from other VMS deposits in Matagami. Total mine production from Bracemac-McLeod (Xstrata 65 per cent, Donner 35 per cent) is expected to be 2,500 tonnes per day.

Additional production potential is projected to come from both the McLeod Deep and McLeod West deposits - which are not part of the current four year mine plan but are included in the mines inferred resources - both are part of the Sandstorm Metal sales agreement. Going forward, underground definition drilling is the works for both these zones.

At the end of 2012, the Perseverance Mine, wholly owned by Xstrata, will be closing and Xstrata’s Matagmi mill will require feed. The Bracemac-McLeod mine was fast tracked by Xstrata who began development in April 2010, before the positive feasibility study was even completed.

Ramp development is moving forward at an impressive rate. A recent update from Donner included: ramp development at the Bracemac-McLeod zinc, copper, silver and gold mine has exceeded previous expectations of 4.5 meters of development per day, and is instead proceeding at 6 - 7 meters of ramp development per day. The ramp will be 2.3 kilometers, and the development team has already reached plus 1,400 meters.

Conclusion

Donner’s joint venture partner Xstrata commenced early construction on the Bracemac-McLeod mine in April of 2010 - and carried Donner for their $15M cost while DON arranged their financing. Xstrata did this in order to provide a seamless transition in mill feed from the Perseverance to the Bracemac-McLeod Mine.

Donner has a 35% share in the new mine, and shares the rest of the camp 50%/50% with Xstrata – a 4750 sq km area of mutual interest. There is ongoing drilling exploration in the camp with a $4 million budget planned for the rest of 2011.

This is a very interesting situation, Xstrata loves the idea of Donner being their exploration arm in the camp and they have to be impressed with results to date. There’s a year and a half until the Perseverance Mine runs out of feed for Xstrata’s mill and Donner gets its share of the four years worth of production from the Bracemac-McLeod mine.

Donner is a company on the road to production and is still exploring an area the size of a small Canadian province (PEI) and having a propensity to give up discoveries – 11 former mines and one still producing. Donner Metals TSX.V – DON should be on every investors radar screen. Is it on yours?

If not, maybe it should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

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