Winston’s Growth Stock Report

Your Source for High Potential Stocks

Issue 3 February 15, 2011

Donner Metals (DON, TSXV) The Final Push to Production & Higher Value

2012 Financing Requirements

Donner’s business plan to become a cash generating producer early next year was endorsed and heavily supported last July when Sandstorm Metals and Energy (SND, TSXV) made a significant investment in Donner. This financing has been the cornerstone and major catalyst DON:TSXV needed to realize their goal of moving from a pure exploration company. Sandstorm’s support for Donner came by way of a hefty US $25 million financing arrangement which is packaged as a Metals Purchase Agreement with Sandstorm Metals and Energy Ltd.

The terms of the agreement called for Donner to receive an upfront deposit of US$17.75 million. A second deposit of $5 million is expected on or before June 30th, 2012. Additionally, Sandstrom subscribed for 6,200,000 shares at $0.35 cents which was a 25% premium to the market at the time and gave DONNER an additional CDN $2.25 million.

The Bracemac McLeod Feasibility Study estimated that $41 million would be required for pre-production capital attributable to Donner. At the time of the Sandstrom deal DONNER had $7.5 M in the bank so with the $20 M from financing, there was 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 Sandstorm Deal

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.

Mr. Nolan Watson, President & CEO of Sandstorm Metals & Energy, said, "We see great potential in the Bracemac-McLeod mine and are excited that initial production is near-term." Total mine production from Bracemac-McLeod (Xstrata 65%, Donner 35%) is expected to be 2,500 tonnes per day and production of copper is expected to be 24 Mlbs in 2013, 16 Mlbs in 2014, 21 Mlbs in 2015 and 21 Mlbs in 2016.

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.

With the mine on schedule for completion for early 2013, Donner IS poised to gain from the recognition of an emerging Zinc producer.

Resources and Development

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.

The mine development is on schedule and on budget which features a 2,500 metre access ramp leading to the main proven and probable mining reserves of 3.73 million tonnes that support an initial 4 year mine plan. In close proximity to these reserves is the McLeod Deep inferred resources of 2.63 million tonnes which appear readily convertible to add an additional 2-3 years mine life. The deposit has the potential to expand to 8+ years of mine life.

Though the compliant 43-101 resources seem light, Xstrata knows the ore they need is there based on the 50 year history of the Matagami Project which has had 18 known Volcanogenic Massive Sulphide (VMS) deposits including 10 past producers. Currently Xstrata is in the final stages of mining out their Perseverance Deposit which prompted them to fast track the development of Bracemac McLeod. Xstrata didn’t require “proving up” tonnage so they could get financing like most juniors. They are just building the mine knowing what they know.

Aside from Bracemac-McLeod, Donner's property is very large, ~4750 square km (about 1/3 the size of PEI), and ripe with large resource growth potential. Donner also has zones of historic resources to tap and a pipeline of drill-ready targets with the objective of having 15 years of mill feed lined up.

Future Valuation

Donner is in an enviable position having a blue chip partner with deep pockets. When Xstrata see’s 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, Donner’s management has been working flat out to keep up.

Donner looks like a good speculation right now. Cash flow will start in early 2013 and there are numerous high potential drill targets throughout the camp which give the company added blue sky potential.

As an investor I always feel more comfortable with my decisions when I’m in the company of fellow investors who are also large, well researched institutions. In Donner’s case, 50% of the ownership is from institutions. And that doesn’t include the heavy backing from Sandstrom.

So now that we are on the last leg of this journey with production looming, we should contemplate where and how this $10 million will be raised and how that will affect the company’s share price once production starts.

Regarding the upcoming $10 M raise, the shares have been trading around 24 cents. As I mentioned at the outset, Sandstrom paid a 25% premium to acquire their shares. I think it’s fair to estimate that DON could again get a similar premium giving them a 29 cent financing point.

Given the $10 M requirement, at a 29 cents raise, that would mean another 35 M shares issued. Donner has 173.6 M shares fully diluted plus my estimated 35 M required for an upcoming funding giving them roughly 208.6 M. However to be more conservative, Haywood Securities recently did a detailed analysis of Donner which they estimated that post financing, Donner would have 219 million fully diluted shares outstanding.

Given current metal prices, Haywood is projecting a target price of 40 cents per share based on a conservative 4.5 X multiple to Donner’s 2013E 2013 cash flow per share of US 9 cents. It should be noted that Donner’s peer group trades at +6.0x annualized CFPS. Given a smooth ramp up in production it would seem plausible that DON, TSXV could be re-evaluated once production is well underway. This would give them a peer group price target of 54 cents.

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 developing junior mining plays.