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THE BUSINESS
Discovery Metals was formed in New South Wales, Australia, in May 2003 as Discovery Nickel Limited and joined the Australian Stock Exchange in December of that year.
Following the listing the company commenced exploration on its projects in Western Australia and the Northern Territory but changed its direction in July 2004 when it signed an agreement to earn up to a 100% interest in the North Eastern Botswana Nickel Project. In 2005 Discovery added the Maun Copper Project, also in Botswana, to its portfolio.
To reflect this change in focus the company changed its name to Discovery Metals and in December 2006 listed on the Botswana Stock Exchange. That was followed by a listing on AIM in June 2007 at 18.5p per share. Since then there has been one major fundraising which raised £4.58 million before expenses through a placing of 31.6 million shares at 14.5p, in September 2006.
The project at Maun is Discovery’s most advanced development and currently its main focus. Maun comprises of seven licences covering 6,435 square kilometres in the North East of Botswana, within the famous Kalahari Copper Belt. To date the company has completed its first and second phases of drilling and has confirmed substantial copper-silver mineralisation at the Zeta, Plutus and Petra prospects.
Over the past year Discovery has increased the total inferred resource at Maun by 130%, with the overall copper grade rising by 17%. Currently, the project has total inferred resources of 46.1 million tonnes at 1.4% copper. This is comprised of; 27.1 million tonnes at 1.3% copper and 27 grammes per tonne of silver of inferred resources at Zeta, a 4.5 million tonne inferred resource at 1.1% copper at Petra; and an inferred resource at Plutus of 14.5 million tonnes at 1.3% copper and 12.6 grammes per tonne of silver, all at a 0.6% copper cut-off.
In addition to these resources the company has significant exploration potential throughout the tenements, with hundreds of strike kilometres of potentially copper containing rocks to explore.
In August 2007 Discovery began a pre-feasibility study at Maun which is expected to be completed in the first half of 2008. Dependent on its successful completion the company intends to begin a bankable feasibility study as soon as possible.
Discovery’s second major project, the Dikoloti Nickel Project, is 85% owned by the company with the remainder owned by partner, Falconbridge Exploration. Dikoloti comprises four prospecting licences that cover 612 square kilometres which surround three nickel deposits owned by BCL Limited in the Selebi-Phikwe region of North East Botswana. Within 45 kilometres of the project lies BCL’s concentrating and smelter facility, which is the largest nickel processing facility in Africa.
The project currently has an inferred resource of 4.1 million tonnes at 0.7% nickel and 0.5% copper at a cut-off of 0.5% nickel. Recent testing at Dikoloti has shown that the mineralisation is open to heap leach bio-oxidation processing using GEOLE ACH technology. Greater than 74% nickel extraction from the ore was achieved after 160 days and 99% of the extracted nickel can be recovered from the bio-oxidation solution as a nickel sulphide. The heap leach approach using GEOLEACH should have capital and operating costs which are significantly lower than conventional flotation processing. Discovery is currently discussing the best strategy for the Dikoloti project. The company also has three smaller projects in Australia, although these are being farmed out to joint venture partners so that attention can be focused on Botswana.
Discovery’s overall aim is to become southern Africa’s most aggressive copper nickel project developer. By using Botswana as a base, it is looking to expand its exploration.
CURRENT TRADING
Work on the pre-feasibility study at the Zeta deposit is ongoing, with the aim of determining whether the resource can be profitably extracted via an open pit operation. A key component of the study was the drilling of 56 infill drill holes - covering a strike length of 3.95 kilometres within the central section of the resource - which was completed in late 2007. Previous studies had indicated that this section has the potential to be extracted via an open pit operation.
The drilling is also aiming to re-classify the potentially open pittable section resource from inferred to indicated status. Results received so far have been encouraging with the suggestion that the copper-silver mineralisation in the centre of the resource is both higher grade and thicker than previous drilling had indicated. An updated mineral resource including the latest drill results is expected in the very near future.
Further infill drilling is currently being undertaken at the nearby Plutus prospect as part of the pre-feasibility study, with the aim of drilling out the potentially open pittable section of the resource and upgrading the resource to indicated status. This drilling programme is expected to be completed by May 2008. Recent drilling results from the programme, which was completed at the end of 2007, have a suggested that there is further potential to increase the size of the resource as the mineralisation extends beyond the current boundary of the resource to the southwest.
Discovery had more good news recently when it announced that the strike length at the Quirinus prospect, located 15 kilometres to the southwest of Zeta, had more than doubled. Results from a soil geochemical survey indicated that the anomalous copper signature of the prospect had increased from 1,500 metres to at least 3,300 metres in strike length. Three exploration reverse circulation holes have been drilled in this area and copper-silver mineralisation of a similar style as found at Zeta, Plutus and Petra was intersected in each drill hole. Assay results are pending and a diamond drilling program similar to those used to define the other resources is planned to further assess Quirinus.
OPPORTUNITES & THREATS
Discovery faces all the usual risks associated with a junior exploration company but with good progress having been made at Maun the project has been significantly de-risked.
The company is currently investigating whether there will be sufficient water resources from underground aquifers (water bearing rock) to sustain a 10 year mining operation.
It has been estimated that a 2 million tonne per annum (Mtpa) flotation processing plant will require approximately 2Mtpa of water. It has also been estimated that project will require 19 million volts per annum of electricity by the middle of 2010. Discovery has had several meetings with the Botswana Power Corporation and the organisation has advised that it is in the process of upgrading the Morupule power station with new capacity sufficient to satisfy the requirements of the Maun project, to come online in 2010.
An environmental impact study for the project is ongoing and a baseline report is expected to be completed in October 2008.
In terms of political risk Botswana is one of the most favourable countries in Africa in which to do business. The country has a multi-party democracy and a strong history of mining. Botswana is currently one of the world’s largest producers of diamonds, revenues from which have made the country relatively wealthy and have contributed to it having a very high sovereign credit rating. Botswana is regularly noted for its low level of corruption, being rated as one of the least corrupt countries on the continent.
Funding wise Discovery had AUD$10.5 million (£4.8 million) in cash at the end of December 2007. We have learned the balance now stands at around AUD$9 million (£4.1 million) and is sufficient to take the company through pre-feasibility at its lead project. When and if the pre-feasibility study is completed successfully the company will require new funding, but with listings on three separate exchanges there will be plenty of investors to target.
RECOMMENDATION
During the third quarter of calendar 2007 Snowden Mining Industry Consultants completed a discounted cash flow analysis for the Zeta and Petra resources. To calculate the net present value for the combined resources the capital cost of a flotation processing plant was estimated at US$55 million for a 2 Mtpa plant and US $62 million for a 3 Mtpa plant. A discount rate of 10% was applied.
Using a copper price of US $2/lb, 2 Mtpa processing rate and 50˚ open pit walls the combined inferred resources of Zeta and Petra were valued at an NPV of US$80 million (£40 million). If the processing rate is increased to 3Mtpa and a copper price of US$2.50/lb is used, the project NPV increases to US$180 million (£90 million). Copper is currently trading at US$3.8/lb, providing significant upside to these numbers.
Additionally, Snowden concluded that further open pittable copper resources at Zeta and Petra had the potential to significantly increase the overall NPV of the project.
A re-evaluation of the economics of Dikoloti in November 2006 by Snowden suggested that the deposit could potentially produce a net present value of $54 million. That was based on a nickel price of US$22,000. Although nickel prices have come down from highs of over US$54,000 a tonne over the past year or so, the current price is still high by historical standards, hovering around US$29,000 a tonne as we write.
Even the lowest NPV valuation of the resources at Zeta and Petra values the company at significantly more than its current market capitalisation. Considering that this valuation did not take into account the inferred resources at Plutus and that the copper price is currently almost double the US $2/lb price used in that scenario then we believe that there is significant upside potential in the shares. Although Dikoloti is currently on the back burner it provides further potential going forward as does the exploration upside. The house broker has a 63p per share target for Discovery.
With a constant stream of newsflow expected over the coming months there will be many opportunities for the share price to be driven towards this target as Maun continues to be moved closer to production. BUY.
Key Data
EPIC: DME
Market: AIM
Spread: 19.5p - 21.5p (.9%)
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