Donner on life-support after losing Bracemac-McLeod

Despite a valiant attempt to raise capital, Donner Metals (TSXV: DON; US-OTC: DONFF) defaulted on a payment owed to Glencore Xstrata (LSE: GLEN) and as a result handed over its 35% interest in the Bracemac-McLeod mine to Sandstorm Metals & Energy (TSXV: SND; US-OTC: STTYF).

The company had tried to raise funds it needed leading up to the payment due date, but with low metal prices and tight capital markets, it came up short. As of Aug. 8 Donner said it had raised $3 million with a private placement, but needed to pay Glencore $4.3 million to cover its share of monthly expenses at the mine.

Bracemac-McLeod is a zinc-copper mine in Quebec’s Matagami camp operated by Glencore Xstrata, which holds the remaining 65% stake.

Missing the payment put Donner in default of a metal-purchase agreement signed with Sandstorm back in 2011, and that meant that its stake in the mine fell into Sandstorm’s hands. But it didn’t stay there for long.

Sandstorm turned around and flipped its newly acquired interest in the mine to Glencore in exchange for a 3% net smelter return royalty (NSR) on all production from the mine — a move more in keeping with Sandstorm’s gold royalty and gold-streaming business model.

The situation has left Donner’s equity in a dilapidated state.

Since beginning the year in the 17¢ range, Donner shares have been on a steady march downwards, and on Sept. 4, a day after news of the forfeit was announced, its shares were trading for just half a cent.

Haywood Securities analyst Stefan Ioannou dropped formal research coverage of the company, noting that he expects the market will view Donner as little more than a shell company.

Not that Donner is walking away from the table empty-handed. With the Sandstorm deal it will get $2 million of Sandstorm’s equity, or 1.3 million shares — although those shares will likely end up going to creditors. The company secured a three-year, $6-million loan from a group of institutional Quebec lenders in March.

Sandstorm will also give the 1% NSR to Donner, although the NSR is only payable once proceeds from Sandstorm’s own 3% NSR exceed $49 million, and Ioannou says that won’t be any time soon.

“We note that a 3% NSR generates only $20 million in revenue over our modelled four-year reserve life,” he writes. “A significant, additional mineable resource would need to be identified at the mine to benefit Donner over time — on the order of over 4.5 million tonnes, in our model.”

And while Ioannou believes that the potential for the McLeod Deep deposit is enough to make such a discovery possible, he says in light of default ownership considerations “the near-term financial impact of Donner’s potential 1% NSR is a moot point.”

As for mine development at the site, Glencore is driving it on time and on budget. Unfortunately for Donner that wasn’t soon enough. Desperately needed cash flows from Bracemac-Mcleod were held up by the fact that ore from the deposit wasn’t fed into the mill until the neighbouring Perseverance mine tapped out.

So while production from Bracemac-McLeod is underway, Donner wouldn’t receive any cash flow until mid-year, due to the 30- and 90-day settlement periods for zinc and copper concentrate sales.

In connection with giving Sandstorm the 3% NSR, Glencore also gets an option to acquire 40.4 million Donner common shares and 26.5 million warrants, with a strike price of 10¢ per share. This could give Glencore a 19.5% stake in Donner — if the troubled firm can find a way to become relevant again.