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Discovery Metals

Discovery Metals: Solid Progress at Muan Copper Project

Discovery Metals has enjoyed a positive start to life in London. Since completing a secondary listing on AIM, the would-be copper producer have moved from approximately 18 pence to hit 26 pence this week, buoyed by positive news flow emanating from its flagship asset, the Maun Copper Project in Botswana. Already well regarded for its diamond prospectivity, Botswana is also an excellent destination for many other mineral deposits, including copper and nickel.

Discovery Metals started life as Discovery Nickel, initially focusing on grassroots nickel exploration in the north and western regions of Australia. This all changed in 2004 when the company took an option (from Falconbridge) to earn into the Dikoloti Nickel Project in north-eastern Botswana. One year later Maun was added to the portfolio and the company underwent a name change to reflect its more diversified project pipeline. Discovery Metals has also been busy on the corporate front, adding listings on the Botswana Stock Exchange and AIM to its ASX listing. The attention not only to exploration and development activities, but also due care to corporate development of the business, is reflected by the senior management within the company. A good mix of accountants, mining engineers and exploration geologists, all with considerable experience in the mining industry, shows through in interviews with the company. A common criticism laid at the foot of mineral exploration companies is a lop-sided board of directors – not an issue with Discovery Metals.

Discovery 'ticks the boxes' in many other aspects too. 'Country risk' is often an area of concern for investors, and there are a number of companies listed on AIM with considerable potential to reward shareholders handsomely, but their shares are discounted because of their location. Botswana on the other hand, is often regarded as one of the best destinations in the world for mining companies, up there with Australia, Canada, Chile, and some of its more stable neighbours in Southern Africa. The country is sparsely populated with vast mineral wealth, and is politically stable with a very positive backdrop for mineral development activities. This is reflected in a number of mining companies listing on the Botswana Stock Exchange. Not a stock exchange that's well known outside of Africa, but if you are a mining company with a serious project in the country, considerable capital can be raised from large investment funds that are keen to invest locally and 23% of Discovery's shares are already held in Botswana. Other notables on the shareholder register include Macquarie Bank (10%), Commodity trading group Trafigura (3.4%) and Fleming Asset Management (1.9%).

Despite the Dikoloti Nickel Project being picked up one year before Maun, the current focus of the business is most certainly its copper project. Maun is located on the Botswana side of the Kalahari Copper Belt, and in close proximately to Africa Copper's (AIM: ACU) Dukwe Project. The company is more than happy to be mentioned in the same breath as Africa Copper and, in many ways the two projects are eerily similar. This offers a relatively straightforward comparison and insight as the Dukwe Project is around two years ahead of Maun, so the development of Dukwe can be used as a guideline to how things may unfold for Discovery Metals.

Progress at Maun in 2007 has been impressive, and the company is well on its way to its stated target of defining 60 million tonnes at an average grade of 1.4% copper. In the last few days the company has released an updated resource estimate for the project, bringing the cumulative copper resource estimate up by 130% inside 12 months. The most recent statement upped the copper resource by a robust 46% - the increase came from the first resource estimate at the Plutus prospect, where the company has now outlined an inferred resource of 14.5 million tonnes grading 1.3% copper and 13 grams per tonne silver, using a 0.6% cut-off grade. The silver credits will effectively add 0.1% to the copper equivalent grade. The total inferred resource for Maun now stands at 46.1 million tonnes grading 1.3% copper (or 1.4% copper equivalent), still using a 0.6% cut off grade.

Discovery currently has a pre-feasibility underway on the Zeta and Petra prospects where an inferred resource of 31.6 million tonnes grading 1.3% copper, using a 0.6% cut-off grade, has been defined. Ore zones at Zeta tend to be 5 to 10 metres in thickness and grades vary between 1.5-2% copper; whilst at Petra, grades are lower and the ore bodies are thinner. Drilling, to date, has confirmed the ore body to a depth of 360 metres at Zeta. A number of factors are under consideration by Snowden Mining consultants, one of Australia's most respected consulting firms, such as whether the mine would be best operated as a 2 million or 3 million tonnes per annum operation, and what is the best pit optimisation for the project. To date, test work using conventional floatation techniques has resulted in recoveries of 95% for the copper and 80% for the silver, producing a clean, high grade concentrate with a ball park figure of 35% copper. The geology of Maun lends itself to open pit mining, with the size and length of the pit determined, to an extent, by the prevailing copper price. Discovery believes this project is robust at $1.50/lb copper, and very robust at $2.50/lb copper.

What does it all mean? To date, this project has shown robust characteristics combined with low country risk, good management and shareholder support. In a nutshell, we don't think Discovery Metals has put a foot wrong at Maun. The news flow will keep coming too. Off-take negotiations are already underway, the pre-feasibility study is expected in the second quarter of 2008, and further drilling will both increase the size of the resource and start upgrading the current resource into higher confidence categories of indicated and measured. The end result is the decision which, barring a collapse in the copper price, seems almost a certainty; to initiate a bankable feasibility study in 2008 with mine development pencilled in for 2009. Of course this will require more cash from investors, but with stakeholders in Australia, London and Botswana, the company is well positioned to raise additional debt and equity.

There is more to Discovery than Maun, too.

The company is considering the possibility of installing a heap leach bio-oxidation plant at the Dikoloti Nickel Project. Dikoloti has refractory ore so, to date, the key issue has been sussing the metallurgy and if that can be cracked the project could be a good earner. Preliminary studies have been encouraging, with recoveries of 96% reported in batch tests. Discovery has modelled a 400,000 tonnes per annum plant - costing approximately US$15 million to build which would produce 1,800 tonnes of nickel per annum. Payback at current metal prices would be less than 12 months.

UK broker to Discovery Metals, Fox-Davies Capital, reiterated their buy stance this week and upped the share price target to 63 pence. Fox-Davies points out that to date the Company has had a discovery cost of A$0.005/lb copper, spending a modest AUD$2.25 million in 2007 on drilling, yet more than doubling the resource and there is still plenty of scope for additional tonnage - Petra, Zeta and Plutus all remain open to the south-west, north-east and at depth.

This paints a very rosy picture for Discovery Metals going into 2008. The Maun copper project is shaping up nicely and the Dikoloti Nickel Project could be an added bonus if the metallurgy can be confirmed on a commercial scale. We will be closely watching how events unfold over the next 12 months.