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Blackswan Equities ups Discovery Metals valuation, maintains 90 pence target and 'buy' rating

Investment advisory service Blackswan Equities responded to a recent quarterly report from Discovery Metals (AIM: DME) by revising its forecasts to incorporate updated consensus metals prices and an underground extension of the Boseto copper mine in Botswana.

The 'buy' recommendation and the price target of 90 pence were left unchanged.

In its report released late last month, the company reaffirmed that it was on track to complete the BFS (bankable feasibility study) for Boseto in March 2010, with first production targeted by mid-2011. Blackswan expects Boseto to be operating at full capacity by FY2012, producing 25 ktpa (kilotonnes per annum) of copper and 700 kozpa (thousand ounces per annum) of silver in concentrate at a total cash cost of US$1.15/lb, while Discovery’s own guidance stands at US$1.04/lb.

Blackswan’s report projected the company’s share price to remain strong on the back of positive news flow in the first half of the current year as it achieves a number of milestones, including the completion of the BFS, securing project financing and locking in off-take.

The company has so far drilled just 5% of the 1,300 km (kilometre) long prospective strike length it holds in Boseto with Blackswan saying that substantial resource growth was likely to be delivered over the medium-term through regional exploration with the potential to discover additional resources, which would support another Boseto-sized operation in Botswana.

The near-term earnings forecasts were left unchanged, while the 2012 NPAT (net profit after tax) forecast was upped to US$79.5 million from the previous US$53.7 million on the back of higher copper price assumptions.

Blackswan’s projections for the company’s pre-tax profits stand at A$0.2 million in 2011 and A$113.5 million in 2012 following a loss of A$3.1 million in 2010, while revenues are expected to amount to A$0.4 million, A$19.5 million and A$221.2 million in 2010, 2011 and 2012 respectively.

Discovery had US$17.6 million in cash at the end of last year, which the research house said would be sufficient to fund the completion of the BFS and enable the company to shorten the development time-frame by making deposits for long-lead items.

Another change had to do with the inclusion of 10 Mt (million tonnes) of underground ore into the forecasts, extending the expected mine life at Boseto by five years and adding US$0.18 per share to valuation.

Blackswan’s Boseto copper NPV (net present value) of US$233 million is now based on a 30 Mt mining reserve being mined over a 15 year mine life with underground mine commencing in 2021 to provide the additional five years.

Boseto currently has an inferred resource of 60 Mt grading 1.4% copper and 19.5 g/t (grammes per tonne) silver. The forecasts are based on a 2 Mtpa (million tonnes per annum) thoughput rate, though the plant is being built with an expansion to 3 Mtpa in mind.

The copper price forecasts for Boseto were changed to a long-term assumption of US$2.25/lb by June 2012.

Disclosure: The author holds no positions in the company