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Fairfax values Discovery Metals at 44p, sees 'major upside' in Boseto copper project

Investment bank Fairfax issued a note on Discovery Metals (ASX: DML; AIM: DME), calling investment in the Botswana operating copper miner a “rare opportunity,” giving it a net present value (NYSE:NPV) of US$256 million or 44 pence per share, compared to the current value of around 33.5 pence.

The valuation, which did not include further expansion and discoveries within the company’s tenements, was based on an NPV estimate for the Boseto copper project with a 10% discount rate, which amounted to US$256 million, and copper prices starting at US$3/lb and trending down to US$2/lb by 2015 with silver prices flat at US$15/oz. The mine life estimate was extended to 15 years.

The total resource delineated at Boseto stands at 60.4 Mt (million tonnes) grading 1.4% copper and 19.5 g/t (grammes per tonne) silver measured, indicated and inferred with the contained copper amounting to 850,000t. According to Fairfax, the project’s main attractions include the very low political risk in Botswana, which also has one of the best mining jurisdictions in the world, while the project had “major upside potential” as the region around Boseto could evolve into what the investment bank called a new copper province.

The total capex of the project is estimated at US$150 million, while mill throughput is expected at 2 mtpa (million tonnes per annum), 10 year mine life processing copper and silver at 82.9% and 59%, leading to an annualized production of 25.6 ktpa (kilotonnes per annum) and 691,000 oz (ounces) of silver, which will account for 7% of total revenues.

Fairfax assumed that the company raises 50% equity at 10% discount t the current price, resulting in the issue of 139 million new shares, while the remaining capex (capital expenditure) of US$75 million would be covered by debt financing at a 10% per annum interest.

Milling costs are projected to be at US$10.31 per tonne of ore milled before Boseto is connected to the main grid, which is expected around the end of 2012. Cash costs over life of mine using these assumptions stand at US$1-1.1 per lb.

Lower recovery rates and concentrate grades during the first two years of production have also factored in the valuation. BFS (bankable feasibility study) work has indicated copper recovery of 83% and concentrate grade of 44% copper.

The company is currently fully funded to complete the BFS after raising US$14.7 million during the financial year, which Fairfax said would also allow the company explore beyond the current resource, adding that the strong cash position would help the company negotiate the full financing.

Fairfax expects the newsflow prior to project financing to comprise off-take agreements, completion of BFS, securing of financing, results of underground scoping study and exploration updates beyond the current resource. The investment bank expects to see it re-rate after the start of production, while liquidity will improve after the project financing with the issue of new shares.

Disclosure: The author holds no positions in the company