Updated fairfax note puts target price of 94p on the UK shares...

Updated fairfax note puts target price of 94p on the UK shares of Discovery metals. That is one some conservative estimates and is 20% above where the shares currently trade.

Key is the statement that with Zeta underground Fairfax see the opportunity to increase mining to 4.5mtpa, being 50% more than in the BFS.

Have no idea where short term fluctuations will take this but at A$1.20 there is considerable longer term upside.

BR
Max

*Discovery Metals* (LSE:DME) ? Quarterly update highlights significant activity
Discovery Metals quarterly update highlights a particularly busy quarter with considerable progress on many fronts including: project progress with permitting and construction, major financing activities, exploration on the core copper assets as well as adding potential manganese exploration targets to the stable. We recommend investors to go the company?s website and download the full announcement for photos of construction underway at site. Following the major financing activities, the company ended the year with A$159.5m on the balance sheet.
? Boseto Copper Project ? Q4 of last year markeda number of major milestones at Boseto most notably the financing and all permitting required to start construction on the mine. The contractor Sedgman is on site and construction is underway with commissioning expected in the first half of 2012. Work is slightly delayed as approvals took a little longer than hoped, but that is not unusual in mining.
? The project development plan is starting with temporary works e.g. access and construction camp. Offsite engineering and procurement is on schedule. Process plant earthworks have been completed with Sedgman handling the progress now. Top soil has been stripped and foundations completed for the mine infrastructure.
? Zeta Underground ? Evaluation of an underground mine at Zeta as part of the Definitive Feasibility Study (DFS) continues. Underground mining at 1.5mtpa of ore is intended to phase in to open pit mining later on to feed the mill at the capacity of 3mtpa. Although not reflected in our model, we anticipate that there is scope to expand the mill and maintain open pit mining rates of 3mtpa of ore and add the 1.5mtpa of underground ore on top rather than cut back open pit operations to fill the mill. A 50 hole drill programme is in progress to improve confidence in grade estimation which has returned some very encouraging intersections with high grades e.g. 2.0% copper over significant widths across over 1km strike length. We look forward to the results of the study that could demonstrate stronger economics than the scoping study completed some time ago.
? Boseto Regional Exploration ? The tenement package comprises of 14 prospective licenses covering 9,656km2 in the Kalahari copper belt in north-eastern Botswana where work has indicated 1,300km strike of favourable geology of which less than 400km has been explored with the soil programme and only 70km drill tested. Discovery has a regional geochemical sampling programme underway aimed at identifying new targets. To test the efficacy of this exploration method an orientation air core programme is underway on targets already identified, 156 hole 2,001m programme has been completed although assay results have not yet been reported.
? The tenement package could hold several Boseto sized resources (which remains open) and we look forward to the results of exploration that could identify a target for drill testing and eventually a new resource to support an additional mine. As part of this regional exploration, management plans to start a 75 hole 6,500m drill programme for completion by the end of March at the Ophion target, located around 40km southwest of the Zeta deposit of the Boseto project. This could evolve into a standalone resource and we look forward to exploration results from the drilling programme to provide an indication of the potential.
? Other Exploration: Discovery also has a JV with JOGMEC on its Dikoloti nickel project in Botswana which has an inferred resource of 4.1mt at 0.7% Ni, 0.5% Cu and 1.2ppm PGMs. JOGMEC is funding the exploration programme with some drilling completed last year. To add to this, Discovery recently secured 16 prospecting licenses covering 14,425km2 in Botswana that could host an extension of the Kalahari manganese field located in South Africa. Management intend to assess these licenses in the first half of this year.
? Valuation: We value Discovery Metals at 94p/share using an NPV on Boseto with a 9% discount rate adding in cash and US$20m for exploration. We updated our numbers to reflect the A$142m equity financing of last year, year end cash position, as well as using the latest copper forward curve for 50% of the first 2.5 years of production as we would expect from the debt package. We have assumed project debt of US$105m and expect this to be agreed in the near future. Our copper price assumption starts at 340c/lb falling to 250c/lb by 2018. We have modelled a ramp up from 0.75mt ore milled in financial year ending June 2012 rising to 3mtpa from the open pit that then goes to 1.5mtpa from 2016 as the underground is phased in. Total capex modelled amounts to around US$300m over the next 3 years which includes around US$170m for plant and mine, US$70m on the fleet (this could be financed through hire lease agreements) and US$40m (funded from cash flows in 2013) on a mini coal power station with the remainder on working and sustaining capital. Cash costs from the open pit are around 125c/lb rising to 170c/lb once the underground starts up, although we note that the underground could be considerably lower cost if higher grade zones (1.5% currently assumed) are mined, and the work from the DFS could better optimise the mine plan and reduce costs.
Conclusion: Q4 was a particularly exciting quarter for the company with major progress seen on numerous fronts. We see ongoing newsflow from construction progress at the mine, updates on exploration work as well as feasibility work on the underground mine at Zeta. Discovery remains one of the few companies with a copper mine in construction and provides excellent exposure to both the metal and the upside that follows as a mine move from development towards production. We see the mine coming on stream into an environment of high copper prices that will enhance value to shareholders, with exploration upside across the asset base that could identify future growth opportunities.
Source: Fairfax & Company data
* Fairfax acts as Nomad and Broker to Discovery Metals