Discovery Metals 18 Jun 08

An emerging Botswana base metal producer

We have followed Discovery Metals and the steady progress the company has made on its African exploration projects for the past few years; however we believe the time is now right to introduce the company to our Members. The company has a major ground position in Botswana and is aggressively pursuing development of its primary project, which is the Maun copper deposit. The company looks cheap compared to its copper sector peers, which has prompted our initial Buy recommendation.

This is our first coverage of Discovery Metals.



From a charting perspective, we believe that Discovery Metals offers considerable upside potential over the longer term. Despite periodic bouts of volatility, a firm upward trend has emerged since 2005 and we anticipate further gains in due course.

As evident on the daily chart, firm gains between April and May saw the stock nearly double in price, reaching a high of 65 cents. Any stock would struggle to sustain such rapid gains. Discovery Metals is no exception. However, in our opinion, the softening of prices this month represents a mere pause for consolidation within the broader upward trend.

In coming weeks, we anticipate a period of consolidation above initial support at 47 cents. Such a development will provide a platform to support future gains with a break above 65 cents to target a retest of the all-time high of December at 72 cents. Given the strength of the underlying upward trend, we believe prices above here are achievable in time.



We have followed the progress of Discovery Nickel (as the company was then known) since 2004, with the company’s exploration activities then focused on grassroots projects in Western Australia and the Northern Territory.

In July 2004, the company’s exploration focus changed forever, when it signed a joint venture agreement with Falconbridge Exploration (Botswana) Pty Ltd to earn up to a 100% stake in the North Eastern Botswana Nickel Project. Discovery’s focus effectively changed from a ‘greenfields’ explorer in Australia to the developer of an advanced nickel project in Botswana.

Another significant addition to the company’s growing African project portfolio came during 2005, when it became involved in the Maun copper project in northwestern Botswana. With just under 6,500km sq km of tenements that contain significant known copper resources, this project has become Discovery’s main focus over recent years.

We also believe its worth highlighting that in addition to its primary listing on the ASX, Discovery also has its shares listed on the Botswana Stock Exchange and on the London Stock Exchange’s AIM market.

So now let’s examine Discovery’s two main projects in more detail. The company is concentrating its activities on these two projects in order to consolidate its position as one of the leading base metal exploration companies in Botswana.



Let’s begin with the Maun copper project, which comprises seven prospecting licences covering an area of almost 6,500 sq km in northwestern Botswana, within the Kalahari Copper Belt. The project covers a large area of significant copper-silver mineralisation, with the full extent of the mineralisation extending for more than 300km of strike length. This extensive tenement package is held 100% by Discovery Metals.

Discovery Metals has completed its first and second phases of drilling on the project and has so far confirmed substantial copper-silver mineralisation at both the Zeta and Petra prospects, as well as a 60% upgrade in the Inferred copper Resource base to 32.5 million tonnes grading 1.4% Cu equivalent.

Furthermore, a 7 million tonne addition to the Zeta prospect has been generated by infill and extension drilling, increasing the Inferred Resource from an initial 20 million tonnes. The resource increase has also been accompanied by an improvement in the overall copper grades from 1.2% to 1.3% Cu.

The overall Maun copper resource comprises the Zeta Inferred Resource of 27.1Mt @ 1.3% Cu and 27g/t Ag (0.6% Cu cut-off) and the Petra Inferred Resource at 4.5Mt at 1.1% Cu at a 0.6% Cu cut-off.



The recent discovery of a brand new high-grade zone of copper-silver mineralisation, comprising 14.3 million tonnes at 1.7% Cu equivalent, will also provide Discovery Metals with wider development options for an open-pit mining operation at Zeta and shorter-term cash flow and project payback benefits.

With respect to development planning, a pre-feasibility study commenced during August 2007 and is on track for completion by the middle of 2008. Assuming a successful result from the pre-feasibility study, the company plans to commence a Bankable Feasibility Study during the first quarter of 2009, with detailed engineering and construction commencing in the same year.

The company is targeting first production in late-2010 at a rate of 24,000 tonnes of copper annually. The table below demonstrates in our view how undervalued Discovery is in comparison with its copper sector peers.

But the story does not stop here. There has been exciting recent news on the discovery front, with Discovery announcing results from the first three exploration drill holes into the Quirinus prospect, which lies 15km from the current mineral resources at Zeta, Plutus and Petra.

Surface geochemical sampling had previously defined a 3,300 metre-long copper anomaly at Quirinus. The recent results confirm the presence of potentially economic mineralisation over the 600 metres of this anomaly that has now been drill-tested. Historic geochemical results suggest the anomaly in this portion of the Quirinus prospect could extend to greater than 6,000 metres along strike.

Importantly, we see a lot more resource upside at Maun, as the current resource base represents less than 5% of the potential 700km of strike length within the total tenement package. We believe the project has the potential to be a company-maker for Discovery Metals.

Now let’s turn our attention to the company’s second project, its Dikoloti nickel project. The project comprises four prospecting licences covering an area of 612 sq km, surrounding the three nickel deposits of BCL Limited in the Selebi-Phikwe region of northeastern Botswana. Discovery Metals has earned an 85% stake in the Dikoloti project from resource sector heavyweight Xstrata, which is currently diluting.

The entire project lies within 45km of BCL’s concentrating and smelter facility, which is the largest nickel processing facility in Africa. Outside of the immediate environment of BCL’s operating mines, little to no modern exploration had been conducted prior to the exploration activities of Discovery Metals.

Dikoloti currently has an Inferred Resource of 4.1 million tonnes grading 0.7% Ni, 0.5% Cu and 1.5g/t PGE’s at a cut-off of 0.5% Ni. With the sustained high in nickel prices, Snowden Mining Industry Consultants were engaged to re-evaluate the project economics of Dikoloti during November 2006.

Using a nickel price of US$22,000/tonne in their re-evaluation, Snowden’s suggested the Dikoloti deposit had the potential to produce a Net Present Value of A$54 million (up from A$24 million). At today’s nickel and copper prices, Dikoloti could generate A$40-60 million in gross revenue.

Through recent test work by Geobiotics, Discovery has found the Dikoloti nickel mineralisation to be amenable to heap leach bio-oxidation processing using the GEOLEACH™ process. Greater than 74% nickel extraction from the ore was achieved after 160 days and 99% of the extracted nickel can be recovered from the bio-oxidation solution as a nickel sulphide, by use of sodium sulphide precipitation. The heap leach approach using GEOLEACH™ should have capital and operating costs which are significantly lower than conventional flotation processing.



Finally, in a major development just last week, Discovery Metals announced that it had received formal approval for the granting of an additional seven prospecting licences in Botswana, enhancing its already substantial ground position in the country. The additional area covers 5,700 sq km stretching as a continuation from the western boundary of the company's current copper-silver tenements across to the Namibian border.

An initial assessment of the seven new tenements by the company indicates that they have the potential to contain approximately 600 strike kilometres of mineralisation of a similar style to that found in the company’s current Zeta, Plutus and Petra Inferred Mineral resources.

Discovery Metals combines an attractive portfolio of mineral assets in Africa that are at advanced stage of development. The company’s market value is modest, but the upside in our view is enormous, driven by its large ground position and the potential for more discoveries.

Accordingly, we recommend the stock as a Buy to all Members around 52.5 cents.

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