Goldman Sachs Investor Research - Discovery Metals Limited

INITIATION 

7 October 2010 

Discovery Metals Limited 

Initiating Coverage 

Materials | Metals & Mining | Australia 

*A full version of this document is available* 

Event: 

• We are initiating coverage of Discovery Metals Ltd (DML). 

Key take Outs: 

• DML is developing the Boseto copper project in Botswana and has 

extensive exploration tenements for both copper and nickel in 

Botswana. 

• To date DML has only completed exploration on sufficient strike extent 

of the known mineralisation to underpin a 3mtpa mine to produce c. 

36kt of copper and 1.1moz of silver per annum. 

• The bankable feasibility study (BFS) contemplates a US$175m capital 

investment for an open pit operation over a 5-year mine life with C1 

cash costs of US$1.28/lb but the Development Plan incorporates both 

open pit and underground operations at the same throughput rate to 

produce a similar level of copper and silver, but over a 15-year mine life 

at a marginally lower cash cost of US$1.23/lb. 

• Our estimates assume the same capital costs and production at similar 

levels but with higher unit mining costs resulting in higher cash costs of 

US$1.60/lb (LOM) but lower in the early years (driven by a lower strip 

ratio in the Zeta Pit). 

• DML plans funding through a combination of 60% debt and 40% equity 

funding with first production in early 2012. 

Earnings and Valuation Impact: 

• Prior to the commencement of production in FY12, earnings are not 

relevant. Our valuation ranges from a base of $0.91/share to upside 

of$1.20/share which is lower than the BFS (which assumes lower cost, a 

higher copper price and cost savings coming from the adoption of a new 

coal-fired power station). 

Investment View: 

• We are commencing coverage with a HOLD recommendation and a 12- 

month target price of $1.50. 

HOLD 

Key Information 

Stock Code 

DML 

Share Price $1.275 

12 Month Target Price $1.50 

Expected 12M Total Return 17.6% 

Investment Data 

Issued Capital 

302mna 

Market Capitalisation 

na 

% of S&P 200 Index na 

Free Float 100% 

Turnover 

$1.6m/month 

12 Month Price Range na¢-na¢ 

Debt/Equity 0.5% 

Investment Arithmetic 

Jun year end 10A 11E 12E 13E 

Net Profit Rep. ($m) -4.7 -9.7 18.7 136.4 

NPAT Pre-NRI's ($m) -4.7 -9.7 18.7 136.4 

EPS Adj. (¢) -2.0 -3.6 6.9 50.4 

EPS Growth (%) nm nm nm 630 

PER (x) nm nm 18.5 2.5 

Relative PER (%) nm nm 75.4 -75.3 

Dividend (¢) 0.0 0.0 0.0 0.0 

Yield (%) 0.0 0.0 0.0 0.0 

Franking (%) 0 0 0 0 

FCFPS (¢) -6.8 -4.9 4.1 73.5 

P:FCFPS (x) nm nm 31.1 1.7 

EV/EBITDA (x) nm nm 20.6 1.1 

BV (¢) 32 24 31 81 

P/BV (x) 3.9 5.4 4.1 1.6 

Av. Full Dil. Shares (m) 229.0 270.4 270.4 270.4 

Share Price Chart 

• Our strong views on the inability of global copper supply to meet our 

forecast demand drives the positive fundamental outlook for copper and 

hence our favourable pricing outlook. 

• Within our universe of copper stocks, DML has a better copper grade 

than most but has lower by-product credits and a materially higher LOM 

strip ratio, leading to an upper 3rd quartile cost curve position. 

• The key risk, in our view, is the actual unit cost of moving rock and this, 

coupled with the high strip ratio, is the major impact on total costs and 

unit costs (both per tonne and per lb). 

Relative Price Performance 

1m 3m 12m 

vs. S&P 200: 42.0% 100.1%203.8% 

vs. MSCI - World: 46.9% 110.4%208.1% 

Ian Preston | +61 3 9679 1453 | ian.preston@gs.com.au 

Paul Hissey | +61 3 9679 1779 | paul.hissey@gs.com.au 

Brett Cottrell | +61 3 9679 1565 | brett.cottrell@gs.com.au 

Source: Company data, IRESS, and GS&PA Research estimates 

Goldman Sachs & Partners Australia 

Investment Research 

All figures in A$ unless otherwise advised 

Important disclosures and the Reg AC Certification appear at the back of this report 

1

7 October 2010 Discovery Metals Limited 

RECOMMENDATION - Our Thinking 

RECOMMENDATION: 

HOLD 

Stock Code: DML Rationale: -ve Neut +ve 

Share Price: $ 1.28 Industry Structure: 

Valuation: $ 0.91 EVA Trend: 

Earnings Momentum: 

Catalysts: 

Price / Valuation: 

 

 

 

We are initiating coverage with a neutral recommendation and a 12-month target price of 

$1.50. 

Our positive view of copper is driven by our view that the market is moving to an ongoing 

deficit which will require a higher copper price, both to allow lower grade and less profitable 

greenfield projects to be developed over time and to destroy some demand from those areas 

where substitution can take place. 

DML controls a significant area of copper mineralisation within the Botswana Kalahari 

Copperbelt which is thought to be a continuation of the renowned Zambian Copperbelt. 

The geology appears to be well understood and DML is proposing a combined open pit and 

underground mining operation and, given the extensive strike continuity of the orebody, 

should be able to extend the mine life by progressively adding to the strike extent of mining. 

Whilst there has been only limited deeper drilling to date, the nature of the orebody (sharp 

geological cut-offs on the F/W and some mineralisation into the H/W) suggest that it will be 

amenable to mechanised underground mining at similar (or better) grade than the open pit. 

The two key operational risks that we can identify are the average strip ratio 15.9:1 (LOM) in 

the development case and the percentages of oxide and transition ore versus sulphide ore 

which will impact overall recoveries. 

We can identify with a strategy of limiting the open pit depth of mining to lower the waste 

stripping and thus LOM strip ratio (but this does mean that there will be a higher percentage 

of oxide and transition ore) and increasing the strike extent of the open pit, or more 

accurately strip mine, to maintain the overall open pit tonnage. 

The second key risk is the cost of actually moving a tonne of material. DML has synthesised a 

material movement cost of US$1.35/tonne which we find extremely low but acknowledge 

that the strip mining may allow less waste handling, leading to a lowering of waste haul 

distances, etc. Nonetheless, this unit cost/tonne is significantly lower than that of any of the 

other companies we cover. 

Corporate Structure 

• Discovery Metals is listed on the following markets: 

• Australian Stock Exchange (ASX: DML) - December 2003 

• Botswana Stock Exchange (BSE: DML) - December 2006 

• Alternative Investment Market (AIM: DME) - June 2007 

• The company has a June year-end and reports in AUD. 



All figures in A$ unless otherwise advised 2


Botswana Background (Snowden Technical Report) 

Background 

• Botswana was formerly a British Colony (Bechuanaland) which gained independence 

from Britain in 1966. Since then, Botswana has enjoyed consistent economic growth 

based principally on diamond mining (also potash, copper, iron ore, nickel, salt and 

silver) and tourism. 

• Similarly to both Zambia and Senegal, Botswana has had civilian governments since 

Independence without any coup d'etat. 

• Botswana occupies a land mass of ~587,000km 2 which is relatively flat (lowest point the 

junction of the Limpopo and Sashe rivers (513m) and the highest point the Tsodilo Hills 

in the extreme north west of the country (1,489m). The country has a semi-arid climate 

with warm winters and hot summers. 

• Botswana is land locked with Namibia to the west, Angola and Zambia to the north, 

Zimbabwe to the east and South Africa to the south. 

• Botswana is a parliamentary republic with an elected President (Head of State) and 

Government and a cabinet appointed by the President. Elections are for 5-year terms 

with the HOS able to be re-elected for a second term. 

• The economy is dominated by diamond mining, accounting for >33% of GDP and 70% - 

80% of export earnings. Other mining, tourism, financial services, subsistence farming 

and cattle raising provide the balance of the economy. 

• Botswana's GDP of US$10.94bn (official exchange rate) or US$26bn at purchasing power 

parity breaks down as: 

Industry ............. 52.6% 

Services ............. 45.8% 

Agriculture ............ 1.6% 

• Prior to the Global Financial Crisis (GFC), Botswana had enjoyed strong GDP growth of 

5.2% 2009; 2.9% 2008 and 4.4% 2007. 

• As with much of Africa, unofficial unemployment is ~40%, although official 

unemployment is much lower at 7.5% (2007) with HIV a major issue in the country and 

reportedly the 2nd highest in the world. 

• The official currency is the Pula which is essentially fixed to the South African Rand and 

the country has public debt of 17.9% of GDP (2009) up from 5.9% (2008); foreign debt 

of US$1.65bn but also foreign reserves of US$9.575bn (2009). 

• The Botswana legal system is based on Roman Dutch law but also includes local 

customary law with judicial review limited to matters of interpretation. 

Botswana Mining Code 

• Mining legislation in Botswana is covered by the Mines and Minerals Act, 1999 - based 

generally on Australian and Canadian models. Mineral rights are therefore vested in the 

Republic of Botswana. 

• The Act provides security of tenure and, although the previous right to free equity for the 

government has been abolished, it retains the right to earn up to 15% as a minority 

interest, with the government paying a pro-rata share for its interest. 

• Mining attracts a variable income tax rate (with the exception of diamonds - which have 

a separate agreement) which is typically 25%, but slides up to a maximum of 50% 

determined annually by reference to the company's profit ratio. 

• Royalties are calculated as a percentage of the gross market value of the mineral and 

are 3% for copper and 5% for silver. 

• Applications for mineral rights are made directly to the Minister of Mineral Resources and 

Water Affairs. There are four types of mineral rights in Botswana: a prospecting licence, 

a retention licence, a mining lease and a mineral permit and these can be granted to an 

individual or a company. 





Prospecting licence 

• A single prospecting licence is restricted to a maximum area of 1,000km 2 and confers 

exclusive rights on the holder over the mineral applied for as specified in the licence. If 

further minerals are discovered during prospecting, the prospecting licence may be 

amended accordingly to include the mineral concerned. 

• A prospecting licence is granted for a term of up to three years, renewable for two 

further periods of two years each. A reduction by 50% of the licence area is required at 

each renewal. Prospecting licences are transferable with the consent of the Minister. 

Among the obligations under the licence are scheduled exploration expenditures, 

reporting requirements and scheduled payments per square kilometre for exploration 

right (i.e. rentals). 

Retention licence 

• Retention licences are granted where minerals have been found during prospecting, but 

are not economically viable to mine in the short term. A retention licence must be 

applied for not less than three months prior to the expiry of the prospecting licence 

concerned. The applicant must show that it has carried out a feasibility study on the 

deposit and demonstrate that it cannot be mined on a profitable basis at the time of the 

application. A retention licence is granted for a three-year period and may be renewed 

only once for a further three-year period. The retention licence must be maintained in a 

safe condition and, within two months of expiry of the licence, all equipment and 

infrastructure must be removed. Quarterly reports of any prospecting activities on the 

retention licence must be filed to the Minister. 

• A person or company holding a retention licence is entitled to apply for a mining lease 

over that retention area. The retention licence is transferable, subject to the approval of 

the Minister. 

Mining lease 

• A mining lease is only issued to a prospecting licence or retention licence holder over the 

ore deposit in question. An application for a mining lease may only be made by a 

company incorporated in Botswana. A mining lease is granted subject to specified 

conditions, and the proposed financing plan submitted as part of the feasibility study 

must provide for a debt to equity ratio of no more than 3:1. The lease is valid for a 25- 

year term and may be renewed for another period not exceeding 25 years. Mining leases 

are transferable with the approval of the Minister. The proposed mining area should only 

cover that area reasonably required for surface mining and treatment facilities and also 

to cover the Measured, Indicated and Inferred Mineral Resources. 

• The holder of a mining lease has the right to conduct operations in accordance within the 

area and time limit specified in the licence, including acquiring the necessary land use 

rights, constructing facilities and carrying out work on the lease area and selling the 

mineral products resulting from its work. Among other requirements, the applicant for a 

mining lease must present and have approved a plan for developing and utilising the 

mineral resources and an environmental impact assessment. 

• The environmental impact assessment must consider the following issues: 

− 

− 

− 

− 

− 

− 

− 

− 

− 

an overview of the project and motivation; 

description of the pre-mining environment (geology, climate, topography, soil, land 

use); 

ecology, animal life, former and current mining operations, surface water, ground 

water, air; 

quality, noise and vibration, archaeological and cultural aspects, sensitive 

landscapes; 

protected areas, visual aspects, regional and socio-economic infrastructure); 

detailed project description; 

environmental impact assessment (separated by phase – construction, operational, 

decommissioning, residual impacts); 

environmental management programme; and 

consultation process. 





DML has an approved EIA for a 2mtpa process plant and has applied to increase the 

annual throughput rate to 3mtpa. This approval is expected in CY10. 

Minerals permit 

• A person wishing to conduct small-scale mining operations (over an area not exceeding 

0.5km 2 ) may apply for a minerals permit, subject to the written permission of the land 

owner, land board or the holder of any other mineral concession over the land applied 

for. Permits for industrial minerals shall only be granted to citizens of Botswana or 

companies incorporated therein. A minerals permit is valid for 5 years, renewable for 

further periods of 5 years. A minerals permit is transferable subject to the approval of 

the Minister. 

Botswana Royalty and Taxation 

Royalty 

The royalty is 3% ad valorem for copper and 5% ad valorem for silver. 

Taxation 

Botswana allows 100% write-off of capital expenditure and pre-production capital before tax 

becomes payable. 

The minimum tax rate is 25% and there is in addition a sliding-scale tax rate that is based on 

the profitability of the operation according to the formula: 

Y = 70 – (1500/X) Y is the tax rate (minimum 25%); X is the profitability ratio. 

On our estimates, in the period to 2015 in an elevated copper price environment, we 

calculate a total tax rate of ~27.5%, ie. A 2.5% variable tax in addition to the 25% base tax 

rate. 

Botswana Government Option 

The Government has a one-off statutory option to acquire at market price (bankable 

feasibility study (BFS) valuation) up to 15% of the project at the time of granting the mining 

licence. Should this option be exercised, the Botswana Government becomes a direct 

shareholder in the company (project) with a requirement to contribute a share of capital and 

in return receive a share of dividends and distributions, etc. 

However, since the introduction of this legislation in 1999, the Government has not exercised 

this option in any mining development. 

Botswana Infrastructure 

Botswana is well-serviced by road, rail and power reticulation and has international air links 

to neighbouring countries. 

However, the net power demand exceeds in-country power generation and thus Botswana is 

an importer of power, mainly from South Africa. Currently Botswana Power Corporation 

(BPC) generates ~80% of required power with the balance of power imported from the 

Southern African Power Grid. There are plans for additional coal-fired power generation 

plants in Botswana which should result in Botswana becoming power self-sufficient by 2013. 

Specifically, expansion of the Morupule Power Plant, Mmamabula and the potential 

Independent Power Plant – Mookane – may see Botswana becoming a net exporter of power 

to the grid. 

With respect to water, Botswana is an arid country with limited water resources. However, 

there are a number of known aquifers which can be tapped into and provide sufficient water 

for all DML’s needs. 

Discovery Minerals 

DML currently has two assets in Botswana. The primary focus of its activities is the Boseto 

Copper Project, for which DML has recently concluded a BFS. This project contains several 

lenses of mineralisation, with the first, Zeta, due to commence production in Q4CY11. 

The second project, Dikoloti Nickel, is less advanced and currently undergoing further 

exploration in order to increase the resource base. We have included a map of DML's 

properties below. 





Source: Company data 

Boseto Copper Project (BCP) 

Highlights 

• Located in north-west Botswana, DML commenced a pre-feasibility study in August 2007 

and announced the outcomes of the BFS at the end of August 2010. A summary of the 

project is included below: 

− Extended Pre-Feasibility Study update in January 2009. 

− Definitive Feasibility Study and Development Plan September 2010. 

− 

− 

− 

− 

Open pit mine with 15-year mine life through a combination of open pit and 

underground mining. 

3mtpa conventional flotation concentrator-Recoveries of 83.6% Cu and 61% Ag. 

To produce 36.4kt Cu and 1.1moz Ag per annum (in concentrate 41% Cu grade). 

CAPEX of US$175m and net cash cost US$1.23/lb. 

− NPV of US$375m at a copper price of US$3.00lb and US$17/oz silver at a 10% 

discount rate and inclusive of coal-fired power. 

• Three strike zones containing 102.8mt of Mineral Resources: 

− Zeta: 35.4mt @ 1.4% Cu and 22.3g/t Ag 

− Plutus: 22.6mt @ 1.5% Cu and 15.3g/t Ag 

− Plutus (NE): 14.9mt @ 1.2% Cu and 12.5g/t Ag 

− Petra: 12.7mt @ 1.3% Cu and 15.0g/t Ag 

− Petra (SW): 17.2mt @ 1.4% Cu and 17.3g/t Ag 

Introduction 

Discovery Metals' Boseto Copper Project (100% owned) is located in north-west Botswana, 

approximately 80km south-west of the town of Maun, within the district of Namaqualand. A 

seven-tenement package was granted to Discovery Metals in September 2005 and fieldwork 

on this tenement package commenced in October 2005. The Government of Botswana 

approved the company's renewal of these tenements in September 2008 and all prospective 

areas were retained by the company. 

In June 2008, Discovery Metals was granted an additional seven tenements extending from 

the south-west boundary of the original 2005 granted tenements through to the Namibian 

border, adding 5,700km 2 to the area held under prospecting licences, to bring the total 

tenement area to 10,100km 2 . In September 2010, DML relinquished 444km 2 as required to 





have a current exploration tenement package of 9,656km 2 . The outer limit of the exploration 

licence area starts approximately 60km south-west of Maun and stretches in a south-westerly 

direction for approximately 300km to the Namibian border. 

The Boseto Copper Project is located within a belt of significant copper-silver mineralisation 

that extends from the well known and more highly developed Zambian Copperbelt across 

north-west Botswana and into Namibia. The poorly explored and undeveloped portion of this 

belt in north-west Botswana is known as the Kalahari Copperbelt. 

Copper in the Boseto Project area occurs predominantly in chalcocite, with minor amounts of 

bornite and other copper sulphides present. At shallow depths, malachite and chrysocolla 

exist in significant proportions within some areas of the mineral resource. 

Resources and Reserves 

Both the current resources and reserve estimates for Boseto have been used as a base input 

for the completion of recent studies by DML. The BFS has taken into account the reserves, 

with the development plan utilising additional material in the mineral resource category. 

Resources 

This resource has been generated from infill drilling associated with the BFS and is current as 

at 31 August 2010. We have reproduced the resource below: 

Boseto Mineral Resource 

Tonnes Grade Metal 

Zeta mt Cu (%) Ag (g/t) Cu kt Ag moz 

Measured 3.9 1.6 23.0 62.4 2.9 

Indicated 7.0 1.5 23.8 105.0 5.4 

Inferred 24.5 1.4 21.8 343.0 17.2 

Total 35.4 1.4 22.3 510.4 25.4 

Plutus and Petra 

Measured 0.1 1.3 11.4 1.3 0.0 

Indicated 11.5 1.4 14.1 161.0 5.2 

Inferred 55.8 1.4 14.8 781.2 26.6 

Total 67.4 1.4 14.7 943.5 31.8 

Total 102.8 1.4 17.3 1454 57 


Reported at a cut-off grade of 0.6% Cu 

Reserves 

Following the release of the BFS on 31 August 2010, we have included the resultant ore 

reserves. Key assumptions used by DML include: 

‣ Copper price US$3.00/lb 

‣ Silver price: US$17/oz 

‣ Copper cut-off grade of 0.6% Cu 

‣ Only those portions of the resource amenable to open pit mining have been included in 

the ore reserve statement. 

The ore reserve statement is: 

Boseto Ore Reserve 

Tonnes 

Grade 

Metal 

Zeta mt Cu (%) Ag (g/t) Cu kt Ag moz 

Proved 4 1.6 22.1 64 3 

Probable 6.5 1.5 23.6 98 5 

Total 10.5 1.5 23.0 158 8 

Plutus and Petra 

Proved 0.2 1.3 11 3 0 

Probable 11.1 1.36 14.5 151 5 

Total 11.3 1.3 14.5 147 5 

Total 21.8 1.4 18.5 305 13 


Reported at a cut-off grade of 0.6% Cu 





Mine Plan 

• The BFS released in late August 2010 outlines a mine plan for BCP, which will see it 

commence production as an open pit in late 2011. In conjunction with this, DML also 

released a development plan, which incorporates additional mineralised material which is 

not of sufficient confidence to be promoted to reserves. We have, where applicable, 

assumed some material outlined in the development plan as part of our base case. In 

effect, we have modelled both open pit and underground mining in our base estimate. 

• Our current base case for DML assumes the construction and operation of Boseto open 

pit for the initial 3 years followed by the addition of an underground mine from 2015. 

Combined production would remain at 3mtpa, increasing to 3.5mtpa (GS&PA estimates) 

as operations are optimised with ore being sourced initially equally from the two 

operations, but at the expanded rate 2mtpa (open pit) and 1.5mtpa (underground). 

• Our key production assumptions compared to the BFS are shown below: 

GS&PA 

DML 

Production Metrics 

Annual Production mtpa 3.0 3.0 

Strip Ratio waste:ore 15 15 

Cu feed grade % 1.5 1.5 

Cu recovery % 84.0 84.0 

Cu production kt Cu 36.4 36.4 

Ag feed grade g/t 20.2 20.2 

Ag recovery % 61.0 61.0 

Ag production moz 1.1 1.1 

Source: Company data, GS&PA Research estimates 

Capital Cost 

DML's pre-feasibility study capital estimate for a 2mtpa plant was US$185m which was 

updated in September 2009 to US$150m. More recently, DML has increased the planned 

throughput rate from 2mtpa to 3mtpa and advised that the contracted capital cost for the 

plant to be ~US$91m and that the total capital cost of construction of the operation at 

Boseto will be in the order of US$175m (including contingencies). 

A breakdown of these capital costs is included below. 

Capital Items 

US$m 

Process plant - fixed price EPCM 91.2 

First fills and spares 10.3 

Tailings storage facility 2.7 

Diesel power generators 10.7 

Roads, offices, workshope, land compensation 13.1 

Process and mine control systems 8.0 

Village infrastructure 15.5 

Temp. Infrastructure 8.7 

Owners Team 3.6 

Subtotal 163.8 

Contigency & escalation 11.2 

Total 175.0 


Operating Cost 

DML has provided guidance as to its expected operating cost of BCP during the initial start-up 

when the project will still have a debt repayment requirement. We have adjusted these as we 

see fit. A summary of the operating costs we have used in our estimates versus the BFS is 

included below. The key difference that we have allowed for is a higher unit cost for moving 

material. 





GS&PA 

DML 

Production Costs 

Mining cost - Open Pit US$/t ore 21.0 21.6 

Mining cost - Underground US$/t ore 37.5 37.5 

Processing cost US$/t 10.35 10.34 

G&A cost US$/t 2.75 2.74 

Average Site Cost US$/t 43.3 34.68 

TC/RC^ $t, ¢/lb $53, 5.3¢ $45, 4.5¢ 

Transport US$/t 180.0 180.0 


^average FY12-FY15 

Mining Costs 

DML has provided a breakdown of the major costs. In our view, the US$1.35/tonne of 

material mined is low in comparison with other operations that we cover. We have used a 

more conservative US$1.50/t. 

In the early stages we have assumed a strip ratio of 13:1 and a cost of material movement 

of US$1.50/t. This translates to a unit cost for the period FY12 - FY14 of US$1.50/lb including 

the ramp-up stage. 

Once both the underground and open pit operations are operational we assume a 15:1 strip 

ratio with 2mtpa of open pit and 1.5mtpa from underground with an overall cash cost of 

US$1.74/lb (and assumes the LT TC/RC of US$90/t and US 9c/lb). 

Underground 

An addition to the BFS is the anticipation of the commencement of underground mining from 

~FY15. The need for this method has arisen due to the increasing strip ratio required to 

extract the relatively thin seam of ore in each of the lenses at greater depths. To date, the 

underground component has only been assessed as a development plan, given there is 

currently insufficient indicated and measured resources available for conversion to ore 

reserves (as a result of economic feasibility). We have, however, assumed some of this 

material is mined in our base case. The large resource base (>100mt) has led to the increase 

in the proposed capacity of the processing plant (along with an ever-expanding resource 

base) from 2mtpa to 3mtpa (we assume that the plant will operate above nameplate capacity 

at 3.5mtpa once limited debottlenecking is carried out). 

The underground development plan (scoping study) is focussed only on the Zeta zone on the 

higher grade copper zone (Cu >1.5% Cu) over 2,000 metres on strike and to a depth which 

varies between 100m and 650m depth. The scoping study evaluated the 25mt @ 1.4% Cu 

and 23.1g/t Ag to a maximum depth of 360m. DML estimated a low capital cost of US$10m. 

DML evaluated some 2,000m of strike broken into two operating sections each serviced by a 

separate decline. The design is based on a total of 13 strike drives situated some 20m 

vertically apart to a depth of ~360m although the deposit remains open below this depth. 

DML envisage a conventional uphole retreat mining method using a top-down mining system 

which limits the ongoing development requirements. DML does not envisage using any backfill 

in order to lower the costs, with the geotechnical stability thus dependent upon rib and sill 

pillars. DML reports that the H/W is competent but does contain mineralisation and thus any 

dilution does carry some grade. 

Bogging will be with remote or tele-remote loaders. 

We note that the oxide ore goes to a depth of 10m to 25m, transition ore from 25m to ~35m 

before moving into sulphide ore. The underground operation will thus increase the 

percentage of sulphide ore reporting to the plant. 

DML anticipates unit costs ~US$37/t off ore with decline costs of US$3,200/metre and 

US$2,900/metre for the strike development. Capital costs were estimated at US$5m at each 

decline and sustaining capital of US$3.5m/annum. We believe that these costs are realistic 





and may perhaps be considered conservative once full steady-state operations are 

established. 

DML assumed mining recovery rates of 68% and unplanned dilution of 5% in the scoping 

study. 

We have included the proposed underground mining operation into our base case, as we 

think it is highly likely that this will proceed. 

Processing 

DML proposes a conventional copper concentrator plant incorporating 3-stage crushing and 

single-stage milling (and a regrind milling circuit) followed by two separate concentrate 

circuits. DML plans to first float the sulphide material with the tails (including oxide material) 

then reporting to an oxide circuit. Each concentrate circuit incorporates 3-stage concentrator; 

rougher, secondary and cleaner circuits. 

Recoveries will vary from ~60% in oxide to +92% - 95% for the sulphide to give the overall 

~84% recovery. Given the mineralogy (chalcocite and bornite), DML anticipates producing a 

very high grade concentrate grading ~41% copper. 

Timeline 

DML anticipates completing the project finance in 2010 with construction to commence 

shortly thereafter and 1st production early in 2012. 






Boseto Headline Outcomes 

DML released the outcome from the BFS and Development plan in late August 2010 with the 

key parameters as follows: 


DML has entered into an offtake agreement with Transamine for 100% of the concentrate 

produced for the first five years, based on normal arms length terms. In return for the 

offtake agreement, DML undertook a share placement to Transamine of 25m shares at 

A$0.76/share ( a 11% premium to the 4-week VWAP share price at the time) to raise A$18m 

in March 2010. 

DML plans to truck the concentrate to Gobabis in neighbouring Namibia (520km) then rail to 

the port of Walvis Bay (650km). 

DML has provided a table of the key sensitivities for the development, which is included 

below. In our view, the key issue for this development is the actual mining cost per tonne 

and, coupled with this, the strip ratio. Whilst we see some upside risk to the planned 

US41.35/t mining costs, we do see the ability for DML to limit the strip ratio with more ore 

being mined from underground and, given the strike extent of the ore zones, the ability to 

replace deeper open pit ore with additional shallower ore for the open pit mining. 






GS&PA Boseto Copper Profile 

Base Case 

• Our current base case for DML assumes the construction and operation of Boseto open 

pit, with a contribution from the underground operation commencing approximately 3 

years later. We allow for a mine life out to 2026 initially at 3mtpa throughput rate 

increasing to 3.5mtpa from 2018. 

• We have not made any allowances for the mix of debt:equity funding, and have assumed 

a flat grade, tonnage and cost profile for both underground and open pit operations. 

• We note that DML is proposing a 60%:40% debt:equity split. We view this as too 

aggressive and believe that at most 50% debt should be contemplated and preferably 

30%:70% as more appropriate for a single-mine, single-commodity development 

company. This should also ensure that any hedging requirement from the banks is 

minimised. In addition, it means that DML will have funds available to continue with the 

exploration programme during the construction phase of Boseto. 

• We have also not allowed for the potential cost reduction that can be achieved from the 

building and operating of a coal-fired power station to replace the diesel power 

generation included in the BFS. 

• We have taken the detail of the BFS and incorporated that into our model for Boseto, 

and, as it stands, the production profile we have considered in our base case is as 

follows: 

>>Forecasts 

>> Long Term Pricing 

Boseto Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 

Open Pit 

Tonnes mt 0.0 0.0 0.6 3.0 3.0 2.0 1.5 1.8 2.0 2.0 2.0 

Grade - Cu (%) 1.46 1.49 1.50 1.50 1.50 1.47 1.46 1.46 1.46 1.46 1.46 

Grade - Ag (g/t) 20.2 21.8 22.3 22.3 22.3 20.7 20.2 20.2 20.2 20.2 20.2 

Cost/t Ore US$/t 0 0 21 21 21 25 22 22 22 22 22 

Underground 

Tonnes mt 0.0 0.0 0.0 0.0 0.0 1.1 1.5 1.5 1.5 1.5 1.5 

Grade - Cu (%) 1.60 1.60 1.60 1.60 1.60 1.60 1.60 1.60 1.60 1.60 1.60 

Grade - Ag (g/t) 1.6 1.6 10.8 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 

Cost $/t Ore US$/t 0 0 38 38 38 38 33 33 33 33 33 

Processing 

Tons Milled (Mt) 0.00 0.00 0.60 3.00 3.00 3.00 3.00 3.25 3.50 3.50 3.50 

Grade - Cu (%) 0.00 0.00 1.50 1.50 1.50 1.52 1.53 1.52 1.52 1.52 1.52 

Grade - Ag (g/t) 0.0 0.0 11.2 22.3 22.3 20.6 20.1 20.1 20.1 20.1 20.1 

Production Copper (kt) 0 0 6 37 38 38 39 42 45 45 45 

Production Silver (koz) 201 1307 1312 1209 1183 1282 1381 1381 1381 

Costs (A$/t) 0 0 41 42 44 57 55 54 52 52 52 

Cash Costs (US¢/lb) 0 0 171 139 139 178 179 179 172 172 172 

CAPEX (US$m) 0.9 37.0 141.2 16.3 26.5 8.5 8.2 8.8 9.0 9.0 9.0 


Upside Case 

In our upside case, we have assumed there is some potential for exploitation of the Cu and 

Ni (+/- PGE) ore at Dikoloti as well as a further 10-year mine life at Boseto (out to FY36) as 

a combined underground and open pit operation. 

Dikoloti Nickel Project (DNP) 

Highlights 

• Located in north-east Botswana. 

• DML farmed into the project in July 2004 and has since acquired 85.3% of the project 

from Xstrata which retains the remaining 14.7%. 

• Marginally economic using conventional processing techniques but heap leach biooxidation 

provides a more feasible option. 

• Entire project is within 45km of BCL's concentrating and smelter facility, the largest 

nickel processing facility in Africa. 

• Resource of 4.1mt @ 0.7% Ni, 0.5% Cu and 1.2g/t PGE. 





Introduction 

• The Dikoloti Nickel Project comprises four prospecting licences covering an area of 

612km 2 , surrounding the three nickel deposits of BCL Limited in the Selebi-Phikwe region 

of NE Botswana. The entire project is 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. 

Resource 

• The current resource is early-stage, and DML has indicated it will be continuing 

exploration around this mineralised zone in order to increase the tonnage and 

confidence, before commencing any further economic studies. 

• This resource includes drilling which was completed historically as well as by DML in its 

JV with Falconbridge in 2004 and 2005. The defined limits of this resource cover 

approximately 2.4km strike length, and a maximum depth of around 100m. 

• Estimation was undertaken using ordinary kriging methods, which were constrained by 

wireframes constructed using a 0.3% Ni envelope as well as geological interpretation. 

Block sizes were based on drilling density, leading to a size of 20m x 40m x 10m (width 

x length x depth) which would seem appropriate at this stage of investigation, and an 

inferred resource category. 

• The resource also assumes a density of 3.72 t/m 3 for mineralised material and 2.85 t/m 3 

for waste. 

We have included a table outlining the existing resource for Dikoloti below: 

Dikoloti Mineral Resource (100%) Grade Metal 

mt Ni (%) Cu (%) Pt + Pd g/t Ni kt Cu kt Pt + Pd koz 

Measured - - - - - - - 

Indicated - - - - - - - 

Inferred 4.1 0.7 0.5 1.2 28.7 20.5 158.2 

Total 4.1 0.7 0.5 1.2 28.7 20.5 158.2 


Reported at a cut-off grade of 0.5% Ni 

Scoping Study 

Snowden completed a scoping level study on Dikoloti in 2006 for the likely economic benefit 

of operating an open pit, underground mine and a combined operation, with ore toll treated 

at the nearby BCL smelter. The study provided a range of outcomes, the greatest of which 

was an NPV of A$57m (100%) for a combined underground and open pit operation. We 

stress that the key assumptions used in this study may now be out of date, and have 

determined our own upside potential for this project (US$48m). 

Investment Case 

• DML uses AUD as a functional currency, although we expect the project in Botswana to 

operate in USD. The financial year-end is June. 

Earnings 

Our current earnings forecasts are based on a combination of both the BFS (which comprises 

open pit mining) and the introduction of underground ore from FY15 (outlined in the 

development plan). We have included this material as we believe the underground operation 

is highly likely, and has been excluded from the BFS because there has been insufficient 

drilling to prove the resource up to a level which can support an economic evaluation (as a 

reserve). The geology appears relatively simple and we feel that this upgrade is a matter of 

when and not if. 

Given the BFS project outline, and our inclusion of some underground material included in 

the development plan, our forecast earnings are shown below: 





Profit & Loss 

(A$m) 

Year end June 2010a 2011e 2012e 2013e 2014e 

Sales Revenue 0 0 63 420 445 

Operating costs 5 11 39 175 181 

Operating EBITDA -5 -11 24 245 264 

D&A 0 0 4 27 29 

Operating EBIT -5 -11 19 218 236 

EBIT -5 -11 19 218 236 

Boseto 0 0 27 221 237 

Other -5 -11 -8 -3 -2 

Net Interest Exp./(Rev) -1 -1 -12 -24 -31 

PreTax Profit (pre ab's) -5 -10 32 242 267 

Tax Expense (pre abs) 0 0 13 106 119 

OEI 0 0 0 0 0 

NET PROFIT (Pre NRI's)1 -5 -10 19 136 148 

Abnormal Items (after Tax) 0 0 0 0 0 

Reported NPAT (post ab's) -5 -10 19 136 148 

Sales Growth (%) -100% 567% 6% 

Op. EBITDA Growth (%) N/A N/A N/A 933% 8% 

NPAT (Adj.) Growth (%) N/A N/A N/A 629% 8% 

EPS (Adj.) Growth (%) 629 8 

Op.EBITDA Margin (%) 37.7% 58.4% 59.4% 

Interest Cover - EBITD (X) 7.8 8.4 -1.9 -10.0 -8.4 

Return on Equity 5 (%) -6% -15% 23% 62% 39% 


The investment arithmetic is shown below: 

Investments Statistics 


Net Profit (Reported) (A$m) -5 -10 19 136 148 

- EPS (Reported) 1 (¢) -2.0 -3.6 6.9 50.4 54.7 

- PER (Reported) 1 (X) -63.1 -35.9 18.6 2.5 2.3 

NET PROFIT (Adj.) 2 (A$m) -5 -10 19 136 148 

- EPS (Adj.) 2 (¢) -2.0 -3.6 6.9 50.4 54.7 

- EPS Growth (%) -62 77 -293 629 8 

- PER (Adj.) 2 (X) n.a n.a 18.6 2.5 2.3 

Dividend (¢) 0.0 0.0 0.0 0.0 8.0 

- Yield (%) 0.0% 0.0% 0.0% 0.0% 6.2% 

- Franking (%) 0% 0% 0% 0% 0% 

Free Cash Flow (A$m) -16 -13 11 199 135 

- P/FCF 4 (X) -18.8 -26.2 31.7 1.7 2.6 

EV(Adj.)/EBITDA 3 (X) -48.7 -33.0 20.8 1.1 0.5 

Avg. Shares (diluted) (mill) 229 270 270 270 270 


Earnings sensitivity to moves in copper price and exchange rate 

Given the project is early-stage, we do not have any relevant sensitivity analysis to the 

project until FY13. The table below indicates that both currency and metal price fluctuations 

have a material impact on earnings. 

Sensitiity Analysis 

Year End Dec 2010a 2011e 2012e 2013e 2014e 

Currency +1¢ n.a n.a n.a -2.1 -2.4 

Copper US5¢/lb n.a n.a n.a 2.5 2.4 


Balance Sheet 

DML has outlined its intention to finance the Boseto project with 60% debt. We believe that 

this level of debt is too aggressive for a single-mine development company. When the final 

financing arrangements are completed we will adjust the financials for the actual debt:equity 

mix. 





For the purposes of our analysis, at this stage we simply assume full debt funding for the 

purposes of Income Statement and B/S evaluation. Our current estimates of peak debt 

funding are shown below in the B/S. 

Balance Sheet 

(A$m) 


Cash 39 14 14 237 372 

Property, Plant, Equip 35 38 38 38 38 

Other Assets 0 0 0 0 0 

Debt 0 30 161 161 161 

Shareholders Equity 74 64 83 220 378 

NET Debt/EBITDA (%) 751% -141% 617% -31% -80% 

Net Debt / Equity (%) -53% 24% 176% -35% -56% 

Net Debt / (D+E) (%) -113% 19% 64% -53% -127% 


Cash Flow 

As is normal for a development company, operating cash flow is currently negative and 

remains so until production commences in FY12 and, on our estimates, DML generates 

positive cash flow after all capital in FY13. We include both the initial US$175m capital 

expenditure and the underground development ~US$20m in our estimates in FY14. 

Our cash flow estimates, as they stand, are included below. 

Cash Flow Analysis (A$m) 


Operating EBITDA -5 -11 24 245 264 

change in working cap. 0 2 2 2 2 

Gross Cashflow -5 -9 26 247 266 

Net Interest Paid 1 0 -11 -12 -5 

Tax Paid (inc. abs) 0 0 0 -27 -116 

Exploration -11 -5 -2 -2 -2 

Operating Cash Flow -15 -13 12 207 143 

Maintenance Capex 0 0 -1 -8 -8 

FREE CASH FLOW -16 -13 11 199 135 

Dividends Paid 0 0 0 0 -11 

Expansionary Capex -1 -43 -166 -12 -26 

Acquisitions 0 0 0 0 0 

Asset Sales 1 0 0 0 0 

Dividends Received/Other. 2 0 0 0 0 

Share Issues/Repurchases 44 0 0 0 0 

Increase in Net Cash/(Debt) 30 -56 -155 187 98 






Valuation 

• As stated previously, we have included the commencement of open pit mining in FY12 

and underground mining in FY15. Our base case assumes combined production from 

these two sources at a rate of 3mtpa increasing to 3.5mtpa for 15 years out to the 

conclusion of FY26. This base case also includes $65m in exploration assets, which is 

included to approximate the likelihood of further resource upgrades. 

• For our upside case, we have included a 10-year extension to Boseto, which, given the 

size of the current resource is feasible, as well as some benefit from a project 

development at Dikoloti. This project is clearly early-stage and not the primary focus of 

DML at present. 

• We have included a summary of our valuation below: 

Discovery Metals 

DISCOUNTED CASH FLOW VALUATION 

Discount Rate Used % 11.7% 

Issued Shares millions 313.9 

Mines 

A$m 

$ per share 

Boseto (15 Year Mine Life) 385 $1.23 

- $0.00 

Sub Total Mines 385 $1.23 

Exploration Assets 65 $0.21 

NPV of Tax (188) ($0.60) 

NPV of Hedge Book – $0.00 

Net Cash 39 $0.13 

Corporate (36) ($0.11) 

Franking Credits 7 $0.02 

Option Dilution 15 $0.05 

Other – $0.00 

Sub Total Corporate/Other (98) ($0.31) 

NET PRESENT VALUE 287 $0.91 

Upside Options 

Boseto Extension of Life (10 Years) - post tax 41 $0.13 

Dikoloti Ni Project - attributable and post tax 48 $0.15 

UPSIDE VALUATION 377 $1.20 

Source: GS&PA Research estimates 

Financing 

DML is yet to complete the funding arrangements for the development of Boseto. However, 

the company has articulated the desire to use a maximum amount of debt (as high as 60%). 

We see some risk to this high level of debt given the experience of a number of junior 

development companies that have not only been forced into excessive hedge positions but 

have also been precluded from accessing the project cash flow to fund any exploration or 

other developments until the debt has been reduced following the commissioning and 

financial closure of the project. 

We further note that, on our estimates, DML is currently trading above our base NPV and 

thus any equity raising (above NPV) is accretive for shareholders. 

Based on the current share price and assuming an equity raising of $121m (gross) 40% 

debt: 60% equity (a 7.5% discount to the current share price $1.28/share) our base case 

valuation increases to $1.01/share. 





At the proposed 60% debt, an equity raising of $78m (gross) would see an increase in the 

valuation to $1.09/share and if we then lower the WACC accordingly this increases further to 

$1.12/share for the base case valuation. 

We assume off-balance sheet finance of US$80m for the mining fleet. 

Comparisons to PEER group 

Earnings Multiples 

DML can clearly be viewed as an emerging copper producer, with all earnings derived from 

the project at Boseto for at least the next 5-10 years. As a result, we have chosen to 

compare the company with other base metal producers of varying scale and commodity. 

Positively, though, DML has a significant copper resource, which should allow either a further 

expansion or an extension to the mine life of Boseto. We further note that copper is our 

preferred base metal. 

PER 

In FY11, DML has no earnings and therefore no PE multiple. In FY13, however, the earnings 

multiple looks inexpensive in comparison to many of its peers including the most direct 

comparison, CGG, which has a developing project in Saudi Arabia. 

FY13 PER Comparison 

GS&PA Investment Research 

20.0 

18.0 

16.0 

14.0 

12.0 

(x) 

10.0 

8.0 

6.0 

4.0 

2.0 

0.0 

OZL 

EQN 

ABY 

PNA 

CGG 

SFR 

DML 

MRE 

WSA 

IGO 

KZL 

ILU 

Source: GS&PA Research Estimates, Company Data 

PE (x) Price 2010e 2011e 2012e 2013e 2014e 2015e 

OZL 1.54 13.1 11.5 9.6 10.0 10.0 55.5 

EQN 5.75 18.2 10.0 7.4 7.4 7.8 60.0 

ABY 1.24 6.3 4.5 3.1 2.6 2.3 3.5 

PNA 0.71 17.0 12.1 8.0 7.4 7.1 43.7 

CGG 0.42 n.a. n.a. 17.6 2.4 2.2 3.2 

SFR 6.92 n.a. n.a. 0.5 0.5 0.4 0.6 

DML 1.30 n.a. n.a. 21.0 2.6 2.4 4.3 

MRE 0.82 11.2 20.3 21.4 6.5 5.2 4.9 

WSA 6.29 76.8 10.5 16.9 7.4 4.6 4.4 

IGO 6.33 24.6 20.7 39.2 18.7 13.9 14.4 

KZL 0.68 122.7 6.7 4.0 5.3 2.9 6.3 

ILU 6.48 127.4 14.2 11.4 9.0 7.8 6.8 

Average 40.4 11.8 12.8 7.3 6.3 16.8 

Copper Average 13.6 9.5 9.6 4.7 4.6 24.4 






P/FCF 

On this measure, DML appears to be quite highly priced at present, particularly in comparison 

to its nearest peers, CGG and SFR. In our view, this is a direct result of the higher unit 

mining costs combined with the strip ratio in our estimates for BCP. 

FY13 P/FCF Comparison 


75.0 

65.0 

55.0 

45.0 

(x) 

35.0 

25.0 

15.0 

5.0 

-5.0 

OZL 

EQN 

ABY 

PNA 

CGG 

SFR 

DML 

KZL 

Copper 

Average 


P/FCF (x) Price 2010e 2011e 2012e 2013e 2014e 2015e 

OZL 1.54 7.6 8.9 7.3 7.1 6.8 24.0 

EQN 5.75 8.8 5.4 5.7 6.8 7.3 69.7 

ABY 1.24 3.7 3.0 2.5 2.4 2.3 5.3 

PNA 0.71 24.7 16.1 9.4 9.2 8.8 42.7 

CGG 0.42 n.a. n.a. 17.3 2.4 2.3 3.4 

SFR 6.92 n.a. n.a. 4.1 3.9 2.4 3.8 

DML 1.30 n.a. n.a. 4.0 71.9 48.7 12.2 

KZL 0.68 139.4 5.1 3.6 4.8 2.4 6.0 



EV/EBITDA 

ON this basis, DML appears more favourably valued, although still more expensive than a 

number of the alternative copper investment opportunities. 

FY13 EV/EBITDA Comparison 


(x) 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

OZL 

EQN 

ABY 

PNA 

CGG 

SFR 

DML 

KZL 

Copper 

Average 






EV/EBITDA (x) Price 2010e 2011e 2012e 2013e 2014e 2015e 

OZL 1.54 5.1 4.2 3.1 2.9 2.3 7.5 

EQN 5.75 15.0 6.3 2.9 1.7 1.2 0.8 

ABY 1.24 n.a. 2.8 1.5 0.4 -0.4 -0.9 

PNA 0.71 11.9 3.1 2.3 1.0 0.1 -0.6 

CGG 0.42 n.a. n.a. 10.9 1.3 0.5 1.5 

SFR 6.92 n.a. n.a. 1.7 0.2 -0.8 -1.8 

DML 1.30 n.a. n.a. 14.9 1.4 1.3 2.7 

KZL 0.68 n.a. 7.0 1.6 0.5 0.3 -0.4 



EV/Production ($lb) 

On this comparison, DML appears attractive, more in line with a developing operation. 

FY13 EV/Production Comparison ($/lb) 


10.0 

6.0 

2.0 

-2.0 

OZL 

EQN 

ABY 

PNA 

CGG 

SFR 

DML 

KZL 

Copper 

Average 


EV /Production ($/lb) Price 2010e 2011e 2012e 2013e 2014e 2015e 

OZL 1.54 13.4 12.3 10.6 9.5 7.5 7.2 

EQN 5.75 11.4 8.1 5.8 4.2 2.9 2.9 

ABY 1.24 3.0 1.8 0.6 -0.8 -2.1 -3.0 

PNA 0.71 14.0 13.3 11.2 8.3 6.2 6.3 

CGG 0.42 n.a n.a 37.5 5.4 2.4 4.7 

SFR 6.92 n.a n.a 26.4 9.2 3.0 1.0 

DML 1.30 n.a n.a 37.4 3.3 1.6 2.7 

KZL 0.68 9.0 6.8 3.7 2.9 0.0 -1.0 



EV/Resource (lbs) 

DML is attractively priced on this measure, given the significant resource base. 

EV/Resource (c/lb) Resources 2010e 2011e 2012e 2013e 2014e 2015e 

OZL 4059 36.2 32.3 27.7 23.6 18.9 18.4 

EQN 6440 25.7 20.3 15.5 11.3 7.3 6.6 

ABY 1762 9.7 6.3 1.9 -2.6 -6.8 -8.8 

PNA 2164 40.7 39.9 34.3 26.6 19.9 20.1 

CGG 700 19.8 62.8 69.8 45.9 21.8 41.5 

SFR 600 52.0 71.2 72.8 55.2 24.7 8.0 

DML 1474 8.2 11.5 15.6 8.7 4.6 7.5 

KZL 73 247.3 209.3 136.5 97.9 1.8 -25.9 







FY13 EV/Resource Comparison (C/lb) 


40.0 

35.0 

30.0 

25.0 

20.0 

15.0 

10.0 

5.0 

0.0 

-5.0 

-10.0 

-15.0 

-20.0 

OZL 

EQN 

ABY 


PNA 

45.9 

CGG 

55.2 

SFR 

DML 

97.9 

KZL 

Copper 

Average 

Valuation 

• On an NPV basis, DML is trading well above its base valuation at 1.42x as opposed to the 

average of 0.99x. 

• The upside for DML appears to be slightly higher than the average of this peer group at 

1.08 but, given the method of calculation (DCF), does not fully encapsulate the value of 

the 100mt+ resource base. 

P/NPV - Base Comparison 


1.60 

1.40 

1.20 

1.00 

0.80 

0.60 

0.40 

0.20 

0.00 

OZL 

EQN 

ABY 

PNA 

CGG 

SFR 

DML 

MRE 

WSA 

IGO 

KZL 

ILU 

Average 

Source: GS&PA Research Estimates, Company Data. * not rated 

P/NPV (x) Price P / Base NPV P/ Upside NPV 

OZL 1.54 0.94 0.90 

EQN 5.75 1.45 1.01 

ABY 1.24 0.80 0.47 

PNA 0.71 1.13 0.64 

CGG 0.42 0.95 0.90 

SFR 6.92 0.96 0.85 

DML 1.30 1.42 1.08 

MRE 0.82 0.57 0.34 

WSA 6.29 1.07 0.61 

IGO 6.33 1.10 0.73 

KZL 0.68 0.58 0.41 

ILU 6.48 0.85 0.79 

Average 0.99 0.73 






Risks 

Country Risk 

We consider the country risk of Botswana to be somewhat lower in comparison to other Sub- 

Saharan African peers. We have reproduced a subsection of the recent survey of mining 

company executives which places Botswana 5th overall in terms of low-risk mining 

destinations. We do note, in the table below, that we have not reproduced all factors. With 

this in mind, we see very low risk in mining investment, with the country being known for 

having a favourable attitude towards mining activities. The primary area of risk appears to be 

infrastructure. 

Country Risk 

Overall Country Financial Risk Sovereign Risk Land Access Social Risk Infrastructure Labour Relations 

1 Canada 0 0 2 1 1 1 

2 Sweden 1 1 1 2 1 2 

3 Chile 1 1 1.5 1.5 1 2 

4 Greenland 1 1 2 2 4 1 

5 Botswana 2 1 1 2 4 1 

6 United States 2 2 2 2 2 2 

7 Laos 2.5 3.5 1 2 3.5 0.5 

8 Kazakhstan 3 2 2 1 2 1 

9 China 3 3 1 0 2 2 

10 Ivory Coast 2 2 2 2 2 2 

26 Australia 3 4 3 2 2 1 

Source: Resourcestocks World Risk Survey 2010. (this list does not include all survey categories) 

Product Risk 

We see limited risk for DML on the product side, as the copper fundamentals are the 

strongest of the base metals with the market forecast to be in deficit from 2011 onwards. 

Whilst copper is not geologically scarce worldwide, future projects are of lower quality than 

the best current producers and, when coupled with the falling grades of current global 

producers, suggest new large-scale producers will take some years to be brought into 

production and require significant capital investment - all in all, not the outlook for easy 

supply additions. We further note that many of the easier opportunities for substitution have 

already been taken. As a result, there is a high degree of demand inelasticity, which is also 

favourable for the metal price. 

Land Owners 

It is our understanding that DML is still required to negotiate with local land holders, who run 

subsistence farming ventures over the potential mining area. Anecdotally this should not be a 

problem, with compensation available to claimants. Given DML is domiciled in Australia, it will 

be bound by acceptable stakeholder practices to our country (as shareholders become more 

interested in companies adopting best practice globally). As mentioned previously, the 

government is also proactive in this area to ensure that developments do take place and it is 

therefore our opinion that this should not present a significant issue. 

Government Legislation 

DML has submitted the Environmental Impact Assessment for public comment and has 

applied for the mining licence but this has not yet been approved. However, given the strong 

pro-mining focus of the authorities we do not believe that this is a major risk. 

Clearly there are some regulatory risks from changes to royalty rates, taxation, etc. 

However, the current royalty rates are globally competitive and the taxation includes a profit 

share based on individual mine level profitability. We thus view any increases in either of 

these parameters as relatively low risk. 

Botswana does have the right to an equity participation in any mining development. 

However, this right is for a direct equity contribution by the Government, it is funded by 





Government (not through any future cash flow, etc.) and could thus justifiably be considered 

as almost advantageous for DML. 

Funding 

DML has yet to complete the funding package for Boseto and, in our view, is looking to too 

large a debt component. That said, in the current investment climate we do not envisage any 

material difficulty in raising the majority of the required funding package from the equity 

markets. 

We further note that a significant negative to debt funding is the inevitable requirement to 

institute a large hedge programme and the lack of access to cash flows once production 

commences due to the ring-fencing of cash flow until debt closure is made, thus inhibiting 

the ability to conduct an aggressive (or limited) exploration programme at the same time. 

Single-Commodity, Single-Mine Company Risk 

As with all companies moving from explorer to producer status, DML has single-mine risks. 

We see the risks to DML as no greater than the other companies in our coverage universe 

that have successfully transitioned. In our view, the board and management have the 

necessary skill set for this transition and there is a history of mining in Botswana which 

provides further comfort on the overall skills required for this development. 

Operational Risks 

We see the greatest risk as the actual unit cost of moving rock. Given the high strip ratio of 

15.9:1, this can materially impact the mining cost on a per-tonne-of-ore-treated basis. That 

said, given the nature of the orebody and the ability to be treated as a strip mine with waste 

removal ahead of mining being dumped into the mined-out area, the cost of waste transport 

is likely to be low and there is no need to build a waste dump as such. 

Power 

Botswana is a net importer of electric power and, as such, DML is proposing to use a dieselfired 

power plant for the operation replaced in later years by a dedicated coal-fired power 

plant. Whilst DML is able to access grid power, the lack of reliability of the grid power is 

being addressed by the use of diesel power and the costs assume diesel power generation. 

HIV 

The country has an estimated adult HIV prevalence of 24.6%, the second highest in the 

world after Swaziland. The impact from this epidemic has been a shortening in the life 

expectancy estimated by the United Nations Agency for adults from 65 years (in 2000) to 

less than 40 years (current). 

The obvious impact of this high level of AIDS infection is the loss of skilled workers and the 

costs to both individuals and companies from providing appropriate levels of medical care. 

Board of Directors and Senior Management 

Chairman: GORDON GALT (Date of Appointment 9 May 2007) 

• Gordon Galt is a senior mineral resources executive and an experienced director with 

international mineral industry experience. 

• In recent years Mr Galt has held the following listed company directorships: 

− 

− 

Aquila Resources Limited from August 2007 to present 

Navigator Resources Limited from August 2008 to present 

− Gloucester Coal Limited from April 2004 to August 2007 

− Magnesium International Limited from August 2002 to January 2006 

CEO: STUART BRADLEY SAMPSON (Date of Appointment 1 February 2008) 

• Brad Sampson has over 20 years Australian and International experience as a mining 

engineer. He has worked extensively in open cut and underground mine operations and 

developments in Southern Africa, Australia and the Pacific. 

Non-Executive Director: MORRICE CORDINER (Date of Appointment 30 May 2003) 

• Mr Cordiner is a corporate lawyer by training and has in excess of 15 years' experience 

in the finance and resources industries. 





• Mr Cordiner is also currently a non-executive director of the ASX and TSX dual-listed 

gold explorer, Andean Resources Limited (Dec 2003 to present) and the ASX-listed zinc 

explorer, Meridian Minerals Limited (July 2008 to present). 

Non-Executive Director: JOHN SHAW (Date of Appointment 14 November 2006) 

• John Shaw has over 40 years experience in exploration, development and operations of 

open cut and underground mines. He was previously Vice President of the Australian 

Operations of Placer Dome Asia Pacific Limited and Managing Director of Kidston Gold 

Mines. In recent years he has held the following listed company directorships: 

− 

IAMGOLD Corporation from March 2006 to present 

− Albidon Limited from February 2008 to April 2009 

− Tri Origin Minerals Limited from October 2003 to February 2008 

− Lodestone Exploration Limited from May 2002 to November 2007 

− Gallery Gold Limited from November 2003 to March 2006 

− Kingsgate Consolidated Limited from September 2000 to March 2005 

Non-Executive Director: JEREMY READ (Date of Appointment 1 February 2008) 

• Jeremy Read has 22 years' domestic and international minerals exploration experience 

and was previously the Manager of BHP Minerals Australian Exploration Team. He has 

extensive exploration experience for gold, nickel sulphides and base metals. He was the 

founding Managing Director of Discovery Metals from its incorporation in May 2003 until 

his appointment as a non-executive director on 1 February 2008. 

Non-Executive Director: RIBSON GABONOWE (Date of Appointment 30 May 2008) 

• Ribson Gabonowe is a well known Mining Engineer with over 25 years' experience in the 

mining industry. For twelve years to Dec 2006, he was the Director of Mines of 

Botswana, responsible for administering the legal and fiscal framework governing 

mineral exploitation. During the past five years he held directorships in the following 

companies: 

− 

− 

− 

Morupule Colliery (Pty) Ltd 

Botswana Diamond Valuing Company (Pty) Ltd 

BCL Limited (Pty) Ltd 

• Mr Gabonowe is currently a director of Kukama Mining and Exploration, African Coal 

(Pty) Ltd, Atlas Minerals (Pty) Ltd and Gabor Consulting (Pty) Ltd. He is also the director 

of all Discovery Metals subsidiaries registered in Botswana. 

CFO: PAUL FULTON 

• Paul Fulton is a highly experienced CFO who has more than 35 years' experience in 

broad commercial management, accounting and Chief Financial Officer roles within the 

resource industry. 





Financial Summary | DML 

Discovery Metals Limited 

Current Price A$: $1.29 Mkt Cap. : 

$355m 

GS&PA DCF: $0.91 ASX Code: 

DML 

Industry: Materials T/O (mth): 

$43m 

Free Float 95% 

Recommendation: 

Price Target: 

Analyst: 

Data as at: 

HOLD 

$1.50 

Ian Preston 

7-Oct-10 

Investments Statistics Profit & Loss (A$m) 

Year end June 2010a 2011e 2012e 2013e 2014e Year end June 2010a 2011e 2012e 2013e 2014e 

Net Profit (Reported) (A$m) -5 -10 19 136 148 Sales Revenue 0 0 63 420 445 

- EPS (Reported) 1 (¢) -2.0 -3.6 6.9 50.4 54.7 Operating costs 5 11 39 175 181 

- PER (Reported) 1 (X) -63.1 -35.9 18.6 2.5 2.3 Operating EBITDA -5 -11 24 245 264 

NET PROFIT (Adj.) 2 (A$m) -5 -10 19 136 148 D&A 0 0 4 27 29 

- EPS (Adj.) 2 (¢) -2.0 -3.6 6.9 50.4 54.7 Operating EBIT -5 -11 19 218 236 

- EPS Growth (%) -62 77 -293 629 8 

- PER (Adj.) 2 (X) n.a n.a 18.6 2.5 2.3 EBIT -5 -11 19 218 236 

Dividend (¢) 0.0 0.0 0.0 0.0 8.0 Boseto 0 0 27 221 237 

- Yield (%) 0.0% 0.0% 0.0% 0.0% 6.2% Other -5 -11 -8 -3 -2 

- Franking (%) 0% 0% 0% 0% 0% Net Interest Exp./(Rev) -1 -1 -12 -24 -31 

Free Cash Flow (A$m) -16 -13 11 199 135 PreTax Profit (pre ab's) -5 -10 32 242 267 

- P/FCF 4 (X) -18.8 -26.2 31.7 1.7 2.6 Tax Expense (pre abs) 0 0 13 106 119 

EV(Adj.)/EBITDA 3 (X) -48.7 -33.0 20.8 1.1 0.5 OEI 0 0 0 0 0 

Avg. Shares (diluted) (mill) 229 270 270 270 270 NET PROFIT (Pre NRI's)1 -5 -10 19 136 148 

Abnormal Items (after Tax) 0 0 0 0 0 

EV Analysis / DCF Valuation Reported NPAT (post ab's) -5 -10 19 136 148 

A$ DCF Valuation: 0.91 Upside: 1.20 Sales Growth (%) -100% 567% 6% 

Price / DCF: 1.41 Op. EBITDA Growth (%) N/A N/A N/A 933% 8% 

Ke: 14.3% WACC: 11.7% NPAT (Adj.) Growth (%) N/A N/A N/A 629% 8% 

Kd: 5.1% RF : 6.5% EPS (Adj.) Growth (%) 629 8 

BETA: 1.30 MRP: 6.0% Op.EBITDA Margin (%) 37.7% 58.4% 59.4% 

Interest Cover - EBI (X) 7.8 8.4 -1.9 -10.0 -8.4 

Year end June 2010a 2011e 2012e 2013e 2014e Return on Equity 5 (%) -6% -15% 23% 62% 39% 

EV (Adj.) 3 (A$m) 255 363 494 271 136 Cash Flow Analysis (A$m) 

EV (Adj.) / EBITDA (X) -48.7 -33.0 20.8 1.1 0.5 Year end June 2010a 2011e 2012e 2013e 2014e 

EV (Adj.) / Sales (X) 7.8 0.6 0.3 Operating EBITDA -5 -11 24 245 264 

EV (Adj.) / Gross C F (X) -49.9 -40.3 19.2 1.1 0.5 change in working cap. 0 2 2 2 2 

Gross Cashflow -5 -9 26 247 266 

Balance Sheet (A$m) Net Interest Paid 1 0 -11 -12 -5 

Year end June 2010a 2011e 2012e 2013e 2014e Tax Paid (inc. abs) 0 0 0 -27 -116 

C ash 39 14 14 237 372 Exploration -11 -5 -2 -2 -2 

Property, Plant, Equip 35 38 38 38 38 Operating Cash Flow -15 -13 12 207 143 

Other Assets 0 0 0 0 0 Maintenance C apex 0 0 -1 -8 -8 

Debt 0 30 161 161 161 FREE CASH FLOW -16 -13 11 199 135 

Shareholders Equity 74 64 83 220 378 Dividends Paid 0 0 0 0 -11 

NET Debt/EBITDA (%) 751% -141% 617% -31% -80% Expansionary C apex -1 -43 -166 -12 -26 

Net Debt / Equity (%) -53% 24% 176% -35% -56% Acquisitions 0 0 0 0 0 

Net Debt / (D+E) (%) -113% 19% 64% -53% -127% Asset Sales 1 0 0 0 0 

Dividends Received/Other. 2 0 0 0 0 

Annual Production Share Issues/Repurchases 44 0 0 0 0 

Year end June 2010a 2011e 2012e 2013e 2014e Increase in Net Cash/(Debt 30 -56 -155 187 98 

C opper kt 0.0 0.0 6.0 37.5 37.8 Gross CF / Op. EBITDA (X) 0.97 0.82 1.08 1.01 1.01 

Silver mozs 0.0 0.0 0.2 1.3 1.3 Maint. C apex / Sales (%) 2.3% 1.8% 1.9% 

Total C apex / Sales (%) 2.3% 1.8% 1.9% 

Maint. C apex / D&A (X) 1.93 0.34 0.28 0.29 

Total C apex / D&A (X) 11.58 39.14 0.72 1.19 

Maint. C apex / GC F (%) -3.5% 0.0% 5.7% 3.1% 3.1% 

Cash Costs 

ROE Analy sis 

Year end June 2010a 2011e 2012e 2013e 2014e Year end June 2010a 2011e 2012e 2013e 2014e 

Boseto US¢/lb 0 0 171 139 139 

EBIT/Sales (X) n.a n.a n.a 0.52 0.53 

Pretax Profit/EBIT (X) 0.87 0.88 1.64 1.11 1.13 

Sales/Assets (X) 0.00 0.00 1.21 1.53 1.09 

Assets/Equity (X) 1.01 0.81 0.63 1.25 1.08 

Return on Equity (RO (%) -6% -15% 23% 62% 39% 

Commodity Prices 

Year Average to June 2010a 2011e 2012e 2013e 2014e 

C urrency A$/US$ 0.89 0.86 0.83 0.80 0.77 ROCE WACC Analysis 

C opper (LME) US$/lb 304 342 380 400 405 Year end June 2010a 2011e 2012e 2013e 2014e 

Silver Price US$/oz 16.88 18.42 18.56 18.94 19.32 Adjusted NOPAT (A$m) -5 -10 19 136 148 

Adj C ap employed (A$m) 28 57 155 186 155 

ROC E (%) NM NM 12.1% 73.2% 95.4% 

WAC C (%) 10.5% 10.5% 10.5% 10.5% 10.5% 

ROCE Spread (abs) 1.6% 62.7% 85.0% 

Sensitiity Analysis C hange in ROC E (abs) 61.1% 22.3% 

Year End Dec 2010a 2011e 2012e 2013e 2014e 

C urrency +1¢ n.a n.a n.a -2.1 -2.4 

C opper US5¢/lb n.a n.a n.a 2.5 2.4 

(1) Net Profit - Adjusted is after share based 

(2) Net Profit (Adj.) is before goodwill amortisation, abnormals 

(3) EV Includes 100% of Mkt. Value of minorities 

(4) Includes 100% of Mkt. Value of minorities and excludes Invest./Assoc. 

(5) ROE excludes Source: Company data, IRESS, GS&PA Research estimates 

Goldman Sachs & Partners Australia Base/Precious Metals Team: 

Analyst: Ian Preston Base/Precious Metals ian.preston@gs.com.au +61 3 9679 1453 

Analyst: Paul Hissey Base/Precious Metals paul.hissey@gs.com.au +61 3 9679 1779 

Associate Analyst: Brett Cottrell Base/Precious Metals brett.cottrell@gs.com.au +61 3 9679 1565 





I, Ian Preston, hereby certify that all of the views expressed in this report accurately reflect my personal views about the 

subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will 

be, directly or indirectly, related to specific recommendations or views expressed in this report. 




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Australia - Research Recommendation Definitions 

Sell (S) 

Hold (H) 

Buy (B) 

Other Definitions 

NR 

CS 

NC 

Stock is expected to underperform the S&P/ASX 200 for 12 months 

Stock is expected to perform in line with the S&P/ASX 200 for 12 months 

Stock is expected to outperform the S&P/ASX 200 for 12 months 

Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with 

applicable regulations and/or Goldman Sachs & Partners Australia Pty Ltd (“GS&PA”) policies in circumstances 

when GS&PA and/or, our New Zealand affiliate, Goldman Sachs & Partners New Zealand Limited (“GS&PNZ”) is 

acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other 

situations 

Coverage Suspended. GS&PA has suspended coverage of this company. 

Not Covered. GS&PA does not cover this company. 

Target Price 

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Research Criteria Definitions 

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factors when determining their recommendation, with any material factors stated in the written research where appropriate. Each criterion is clearly 

defined for the research team to ensure consistent consideration of the relevant criteria in an appropriate manner. 

Industry Structure: 

EVA Trend: 1 

Earnings Momentum: 

Catalysts: 

Price/Valuation: 

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GS&PA analysts believe will allocate capital poorly in the estimated timeframe. 

The percentage change in the current consensus EPS estimate for the stock (year 1) over the consensus EPS 

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The premium or discount to base case DCF valuation at which the stock is trading relative to the average 

premium or discount across the market. 

For Insurers 

ROE Trend: ROE is used as a proxy for EVA. Rating takes into account the expected level and trend of ROE over the next 2 

years. 

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Analyst’s assessment of the quality and strength of the insurer’s balance sheet, including conservatism of 

provisioning, sufficiency of capital, and quality of capital. 

For REITs 

Strategy: 

EPU Growth: 

Yield: 

For NZ Companies 

Relevant Index: 

Used instead of industry structure as many REIT investors are intra rather than inter sector focussed. 

Ranking of Earnings Per Unit growth relative to other listed Real Estate Investment Trusts. Used instead of EVA 

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Yield relative to the REIT sector average. Used instead of Earnings Momentum. 

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1 EVA is a registered trademark of the U.S. consultancy firm Stern Stewart 

Distribution of Recommendations – as at 30 September 2010 

Recommendation Overall Corporate relationship* in last 12 months 

Sell 7% 0% 

Hold 57% 58% 

Buy 36% 42% 

* No direct linkage with overall distribution as the latter relates to the full GS&PA/GS&PNZ coverage (>250 companies). The above table combines 

the corporate relationships and recommendations of both GS&PA and GS&PNZ. 

© 2010 Goldman Sachs & Partners Australia Pty Ltd – ABN 21 006 797 897, AFSL 243346

Goldman Sachs Investor Research - Discovery Metals Limited

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