Capstone bids $725M for Far West, partners with KORES

Capstone Mining (CS-T) has made a $725-million bid for Far West Mining (FWM-T) for its Chilean copper project while bringing on South Korean partner – Korea Resources Corp. (KORES) – to front the cash.

In the offer, Far West shareholders would get 1.825 Capstone shares and $1 cash for each Far West share. Using a 30-day volume-weighted average price, the deal values Far West shares at $9.19 and represents a 30% premium. Shareholders will have the option of choosing more cash or shares, though the maximum total cash consideration is $79 million.

For Capstone, the deal provides strong growth potential thanks to Far West’s Santo Domingo copper-iron-gold project in Chile. The development-stage Santo Domingo hosts 485.5 million indicated tonnes grading 0.32% copper, 27.2% iron and 0.043 gram gold per tonne and 61.8 million inferred tonnes grading 0.19% copper, 25.7% iron and 0.025 gram gold.

Capstone president and CEO Darren Pylot hailed the deal as momentous in a conference call.

“This is a transformational development for Capstone,” said Pylot, adding it will “substantially enhance our growth platform.”

Far West president and CEO Rick Zimmer said in the call that Far West shareholders are getting a very attractive premium, are exposed to much greater liquidity, and will also be exposed to a fully-financed solution to Santo Domingo through to production, with no further stock dilution.

“We’re marrying up production, plus a project, plus financing. I think it’s a great deal for all three of the companies,” said Zimmer.

To help minimize dilution and ease future financing, Capstone has engaged in a partnership with the state-owned enterprise KORES. In the arrangement, KORES will buy 30% of Santo Domingo for $210 million, paid to Capstone, and will arrange for 65% of the debt for the project and fund 30% of the balance of the project’s capital requirements.

KORES will also be subscribing for roughly 39 million shares, or 11% of Capstone’s outstanding shares, to become its largest shareholder. Capstone expects to receive roughly $170 million from the offering, based on its 5-day volume-weighted average price, and a KORES representative will join the Capstone board.

Along with stakes in Capstone and the project, KORES secures a 50% offtake agreement on all copper and iron produced from Santo Domingo, with market terms to be set later. KORES is no stranger to such deals, having recently invested substantial sums in projects owned by Augusta Resource (AZC-T, AZC-X), Baja Mining (BAJ-T), and Sherritt International (S-T).

KORES could start receiving offtake from Santo Domingo in a few years, with Capstone targeting 2015 for production at Santo Domingo. A prefeasibility study, expected in the third quarter of 2011, will factor in a doubled resource compared with a 2008 preliminary economic assessment.

Because the study is neither completed nor public, executives of both companies were restrained in reporting details. Executives did indicate, however, that a higher throughput would be possible. Pylot noted that in Capstone’s six months of due diligence, there were no major concerns raised.

“We view any risks to this point as an extension of time rather than fatal flaws of any sort,” Pylot said.

In expressing confidence in the project, Pylot emphasized the project’s proximity to a deep-sea port, along with other key infrastructure such as a highway, rail, smelter, airport and power.

The deal is subject to conditions including two-thirds of Far West shareholders voting in favour, while shareholders representing 38% of fully-diluted shares have already committed to doing so. The deal is subject to a $20-million break fee.

Additionally, Pylot said Capstone would likely continue developing its smaller-scale Kutcho polymetallic project in northwestern British Columbia. A 2010 preliminary economic assessment estimated an after-tax net present value, with a 10% discount, at $77 million and the internal rate of return at 22%. The mine has reserves of 10.4 million tonnes grading 2.01% copper and 3.2% zinc.

Pylot said that Kutcho could likely be developed with Capstone’s current team, while Santo Domingo will require significant additions to staff. Easing those additions, Pylot noted that Gregg Bush, chief operating officer of Capstone, has 17 years of experience working in Chile and will be a significant asset in establishing the company’s Chilean presence.

Capstone also owns the producing Minto open-pit copper mine in the Yukon and the Cozamin underground copper-zinc mine in Mexico.

Far West’s share price was up 53¢ or 6.9% to close at $8.21 on the day, with 5.9 million shares traded. The company has 65.2 million shares outstanding.

Capstone’s share price fell 18¢ to $4.03, with 2.4 million shares traded. The company has 204 million shares outstanding.