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

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

In the offer, Far West shareholders 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 over the same 30 days. Shareholders will also 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 private, government-owned enterprise Korea Resources Corporation, or KORES. In the arrangement, KORES will buy 30% of the Santo Domingo project for $210 million, paid to Capstone, and will also arrange for 65% of the debt financing 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, while a KORES representative will join the Capstone board.

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

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

Because the study is neither completed nor public, executives of both companies were restrained in reporting any 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” said Pylot.

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 customary 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.

Along with Santo Domingo, Pylot said Capstone would likely continue development of 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 proven and probable 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 and living 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 about 65.2 million shares outstanding.

Capstone’s share price was down 18¢ to close at $4.03 on the day with 2.4 million shares traded. The company has roughly 204 million shares outstanding.