Inmet finances Cobre Panama under majority ownership

VANCOUVER — Toronto-based major Inmet Mining (IMN-T) has opted to retain its majority interest in the world-class Cobre Panama copper-gold project through development financing, as the company announced a hybrid plan that would see it shoulder the bulk of a US$6.2 billion capital expenditure (capex) requirement aimed at putting the project into production by 2016.

Inmet divested 20% of the project to Korean-based consortium Korea Panama Mining Corporation (KPMC) for US$169 million in late April, and the company continues to explore bringing in additional partners to decrease its share of the project,

“Over the past year we have evaluated opportunities to increase our project and financial capacity through the potential merger with Lundin Mining (LUN-T) and more recently through partnership discussions with a number of major mining companies,” commented president and CEO Jochen Tilk during a conference call in early May. “Our decision not to proceed with either of these two alternatives was based on a number of factors. Fundamentally, we were not willing to accept a structure that would not properly reflect the value inherent in our company and Cobre Panama.”

Inmet had explored a 40-40-20 ownership structure that would have allowed it to finance the project primarily through cash-on-hand and operational cash flows, but the company announced a US$1.5 billion senior-note offering on May 15 to cover a capex shortfall, and move ahead with project development without additional development partners.

Under terms of the offering Inmet will receive gross proceeds of US$1.48 billion via the sale of senior unsecured notes maturing in 2020 with a coupon rate of 8.75% per annum, and a 9% yield to maturity. The company is negotiating streaming agreements on its silver and gold credits to raise an additional US$1 billion,

“The capital markets have developed very favorably, as have the markets for the sale of a precious metal stream with rising gold and silver prices, and an increase in the scarcity of long-term streams,” Tilk explained. “With the continued strong performance of our operations we are in a position financially where we have no need to unnecessarily compromise our value or its structure.”

When asked about the quantities of gold and silver up for stream auction Tilk offered no details, though he did say Inmet was looking to commit a “significant portion” of Cobre Panama’s precious metals to stream-financing partners. Inmet owns 80% of gold and silver reserves that total 2.3 billion tonnes grading 0.07 grams gold per tonne and 1.4 grams silver for 5.2 million oz. of contained gold and 104 million oz. of contained silver.

Inmet’s financing plan includes US$1.7 billion in cash-on-hand, a US$1.4-billion commitment from 20%-ownership partner KPMC, US$2 billion from the senior-note issuance and stream agreements, and US$1.5 billion from operating cash flows from 2012 to 2015.

When taken together, the financing model totals US$6.6 billion or roughly 106% of the capital requirements needed for Cobre Panama’s development. Inmet plans to raise an additional US$1 billion through potential project divestiture, off-take financings, or revolving credit facilities,

“We’ve taken a step in the direction where we’re comfortable developing eighty percent,” Tilk said. “What we want to be clear is that it’s always prudent to consider keeping the risk and rewarding balances as appropriate as possible. I’ve basically said we could sell an additional minority interest. It could be an off-take interest, or ten or twenty percent, but it’s the conditions that matter.”

Cobre Panama’s current mine plan has a 31-year life, producing copper-gold and molybdenum concentrates via a truck-and-shovel, open-pit operation. Inmet is planning to construct a US$646-million, 300-megawatt, coal-fueled power plant and will ship its product via Panama’s port-canal system. The company has earmarked US$885 million for the project this year, with construction underway on a 40-km road connecting the project to the Pan-American Highway.

“The project has a combination of scale, life, economics, jurisdiction and privilege to operate that sets it apart as one of the finest undeveloped copper projects in the world today,” Tilk commented. “Its logistics are excellent with access to water and power, and the presence of a transportation hub through the famous Panama Canal.”

According to vice-president of engineering and infrastructure Fernando Martinez-Caro, the updated study follows seventeen months of engineering and scoping that leave the company confident in its US$6.2-billion capex figure. Assuming US$1.6 billion worth of senior debt and a 7.25% nominal interest rate Cobre Panama carries an internal rate of return of 16.5% and a US$4.4 billion net present value at an 8% discount rate. Inmet’s economics assume a US$3 per lb. copper price, a US$1364 gold price, and a US$21.82 silver price. Average life-of-mine cash flows are projected to total US$932 million,

Rating agency Standard & Poor’s (S&P) assigned the company’s senior note offering a “B+” standing,

“The ratings on Inmet reflect our view of the project execution risks associated with its 80%-owned Cobre Panama copper project, the company’s reliance on volatile metals prices to support its capital funding obligations, and short reserve lives,” noted S&P’s credit analyst Donald Marleau, “These risks are counterbalanced by the company’s attractive second-quartile cash cost position, geographically diversified operations, and strong operating margins.”

Despite the Panamanian governments recent difficulties with indigenous groups including a variety of anti-mining related protests, Inmet remains confident in its ability to acquire and maintain the necessary permits and regional support for its project,

“When we say a broad acceptance of our presence, we mean at the government level, at the community level, and within Panama in general,” commented Craig Ford, Inmet’s vice-president of corporate responsibility, “We’ve implemented a leading-edge controversy off-set conservation program, which is focused on producing a net positive benefit. We’ve involved local communities and institutions in species protection, ecological restoration, research, and implementation.”

Inmet’s shares have taken a beating so far this year, with prices down 33% or $22.40 per share to a $46.79 presstime close on 308,000 unit average daily trade volumes. Bank of Montreal Capital Markets analyst Stephen Bonnyman gave Inmet an “Outperform” rating in late April, with a $78 target price. Bonnyman forecasts total copper prudction of 111,000 tonnes during 2012, and estimates Inmet’s net asset value at US$80.56 per share.