Inmet, Franco-Nevada ink Cobre Panama deal

VANCOUVER — In a highly-anticipated move, base-metal producer Inmet Mining (IMN-T) has closed a financing deal with streaming company Franco-Nevada (FNV-T, FNV-N) worth US$1 billion in a bid to cover a funding shortfall at its US$6.2-billion Cobre Panama copper-gold development 120 km west of Panama City, Panama.

Inmet had reported its intent to sell precious metal streams to raise an additional US$1 billion, and Franco-Nevada conveniently had US$1.2 billion in cash and equivalents available for acquisitions at the end of June.

Precious metal stream agreements have been entering the spotlight as numerous developers look for alternative financing options to limit equity dilution, but the Cobre Panama deal is notable both for its size and structure,

“This deal is a demonstration of how competitive stream-mine financing has become,” said David Harquail, Franco-Nevada’s president and chief executive officer, during a conference call. “It can now be used to fund even the largest global mining projects. All of the royalty and streaming companies have been very active in this market and I believe we’ll continue to do so.”

Inmet holds an 80% stake in Cobre Panama through Minera Panama SA — the remainder is held by Korea Panama Mining Corp. Inmet now has US$4.2 billion in capital in place to fund Cobre Panama’s development. The company will require US$4.8 billion to cover its 80% stake in the project.

Under terms of the agreement US$1 billion will be available to Inmet once the company’s funding commitments at Cobre Panama exceed US$1 billion, which could come as soon as first quarter 2013. Franco-Nevada will then match Inmet’s capital expenditures on a pro rata basis — at a ratio of 1:3 — up to the maximum US$1 billion figure.

According to Harquail, a discussion between Inmet and Franco-Nevada began roughly three years ago and reflects a dedication to capital reinvestment and long-term asset growth. Harquail also stressed that the funding schedule for the deal allows Franco-Nevada the flexibility to pursue other royalty and streaming opportunities, with the capacity to complete another US$1 billion worth of acquisitions in the short term.

“The Cobre Panama stream provides us with long-term production from a world-class, low-risk asset with lots of upside potential,” commented Franco-Nevada’s senior vice-president of business development Paul Brink. “It is a rare opportunity to invest in a permitted project, already under construction, with an experienced operating team in a supportive country.”

The two companies orchestrated a versatile deal structure to cope with Cobre Panama’s long mine life and grade variability over different stages of its mine plan.

The streaming agreement indexes gold-silver streams with copper production. Over the first 11 years Inmet will sell 120 oz. of gold and 1,376 oz. of silver for every 1 million lbs. of copper produced. From years 12 to 31 the quantities will switch to 81 oz. of gold and 1,776 oz. of silver before reverting to a typical stream percentage where Franco-Nevada purchases 63.4% of gold in concentrate and 62.1% of silver in concentrate over life of mine.

Franco-Nevada’s production fee is also fluid. The company will pay US$400 per oz. of gold and US$6 per oz. of silver for the initial 1.3 million oz. of gold and 21.5 million oz. of silver. Afterward Franco-Nevada will pay the greater of US$400 oz. of gold and US$6 oz. of silver or half the prevailing gold and silver market prices,

“Since we are first and foremost a copper producer this transaction ensures alignment between our goal for maximized copper production and our partners ensured precious metal streams,” commented Inmet president and CEO Jochen Tilk. “This is one of the only streaming agreements I’ve seen that includes price participation. It recognizes the long-life nature of the asset, and realizes the potential for extending that life as we convert more resources into future mine plans.”

Tilk said one of the main benefits for Inmet is the ability to retain its cost competitiveness — as a result of the transaction costs at Cobre Panama increase from roughly 72¢ per lbs. copper to 86¢ per lbs. over the first 16 years of operation.

Based on the current mine plan, Cobre Panama is expected to have a throughput rate of 160,000 tonnes per day, with potential for expansion to 240,000 tonnes per day following its tenth year of operation. The plan incorporates 2.3 billion tonnes of proven and probable reserves grading 0.14 gram gold and 1.6 grams silver for 5.2 million oz. contained gold and 104 million oz. contained silver,

“This is a precious metal deal, but by linking it to copper production we have complete alignment between the two companies,” Harquail explained.  “If Inmet achieves greater metallurgical recoveries or finds richer gold zones, Inmet gets the benefit. [We] get the comfort of knowing Inmet’s incentive to maximize copper production, while taking less technical risk.”

The deal gives Franco-Nevada a long-life stream asset with expansion potential. On top of the current mine plan Cobre Panama boasts 4.2 billion measured and indicated tonnes grading 0.07 gram gold, 1.3 grams silver, and 0.35% copper.

In the event of a precious metals production shortfall, Inmet will have the option to reduce its streaming obligations by repaying up to 10% of the US$1 billion deposit, net any value associated with prior deliverables to Franco-Nevada. The option is available on either the third or fifth anniversary of first production.

Scotiabank Capital analyst Tom Meyer reiterated his “sector outperform” rating on Inmet following the financing and maintained a $84 price target on the stock,

“The [deal] lowers the financing uncertainty and lends credibility to management’s plans,” Meyer wrote in an August 20 research report. “Additional capital for the balance is expected either from other sources of debt, equipment financing, from future operating cash flow or the potential to opportunistically sell an additional equity stake in the project.”

The agreement involves 86% of Inmet’s precious metal reserves, and is expected to provide Franco-Nevada with average annual gold equivalent production of 87,500 oz. through the first 11 years of operation at Cobre Panama, and 61,500 oz. through its remaining mine life.