Thompson Creek to acquire Terrane Metals

Vancouver – The Mount Milligan gold-copper mine in British Columbia is a big step closer to reality after Thompson Creek Metals (TCM-T, TC-N) struck a deal to acquire the project’s owner, Terrane Metals (TRX-V).

The $650-million offer for Terrane includes 90¢ in cash plus 0.052 Thompson Creek shares for each Terrane share. The deal puts an implied share value of $1.41 on Terrane and represents a roughly 21% premium on the company’s closing price the day before the deal was announced. Terrane currently has 459.4 million shares outstanding or 535.6 million fully diluted. Two-thirds of Terrane shareholders must vote to approve the deal.

“We’ve taken a huge significant first step,” said Kevin Loughrey, chairman and CEO of Thompson Creek in a conference call. “We think of this as a very exciting opportunity for us… We’re pleased to have waited to find what we think is a really beneficial transaction and one we’re proud to do.”

The deal marks a diversification of Thompson Creek’s commodity exposure at a company known as one of the largest pure molybdenum producers in the world.

In the markets Terrane was up 19¢ or 16.2% to close at $1.36 on 45 million shares traded. Thompson Creek was down 48¢ or 4.8% to close at $9.42 on 2.8 million trades.

“I think it’s a good deal,” said Stefan Ioannou of Haywood Securities in a phone interview, who had a target of $1.35 on Terrane. “The key thing is Terrane’s project was great on paper, great management team, but they were really faced with a huge wall to climb in terms of project financing.”

Mt. Milligan hosts reserves of 482.4 million tonnes grading 0.2% copper and 0.39 gram gold, with annual production estimated to be 81 million lbs copper and close to 200,000 oz. gold for the 22-year mine life.

Construction has already started on an access road and site preparation. The project only awaits a permit from Fisheries and Oceans Canada before having the full go-ahead. Capital costs for the conventional truck-shovel open-pit mine, however, are estimated to be $915 million.

“To raise $800 to $900 million dollars for a small company like Terrane is a pretty risky endeavour,” said Ioannou. “To have Thompson Creek come in who has a strong balance sheet, operating cash flow, better access to debt, their ability to finance Mt. Milligan is much more realistic, so I think it de-risks the project significantly in terms of timely construction targets.”

Thompson Creek announced at the same time that it has secured a gold stream agreement with Royal Gold (RGL-T, RGLD – Q). The gold stream company will secure the purchase of 25% of the life-of-mine gold produced from Mt. Milligan for US$311.5 million. Of the total, US$226.5 million will be paid after the successful completion of the Thompson-Terrane deal and US$85 million will be paid during mine construction.

Ioannou said the gold stream move was prudent and still allows Thompson to be exposed to high gold prices. “Even for Thompson Creek to build Mt. Milligan it’s a big chunk of cash and this brings $300 million in the front door to put right towards construction,” said Ioannou. He added that it was far less likely that Terrane would have been able to secure such a deal on its own as a junior.

Goldcorp (G-T, GG-N), which owns approximately 58% of Terrane through both preferred and common shares, has agreed to support the deal.

Terrane controls several other projects in B.C. including the Berg project which hosts 506 million measured and indicated tonnes grading 0.3% copper, 0.037% molybdenum and 3.8 grams silver per tonne, using a 0.3% copper equivalent cutoff grade.