Thompson Creek to acquire Terrane

VANCOUVER– The Mt. Milligan gold-copper mine in British Columbia is a step closer to reality after Thompson Creek Metals (TCM-T, TC-N) struck a deal to acquire project owner Terrane Metals (TRX-V).

The $650-million offer for Terrane includes 90¢ in cash plus 0.052 of a Thompson Creek share for each Terrane share. The deal implies a share value of $1.41 for Terrane and represents roughly a 21% premium on the company’s July 14 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 diversifies Thompson Creek’s commodity exposure, with the company having been known as one of the largest pure molybdenum producers in the world.

On the acquisition news, Terrane was up 19¢ or 16.2% to close at $1.36 a share on 45 million shares traded.

Thompson Creek was down 48¢ or 4.8% to close at $9.42 apiece on 2.8 million trades.

“I think it’s a good deal,” says Stefan Ioannou of Haywood Securities in a phone interview. Haywood has a 12-month target price of $1.35 per share 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 has reserves of 482.4 million tonnes grading 0.2% copper and 0.39 gram gold, with annual production estimated at 81 million lbs. copper and about 200,000 oz. gold for the 22-year mine life.

Construction has already started on an access road and site preparation. The project 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 million to $900 million for a small company like Terrane is a pretty risky endeavour,” says Ioannou. “To have Thompson Creek come in with 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 royalty company will secure 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 during the mine building.

Ioannou says 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,” says 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 about 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.