08/20/2012 09:07 EDT | Updated 10/20/2012 05:12 EDT

Franco-Nevada to provide $1 billion towards Inmet's cost of Cobre Panama mine

TORONTO - Franco-Nevada Corp. has agreed to commit $1 billion toward the cost of a major copper mining project in Panama being led by Inmet Mining Corp., a mid-sized Canadian mining company based in Toronto.

"Inmet is an experienced and proven mine operator and developer. Franco-Nevada is proud to partner with Inmet to provide the financing needed to develop one of the world's largest mining projects," David Harquail, Franco-Nevada's president and CEO, said in a joint announcement Monday by the companies.

Inmet (TSX:IMN) owns 80 per cent of the Cobre Panama project through Minera Panama SA and the remainder is owned by Korea Panama Mining Corp.

Franco-Nevada's $1-billion advance payment for future purchases of gold and silver produced by the mine as secondary metals will go towards Inmet's share of building the primarily copper project.

The total cost of Cobre Panama is estimated at $6.2 billion, including $1.4 billion to be funded by Korea Panama Mining and $4.8 billion through Inmet.

Franco-Nevada (TSX:FNV) specializes in financing for mining projects in return for production "streams" once they begin commercial operations. The company's aim is to sell the production at a higher future price than it pays for the production streams.

Harquail said Franco-Nevada views the Cobre Panama precious metals stream as a "long-term cornerstone" asset but it recognizes that investors and analysts have "near-term worries" about commodity markets and cost containment.

"Stepping back, and taking a long-term perspective, we believe no business can succeed and grow without re-investing and building new assets. We believe we have structured a win-win transaction for both parties," Harquail told analysts in a conference call to discuss the deal.

Inmet will benefit if it has better metallurgical recoveries or finds richer gold zones while Franco-Nevada takes less technical risk and gets the comfort of knowing that Inmet has incentives to maximize its copper production, he said.

"We want to ensure Inmet has more skin in the game," Harquail said.

Franco-Nevada said its financing for the Cobre Panama project can largely be funded from its ongoing free cash flow.

Inmet president and chief executive Jochen Tilk said the financing provided by selling the future production stream has advantages over other forms of funding.

"Securing this financing early reduces the financing risk to our shareholders, without sacrificing our copper production growth profile. We look forward to having Franco-Nevada as a partner in Cobre Panama," Tilk said.

Under the agreement, a Franco-Nevada subsidiary will pay US$400 per ounce of gold for the first 1.341 million ounces and $6 per ounce of silver for the first 21.51 million ounces, subject to annual adjustments for inflation over an estimated 20 years.

After that, the prices will be adjusted in accordance with prevailing market prices.

In the event of a precious metals production shortfall, Minera Panama, S.A. (MPSA) — the producing joint venture — will have the option to reduce the stream by repaying up to 10 per cent of the $1 billion deposit, net of the value associated with any prior deliveries made to Franco-Nevada (Barbados).

MPSA will have this option only once at either the third or fifth anniversary of the start of production.

John Hughes of Desjardins Capital Markets said Cobre Panama is expected to average 266,000 tonnes per year of copper production over its currently anticipated 31-year minelife. Shipment of first concentrate is expected in the first quarter of 2016.

"We view this news as positive as the agreement decreases the company’s exposure to financing risk as well as secures its attributable copper production at the project," he wrote in a research note.

Franco-Nevada's stock gained three cents to $49.11 on the Toronto Stock Exchange. Inmet's fell 55 cents to $44.27.

At those prices, Inmet has a market value of about $3 billion — less than half of Franco-Nevada's value. By comparison, Barrick Gold Corp. (TSX:ABX) has a market value of about $35.7 billion and Goldcorp Inc. (TSX:G) is worth about $30.8 billion, making them Canada's No. 1 and 2 gold producers.