The Northern Miner, 7/7/2008

Inmet offers $345 million for Petaquilla Copper

Vancouver - In a bid to expedite development of one of the largest copper deposits in the world Inmet Mining (IMN-T) has made a $345 million takeover bid for joint-venture partner Petaquilla Copper (PTC-T).

Petaquilla Copper owns 52% of Minera Petaquilla, the Panamanian company formed to develop the large porphyry copper project. Inmet holds the remaining 48% interest.

Its majority interest in the Petaquilla project is Petaquilla Copper's only significant asset. It is a massive deposit that has been through many hands and several feasibility studies since its discovery in 1968. A 2007 updated feasibility study pegged total reserves at 1.1 billion tonnes grading 0.5% copper with minor molybdenum and gold.

Inmet now wants Petaquilla Copper out of the picture and it willing to pay handsomely for it. The Toronto-based major is making an all-cash offer for the Vancouver-based company, offering $2 per share. The $345-million offer represents a 108% premium to Petaquilla Copper's closing price on July 4th and an 85% premium over the 20-day volume-weighted average price to that date.

Inmet managed to secure lock-up agreements with certain institutional shareholders representing 15.1 million shares or 9.4% of Petaquilla Copper's issued and outstanding shares. To succeed the takeover requires support from more than 50% of Petaquilla Copper's shareholders.

Petaquilla Copper did not reply publicly to the offer on the day it was announced but its share price certainly responded. PTC shares gained 98¢ or 102% to close at $1.94 on a record trading volume of 16.6 million shares.

Inmet's move on Petaquilla Copper comes not long after the majority owner started arbitration against the other player in the project, Teck Cominco (TCK.B-T, TCK-N). Teck had been earning in a 26% interest in the project from Petaquilla Copper by funding 52% of the costs to bring the project to commercial production; it would then have the right to receive 52% of the project cash flow until it recoups its entire investment.

In March, just before Teck had to make its yay-or-nay decision on continuing with the joint venture, the two majors announced an interim agreement whereby Inmet would lead the project and finance expenditures until the earlier of September 2009 or Imnet spending $50 million at Petaquilla. At the end of the interim period Teck can either elect to continue participating and resume funding or sell its interest to Inmet.

Petaquilla Copper initially voiced support for the interim agreement. However, within a few weeks the company delivered a notice of request to arbitrate, alleging that Teck had "failed to satisfy the preconditions" for making the final commitment to proceed with development. Petaquilla Copper also declared that Teck's interest in the property "has now been terminated."

Inmet disagrees with the claim that Teck failed to fulfill obligations and was "extremely disappointed" with the arbitration, particularly in view of the un-avoidable delays such an argument will mean for the project.

Now it seems Inmet just wants Petaquilla Copper out of the picture completely. In a conference call about the takeover bid Inmet's president and COO Jochen Tilk said the main motivation for moving on Petaquilla Copper now is a desire to rapidly advance project development.

"We believe that Petaquilla Copper's business strategy is not aligned with development of a large project," Tilk said. "This transaction will provide a very clear path forward. It would also certainly resolve other uncertainties, such as the arbitration proceedings currently ongoing between Petaquilla Copper and Teck, which create further uncertainty and potential delay for the project."

Tilk also outlined what Inmet sees as the benefits of the takeover for Petaquilla Copper shareholders, including full value, immediate liquidity for shares that normally move slowly at best, and the removal of the financial risk or share dilution that would be necessary to Petaquilla Copper to fund it portion of development.

To put it into perspective, developing the Petaquilla project is not going to be cheap. In mid-2007 capital costs were estimated at US$1.7 billion; by early 2008, when Inmet and Teck released an interim report on the Petaquilla Front Engineering and Design study, capital costs had soared to US$3.5 billion, with a US$515 million contingency. Operating costs came in at US$1.06 per lb copper for the first ten years of the 23-year mine life.

The other option for Petaquilla Copper to avoid share dilution or financial risk in development would be to elect to have its interest carried. In that case the company would not have to spend a dime on development but would also not see a dime until the project's financiers have recouped their costs in full.

Using a copper price of $2 per lb. and the joint venture agreement terms for carrying, which are U.S. prime interest rate plus two, Petaquilla Copper does not see any cash flow from the operation until 2026, which is when the mine starts to produce pre-tax cash flow with development based on the current feasibility studies. Inmet argues that is a long time for shareholder to wait for payout; the buy-out offer, on the other hand, would give shareholders cash-in-hand now.

Inmet is clearly keen to remove a player from the project. A major focus in management's presentation of the takeover bid was the advantages the project can glean from a streamlined shareholder structure. Inmet is also already working to optimize development plans; for example, discussions are ongoing to arrange coal-fired power instead of relying on diesel-backed power as assumed in the feasibility study.