By Steven Ralston, CFA
On October 24th, Inmet Mining (Toronto:IMN.TO) ( OTC Markets:IEMMF) increased its cash- stock offer for Petaquilla Minerals (Toronto:PTQ.TO) (OTC BB:PTQMF) by 25% from $0.48 to $0.60 per share. We concur with the opinion of UBS Securities Canada, Petaquilla's financial advisor, that Inmet’s revised offer is inadequate and does not sufficiently reflect Petaquilla’s value. On October 29th, Petaquilla's Board unanimously rejected Inmet Mining’s higher offer. Management continues to explore strategic alternatives, including discussions with third parties regarding an alternative transaction. Though Inmet’s CEO indicates that this is the final offer and that no further adjustments will be made, Petaquilla is a strategic asset in the completion of Inmet's Cobre Panamá project for two important reasons.
First, the Cobre Panamá project consists of several conventional open pit mines and the associated infrastructure to produce copper, gold, silver and molybdenum. The Basic Engineering Summary Report (dated May 2012 and available on Inmet’s website: see figure 2-9) proposes the construction of three pits (Colina, Valle Grande and Botija) and four associated waste dumps. Three recent, significant and clear rulings by the Panamanian government denied Inmet's requests and reaffirmed Petaquilla’s rights to three concessions to which Minera Panama, Inmet’s subsidiary, requested access: San Juan (on September 25th by the Department of Mineral Resources and on October 18th by the National Authority of Land Administration), La Esperanza (on October 18th by the National Authority of Land Administration) and Rio Belencillo (on October 22nd by the National Directorate). Currently, without an agreement with Petaquilla, Minera Panama is unable to locate the waste dumps as planned.
Inmet through its subsidiary, Minera Panama, may still be able to develop the Cobre Panamá project but with inefficiencies that will require additional capital costs. Minera Panama has the required permits to begin construction of the project; however, the construction and optimal placement of the waste dumps will require either the acquisition of Petaquilla’s Panamanian assets or the consent of Petaquilla for access to the land, which at this point would most likely require a sizable negotiated fee or compensation set by arbitration as provided for in Petaquilla Law 9. As stated by Inmet’s management, though in a different context, the acquisition of Petaquilla would eliminate a potential source of disruption to the development of Cobre Panamá.
In developing Cobre Panamá, Inmet has committed considerable capital, approximately $3.0 billion by the end of 2012, with the projected total capital cost of the project being $6.18 billion. The current $140 million offer for Petaquilla Minerals is minor (less than 3%) compared to the potential sub-optimal development of Cobre Panamá and/or the legal costs to acquire access to the required lands.
Second, Petaquilla Minerals retains the claim to the gold rights throughout the area being developed by Minera Panama under certain conditions. Originally, when the Petaquilla Law 9 was enacted in February 1997, the right to mine copper, gold and other mineral deposits in the entire 13,600 hectare Cerro Petaquilla concession were united, and only subsequently in 2005, were 100% of the gold rights in the Molejón area assigned to Petaquilla, along with the gold rights throughout the entire Cerro Petaquilla concession if the value of the gold resource supersedes the value of the copper-molybdenum resources. Therefore, if a particular deposit currently under development by Minera Panama (Inmet) contains a larger dollar value in gold than copper and molybdenum, Petaquilla Minerals would lay claim to the gold in the deposit. A specific case in point is the Whittle shell of the Palmilla deposit in the Belencillo Concession (see below). It is hard to believe that Inmet's management is not aware of the potential effect of this scenario. Even the Basic Engineering Summary Report reflects that there are significant gold resources within the Cobre Panamá project in its projection of initial annual production of 106,000 ounces of gold concurrent with 298,000 tonnes of copper.
On October 30th, Petaquilla Minerals announced that a NI 43-101 compliant inferred resource for the Palmilla deposit located in the Belencillo concession has been completed. The Palmilla deposit is estimated to contain 318,500 ounces Au (19,725,000 tonnes graded at 0.50 g/t), along with 345,600 ounces Ag (19,725,000 tonnes graded at 0.54 g/t), concurrent with 33,500 tonnes of copper. We calculate that in this deposit the value of gold ($541 million) exceeds the value of copper ($250 million) by 117%.
Petaquilla’s management continues to proceed with the offering of US$210 million in notes announced in July. The primary use of the net proceeds of this major debt financing is two-fold: to pursue the development of Lomero-Poyatos project in Spain and to unwind the forward gold and silver purchase contracts with Deutsche Bank. The notes were rated Caa1 by Moody’s in early October. Inmet’s $140 million offer for Petaquilla Minerals is conditional on the debt offering not closing.
We reaffirm our Outperform rating and raise our price target to $1.75 to reflect the additional inferred resource of the Palmilla deposit in the Belencillo concession.
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