Cobre Panama is a large open-pit copper development project in Panama.
Inmet Mining Corp. has agreed to sell future gold and silver production from a giant copper mine it is building in Panama in exchange for $1-billion (U.S.) of project finance from royalty company Franco-Nevada Corp.
It's the third deal in as many weeks where a Canadian miner has turned to innovative financing to fund development of a major project.
The agreement with Franco-Nevada means Inmet will have almost covered its share of the $6-billion development costs at Cobre Panama while avoiding costly debt or share dilution from an equity issue.
"This is an endorsement of not only the Cobre Panama project, but also of the advantages of the stream finance model," said Inmet president and chief executive Jochen Tilk.
"Inmet now has funding in place for $4.2-billion of its $4.8-billion required capital," the Toronto-based company said on Monday in a move that addresses shareholder concerns about the company's ability to safely shoulder the booming costs of the venture on its own.
Miners are increasingly reluctant to engage in equity financing in a market beaten down by risk-averse investors who are fearful that the global commodities boom is teetering.
Debt costs are also unattractive after embattled European banks that typically lead the sectorstopped lending.
Stream financing involves agreements to sell future production of metals at set prices in exchange for financing. Franco-Nevada, which specializes in precious metals, can attract a higher-market valuation for the gold and silver stream at Cobre Panama than Inmet, a diversified miner.
"So, what we'll pay for that precious metals stream compared to what the market was paying them is a big difference," explained Franco-Nevada's Paul Brink, senior vice president for business development. "Bank financing for big projects is fairly limited."
Stream financing is also easier on miners because it is contingent on production and not fixed dates and other bank covenants and restrictions.
At the start of the month, Toronto's HudBay Minerals Inc. signed a $750-million deal to sell future gold and silver production to Silver Wheaton Corp., the world's largest silver streaming company.
The much-needed financing for its $1.5-billion Constancia project in Peru came three months after HudBay abandoned a $400-million offering due to poor market conditions.
"It's a better deal for a company like Inmet or Hudbay to get its financing from selling its gold than from paying 9 per cent to borrow cash," said Raymond Goldie, an analyst with Salman Partners in Toronto. "I can say it's a good deal for both sides."
Last week Thompson Creek Metals Co. Inc., announced a $200-million deal to sell more future gold output from its struggling Mount Milligan gold and copper project in B.C. as it topped-up on financing for the project, where costs have ballooned beyond expectations.
More opportunities are likely to arise for stream financing companies like Silver Wheaton and Franco-Nevada, each with access to about $1-billion for further acquisitions.
"There are a good amount of opportunities," said Mr. Brink. "We would love to get more done in the next while," he added.
Cobre Panama, 20 per cent owned by Korea Panama Mining Corp. will produce 266,000 tonnes of copper per year, turning Inmet into a mid-tier copper miner.
The open-pit mine, 120 kilometres to the west of Panama City, will also produce 87,000 ounces of gold, 1,545 ounces of silver and 2,900 tonnes of molybdenum per year when it starts production in early 2016.