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Inmet's Cobre Panama project
Inmet's Cobre Panama project

Panama ruling poses hurdle to Inmet-Lundin merger Add to ...

Inmet Mining Corp. 's friendly merger with Lundin Mining Corp. has hit a new obstacle after the company announced a major issue with its flagship project in Panama, a $4.3-billion copper mine.

The Panamanian government rejected Inmet's plan to use coal-fired power at its proposed Cobre Panama mine, preferring natural gas power instead. Lundin said it is reviewing the impact of the change, which could delay construction of a project that is expected to produce more than 250,000 tonnes of copper a year starting in 2016 and is central to the merger.

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"That is a pretty material departure from what we looked at, at the time we did our due diligence," Lundin CEO Phil Wright said in a conference call Monday, during which he discussed his company's rejection of a hostile $4.8-billion bid from Equinox Minerals Ltd.

Lundin has rejected the Equinox bid as too low and fraught with debt and geopolitical risk. But while it is still backing its merger with Inmet and believes the project in Panama will go ahead, Mr. Wright said the company is studying the new power supply options "that would allow us to reach the same level of comfort on the supplier option and the reliability and constant schedules we had before."

"Without having the comfort that the power is available or being able to satisfy ourselves to a degree of detail that would warrant spending the amount of money that we are talking about, I think at this stage you would have to say that we, as yet, haven't been able to satisfy ourselves," Mr. Wright said in response to questions on the changes to Cobre Panama.

Lundin and Inmet have moved ahead their shareholder votes on the proposed merger by a week until April 4.

Some analysts say there is possibility that Lundin could view this new information as a material adverse change from the original deal struck with Inmet, which could allow them to back out of the merger deal, which aims to create a company with a market capitalization of more than $8-billion.

A similar move happened last week when Russian state-owned uranium mining company JSC Atomredmetzoloto, also known as ARMZ, said it was reconsidering its $1.2-billion offer to buy Mantra Resources Ltd. as a result of the negative impact on the industry from the Japanese nuclear disaster. On Monday, the Australian uranium company announced its board is supporting a reduced takeover offer from ARMZ.

It's yet another blow for Inmet at the hands of the Panama government, which said recently that it plans to repeal part of that country's mining code that allows investments from foreign governments.

That raised questions about Cobre Panama, which has drawn investments from sovereign wealth funds in South Korea and Singapore.

Inmet has said its overall development would not be hindered if Panama went ahead with the change. Inmet also said the new power option is not a material change.

"[Liquid natural gas]is a viable alternative. If there were a delay in receiving LNG we would draw power from the grid," Inmet CEO Jochen Tilk said in an interview.

The change is expected to add fuel to Equinox's argument against the Lundin-Inmet merger that the Cobre Panama project still faces significant financing risk, in a country with untested mining laws.

"Any alternatives to power could raise more unnecessary questions surrounding the project," said BMO Nesbitt Burns analyst David Cotterell.

"Those are two key things to the project before we even worry about getting financing."

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