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The high-stakes game over Inmet’s Cobre Panama

Inmet’s Cobre Panama mine site. While Inmet also owns assets in Spain, Turkey and Finland, the raison d’etre behind the First Quantum bid for the company – and any subsequent, higher bids from it or other parties – is Cobre Panama.

Inmet Mining

It's now Jochen Tilk's move in the $5.1-billion takeover saga gripping Inmet Mining Corp., the Toronto miner that owns a copper project in Panama set to be the largest ever in Central America.

As companies gear down for the holidays, Mr. Tilk will be preoccupied with the fate of his. As president and chief executive officer of Inmet, Mr. Tilk must decide whether to engage a hostile bidder that wants to be friendly, launch a full-blown auction of the company, or convince shareholders to go it alone in the hopes of far greater riches eventually from the flagship Cobre Panama project.

Mr. Tilk has withheld comment so far, waiting on his board to confer and consider the opinions of shareholders and other factors that will influence how the company will answer the $72-a-share hostile bid announced Dec. 16 by First Quantum Minerals Ltd., a big Vancouver-based copper miner.

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As it maps its route, Inmet faces a tricky set of options. Among the questions Mr. Tilk and Inmet must ask themselves is whether Cobre Panama can attract sufficient interest from big players at a time when major copper producers like BHP Billiton Ltd. are backing off big spending and the world's No. 1 public copper producer, Freeport-McMoRan Copper & Gold Inc., is diversifying into oil.

If Inmet were to develop Cobre Panama alone, would it be able to do so on budget and on time? Or, in an era of industry cost over-runs and time delays, should it cede to the expertise of First Quantum?

First Quantum president Clive Newall makes the case his company can do it better.

"We tend to build our operations extremely efficiently. They are on budget, on time and they work right out of the gate," Mr. Newall said in an interview. He says his company would use in-house skills to build Cobre Panama for far less than the $6.2-billion (U.S) budgeted so far by Inmet, and then share those savings with shareholders.

Inmet raised estimated costs at Cobre Panama by 43 per cent in May, from $4.3-billion (U.S) estimated in an engineering and design study dated March, 2010.

"We tend to build them at somewhere between a third and a half the costs of anybody else," said Mr. Newall, pointing to a copper mine called Sentinel that he is building in Zambia that will produce roughly the same amount of copper as Cobre Panama, but at a cost of $2-billion. That fact, Mr. Newall said, was what led his company to look at Inmet in the first place.

Investors are eagerly awaiting word from Inmet.

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"I think whatever they do they'll have to make the case to their shareholders," said Invesco portfolio manager Rory Ronan, an Inmet shareholder. "They have a strong management and board and I just think they'll do what's best in terms of maximizing shareholder value."

Inmet officials could not be reached for comment on Friday.

Set 120 kilometres west of Panama City and 20 kilometres from the Caribbean Sea coast, Cobre Panama promises to produce nearly 300,000 tonnes of copper per year for 40 years.

It will come on-stream in the first quarter of 2016, as other major projects are delayed by funding problems and issues of permitting in top producer countries such as Chile and Peru.

Add to that sustained high copper prices and the belief that demand could drive them higher soon if China's economic growth picks up and Europe and the United States heal their economic woes, and it's understandable why Inmet is determined to secure a bid higher than First Quantum's offer, or develop the project solo.

Inmet stock was trading near $46 a share before First Quantum began poking around in late October, when it made a first approach at $62.50 a share. It raised that to $70 a share, or $4.9-billion, about a month later, and sweetened it by another $2 a share last week.

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A successful execution at Cobre Panama could justify an Inmet share price of $98 a share, which it reached in April, 2008, as the commodities cycle was in full swing, some analysts suggest. On the other hand, Inmet should take heed from previous examples in the industry where miners successfully fought off hostile bidders only to see their stock prices sink and wallow indefinitely.

While Inmet also owns assets in Spain, Turkey and Finland, the raison d'etre behind the First Quantum bid – and any subsequent, higher bids from it or other parties – is Cobre Panama.

"The question is, what happens when Inmet opens itself up to due diligence, which First Quantum hasn't had, by the way," said a merger and acquisitions lawyer involved in Canadian mining. "It will all depend on that project and how comfortable any bidder can get that the costs that they're talking about are actually going to be the costs at the end of the day."

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