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Inmet president Jochen Tilk says his company has earned a ‘social licence’ to build Cobre Panama through years of working with local communities. Mr. Tilk is seen with a model home, one of the designs chosen by families who will relocate as the mine is built.

Kevin Van Paassen/The Globe and Mail

A $5.1-billion takeover bid for Inmet Mining Corp. does not begin to capture the value of its star copper asset in Panama, said chief executive officer Jochen Tilk, and the project may be even bigger than currently proposed.

"[The bid amount] is simply too low," Mr. Tilk said in an interview after the Toronto mining company filed a circular on Tuesday that recommended shareholders vote against a hostile, $72-a-share bid from rival First Quantum Minerals Ltd.

Citing the conclusions of a special committee of independent directors as well as input from financial and legal advisers, the Inmet board also said it is talking to a number of third parties regarding strategic alternatives to the hostile bid, and has signed confidentiality and standstill agreements with "a number" of those.

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Cobre Panama is due to come on stream in 2016, which would add, under the current design, 300,000 tonnes of copper to global production at a time when demand is expected to rise and there will be scant new supply.

The $6.2-billion project will be the largest mining development in Central America and Mr. Tilk said that by adding another one or two milling lines on top of what is already contemplated, there is the potential for a mine with annual output of as much as 500,000 tonnes.

To put that in perspective, copper mines can range in size from tens of thousands of tonnes to hundreds of thousands of tonnes. The Escondida mine in northern Chile can produce up to a million tonnes, with the next-largest producing in the 500,000 tonnes range. After that the numbers fall quickly, to the 300,000 tonnes and 100,000 tonnes level and below.

"The point being, it's incredibly large," Mr. Tilk said. "So if I were to predict the future of Cobre Panama through a couple of evolutions, I would definitely see it ending up there at some point in time."

Cobre Panama has gone from being a little known prospect a few years ago to a massive mine in construction which Mr. Tilk said painstakingly earned the social licence to operate in the country best known for the Panama Canal. Part of that, he said, came after working with anthropologists embedded in local communities to negotiate details of relocation that even went down to the design of new homes.

In its 40-page directors' circular and accompanying documents, Inmet's board says First Quantum's offer, a 29-per-cent premium to the company's stock price before it was announced, is well below precedent premiums of 52 per cent in successful hostile takeovers and 45 per cent in other base metal transactions.

The circular also points shareholders to analysts' research suggesting a per-share valuation of Inmet of between $85 and $128 a share once Cobre Panama is built, depending on the copper price outlook.

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"When we take this in the context of $72 [on offer] we caution them and say, this is what the offer is, this is what consensus is, this is what it will be when Cobre Panama is in production," said Mr. Tilk, adding that the shareholders he is talking to want a higher bid.

That could be the sticking point, as First Quantum has said so far that its offer stands as is, and asks shareholders to see future value in the cash-and-stock bid when it shaves substantial costs from the project.

First Quantum declined comment on Tuesday, but in recent weeks it signalled potential cost savings by using expert in-house engineers versed in bringing projects into production without the use of expensive external contractors. It holds up its similarly sized Sentinel project in Zambia, with costs of $2-billion, as proof of its track record.

The Inmet board disputed that claim too in its circular because the mine has yet to be built, and instead criticized its rival for cost overruns at its mines in Australia and Finland.

How shareholders view First Quantum's track record will be key to their decision-making process because they are being asked to accept a portion of the bidders' stock as payment under the bid.

First Quantum's offer is scheduled to expire at 5 p.m. on Feb. 14.

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First Quantum (FM)

Inmet Mining (IMN)

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