Ms. Cindy Burnett of Capstone reports
CAPSTONE MINING TO ACQUIRE FAR WEST MINING AND FORM STRATEGIC PARTNERSHIP AND JOINT VENTURE WITH KOREA RESOURCES CORPORATION
Capstone Mining Corp. and Far West Mining Ltd. have entered into a definitive agreement pursuant to
which Capstone will acquire all of the issued and outstanding common
shares of Far West, by way of a court-approved plan of arrangement.
Under the terms of the agreement, Far West shareholders will be
entitled to elect to receive, in exchange for each Far West share held,
1.825 shares of Capstone and $1 in cash. The consideration implies
a total transaction value of approximately $725-million. The consideration represents a total of $9.19 per Far West share, based
on the volume-weighted average price of Capstone shares on the Toronto Stock Exchange for
the 30 trading days ended April 15, 2011, and a premium of 30 per cent to the
volume-weighted average price of Far West shares on the TSX for the
same period.
Far West's 100-per-cent-owned Santo Domingo project is a large-scale copper-iron-gold development project
located in Region III, Chile. Santo Domingo has the potential to be a
long-lived significant copper and iron ore producer, based on an
indicated mineral resource of 486 million tonnes at a copper equivalent grade of 0.57 per cent and an additional inferred mineral resource of 61
million tonnes at a copper equivalent grade of 0.46 per cent. The project is
strategically located near key infrastructure (highway, rail, power,
port, smelter and airport) in a prolific, established mining district
with several significant copper and iron mining and smelting
operations. A preliminary economic assessment (PEA) completed in May,
2008, using indicated and inferred resources, projected life of mine
average annual production of 65,000 tonnes of copper and four million tonnes of iron concentrate. Since completion of the PEA,
the indicated mineral resource has more than doubled. The
prefeasibility study, which the company anticipates completing in third quarter 2011, is currently under way based on the updated mineral resource
estimate. If warranted by the prefeasibility study, the company may
also consider higher throughput rates, which could potentially increase
copper production significantly.
Kores partnership
Capstone has also entered into agreements with Korea Resources
Corp. (Kores) to form a long-term strategic partnership for the
development of Far West's Santo Domingo project, subject to completion
of the Far West transaction. Under these agreements:
- Upon completion of the Far West acquisition, Kores will acquire a 30-per-cent
interest in Santo Domingo for cash consideration of approximately $210-million to Capstone.
-
Kores will arrange for a debt financier to offer to provide financing, on
then-prevailing market terms, for 65 per cent of the capital costs of the
project and finance 30 per cent of the balance of the capital requirements at the
project.
- Kores will enter into an offtake agreement for 50 per cent of all copper
concentrate and iron concentrate produced from the project over the
life of the Santo Domingo mine, on then-prevailing market terms (at the
appropriate time).
-
Upon completion of the acquisition, Kores will subscribe for an
approximate 11-per-cent interest in Capstone to become Capstone's largest
shareholder. The private placement will represent approximately 39
million Capstone shares, and Capstone will receive proceeds of
approximately $170-million, based on the volume-weighted average price
of Capstone shares on the TSX for the five trading days ended April 15,
2011.
-
Kores will appoint one representative to Capstone's board of directors
upon completion of the acquisition.
- The agreements between Capstone and Kores are subject to a number of
conditions, including completion of the acquisition of Far West by
Capstone.
Transaction benefits
- Highly compelling transaction delivering fully financed growth from Santo
Domingo;
-
Santo Domingo is favourably located with access to nearby infrastructure,
and continuing studies continue to demonstrate the potential for
significant copper and iron ore production;
-
Consistent with Capstone's strategy of building a mid-tier copper
producer focused in the Americas forming a combined portfolio of high-quality operating mines and a strong pipeline of copper production
growth in mining-friendly jurisdictions;
-
Over 200-per-cent growth in anticipated copper production from 2011 to 2016 and
over 125-per-cent increase in measured and indicated copper contained in
mineral resources;
- Further asset diversification in a preferred mining geography;
-
Robust cash flow generation in a company with a strong pro forma balance
sheet and a strategic partnership with Kores to finance a leading copper
production growth profile;
- No future share dilution to finance Santo Domingo as Capstone expects to
finance its portion of Santo Domingo capital requirements through
pro forma balance sheet and continuing cash flow from operations;
-
Enhanced capital markets profile through increased market
capitalization, which should further improve trading liquidity for
shareholders of Capstone.
Compelling offer for Far West shareholders
-
Immediate premium to current share price;
-
Opportunity to participate in the future potential of an Americas-based
mid-tier copper producer with a fully financed growth pipeline;
- Santo Domingo project derisking through Capstone's and Kores's development
and operational expertise and financing capabilities;
-
Exposure to a diverse portfolio of producing and development assets in a
robust commodity price environment;
-
A platform through which to participate in future industry
consolidation;
- Increased trading liquidity through ownership of Capstone shares;
-
Tax-free rollover option for Canadian shareholders, upon election of
share consideration.
Darren Pylot, Capstone's president and chief executive officer, commented: "The proposed
acquisition of Far West is consistent with Capstone's strategy of
building a growth-focused mid-tier copper producer in the Americas and
represents an excellent value opportunity for our shareholders. Santo
Domingo is a robust development opportunity that will substantially
increase Capstone's leverage to copper and long-term growth profile.
Our strategic partnership with Kores brings significant financial
support and mitigates risk for all shareholders."
Rick Zimmer, Far West's president and chief executive officer, commented: "The proposed
transaction delivers an immediate premium to our shareholders.
Moreover, it provides our shareholders with the opportunity to
participate in the future potential of the combined portfolio of
producing and development assets. We are pleased to be announcing this
transaction with Capstone. Their financial strength and current base of
operations, combined with the Kores partnership, provide a clear path
forward for the funding and development of Santo Domingo. This
transaction has the potential to unlock the full value of Santo Domingo
for all shareholders."
Transaction overview
The proposed transaction will be carried out by way of a court-approved
plan of arrangement whereby Capstone will acquire all of the issued and
outstanding common shares of Far West, and Far West would be held
through a newly formed subsidiary of Capstone, to be owned 70 per cent by
Capstone and 30 per cent by Kores. Far West shareholders will be entitled to
elect to receive, in exchange for each Far West share held: (i) 1.825
shares of Capstone and $1 in cash, (ii) 2.047 shares of Capstone
and 0.1 cent in cash, or (iii) $9.19 cash, subject to pro ration on the
basis of an aggregate maximum cash amount of approximately up to $79-million and provided that no Far West shareholder that elects option
(iii) above will receive less than $1 in cash per Far West share.
The proposed transaction is subject to certain customary conditions
including the approval of not less than 66-2/3 per cent of the votes cast at a
special meeting of Far West security holders that is expected to be held
in June, 2011, and not less than a majority of the votes cast at a
special meeting of Capstone shareholders that is expected to be held at
approximately the same time. The Far West annual general meeting will
be rescheduled and may be combined with the special meeting for Far
West security holders. Pursuant to the terms of the agreement, the
proposed transaction is also subject to applicable regulatory approvals
and the satisfaction of certain closing conditions customary for
transactions of this nature. The arrangement agreement also provides
for, among other things, customary board support and non-solicitation
covenants from Far West (subject to customary fiduciary out
provisions that entitle Far West to consider and accept a superior
proposal and a five-business-day right to match in favour of Capstone).
The arrangement agreement also provides for the payment of a break fee
of $20-million to Capstone and to Far West in certain specified
circumstances.
The boards of directors of Capstone and Far West have each unanimously
determined that the proposed transaction is in the best interest of
their respective companies and fair to their respective shareholders
and recommend that their respective shareholders vote in favour of the
proposed transaction, other than those directors who were recused from
meetings regarding the agreement. Scotia Capital provided a fairness
opinion to Capstone's board of directors that the transaction is fair,
from a financial point of view, to Capstone. The Far West board's
determinations are based on the recommendations of a special committee
of independent Far West directors. BMO Capital Markets, financial
adviser to Far West and its board of directors, and National Bank
Financial, fairness opinion provider to the special committee of the
board of directors of Far West, have each provided an opinion to the
effect that the consideration to be received by Far West shareholders
is fair, from a financial point of view, to Far West shareholders. Far
West's directors, senior management, Quadra FNX Mining Ltd. and certain
other shareholders, representing, in aggregate, approximately 38 per cent of
Far West's fully diluted shares outstanding, have entered into
customary voting support agreements pursuant to which, among other
things, they have agreed to vote their Far West shares in favour of the
proposed transaction. Capstone's directors and senior management have
entered into customary voting support agreements pursuant to which,
among other things, they have agreed to vote their Capstone shares in
favour of the proposed transaction.
If it is approved by security holders of Far West and shareholders of
Capstone, the proposed transaction is expected to be completed in July,
2011, and is subject to certain customary conditions, including receipt
of all necessary court, TSX and security holder approvals. Upon
completion of the proposed transaction, a Far West nominee will be
appointed to the board of directors of Capstone. In order to
accommodate the appointment of the Far West and Kores nominees to the
Capstone board, Stephen Quin has agreed to resign from the board of
Capstone upon the effective date.
The terms and conditions for the proposed transaction will be summarized
in the respective management information circulars to be mailed to Far
West security holders and Capstone shareholders in May, 2011. Copies of
the agreement, the agreements between Capstone and Kores, the
management information circulars, and certain related documents and
agreements will be filed with Canadian securities regulators and will
be available at the SEDAR website under Capstone's and Far West's profiles, as applicable.
Advisers
Scotia Capital is acting as lead financial adviser to Capstone and its
board of directors, and a finder's fee is payable upon closing of the
transaction to RCI Capital Group in respect of the Kores agreement.
Scotia Capital has provided a fairness opinion to Capstone's board of
directors. Capstone's legal counsel is Blake, Cassels & Graydon LLP.
BMO Capital Markets is acting as financial adviser to Far West and its
board of directors, and National Bank Financial is acting as fairness
opinion provider to the special committee of the board of directors of
Far West. Far West's legal counsel is Davis LLP, and Borden Ladner
Gervais LLP is acting as legal counsel to the special committee of the
board of directors of Far West.
Gryphon Partners acted as financial adviser to Kores with respect to the
Capstone private placement. Kores's legal counsel is Stikeman Elliott
LLP.
Conference call
Capstone and Far West will hold a conference call at 8:30 a.m. Eastern
Standard Time (5:30 a.m. Pacific Standard Time) on April 18, 2011, to allow shareholders,
securities analysts and investors the opportunity to hear management
discuss the transaction outlined herein. The call can be accessed by
dialling (toll-free) 888-231-8191 or international 647-427-7450. The
call will also be webcast.
The webcast and presentation can be accessed at Capstone's or Far West's
websites. The call will also be available for replay by dialling
(toll-free) 1-800-642-1687 or international 1-416-849-0833 -- password:
61244676 -- for 14 days. A slide presentation will be available on
Capstone's and Far West's websites before the conference call.
We seek Safe Harbor.
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