Capstone Mining offers C$725 million for Far West Mining and inks deal with Korea Resources Corp

Capstone Mining (TSE:CS) has finally found a suitable acquisition. The Canadian headquartered copper miner has been hunting for a suitable transaction for some time, to put to good use its strong balance sheet and cash flow from its currently operations.

Capstone is offering 1.825 shares and $1.00 in cash for each Far West Mining (TSE:FWM) share, implying an price of C$9.19 per share for Far West shareholders, or C$725 million.

Far West owns the Santo Domingo Project in Chile, a large copper-iron-gold deposit with an indicated mineral resource of 486 million tonnes at a copper equivalent grade of 0.57% with a further 61 million tonnes at a copper equivalent grade of 0.46%.

A Preliminary Economic Assessment ("PEA") completed in May 2008 projected life of mine average annual production of 65,000 tonnes of copper and 4 million tonnes of iron concentrate. Since completion of the PEA, the indicated mineral resource has more than doubled, Capstone noted.

In addition to the acquisition, Capstone announced an agreement with Korea Resources Corporation ("KRC") whereby KRC will acquire a 30% in the project for C$120 million. KRC has also agreed to arrange financing for the 65% of the capital costs of the project and fund 30% of the balance of the capital requirements.  In return, Korea Resources Corp will have an off-take agreement for 50% of all copper and iron concentrate from the project.
Assuming the acquisition is completed by Capstone, KRC will additionally subscribe for an 11% equity stake in Capstone through the issue of 39 million shares, which will raise proceeds of C$170 million for the copper miner.

Capstone noted a number of reasons why the transaction was compelling, including the potential to increase its own anticipated copper production between 2011 and 2016 by 200%, and boosting its measured and indicated copper resources by 125%.  The junior copper producer also noted that the acquisition was in line with its ambition to become a mid-tier producer with a focus on  North and South America. 

Cleary the involvement of Korea Resource Corp is also a coup for the company, offering a way to finance the project without significant equity dilution, though shareholders will certainly be feeling some dilution in the near term if the acquisition is completed and KRC takes up an 11% stake in Capstone.

"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," Darren Pylot, Capstone's President and CEO highlighted to investors this morning.

Considering the strong interest advanced copper assets and more generally speaking copper producers, it will be interesting to see if Capstone will be able to acquire Far West without the complication of a competing bid.