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Cobre Panama: Everything Franco-Nevada Investors Need to Know

By Dan Caplinger – Apr 9, 2018 at 7:27AM

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The streaming company has made a huge bet on this Panamanian property. Find out more about it.

Streaming and royalty financing specialist Franco-Nevada (FNV 0.81%) has a diversified portfolio of assets in its portfolio, with various precious metals and oil and gas projects making up the vast bulk of its revenue-generating holdings. Yet among all the properties that Franco-Nevada has interests in, Cobre Panama has become one of the most important. That makes it critically important for investors to understand everything they can about Cobre Panama, including its opportunities and risks. Here's the latest information that Franco-Nevada has provided about Cobre Panama and its prospects for driving profits in the future.

The basics of Cobre Panama

Cobre Panama is located 120 kilometers west of Panama City, which puts it about 25 kilometers from the northern coast of Panama on the Caribbean Sea. The mining concession covers more than 32,000 acres and is split into four zones, with no nearby industrial development and relatively few people living in the vicinity.

Though not yet in production, Cobre Panama's been in development for a long time. The original mineral concession was granted to Minera Panama back in 1997, but the initial 20-year period was extended last year to run through 2037. Under Panamanian law, the concession could once again get extended for 20 more years beyond its current expiration.

Port facility with power, production, and dry-bulk vessel loading capacity.

Image source: Franco-Nevada.

Early exploration showed promising signs at Cobre Panama. As early as the 1960s, surveys found copper, gold, and molybdenum in the area, which revealed porphyry copper deposits that are typical for the geological region in which Cobre Panama is located and in other places around the Pacific Rim.

How Franco-Nevada stands to benefit from Cobre Panama

Franco-Nevada's involvement in Cobre Panama stems largely from its relationship with streaming partner First Quantum. The mining company acquired an indirect 80% stake in Cobre Panama back in 2013, and it increased its ownership to 90% last August. Franco-Nevada also made a separate streaming agreement, with the mine's other 10% owner, state-owned Korea Resources Corporation. That gives Franco-Nevada 100% exposure to the production from the mine.

Further testing has determined extensive mineral reserves at various sites within the Cobre Panama complex. Between the Botija, Colina and Medio, Valle Grande, Balboa, and BABR pits, Franco-Nevada sees total proven reserves of about 345 million metric tons, with 2.84 billion metric tons more in probable reserves. About 0.38% of that material, or roughly 12 million metric tons out of the total proven and probable reserve amount, is likely to be copper, with molybdenum making up another 190,000 metric tons. Proven and probable gold reserves are estimated at 6.94 million troy ounces, with 138 million ounces of silver proven and probable at the site.

The terms of the streaming arrangement involve Franco-Nevada receiving an amount of gold and silver for every million pounds of copper that the mine produces. Early in the period, Franco-Nevada will get 30 gold ounces and 344 silver ounces per million pounds of copper, until total deliveries reach 202,000 gold ounces and 2.46 million silver ounces, which is expected to occur in 2029. After that, the mix will change to 20.25 gold ounces and 444 silver ounces for every million pounds of copper production until around 2044, when total deliveries reach 429,000 gold ounces and 7.43 million silver ounces. From there on, Franco-Nevada will be entitled to 15.8% of the gold found in Cobre Panama's copper concentrate and 15.5% of silver found there. In exchange, Franco-Nevada will pay fixed amounts for 80% of the production and set percentages of then-prevailing spot gold and silver prices on the remaining 20%.

A lot of work to do

Franco-Nevada is looking forward to Cobre Panama starting to produce, but there's still a lot to get done before that can happen. The company estimates total capital expenditures for 2018 at $1.18 billion. First Quantum has done a good job of obtaining required environmental and other permits to allow both for the mining and plant facilities as well as a port and power station to help facilitate delivery.

Plans for the mine, however, are ambitious. By 2019, First Quantum hopes to have ore feed rates at 74 million metric tons per year, rising to 85 million by 2021 and 100 million in 2022 and thereafter. That should give the mine about a 40-year life-span, with recoveries of about 97,000 gold ounces, 1.57 million silver ounces, and 2,570 tons of molybdenum per year.

Cobre Panama involves risks, but Franco-Nevada expects a big payoff once the mine begins actually producing. As long as nothing goes wrong between now and the time that First Quantum is ready to move forward, then Franco-Nevada investors can plan to see substantial growth in 2019 and beyond once Cobre Panama comes on line.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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