Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. My name is Anas, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capstone Mining Q1 2021 Results Conference Call. [Operator Instructions] Mr. Annett, you may begin your conference.

[Jerrold I. Annett]

Good morning. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2021 first quarter financial results is available on our website. And if you're logged into the webcast, we will be advancing slides. On the call are Darren Pylot, President and CEO; Raman Randhawa, Chief Financial Officer; and Brad Mercer, Chief Operating Officer. Following our brief remarks, there will be an opportunity for questions. Comments made on the call today will contain forward-looking information. This information, by its nature, is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please see Capstone's relevant filings on SEDAR. And finally, I'll just note that all amounts we discuss today will be in U.S. dollars, unless otherwise specified. Now I'll turn the call over to Darren Pylot.

[Darren M. Pylot, President, CEO & Director]

Thank you, Jerrold, and good morning, everybody. To start, I want to point out on the front cover of this presentation showing that Santo Domingo is ready to start major construction late this year. By midyear, we expect to announce our strategic partnership and financing plan that will set the stage for a 2-year construction period and full production in 2024. Starting now on Slide #6. Q1 of this year, the operating results were terrific as we benefited from a combination of strong production, lower cost and higher copper prices. The Q1 consolidated production of 47.8 million pounds of copper at a C1 cash cost of $1.70 per pound surpassed our expectation, and I was particularly pleased to see cash costs below the $1.75 per pound low end of annual guidance. Turning now to Slide #7. With 49 million pounds of copper sales at C1 cost of $1.70 per pound and a realized copper price of $4.12 per pound really fueled that 40% EBITDA beat versus consensus, which is $119 million actual versus $85 million of consensus. I believe this quarterly performance firmly places Capstone in the mid-cap group of companies. And as our production profile moves up another 10% next year and 100% overall in the next 3 years with Santo Domingo, we believe this company is transforming to the premier mid-cap copper company. One that operates in top mining jurisdictions with district growth optionality and powered by a debt-free balance sheet with even lower cash costs when Santo Domingo is added to the portfolio. In addition, we've outlined the significant EBITDA generation of over $400 million in this current $4-plus copper price environment, and that's based on the midpoint of our guidance for Cozamin and Pinto Valley, respectively. $119 million is a great number to start the year with. And now on to Slide #8. This quarter was the highest operating cash flow in Capstone's 15-year history as a copper producer. You can see on the chart, we started 2021 on the back of a strong finish to last year. Both operations saw higher grades, higher throughput, with strong copper recovery and cost containment. Pinto Valley performance was underpinned by the completion of our Phase 1 PV3 optimization to increase throughput up to the currently -- current levels of 58,000 tonnes per day in the quarter and Cozamin ramped up production at 3,780 tonnes per day, which was the target within the completion of the one-way ramp that we did late last year. As we noted earlier, the performance was a glimpse of what is to expect moving forward. Raman, I'll pass it over to you now.

[Raman S. Randhawa, CFO & Senior VP]

Thanks, Darren. We are now on Slide 9, which highlights the financial transformation that occurred at Capstone over the past year. While the $4-plus copper price environment is definitely a strong tailwind, the growth at Capstone has been underpinned by the key building blocks we focused on over the last 12 months, which included the following. Number one, innovation and optimization of Pinto Valley, which has led to a sustainable throughput increase by 10% to 58,000 tonnes per day. Number two, exploration excellence at Cozamin, which has led to a mine length extension to 10 years in the latest technical report, with the strongest production and cash flow profile in its 15-year history. Number three, Silver Stream. $150 million Silver Stream propelled Capstone's debt-free status and full leverage to copper prices to equity shareholders now. And number four, advancing the reduced capital strategy for Santo Domingo lowers the risk for Capstone to advance a world-class project to major construction. The operating results for the first quarter are reflective of Capstone's strong earnings and operating cash flow generation potential in a rising copper price market. The Q1 2021 actual figures on a stand-alone basis is close to that of a full year 2022 actuals for EBITDA and OCF. Overall, these results are a good indicator of our full 2021 potential. We finished the quarter with adjusted EBITDA of $119 million in cash flow from operations before changes in working capital of $245 million. Operating cash flow adjusted for the $150 million from the Cozamin stream equals $95 million. During the quarter, we fully repaid our long-term debt of $185 million, and we are now in a net cash position of $45 million. Subsequent to quarter end, we received the initial draw from Wheaton on the gold stream of $30 million, thus increasing our net cash position from $45 million to $75 million. Now turning to Slide 10. Chart on the right highlights our after-tax operating cash flow generation on a $4 copper price environment. We would generate $1 billion cumulative over the next 3 years. Keep in mind, our annual site sustaining capital is fairly minimal at $75 million combined for the 2 mines, plus some expansion in capital currently on PV3 optimization, exploration and the paste fill plant at Cozamin. With a zero long-term debt on our balance sheet and with the annual EBITDA generation outlined earlier by Darren north of $400 million, we are well positioned to leverage our balance sheet and cash flows to finance our portion of Santo Domingo at a very attractive cost of capital options. Now I'll pass it over to Brad.

[Bradley J. Mercer, Senior VP & COO]

Thanks, Raman, and good morning, everyone. For your reference, we're now on Slide 11. Darren and Raman already talked about the record operating cash flow and the strong balance sheet. I want to talk about some operational milestones now. At Pinto Valley, the Eriez HydroFloat engineering work is advancing very well, and we are expecting to green-light this approximately $70 million project for construction by midyear, and it should be operational after that by mid '22. Recall from our earlier calls, we expect an attractive payback on capital that's driven by a 6% increase on copper recovery. Moving on to Cozamin. The ramp-up to 3,780 tonnes per day has been met. It was the target previously announced in our technical report. I'll also add that the one-way ramp is proving to be a major debottleneck win as we thought it would be. For the mine, as we have seen several days in the past quarter, over 4,000 tonnes a day being hauled up that ramp, not -- without anything coming up the shaft while the shaft was down for maintenance. So with that, plus the 2,000 tonne per day capacity of the shaft, this tells me the mine will not have any logistical issues to grow production. Specific to growth at Cozamin, we have commenced work on Impact23 initiatives, backed by ongoing exploration, ongoing exploration in the West Mala Noche Footwall Zone, where we are currently drilling from surface but will move to underground drilling in 2022 after completion of an exploration drift. An update on these initiatives will be given later on this year. Moving on to Santo Domingo. Discussions with strategic partnerships and a financing plan are well advanced, trade-off studies to replace the iron ore pipeline with the rail option is proceeding very well, and we have commenced feasibility work on the cobalt project. This is one of the top 3 cobalt projects outside of the DRC and has a potential being one of the world's lowest cost. I direct your attention now to Slide 12. This slide always puts a smile on my face because it is amazing how far mining has come in a short time frame with new technologies. Pinto Valley back in the 1970s was designed for daily throughput of 36,000 tonnes a day with, I believe at that time, were the biggest ball mills in the world. And today, the nominal capacity is nearly 2x higher with the same motors and the same mills. I think that's remarkable. Recently, we've had great success with blast fragmentation technology that has seen sustainable finer feed size to our mills, and that is having a big impact. Today, we are generating from the pit, on average, 35% to 40% fines minus 1 -- minus 0.5 inch, sorry, in our feed versus about 25% was minus 1.5 inch a year ago. This finer feed lowers our power cost, lowers our maintenance cost and increases ball mill throughput. On top of that, as I mentioned, the combination of Eriez HydroFloat and Jetti catalytic leach technologies will ensure that Pinto Valley can maximize copper recovery of a resource. We -- in short, we think we can get new mill-like throughput from an old mill that was constructed in 1970s era, same for cost and recovery. So this begs the question, what could Pinto Valley ultimately look like in the future? We are aiming to answer that in our PV4 study to be released in 2022. We are locking down our inputs into that study in early Q3. And I think of note, we are sitting on 1 billion tonnes of resource at similar grade to the reserves but not currently in the reserves, so we expect to show a mine plan into the 2050s with a higher production profile than our current PV3 plan. Our strategy is to maximize leaching activity to fill our SX-EW plant, which has a lot of capacity and to help pay for the additional stripping required to deepen the pit. It could also allow for a higher cut-off grade to the mill. In short, I think we have a very exciting future at Pinto Valley and at Capstone, as you heard earlier. And with that, I'll conclude my remarks and hand it back to Darren. Thank you.

[Darren M. Pylot, President, CEO & Director]

Thank you, Brad. And everybody, we're now on to Slide 13. We've covered most of the catalysts on this slide. The updated technical report in the second half of this year for Pinto Valley will incorporate the optimization efforts we have realized to date. But it's really, as Brad talked about, it's really the PV4 study next year that will reveal the mine's true potential. And this is why we bought Pinto Valley back in 2013 because of the huge upside we saw for this operation, not only on the property but in a prolific copper mining district in Arizona. I believe there's an opportunity for Capstone to consolidate this district under one umbrella to improve overall environmental performance while responsibly advancing copper growth to production. The near-term catalyst for Capstone is the announcement of our strategic partner and financing plan for Santo Domingo expected by midyear. I know that many of you may be thinking that Capstone is currently generating sufficient cash flow to build the whole project ourselves, but our strategy has not changed. Until the ownership and financing plan is completely outlined and finalized, we will not be proceeding with any major capital expenditures until that. So regardless of this type of partnership structure, I'll add that Capstone will ensure we have the technical depth within the owner's team to execute on the build of this transformational project should Capstone remain the operator during construction. Now moving on to Slide 14, the last slide. The chart on the right shows that we're on 100%-plus production growth plan over the next 3 years, and that comes with significantly lower costs. I believe Capstone is right now a premier mid-cap, high-growth company, one that embraces technology to drive high return on capital. Thank you for joining us today. We'll now open up for questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from Craig Hutchison with TD.

[Craig Hutchison, Research Analyst]

Great results this morning. Just a couple of questions on Pinto Valley. Just in terms of the use of the Jetti technology, are you guys starting to use that currently in the field? Or is it still really at the kind of the test phase in terms of some of the column leaching tests that you were doing previously?

[Darren M. Pylot, President, CEO & Director]

Craig, thanks for that question. No, we are currently using it in the field from now and have been using over the past year. The testing is to be able to convert the low-grade mineralized waste into a reserve by column leaching and testing over the next 8 to 12 months. So it just takes a long time. But if we get the results we're expecting, we can then convert a lot of that waste into actual reserves both in our waste dumps and in their pits. And Brad, you're on the line, I don't know if you want to add anything more to that answer.

[Bradley J. Mercer, Senior VP & COO]

No. I think that covers it very well, Darren. It's really -- Craig, it's really driven to be able to declare a reserve.

[Craig Hutchison, Research Analyst]

Okay. So does the timing for that in terms of where you feel the confidence level will be more sort of back into this year, kind of early next year? Or...

[Darren M. Pylot, President, CEO & Director]

Yes. That's why...

[Bradley J. Mercer, Senior VP & COO]

The testing is going...

[Darren M. Pylot, President, CEO & Director]

Sorry. Go ahead, Brad.

[Bradley J. Mercer, Senior VP & COO]

Yes. So the testing is going to take -- the column tests are going to take probably 8 months, and they're starting -- they're reloading up shortly. So that's why the PV4 study is coming out later in '22. We just need the runway to get good results on the column test.

[Craig Hutchison, Research Analyst]

Okay. In the past, you guys have talked about the potential to incorporate additional resources, regional resources around Pinto Valley. What's the status of these initiatives? Anything kind of holding you guys back at this point?

[Darren M. Pylot, President, CEO & Director]

Craig, again, it's Darren. Nothing holding us back. We're in active discussions biweekly with our neighbors. It's never been -- the activity has never been more than has is now. So we see a real opportunity clearer than ever that there's a potential for a consolidation with the brownfield resources, both copper resources, brownfield areas and also water resources in and around the area that we feel as we're the only -- as we know, we're the only producing mine in the district. We feel strongly that there's a consolidation opportunity in those areas sooner rather than later.

[Craig Hutchison, Research Analyst]

Right. Okay. And you guys, I think, recently received a positive draft record decision on Pinto Valley expansion. Would any of this material be covered off in that in terms of potential to put it on to your new areas you're approaching onto the forestry services times?

[Darren M. Pylot, President, CEO & Director]

I would -- no, I would say, as you said, there is a draft record of decision out there in the public, and we're in the 45-day public comment period with the current schedule with final permit issued in the fall. And that is -- that incorporates just our PV3 mine plan and operations.

[Craig Hutchison, Research Analyst]

Okay. And maybe one last question from me. At Cozamin, you guys we're pretty excited about some of the western and eastern extension of the Mala Noche Footwall Zone. Any updates on where you guys are with this and when we can expect our first sort of glimpse of the new drill results?

[Darren M. Pylot, President, CEO & Director]

Sure, Craig. I'll let Brad answer that one.

[Bradley J. Mercer, Senior VP & COO]

Well, we have drills operating from surface. Now as you can imagine, from surface, it takes a bit of time to get one hole. We're happy with the results, the way they're going. I think when we get a critical mass of results, we will make a release later on this year. The big push on that -- sorry, Craig, the big push on the -- on exploring to the east will be next year underground when we get the -- when we complete the drift.

[Operator]

Your next question comes from Dalton Baretto with Canaccord.

[Dalton Baretto, Analyst]

Congratulations. I apologize if I missed this in your comments. I've been kicked off the call a couple of times. Pinto Valley, what are you averaging on a throughput rate in April? And do you have a sense for what you expect to average this year? Can it be higher than 58,000 tonnes per day?

[Darren M. Pylot, President, CEO & Director]

Yes. Brad, I'll let you kind of give the exact numbers, but we're -- yes, Brad, over to you. Go ahead.

[Bradley J. Mercer, Senior VP & COO]

Yes. So we're concentrating on stabilizing the throughput. I think we've done that at about 58,000 tonnes a day. We feel the mill has capacity to go much higher than that. Well, higher up to probably over 60,000. Right now, we are focusing on recovery, but the mill is certainly not stressed to make 58,000 tonnes a day.

[Dalton Baretto, Analyst]

Okay. Great. And then just speaking of recovery, aside from the coarse flotation technology, what's left to implement from a PV3 perspective?

[Darren M. Pylot, President, CEO & Director]

No. That's really the lion's share of it. I mean the -- we're not playing much else. The areas is really the big thing that we -- the big-ticket item that we think is going to substantially boost that recovery into the low 90s. Other than that, it's -- like I said, our strategy is to make this old mill run like a new one with technology and a little bit of capital but not to write the big check to spend a huge amount, and we're seeing these results from the front of the mining with the blast fragmentation, upgrading the fine crushers in the screen decks, which are already done and now the final piece on the back end being the recovery. So we -- as Brad mentioned, we think sometime in the next 12 months, we can bump recovery up -- sorry, the throughput up into in the 60,000, low 60s and achieve that 90-plus percent recovery. And that will be the full PV3 optimization completed.

[Dalton Baretto, Analyst]

Okay. Great. And then I wanted to ask about the Santo Domingo JV process as you guys progressed. But are you able to tell us at all a little more about it, just in terms of kind of the nature of the participants right now, whether you're leading towards the higher end or lower end of your ownership range? And just what the bid-ask looks like right now?

[Darren M. Pylot, President, CEO & Director]

Well, well, Dalton, again, we're on a dual track. I said we started off the process a while ago, obviously, and it's taken a while with COVID and copper prices moving around. And so the dual track is being much less of an owner, and that's the one we started with. And then, of course, with copper prices in our balance sheet, we've been able to also incorporate us owning a larger portion around that 70% mark. So there's a dual track. I can't tell you which one is over. I can tell you that we really believe and understand and know this fully permitted large-scale project in Chile is a Tier 1 asset, especially in the early years of copper production, and that we want to own as much as we can of it. But we are going to take the best, the lowest risk, highest return kind of deal for our shareholders, and that's our #1 obligation. That's what we're doing. So we are on both those tracks, but we do expect a clear kind of picture fairly soon, definitely by the next time we speak on this call, on the next quarter call.

[Dalton Baretto, Analyst]

Okay. Great. And then maybe just one last one from me. So you've got no more debt now for the first time since 2013. And you're generating tons of cash, you've got a decent line of sight to funding Santo. Are you thinking at all about capital deployment outside of Santo Domingo, either capital return or new projects?

[Darren M. Pylot, President, CEO & Director]

Well, once we -- as you just mentioned it, right, we've got some capital with -- we've got a couple of things to look at. We've got the PV3 organization capital, which is well understood. And then we're going to look at -- we're going to come out with this PV4 study, understand what capital, what it looks like there. Obviously, we're going to define the ownership of Santo Domingo and have our capital obligations there. But again, we think those will be very, very conservative based on the fact that just because we bought the -- we consolidated the Santo Domingo ownership at 0.3x NAV is what we purchased, it doesn't mean we're going to sell to someone else at that low price. So from the proceeds of us selling down our position and the debt financing that can be put on it, we feel there'll be minimal capital out. So yes, we'll have -- we believe we'll have additional capital to understand how to give that back to shareholders in the best way forward, either by expanding our operations or distributing that capital, and we'll be able to look at that in the second half of this year.

[Operator]

We have a following question from Stefan Ioannou with Cormark Securities.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Just -- I know previously, you mentioned a modest sort of initial program at Donovan exploration program. I'm just wondering if that has started yet or if it's something that's earmarked for later this year? And if you're seeing any other sort of regional opportunities down in Mexico right now?

[Darren M. Pylot, President, CEO & Director]

Thanks, Stefan. Brad, over to you on that one.

[Bradley J. Mercer, Senior VP & COO]

Yes. We've just finished the drilling program. We drilled -- I can't remember the exact total, but I think it's somewhere around 2,000 meters. As for other opportunities, we are talking to our neighbors all the time. Everything from ranging from drilling deeper targets on their property below silver targets all the way up to [ total mine ]. So we're in discussions, I would say, pretty continuously, but we haven't signed anything else recently.

[Operator]

[Operator Instructions] It appears there are no further questions at this time. You may proceed.

[Darren M. Pylot, President, CEO & Director]

Thank you, operator, and thank you, everyone, for participating on the call. We appreciate your support and your questions as always, and don't hesitate to contact us for any follow-up questions you may have. Thanks, everybody. Have a good day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.