Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to Capstone Mining Corp. Second Quarter Results 2019 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, July 31, 2019.I would now like to turn the conference over to Mr. Paul Jones, Vice President, Business Development and Investor Relations. Please go ahead.

[Paul V. Jones]

Thanks, Leonie. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2019 second quarter financial results is available on our website, along with an updated corporate presentation. With me today are Darren Pylot, President and CEO; and Raman Randhawa, Chief Financial Officer. Following our brief remarks 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.I'll now turn the call over to Darren.

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

Thank you, Paul, and good morning, everybody. We're very excited today to discuss our financial results, which demonstrate continued operational success and momentum in the second quarter. Overall, we produced 37.7 million pounds of copper at a C1 cash cost of $1.78 per pound. We now expect to finish the year towards the higher end of our production guidance, which is between 145 million to 160 million pounds of copper, and at the lower end of our C1 consolidated cash cost guidance of $1.80 to $2 a pound. At Pinto Valley, we performed better than expected despite the temporary shutdown due to the wildfires. The mine ran extremely well, and we saw operational productivities increase. We're able to increase waste stripping well ahead of plan, which allowed us the flexibility to access higher-grade areas of the mine and essentially smooth out the grade profile for this year and subsequent years after that. In addition, some improvements to our metallurgical departments saw recoveries increasing to 87%. I'd also like to take this opportunity to acknowledge our Pinto Valley colleagues for their professionalism, teamwork, care and preparedness during the Woodbury wildfires in June. Their hard work and tremendous commitment to safety ensured that there was no harm to our people or damages to our assets.At Cozamin, our team delivered another strong, low-cost quarter, producing nearly 9 million pounds of copper at cash costs of just over $1 per pound. We were able to increase throughput to over 3,000 tonnes per day, while we increased our operating development meters as we prepare the mine for the increased mining rates in 2021. Our employees' commitment to continually strive for improved safety and diligently working towards our goal of zero harm has continued our exceptional safety performance. Our lost time incident frequency rate was further reduced to 0.16, and there were no lost time injuries in the second quarter. I'll now turn the call over to Raman to give you a brief overview of the credit facility amendment and our company-wide cost reduction program.

[Raman S. Randhawa, Chief Financial Officer]

Thanks, Darren. As announced last week, we extended our corporate revolving credit facility to July 2022. The RCF was amended to remove the 50 basis point increase in interest rate, which had equaled savings of approximately $1 million per year in interest payments. In addition, the future annual amortization of the credit line was removed. The credit facility will remain at $300 million for the entire term. Our peer-leading low net debt-to-EBITDA ratio of 1.26 exemplifies the strength of our balance sheet. Turning to cost reduction. With our Q2 results, we have provided more color and published targets for our company-wide cost reduction program. Our goal is to reduce overall operating cost by $25 million to $30 million per year versus a 2018 baseline of actual operating cost. To date, we have actually achieved already $20 million in annualized savings related to Pinto Valley, corporate restructuring and disposition of Minto. The target is to achieve additional $5 million to $10 million at Pinto Valley by focusing on contractor management, transitioning away from a marked contract and improving maintenance practices. Our 2019 focus on cost reduction is evident in Pinto Valley's year-to-date cash cost of $1.89 a pound, which are $0.27 a pound less and 12.5% lower than 2018 average of $2.16 a pound. Now I will turn the call back over to Darren to discuss progress we made on our robust organic growth opportunities.

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

Thanks, Raman. So looking ahead to the rest of this year. At Pinto Valley, we have initiated our PV4 work, and this encompasses the scoping level study aimed at identifying opportunities to take advantage of the roughly 1 billion tonnes of additional resources that we already have at site, in the ground. PV4 will also evaluate scenarios to expand the mill. We expect to complete the bulk of this work by the end of the calendar year and communicate the results in the first half of next year. At Cozamin, development of the one-way ramp remains on track for the end of 2020, which will drive an increase to annual production levels to between 40 million and 45 million pounds of copper per year. Concurrently, we are undertaking a large infill definition drilling program to target resources to reserve conversion. This additional drilling does not impact our 2019 exploration cost guidance of $6 million, and we believe that once this program is completed, it will be a clear demonstration of what we internally here at Capstone have long believed, that Cozamin will have a mine life well in excess of what is currently modeled by most analysts. And we're targeting the demonstration of a mine life to approximately 2030, which is roughly double the current mine life. At Santo Domingo, just this past week, we received notification of the approval of our closure plan. This is the final preconstruction permit required and the project is now completely shovel-ready. We are also making very good progress in defining a few project optimizations that should have favorable results on the project NPV. Specifically, improvements to our gold recoveries, lower power costs as well as defining the economics surrounding the production of battery-grade cobalt. Finally, the strategic process continues to be robust, and we will update the market at the appropriate time. So in conclusion, the first half of this year has been operationally very strong. We are looking forward to further progress to be made in the second half of this year. And with that, we are now ready to take questions from the floor.

[Operator]

[Operator Instructions] Your first question is from Stefan Ioannou from Cormark Securities.

[Stefan Ioannou, Analyst]

Good to see the quarter. Just wondering on the sort of the cost reduction initiatives that are outstanding still at Pinto Valley. Just wondering maybe what the timing is? And if maybe you can provide us just a bit more color on sort of what exactly they pertain?

[Raman S. Randhawa, Chief Financial Officer]

Stefan, it's Raman. Yes, I mean, the team is heavily focused on completing them by the end of the year so we can incorporate them into next year's run rate. The focus is working with a lot of our contractors, so one of our biggest expenses is Empire, the Cat dealer there. We spend $80 million a year. So there, we're partnering with them on how we can reduce costs by at least 10%. And one of the marked contracts I mentioned is [ Arnold ]. We're working with that contractor as well. We're looking at in terms of how often we do some replacements, which are pretty frequent if we push them off a little bit, which is a trade-off on cost there. And we're also working on possibly a new power provider. Those are kind of the big 4 items, I guess, and a lot of other small initiatives, just driving the cost culture at site to drive down the cost.

[Operator]

Your next question is from Oscar Cabrera from CIBC.

[Oscar M. Cabrera, Research Analyst]

Darren, I was wondering if you could just comment on how should we be thinking about the Santo Domingo process? Like, it seems like you have a number of pieces lined up already. And so are you -- have you talked to different parties, are you finding a lot of interest? Can you just provide more color around that, please?

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

Yes. Oscar, I think that the process is running as expected. As you mentioned, we have a number of parties interested. We're dealing with those parties. I think this particular asset, compared to other ones, is a bit complex in that you've got interested parties with copper and they have to understand iron. And you've got interested parties on the iron that need to understand copper. So I think it's taking a little longer-than-normal process because it's got 2 different commodities in there. But as I said, we're pleased with the interest and we're pleased with the progress we're making. And we're confident that we'll get to a resolution here on a partnership in the near future. But we're, obviously, not ready to comment on who that is at this point.

[Oscar M. Cabrera, Research Analyst]

Sure. Then secondly, on Pinto Valley. You were talking about providing the market with a scoping study on the second half of 2020. Can you remind me if -- what's the current capacity for your tailings? And what would you need to improve the life of mine of the asset and the timing on that, of how you're thinking about it?

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

Yes. So Oscar, our tailings is permitted for all of our PV3 life. So all of the reserve life that you're modeling and you have there, we're permitted for that. And that's exactly what we're working on. Obviously, with 1 billion tonnes of resource and a large low-grade porphyry, mine life is not a problem. It's tailings capacity. So we're understanding how much additional tailings capacity from other areas within our site we have, and then how much external we can potentially permit. And that drives how big the expansion will be, and that drives if we can do it in a stepped way. So I go from where we're at now in the 50,000s up to some incremental step by using other tailings facilities on-site. And then permitting another side, externally, which gets us to a larger scenario. And obviously, the larger the better when it comes to low-grade porphyry. So that's exactly what we're doing, is analyzing and understanding our waste dump capacity on-site and our tailings capacity. Once we have that, we can work backwards to the throughputs that we obviously can do in the expansion. So that's what we hope to get back to you on a broad scale next quarter, and then put that into a study and have that out as soon as we can to you guys.

[Oscar M. Cabrera, Research Analyst]

Okay. I'm sorry, so next quarter, we would have an idea of what your plans are but the scoping study won't be ready until next year?

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

Correct.

[Operator]

[Operator Instructions] Your next question is from Daniel McConvey from Rossport Investments.

[Daniel McConvey, Founder & Portfolio Manager]

Two questions. One just on -- you have some -- there are some major mining companies who own properties around you. Are you talking with them, Darren, in terms of possibly doing something together? Making life easier for all of you just in terms of tailings or mining together.

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

Yes. Absolutely, we are doing that. And there is major mining companies next to us, with a lot of ground that has no infrastructure and no intention of any mining now or in the future. So that's absolutely a possibility. But obviously, we don't control that. We have to have a negotiation and an understanding between the 2. And so that's going on in parallel with what we can control. And all the things in our ground, obviously, we can control. So we're going to do the work required to understand what it would take ourselves as well.

[Daniel McConvey, Founder & Portfolio Manager]

Okay. There is scope there. You're not coming up a brick wall in terms of talks with them. Your feeling is that over time, something could be done.

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

Absolutely. Our feeling is over time, something could be done. Yes, there's a negotiation and openness from all the parties around us. So yes. Feeling very good about that as well.

[Daniel McConvey, Founder & Portfolio Manager]

Okay. Congratulations on the cost reductions. It's a nice set of results. Looking forward, just is there anything we should worry about going the other way in terms of cost over the next year or 2? For example, is your power renegotiation going to result in a higher power cost? Or something that's -- or paying more for water, whatever it is, over the next couple of years that we -- that is going to make any kind of material small step change to costs going in the other direction?

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

We do not see any cost that you mentioned, or any other ones moving in the other direction. Obviously, the commodities that are priced daily like oil and anything else, steel, we're subject to that like anyone else. But other than that, we do not see any -- we see lower power costs. We've been -- we've just got a step change lower rate with our current provider. And as Raman mentioned, we're working on switching providers that would allow more substantial rate decrease. So we see some more cost savings. We don't see anything that we need to disclose publicly that we think is large capital expenditures outside of our guidance or any one-off pricing increases.

[Operator]

Your next question is from Orest Wowkodaw from Scotiabank.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Two questions on Pinto Valley. First of all, just wondering if the grade, the copper grade, for the back half of the year, if you expect that to be sort of similar to what we saw in Q2? For the first question.

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

Orest, first question is the grade. No change from what we've guided. And it's, essentially, I think a little higher than in Q2, around that kind of 0.32-ish range for the second half of the year.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay. Yes, because your grade in Q2 is a lot better than originally you have guided for. So I'm wondering if there was some clawback in the back half of the year related to that.

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

Yes. No, what we did was we're are about 20% to 25% ahead of our stripping as I mentioned on the call, and that's allowed us to obviously open up more areas of the mine. So really, if you look past this year, you'll see low-grade, lower grades relative to this year, next year and then much higher grades relative to next year in that year, and we're going to be able to smooth those years out a little bit more by -- the more and more we get ahead in -- on our stripping. So we plan to keep moving forward on this stripping to give us much more flexibility within the mine, but it's not going to affect the back half of this year in grade.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay. And just on the stripping, I think you had issued earlier in the year stripping guidance for PV of $13.5 million. You've already spent a little over $12 million in the first half of the year. Are you expecting that to basically now fall off in the second of the year? Or is that budget going up as you're advancing?

[Raman S. Randhawa, Chief Financial Officer]

Orest, good question. Yes, I mean, given we're ahead on the stripping, there is more dollars going to capitalized stripping. So we -- that number will be about $6 million higher than what we had guided.

[Operator]

[Operator Instructions] Your next question is from Pierre Vaillancourt from Haywood Securities.

[Pierre D. Vaillancourt, VP & Senior Mining Analyst]

Darren, I was just wondering in this copper environment what your thoughts are on hedging?

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

Pierre, thank you for that question. No, we don't have any thoughts on hedging. We think this is like at a low point of the scale. We wouldn't want to lock in copper prices at this low level. So no, no plans to hedge in the near term or future.

[Operator]

There are no further questions at this time. Please proceed.

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

Well, thank you, everybody, for joining us on the call today. And as always, please don't hesitate to call us for any additional questions you have. Thank you very much.

[Operator]

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