Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2023-Q2

[Operator]

Good day ladies and gentlemen and welcome to the Capstone Copper Q2 2023 Results Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday August 02, 2023.

I would now like to turn the conference over to Jerrold Annett. Please go ahead.

[Jerrold Annett]

Good morning. I’d like to welcome everyone to Capstone Copper’s Q2 2023 conference call. Please note that the news release and regulatory filings announcing Capstone Copper’s 2023 second quarter financial and operational results are available on our website and on SEDAR. If you are logged in to the webcast, we will advance the slides of today’s presentation, which is also available in the Investors section of our website. I’m joined today by our CEO, John MacKenzie; our President and COO, Cashel Meagher; our Chief Financial Officer, Raman Randhawa; and our Senior Vice President, Risk, ESG and General Counsel, Wendy King. Following our brief remarks, there will be an opportunity for questions.

Please note that comments made on the call today will contain forward-looking information within the meaning of applicable securities laws. 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 the risks and uncertainties pertaining to our business, please see Capstone’s most recent filings, which are available on our website and on SEDAR. And finally, I’ll just note that all amounts we will discuss today are in U.S. dollars unless otherwise specified.

Now, I’ll turn the call over to John MacKenzie.

[John MacKenzie, Chief Executive Officer]

Thanks, Jerrold, and good morning everyone. We’re pleased to present our second quarter 2023 results and achievements. Turning to Slide 5, we’re pleased to report the construction at our transformational Mantoverde Development Project, or MVDP, remains on time and on budget. We have over 4 million tons of sulfide ore stockpile to date at an average copper grade of 0.63% ready for our ramp up that will commence by the end of this year. Photo on the slide provides an overall view of the new sulfide concentrator showing the primary crusher in the back left. The covered coarse ore stockpile dome in the middle and the grinding flotation and filtration in the center. This year is pivotal Capstone as we expect to complete the MVDP construction by year end setting the stage for a doubling of consolidated cash flow and positioning us well for our organic growth pipeline.

Turning to Slide 6, from an operational standpoint, we experienced a challenging quarter in Q2 marked by unplanned downtime at our Pinto Valley mine in Arizona and continued debottlenecking at Mantos Blancos in Chile. As a result, we produced a total of 39,300 tons of copper at consolidated C1 cash costs of $3.01 to payable pound copper produced. In addition to these challenges at Pinto Valley and Mantos Blancos production at Mantoverde was impacted by a planned plant shutdown for an electrical tie-ins of the MVDP. On a positive note, Cozamin had an excellent quarter, as the mine has now ramped up to full production levels with the new cut-and-fill mining method. Although our cost to elevate in Q2, a large portion of this is a reflection of our weaker production levels rather than underlying cost pressures. We’re encouraged by some of our input costs that are trending lower, which we’ll discuss in more detail in a few slides.

Turning to Slide 7, we provided H2 2023 guidance to provide more clarity on our operations following the slow start to the year. At Pinto Valley, we expect higher grades and no scheduled major maintenance in H2 to drive stronger production levels and lower costs. At Cozamin, we anticipate a continued strong performance in the back half of the year. At Mantos Blancos, we’ve moderated our expectations, which we expect reduced downtime to lead to more consistently higher throughputs in H2. And lastly, at Mantoverde, we anticipate higher oxide production in H2 as a result of higher irrigation rates with the expanded desalination plant for the MVDP. We have reiterated our previous 2023 capital guidance.

Now I’ll pass over to Raman for our financial results.

[Raman Randhawa, Chief Financial Officer]

Thank you, John. We are now on Slide 8. In Q2, we recorded copper sales of 40,800 tons, which includes a sales catch up on the prior quarter due to the timing of shipments in Chile. LME copper prices during Q2 averaged $3.84 per pound, down 5% compared to $4.05 in Q1 2023. Our realized copper price of $3.71 per pound was slightly below the LME quarterly average due to the timing of QP hedges, which provides month after shipment average prices. Based on current off-take contract structure, this mechanism works best for us. As a result, we recognize revenues in the quarter of $334 million. Realized copper prices, including the impact of copper hedges, results in a copper price of $3.61 a pound.

Our elevated costs on a per pound basis in Q2 were denominator-driven, as John mentioned. We have seen relief on some of our key inputs including sulfuric acid, diesel, and power costs, which are [indiscernible] in Chile. The largest input cost sulfuric acid, which peaked in 2022 at over $250 a ton, averaged $158 a ton in the first half of 2023. Moving forward, we expect to release $20 a ton lower in H2 and this lower trend is continuing into early 2024 where we have been – we have secured contracts at sub $100 a ton. With Mantoverde sulfides ramping up in 2024, our oxide production and hence asset consumption will be a lower overall portion of our cost base. The lower spot sulfuric acid prices should still bode well for our business. Ocean freight for copper concentrates from West Coast Mexico to Asia have declined from a peak of over $80 a ton in 2022 to just under $40 a ton in June. Additionally, slot diesel prices in the U.S. have declined from slot prices of over $5 a gallon last year in the mid $3 per gallon range. Furthermore, we have labor agreements in place at all of our operations for the next three years, providing additional cost certainty.

Turning to adjusted EBITDA, in Q2 of $43.4 million was impacted by lower production and higher maintenance costs incurred as a result of unplanned downtime, Pinto Valley and Mantos Blancos. The difference between LME of $3.84 per pound and our realized price, including hedges of $3.61 per pound translates into approximately $15 million impact after tax of $0.02 per adjusted EPS.

Moving on to Slide 9. On the left hand side, we summarize our available liquidity, which is at – which as at June 30th was approximately $420 million, which includes $118 million of cash and short-term investments and $302 million of undrawn amounts on our $600 million corporate revolving credit facility. We ended Q2 with a consolidated net debt of $760 million and an attributable net debt balance of $609 million. Our balance sheet is in excellent shape and is well positioned to complete the construction of the Mantoverde Development Project by year end. With Mantoverde spent to date of $706 million, the remaining balances are approximately $120 million.

The chart on the right hand side of the page illustrates our EBITDA sensitivity of various copper prices. You can see that 2023 is overshadowed by the EBITDA generation with Mantoverde sulfides at full run rate production. At $4 copper, we expect to generate approximately $330 million of EBITDA in 2023 and over $1 billion of annual EBITDA when Mantoverde Development Project is online. Although the Santo Domingo project is currently unsanctioned, the project has potential to further increase our EBITDA generation to about $2 billion per annum with the metal prices at current levels. The EBITDA generation associated with Mantoverde will enable accelerated opportunity to delever our balance sheet and be below one times net leverage at copper prices between $3.50 and $4 per pound, which provides additional liquidity to advance our future growth pipeline.

Turning to Slide 10. During recent months, we have received some level of clarity with a respect to the new tax regime in Chile. The new Mining Royalty Bill was approved by the Constitutional Court of Chile in July, and we expect it to be enacted in Q3 2023 and effective starting Jan 1, 2024. The overall effective tax rate is capped at 46.5% of adjusted mining operational income, not net income. However, we expect to be well below this level in the near-term driven by three main factors. Firstly, we do not expect to incur the 8% cash withholding tax for the next several years as we reinvest in Chile in our growth pipeline that includes Santo Domingo and expansions at both the Mantoverde and Mantos Blancos. Secondly, historic tax loss pools, an accelerated depreciation allowance on our project capital spend and future spend will significantly shield taxable income. As a result of these two items, we expect our tax rate to be below 20% over the next three to four years in Chile. Lastly, we are protected by DL 600 tax stability agreement at our Fully Permitted and Shovel Ready Santo Domingo project.

Now I’ll hand it over to Cashel for the operations review.

[Cashel Meagher, President and Chief Operating Officer]

Thanks, Raman. We’re now on Slide 11. Pinto Valley produced 12,600 tonnes of copper at a C1 cash cost of $2.98 per payable pound during Q2, which was below our expectations largely due to unplanned downtime in the primary crushing circuit resulting in an approximately 12 lost days of production. The operation restarted in mid-June and has been performing well through the end of July. Over the second half of the year, we anticipate higher copper grades with no significant maintenance scheduled to drive a meaningful increase in copper production and a decrease in costs. Furthermore, we are placing an emphasis on operational discipline driven key performance indicators. We are conducting component and asset assessments based on downtime priority, and we are implementing condition monitoring in order to improve our performance. In terms of our growth at Pinto Valley, we continue to engage with the local stakeholders during the quarter. Our efforts remain focused on identifying opportunities to transform the district.

Moving to Slide 12. Cozamin mine had an exceptional quarter producing 6,700 tonnes of copper at a C1 cost of $1.63 per payable pound. The mine has successfully ramped up mining rates using the new cut-and-fill mining method. Over the remainder of the year, we expect a continued strong performance for Cozamin. Our Mantos Blancos asset is highlighted on Slide 13. Total sulfide and cathode production yielded 11,700 tonnes of copper at a blended C1 cash cost of $3.15 per payable pound. This was below our expectations driven by preventative mill maintenance downtime and debottlenecking. While the major components including the crushing, grinding and flotation circuits remain more than capable of throughput rates in excess of 20,000 tons per day, linkages between these systems, including pumps and pipes have exhibited bottlenecks. Our H2 production guidance at Mantos Blancos includes a plan to address the plant stability, including improved maintenance and optimization of the concentrator. We expect to be delivering more consistently high operating rates within the fourth quarter.

Now on to Mantoverde on Slide 14. Q2 2023 oxide production was 8,300 tonnes of copper in cathode at an elevated C1 cash cost of $3.92 per payable pound. As previously mentioned, production and costs were impacted by the plant shutdown for the electrical tie-in of the Mantoverde Development Project. In the second half of the year, we expect oxide production to benefit from higher irrigation levels from the expanded desalination plant and we expect cost to decrease with higher production levels and lower sulfuric acid input prices. Most important significant progress was achieved at the MVDP during Q2. Project progress now stands at 88% with $706 million spent as of June 30th. With many of the classical major escalator risks behind us and/or materially diminishing, the total expenditure for the project remains at $825 million and on schedule for wet commissioning by the end of the year. The Mantoverde Development Project will deliver blended C1 costs below $2 a pound and produce approximately 120,000 tonnes of combined cathode and copper and concentrate with over 30,000 ounces of gold per year.

Slides 15 through 20 show construction progress at several key areas of the MVDP. Slide 15 shows the primary crusher with the retaining wall and conveyances advancing well. Slide 16 shows the ore stockpile dome, which is now fully enclosed and provides capacity for approximately two days of coarse ore mill feed. Slide 17 outlines the processing flow sheet on the bottom left from a bird’s eye view. All major components are procured and onsite are now in the final tie-in stages. During the quarter, the SAG mills internal rubber lining and the ball mills liners were installed. Slide 18 shows the new truck shop, which is largely complete and will be able to support the expanded mining fleet for the project.

On Slide 19, we highlight the tailing storage facility. Dredging work is largely complete and we are now in the final stages of liner installation. And lastly, on Slide 20, you’ll find the desalination plant. It has now been expanded to 380 liters a second to support the MVDP, and we are currently ramping up flow rates to that capacity. Turning to Slide 21, we outline a case study on previous ramp ups performed by Ausenco for similar copper concentrators. Recall that MVDP is off the shelf and features a conventional flow sheet. It is also a brand new plant with no pre-existing components. In the four most recent Ausenco projects highlighted, the ramp up to 100% of design capacity was achieved within six months. We look forward to completing construction by year end and commencing the ramp up.

Now over to Wendy King for the sustainability review.

[Wendy King]

Thank you, Cashel. We’re now on Slide 22 with a review of our sustainability highlights from Q2. At Mantos Blancos and Mantoverde, we have completed the independent assessment phase for the Copper Mark Assurance process, and we expect the award of the Copper Mark for both sites shortly. At Cozamin, we have completed the gap assessment phase. Cozamin and Pinto Valley are developing project plans to address identified gaps to participate in the Copper Mark process. This quarter we established a working group to support our sustainable development strategy implementation, which we outlined in Q1. We’ve identified pillar leads and have executive accountability assigned. Our inaugural sustainability report for the combined Capstone Copper Company comprising our Pinto Valley, Cozamin, Mantos Blancos, Mantoverde and Santo Domingo site is planned to be published in Q3. This report titled Growing Responsibly will build on our sustainable development strategy, including our specific greenhouse gas emissions targets.

We are very pleased that the paste fill and dry stack tailings facility at Cozamin reached its design capacity during Q2. This is an important improvement to the sustainability of Cozamin mine. We are now capable of diverting tailings to fill underground voids and provide greater stability to the mine, and we can recover more water from the dry stack tailings deposition process, reducing our overall makeup fresh water production requirements. The addition of this facility reduces the space required that conventional tailings would typically require. And proudly at Pinto Valley we have started a Women in Mining Chapter to promote the employment and advancement of women. We have also had women in mining logos placed on five new trucks. Women are underrepresented in mining and we must foster an inclusive and diverse environment to retain and attract a more diverse workforce.

And with that, I’d like to pass it back to John.

[John MacKenzie, Chief Executive Officer]

Thanks. Thanks, Wendy. Turning to Slide 23. We’ve outlined our sector leading growth plans and some of the additional upside within our portfolio. As can be seen, we expect MVDP at its run rate production level to bring us to a consolidated level of around 260,000 tons of copper at significantly lower costs. From there, we have a clear pathway to over 400,000 tons of copper production. We have brownfield expansions at both Mantoverde and Mantos Blancos with attractive capital intensity, and our portfolio includes a fully permitted and Shovel Ready Santo Domingo project. Further upside exists with oxides at Santo Domingo, utilizing our SX/EW plant at Mantoverde. Mantoverde Phase 2, growth in our Pinto Valley District and cobalt optionality in our Mantoverde Santo Domingo district.

On Slide 24, we’ve outlined a potential development timeline for our portfolio. Nonetheless, we’re fortunate to have significant flexibility in this regard and we intend to progress our pipeline in a prudent manner. Furthermore, our capital allocation decisions will be influenced by the eventual results of the studies we are working through with respect to each of these projects. However, this timeline does represent a feasible opportunity for us and would allow our project team to transition from MVDP to our brownfield optimization projects, followed by Santo Domingo. We are focused on execution to realize the value embedded within our portfolio. On Slide 25, we highlight the timelines for the aforementioned studies and catalysts we have over the next two years that support our growth plans with further upside beyond this across our portfolio. We’ve continued to build a talented technical team and are working with strong engineering firms to execute on these studies.

Before concluding, I’d like to announce some key management additions effective August 1st. Jim Whittaker is joining Capstone Copper as our SVP, Head of Chile. Jim has over 30 years of experience most recently with BHP Chile as President of Escondida Copper Mine. I would also like to thank Giancarlo Bruno, our former Head of Chile, who is retiring in mid-August, and who was instrumental in the development projects at Mantos Blancos and Mantoverde. Meanwhile, we’ve added to our operational and technical bench strength with Hayden Halsted joining our team as Vice President, Mining and Maintenance. Hayden also has over 30 years of experience in mining and civil construction industries, primarily in South America. And lastly, Edgar Rocha is joining us as the Project Director for Santo Domingo. Edgar joins at an exciting time as we are progressing the feasibility study ahead of a potential project sanctioning decision late next year.

In conclusion, we reiterate that we are in the midst of a transformational year for Capstone. I am very excited that we are on track for wet commissioning at MVDP by year end, that’ll lead to a step change to 260,000 tonnes of copper per year at significantly lower costs.

With that, we’re now ready to take questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

[Orest Wowkodaw, Scotiabank]

Hi, good morning. Nice to see the solid progress on the MVDP. I did want to get some more color though on the existing operations. We’ve seen a couple quarters in a row now of what I would call challenging performance at both Pinto Valley and Mantos Blancos. I realize there’s no more planned downtime. But Cashel can you give us some color on sort of why we are seeing so much unplanned downtime? And what measures maybe need to be put in place to try to minimize that going forward?

[Cashel Meagher, President and Chief Operating Officer]

Yes, hello Orest. Yes, certainly the first half of the year has been a challenge at Mantos Blancos. During the ramp up, I think, the elevator pitch is that the major components were put in and some of the linkages between them for maintainability and operability weren’t thought through really well. That was one issue we were addressing.

The other issue we were addressing was probably intensity and application of resources. After, when initially we achieved commercial production we got maybe a false sense that the systems and linkages were working properly between the major components and we didn’t resource enough a crew to address outstanding issues versus a crew to address preventative maintenance issues. So we’ve since divided the crews where one looks after preventative maintenance, making sure that our major components are being addressed and maintained properly while addressing the weaknesses in the design between the linkages. So this is underway.

We’ve also taken on more resources more experienced management to address these particular issues. So we’re focusing separately on implementation of preventative maintenance and reliability from addressing the, the interlinkage component issues we had.

Maybe for just a little bit of color, I’ll give you one example. One example is, is our Hydrocyclone classification units were lined with rubber in the initial phases of the project. And early on that worked really well. But Manos Planos has very coarse material, and that material wear was in excess of what the design the rubber could take. So, we’ve since reline those hydrocyclones with ceramic liners. So that’s an example of where now the maintenance periods between needing to change those liners, there’s increase and therefore less downtime.

So, when you build many of those upon each other you create less downtime and that is the key to Mantels Blanco’s ramp up. And that is where we’re working towards.

[Orest Wowkodaw, Scotiabank]

No comments on – Pinto Valley?

[Cashel Meagher, President and Chief Operating Officer]

Yes. So in the first quarter, as we sort of spoke about last time in Pinto Valley there was heavy rainfall and some of our ore distribution circuit was not used to heavy rainfall, and we were suffering from what we call sticky muck within the crushing plants. So, that was a bit of a challenge.

And then in the second quarter, what we’ve now experienced, again, in sort of the crushing circuit, we had some failures for some key structural pieces and some for motor alignments on some conveyances. And those were the biggest issues. These are one-off failures on an aged infrastructure. This has prompted us to re-look at what our view is of asset integrity. And it’s one of the focuses now where we’ve redesigned also our maintenance focus to look at electrical, structural and non-destructive testing in addition to our normal preventative maintenance processes. And we believe we’ve addressed the biggest issues at Pinto Valley.

So, with what’s been happening over the last month, we feel fairly very confident that we’ll be able to deliver on average about 54,000 tonnes a day going through to the end of the year. And we also have no major scheduled maintenance shutdowns. So it’s a refocus again on asset integrity and major components non-destructive testing.

[Orest Wowkodaw, Scotiabank]

Thanks, Cashel. And just one more, if I could just on Slide 24, which talks about your organic development pipeline, am I reading this correct, that you are planning to do the Mantoverde optimization project and the Montoss Blancos Phase 2 and start Santo Domingo all at the same time overlapping in in 2025?

[Cashel Meagher, President and Chief Operating Officer]

Yes, Orest what that shows is an idealized program for each of those projects. And the way we look at Santo Domingo is very similar to sort of Mantoverde development project Phase 1, which is a major capital project. We already have a very strong owners’ project team together with the Ausenco team that we would intend to see coming across to Santo Domingo.

The MVDP optimized in the Mantos Blancos Phase 2 are what could be described as more debottleneck projects of existing processes. So those obviously have relatively straightforward implementation, for example, in the case of both a major proportion of them is actually just additional mine fleet in terms of expanding the mine. So, we do believe that we can commence each of those two projects with the, what I would call the mine project teams that we have independently from our decision making around the commencement of Santo Domingo.

I think we’ve also sort of said before Santo Domingo, we will look at a full notice to proceed once we are sort of confident of, I would say, sort of a number of different factors. I think the first is the completed and successful ramp up of Mantoverde and seeing the sort of cash flow coming in from Mantoverde and the de-leveraging of our balance sheet. I think secondly, we would also be looking to sort of look at the macro environment and be comfortable that we sort of where we are in terms of capital escalation, where we are in terms of order lead times and copper pricing, what makes the most sense in terms of the point at which we pull the trigger on Santo Domingo.

At this stage we don’t see any reason why that shouldn’t be around the end of next year. But with each of these projects, we retain total flexibility on when we actually commence these projects. So, we will sort of look at the conditions at the time and see whether it’s prudent to commence that particular project at a point in time, whether there’s any justification to pause for a while and make sure we’re comfortable that whether it’s our balance sheet or the macro environment is in the right condition to advance.

[Orest Wowkodaw, Scotiabank]

Thank you.

[Operator]

Thank you. The next question comes from Dalton Baretto of Canaccord. Please go ahead.

[Dalton Baretto, Canaccord]

Thanks. Good morning John and team. I want to start by asking about MVDP. I mean, you’re in the home stretch now. Looking ahead to the actual ramp up, can you talk to some of the key risks you’re looking at and how you’re managing them?

[John MacKenzie, Chief Executive Officer]

Yes, thanks Dalton. And look, I will be turning this across to Cashel to talk in a bit more detail. But just sort of from a starting point, this is a project – we haven’t used any sort of new technology. These are established sort of concentrator flow sheets. A lot of the de-risking takes place in the sort of early stages of project preparation. And just by way of example, it obviously starts sort of with the ore body and for the sulfide ore body for the Mantoverde project we have for the full life of the mine, 70% of the reserves in the proven category and 30% in the probable category. That’s a high level of geological confidence. And most mines have actually for just the next couple of years, never mined for the full life of the mine. We’ve done very, very extensive metallurgical test work and designed the process plants accordingly.

And I think you probably saw – so we’ve actually – our contract with Ausenco includes the commissioning and the ramp up process. And with pretty much identical plants to the ones that Ausenco building for us they’ve achieved sort of, well better than sort of industry average ramp up rates in the previous four copper concentrators that they have built.

I think the next part to sort of de-risking obviously comes around operational readiness. And I would beforehand handing across to Cashel, I will just say, we have a very detailed operational readiness planned. Right now we are ahead of schedule in terms of the implementation of that plan. The mine itself is – it’s operating at full capacity. We’re already producing sulfide ore. So, the trucks are there, the shovels are there, the operators are all there and it’s all operating. So it’s really a question of getting the processing plants, operating procedures, processes and team in place. That’s very much the case. We’re busy ramping up very quickly. The team that we’ve got.

And I think in terms of sort of ore aspects of progress, whether it’s sort of critical spares, whether it’s sort of service contracts, suppliers, consumables, all of that is now very well advanced. But maybe just with that, if I can pass across to Cashel just for any sort of additional color.

[Cashel Meagher, President and Chief Operating Officer]

Sure, yes. There are a few key components near the end of any project and one is project completion is actually outfitting things. Like any project some areas fall behind and we address that with extra resourcing. So, we’ve put on a night shift in the last month, which we hadn’t had to do before, and that’s to help with the pulling electrical cables, small bore piping and termination of cabling that allows less people in the same amount of space, which allows for better inspection and in a 24-hour period obviously for further production. And in fact the productivity has been really good. They’ve been pulling over 2000 meters of cable a day. So it’s going quite well that portion. And so that was one mitigating factor where we stay on schedule.

Another one is in our tailings facility we have two contractors and we split the accountabilities on the earth moving and the liner placement. And so that has really sped up the productivity within the tailings facility. And again, that’s was addressing, we saw, a couple months ago that the productivity in the tailings facility was falling off a little, so that’s something you address. So those are the things you addressed to meet your completion date.

And then John is absolutely correct that the next thing is operational readiness. Our team has hired more than half the complement of people that are there over the next month will be up to finishing that off to a total of 126 new employees, including supervisors, managers, et cetera. So that is going extremely well as well as the implementation and population of the maintenance program and our SAP program and the various procedures and operating processes.

The other thing that’s unique about this particular contract that we have with Ausenco is they’re actually staying on through the ramp up. Typically they stay on through the commissioning phases and then the operational readiness crew takes over, which is extensively the operating crew. And so in this particular contract that was negotiated with Ausenco to achieve these as per our presentation, some of the outstanding better than industry benchmark ramp up they had in their last four copper concentrators. And we want assure ourselves that we have a chance of doing that too. They’re staying right on through commercial production in this with their A team for the operational readiness. And in fact their team for commissioning is already there working on that and preparing for it. So we feel really confident with it.

And I would just add to what John said, it is key that we have four million tonnes of stockpile there, it is key that the mine is already ramped up, three of the four shovels are fully operational, the better part of 80% of the fleet is operating. We’re just adding to future incremental stripping that is required in the mine plan later in January when the four shovel arrives. So of all the projects I’ve been with, this one is extremely well organized and looks to that operational period with a lot of forethought. And so that’s why we’re very confident in where we stand today.

[Dalton Baretto, Canaccord]

Thank you for that detailed answer. And then just maybe looking forward a little bit what’s the latest on your thinking around the MVDP optimization?

[John MacKenzie, Chief Executive Officer]

Yes Cashel, we’re actually super excited about the MVDP optimization. It’s just a sort of quick summary as to what it’s about is we have designed the MVDP to do 32,000 tonnes of ore process a day. However, we have somewhat over-designed the primary crusher and the grinding system that we believe can do sort of in the range of 40,000 tonnes to 45,000 tonnes a day. And so the MV optimized is really a study that’s – and it’s a detailed engineering that’s currently underway to debottleneck the backend of the plant to also be able to process that 45,000 tonnes a day.

So, that’s work in progress. We’ll pretty shortly be submitting the permit for that, which is – it’s a DIA, which is a relatively straightforward permit. And our current estimates as to the capital cost of this project is probably in the region of $150 million. That should produce around an extra 25,000 tons or so of, of copper a year.

And if you just look at that in terms of capital intensity, that’s around $6,000 per annualized tonne of copper production, which – that’s about half of what’s MVDP itself is, and MVDP itself in turn is around half of what the industry capital intensity figures are.

So, it’s a super attractive project. We believe it’s a pretty straightforward project. It’s really just sort of in the kind of flotation and filtration area where some additional equipment will be required, but we do believe it’ll be a really, really good sort of returning project and one which, I think, sort of continues to sort of, along with our other catalysts, kind of really provide another exciting year in the year to come.

The end of this year we begin the sort of commissioning and ramp up of Mantoverde. We also complete the feasibility study for Santo Domingo. And then during the course of the first half of next year we’ll complete this sort of optimization study at Mantoverde and obviously complete the sort of – the ramp up.

So in parallel with that, we continue to look at in Mantoverde Phase 2, which would then be a sort of full second line at Mantoverde. The resource base is large enough to support sort of another 45,000 tonne a day line. And that’s a study which we should be bringing out sort of during the first part of next year as well. So, a lot of different catalysts that sort of continue this, what I would call, sort of low risk growth profile moving forward.

Cashel is there anything you’d like to add to that?

[Cashel Meagher, President and Chief Operating Officer]

Yes. I think one of the unique things, and it was asked in the previous question too we have the opportunity to overlap MB to MV to or optimized MB and Santo Domingo. But I think one of the unique things about Mantoverde optimize and the increase from 32,000 tonnes a day, what we believe will be closer to 45,000 tonnes a day, that in the past that these Ausenco designed plants have achieved this. And so I had the fortune of working on one of their previous plants, which was designed for 76,000 tonnes a day, and ultimately, although it wasn’t called an optimized process, ended up being capable of producing consistently at 90,000 tonnes a day.

So we know the overall engineering design is there, and Ausenco has validated this with us, and that is why this is based on this engineering study that will come out in the first quarter. And we have great confidence in the ability of the major components of the grinding circuit and the tailing circuit to be able to handle this tonnage. And it’s something that I’ve experienced before and certainly Ausenco has experienced before. And so we have great confidence in this being a very simple to us in-house expansion of The Mantoverde Development Project to get to 45,000. So this is a complicated addition. I’d also add that, as John had mentioned, Mantoverde Development Project has great project metrics per capital intensity, and this is even better, we believe. So we really look forward to putting out this study in the first quarter next year.

[Unidentified Analyst]

Thanks guys. Maybe we can just squeeze one last one. And just on Pinto Valley, just wondering where the conversation stands between BHP and Freeport? And how you come up with that 80,000 tons of copper per annum number in your presentation? Thank you.

[John MacKenzie, Chief Executive Officer]

Yes. Thanks Dalton. We’ve been quite enthused by the engagement that we’ve had in that district with the players in that district, and those conversations are continuing. We were obviously sort of doing a lot of work behind the scenes in terms of looking at what an optimal district could look like. I would say it’s still early stage. We’ve got – there’s a lot of work to be done both in sort of district discussions, but also in terms of our own work to figure out the optimized kind of configuration for that district. What we do know is it’s a district with very; very large – very, very large resource base, a lot of infrastructure already in place and the capacity to support very, very large throughput rates at what we believe could be highly competitive costs.

So when we sort of look at sort of where that could take us to, today we have the sort of capability of doing around sort of 60,000 tons a day at Pinto Valley with the sort of district resource base that is there. One could certainly see that being sort of potentially tripled in terms of processing sort of throughput rates and just looking at kind of average resource grades of the area that’s how we sort of that calculate to the kind of – the kind of numbers that’s – that you’re referring to. And that’s obviously in addition to what we’re currently producing at Pinto Valley.

So that’s – that’s, as I say it’s early stage work. There’s a lot of work to be done. I think that works well for us. We have sort of, when we look at our pipeline, we need to complete Mantoverde Development Project. The next phase will be Santo Domingo after that. Obviously we have sort of in parallel potentially sort of Mantoverde optimized and Mantos Blancos Phase 2. And I think that gives us the time to really work through what is the optimal approach to developing this as a world class district.

[Unidentified Analyst]

Thanks for that, John. I’ll jump back in queue.

[John MacKenzie, Chief Executive Officer]

Thanks Dalton.

[Operator]

Thank you. The next question comes from Ralph Profiti of Eight Capital. Please go ahead.

[Ralph Profiti, Eight Capital]

Thanks operator. Good morning everyone. I just want to come back to some of John and Cashel’s commentary. And Cashel, you talked about this – this comprehensive component and infrastructure assessment at Pinto Valley and is testing that’s going to be going on? And just wondering how that plays into sort of the district growth plan that that was just addressed because that in of itself has investments in mill expansion required. And just wondering if you’re going to be stress testing some of those scenarios in the study that’ll give us a line of sight into that?

[Cashel Meagher, President and Chief Operating Officer]

Yes. Sure, Ralph. What we’re doing with the study and it’s a joint task force and we do work with the partner property owners in the region principally BHP is understanding what is available to us. And simply we’re in trade-off studies now whereby we’re evaluating what are the end members of what is possible. So one of the end members, for example, we would be stress testing is what is currently capable of expansion at the Pinto Valley processing facility itself with obviously the ongoing maintenance focus and upgrading. And the idea would be is, if you were to optimize the resources available to you within the district as far as Old Dominion, including Copper Cities, is there a way to high grade the district to increase the grade going through our current facility and what incrementally could we increase our current facilities production rate per day to accommodate that; so that’s one end member.

John, described I thought quite well the other end member, which is maybe what if we added processing facilities in strategic locations to where those resources are to increase the district product per day, and it could be as much as 150,000 ton a day with the sum of all two – two processing facilities and then utilizing all the resource in an optimized mine fashion to be able to determine what the output is. So that’s the exercise underway. That exercise is key to determining what kind of partnership we would arrive at, and that’s sort of the work that our technical services team jointly with the likes of BHP are working on to understand what is in the art of the possible, knowing that the resource is there. We validated the resource at Copper Cities. We know there are key underground deposits within the region that also offer high grade opportunities for sweeteners to the feed. So we’re really excited about this of being the next leg of growth for Capstone Copper after Santo Domingo.

[Ralph Profiti, Eight Capital]

Okay. That’s helpful. Thanks. Thanks Cashel.

I wanted to ask a second question and more as a follow up to the Ausenco and the specifically the slide that, that dealt with the case studies. And just as a point of clarification is, is Ausenco sort of benchmark on the industry standard? Or are they giving you sort of a more of aggressive timeline based on their precedent, right? And because you sound pretty confident that the proper incentives are in place regarding execution, which would put commissioning sometime in and around Q3 of 2024?

[Cashel Meagher, President and Chief Operating Officer]

Yes. Like I am pretty confident, this is they – they have a – their Chief Technical Officer is a guy named Greg Lane, and he’s well known in the industry for copper flotation circuits, and he’s proven it up. He’s the – now the proof is in the pudding. They ramp up better than what industry standards are? We all know, and we all hear about other ramp-up that take considerable time and considerable pains and Ausenco is one of the engineers that have found a niche and their niche and their expertise is in copper plant ramp-up; and so it gives me confidence. What I will tell you is, is budgeting purpose wise, we’ve assumed industry standard, ambitiously and confidently I think will exceed that standard.

[Ralph Profiti, Eight Capital]

Thanks Cashel, very helpful.

[Operator]

Thank you. The next question comes from Craig Hutchinson of TD Securities. Please go ahead.

[Craig Hutchinson, TD Securities]

Hi, good morning everyone. A couple of quick questions from me. John you gave good clarity in terms of the capital cost for the MVDP optimized expansion of $150 million. Anybody can kind of give us a sort of broad sense of what the cost will be for the Mantos Blancos Phase 2 optimization?

[John MacKenzie, Chief Executive Officer]

Yes. Thanks Craig. It’s work in progress and I think sort of the approach to how we’re going to deal with the Mantos Blancos Phase 2, I think is also – is also evolving. I would say sort of the, the quick answer to your question is probably sort of in the sort of sub-$100 million range to get us up to 27,000 tons per day. I think the approach that we’re looking at, we’ve – we are taking a lot of learning’s from the current sort of commissioning and ramp-up of the plant. And I think one of those learning’s is that rather than sort of do a project that steps us up from 20,000 up to 27,000, we might well look at doing it in steps, sort of a progressive de bottle making through each item of the plant that’ll – that’ll move us in steps up to that 27,000 tons a day.

That capital number, which I mentioned, there’s not actually that much that’s needed within the plant. I would say at least half of that amount is actually additional mine equipment to provide the sort of additional throughput. So it’s really more a question of tweaking what is there already to get us up to that – to that throughput rate. And there’s work in progress on that. We have for example a number of the sort of smaller older mills that are available that can be utilized to get us to the 27,000 tons a day. However, what we are seeing is just with the – the current two mills that we’re running for the – the current project, those – those may have the potential actually to get us all the way to that tonnage without even needing those, those smaller mills.

So this is really where we are looking at sort of what is the – the most efficient sort of project configuration to get us up to that, that throughput rate? And that throughput rate really sort of represents the optimal kind of pillar value throughput rate for the current resource space as we know it.

[Craig Hutchinson, TD Securities]

Okay, great. Thanks for that. And just one other question just with regard to the decision to sanction Santo Domingo, you said it’s obviously contingent on a few things, the macro environment. They also mentioned the ability to kind of leverage your balance sheet. What kind of financial metrics are you guys sort of comfortable with in order to go ahead and sanction that project?

[John MacKenzie, Chief Executive Officer]

I’ll pause that one across to our CFO too, Raman.

[Raman Randhawa, Chief Financial Officer]

Yes. I mean, Craig, we always say we want be below two times net debt-to-EBITDA and then we’ll kind of lever up during the build phase. So like making sure the numbers south of that would be a good proxy. And – but look – when you look at MVDP, it quickly starts bringing our net debt closer to one time. So I think somewhere between that one to two before we layer it back on, but we view that as back end of 2024.

[Craig Hutchinson, TD Securities]

Alright, great. Thanks guys.

[Operator]

Thank you. The next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

[Stefan Ioannou, Cormark Securities]

Yes. Great. Thanks very much for all the detailed answers, guys. Just kind of curious, I mean, it’s obviously great to see the transition at Mantos Blancos and Mantoverde from oxides to sulfides? Just kind of curious given we’re looking at a compelling sort of copper macro going forward, are there any sort of plans maybe in the background to nevertheless look to augment those mines with additional oxide output going forward?

[John MacKenzie, Chief Executive Officer]

Yes. Thanks. Thanks for the question, Stefan. And again the short answer to that is yes. We’re looking at lots of different ideas as sort of it’s both – both the SX/EW plants, Mantoverde and Mantos Blancos have a capacity of 60,000 to 65,000 tons of cathode per year each. At Mantos Blancos, we’re producing in the region of sort of 15,000 tons or so. A year at Mantoverde going forward for the next 15 years or so, it’s in the region of sort of 30,000, so about half the capacity. So we have between half and three quarters of that SX/EW plant capacity that’s available. So starting with Mantoverde, we’ve got a lot of different options. We know there’s 90 million tons of oxide ore at Santo Domingo, which was never part of the project. It was they couldn’t justify with that tonnage building their own SX/EW.

So today it clearly makes more sense to sort of leach that material and utilize sort of pipe the [indiscernible] to Mantoverde and utilize that capacity. So that’s because that was never included in the previous project. There’s some drilling work and some network that’s needed before we can kind of confidently include that, but that – that works underway and we’re very positive about it. I would say at both operations there’s obviously the possibilities of sulfide leaching. We have low-grade sulfides at both Mantos Blancos and Mantoverde, which certainly could be used for kind of additional feed into the SX/EW plant. One of the things we’re looking at Mantos Blancos is we’ve got, it’s an old mine, it goes back to the sort of late-50s, early-60s and so we’ve got very, very large kind of sort of what you call sort of coarse tailings that, that are quite high grade in terms of oxide grade.

And we are looking at the possibility of leaching some of that material. And that could provide a fairly significant feed into our SX/EW plants. On our property we have – we have some sort of known areas where they’re sort of showings of oxides and we will be sort of moving on to investigating whether those sort of warrant developments. And then obviously we sort of always look at kind of the straight opportunities that could sort of also feed into sort of either of those SX/EW plants. To us it’s – any unused capacity is sort of a potential dollar wasted. So we are looking very, very hard at how we over time make absolute sort of best use of that infrastructure.

[Stefan Ioannou, Cormark Securities]

Great. Great. Got it. Well thanks very much for that.

[Operator]

Thank you. The next question comes from Alex Terentiew of Stifel. Please go ahead.

[Alex Terentiew, Stifel]

Hi guys. Good morning. So two quick questions from you. First, I just want to go back to Mantoverde, 2024 when you guys start this mine up, one of the key benefits you’ve reiterated many times here is the expectation for cost to drop. Can you just give me an idea of those costs based, I’m assuming that’s based on obviously past studies and stuff but have those costs been updated due to reflect the current cost environment? So in other words, I’m guessing, or I’m asking is, is that sub-$2 cost still something that you are pretty confident in achieving? So I’ll leave it there from my first one. I’ll ask my second one after.

[John MacKenzie, Chief Executive Officer]

Yes. Alex, we’re just going through our annual budgeting process now, but those are – those are not old tech report numbers. Like we refresh some annually and we’ve seen one of the biggest drivers is going to be energy price that’s going to move away from being cold indexed. So that’s going to be some significant savings when we turn the plant on. So yes, they’re – they’re fairly recent, but they’re – we’re just going to go through the annual budgeting process to refreshing. But a lot of the input cost, one of the major ones is power will be falling off that cold index.

[Alex Terentiew, Stifel]

Okay. Perfect. And my second question relates to the surety bond at Minto Mine. I have to admit, I’m not particularly familiar with the accounting treatment of such bonds. But, so in simple terms the $54 million liability, is this a cash liability that Capstone is expected to pay within the next few years; just any clarity on that would be appreciated?

[John MacKenzie, Chief Executive Officer]

Yes. So we were indemnified the surety bond for Minto and when we sold it. So it was Canadian 72 or 54 U.S. And so from an accounting perspective, we recorded the 54 U.S. as a liability on our balance sheet. And that means, like you mentioned it’ll be paid out over time as reclamation is spent on the mine in cash.

[Alex Terentiew, Stifel]

Okay. And I’m kind of assuming in over the next five, 10 years or so?

[John MacKenzie, Chief Executive Officer]

Yes. It’s probably front loaded, right, so over the, a large chunk of it probably over the next five years.

[Alex Terentiew, Stifel]

Okay. That’s it for me. Thank you.

[Operator]

Thank you. [Operator Instructions] The next question comes from Bendik Nyttingnes from Clarksons Securities. Please go ahead.

[Bendik Nyttingnes, Clarksons Securities]

Thank you. Just looking at the second half guidance for Mantos Blancos [indiscernible] quite a bit stronger than so far this year. I’m not a geologist, so how much of a gradual process is turning up that throughput just in terms of timing through the second half? And also what’s the potential for the sulphide operations at Mantos Blancos in 2024, if the concentrator optimization is successful?

[John MacKenzie, Chief Executive Officer]

Yes. So for Mantoverde we see ourselves through the wet commissioning by the end of the year. And the worst case scenario I believe is by late H1. We’d be fully ramped up at Mantoverde Development Project, but as we’ve sort of been indicating in the presentation and also the presentation we’re quite confident in beating industry standards and our setup is going well. So we’re optimistic that it’ll be more in Q1 that will be fully ramped up for Mantoverde.

Mantos Blancos, sorry go ahead.

[Bendik Nyttingnes, Clarksons Securities]

No, sorry. Yes, I was more and more thinking about the Mantos Blancos optimization of the concentrator.

[John MacKenzie, Chief Executive Officer]

Yes. So we believe by the end of the year we’ll be fully ramped up to design capacity.

[Bendik Nyttingnes, Clarksons Securities]

Okay. Thank you.

[Operator]

Thank you. There are no further questions. I will turn the call over to John MacKenzie for closing remarks.

[John MacKenzie, Chief Executive Officer]

Thank you. We look forward to updating you again in November in our Q3 results. And until then, keep well and feel free to reach out to Jerrold or Daniel if you have any further questions. Thank you for your continued support and have a good day.

[Operator]

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.