Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp. Third Quarter Results 2019 Conference Call. [Operator Instructions] This call is being recorded on Wednesday, November 6, 2019.I would now like to turn the conference over to Jerrold Annett, Vice President, Strategy and Capital Markets. Please go ahead.

[Jerrold Annett, Vice President, Strategy and Capital Markets]

Thank you. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2019 third quarter financial results is available on our website. And if you are logged into the webcast, we will be advancing slides, which are also available on our website.With us today are Darren Pylot, President and CEO; Raman Randhawa, Chief Financial Officer; Brad Mercer, Senior Vice President of Operations and exploration; and Mike Wickersham, General Manager of Pinto Valley Mine. 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]

Thanks, Jerrold, and good morning, everybody. We appreciate everyone dialing into our call an hour earlier than usual. And for those not on the webcast, we're on Slide 3 of the presentation.Overall, the third quarter met our expectations. Importantly, we made good progress in further distilling our organic growth opportunities, particularly at Cozamin, which we'll expand on later in the call.Focusing on Q3 results. Overall, we produced 39 million pounds of copper at a C1 cash cost of $1.85 per pound. We expect to finish the year within our guidance on both production and costs.At Pinto Valley, increased waste stripping allowed us flexibility to access higher grades at the mine, averaging 0.34% copper within the quarter.At Cozamin, our team delivered another strong quarter, producing over 9 million pounds of copper at cash cost of $0.94 per pound. We're able to increase throughput to over 3,200 tonnes per day, and we continue to increase our operating development meters to prepare the mine for increased mining rates in 2021.I'll now turn the call over to Raman to give you a brief update from a financial perspective, and then he'll forward over to Brad Mercer to expand on Cozamin's drill results announced yesterday.

[Raman S. Randhawa, Chief Financial Officer]

Thanks, Darren. Moving on to Slide 4 of the presentation. Operationally, we had a solid quarter on production and cost. On a financial results perspective, the timing of sales in Q3 affected revenue and operating cash flow plus a negative provisional pricing adjustment in the quarter of $3.4 million, which resulted in a net loss of $10.7 million or $0.03 a share. We reported adjusted EBITDA of $14 million. So if you add back the lower sales of approximately 8 million pounds at a margin of $0.50 a pound, that equates to additional EBITDA of $4 million plus the negative provisional pricing of 3.4%, thus, the EBITDA normalized for lower sales and provisional pricing would have totaled approximately $23 million in line with the consensus. The timing of sales also resulted in a draw of $10 million on our revolver. Our balance sheet is still strong in a low copper price environment, with peer-leading net debt-to-EBITDA of 1.5.Next slide, Slide 5. I'm pleased to say that Capstone has now removed $25 million of sustainable annualized cost out of the business, achieving our target of $25 million to $30 million. In the quarter, Pinto Valley achieved additional $2.5 million, bringing their year-to-date total to $12.5 million compared to a target of $15 million to $20 million. And at the corporate level, we saved additional $2.5 million (sic) [ $3.5 million ] from improved terms on our credit facility as well as optimized cash management to minimize interest [ costs ]. These cost reductions have us on track to hit the low end of our cost guidance for the year. Also, as part of prudent capital management, we have reduced our 2019 capital guidance by $8 million, at least half of which has been eliminated.Before I pass it over to Brad to discuss the drill results from Cozamin, from my perspective, to have a first quartile low-cost mining at Cozamin with production now growing to almost half the size of Pinto Valley is very exciting. This mine generates substantial free cash flow at all points of the copper cycle. It's great to see that Cozamin will remain a core asset for Capstone for the next decade.

[Bradley J. Mercer]

Thank you, Raman. For those following on the webcast slides, we're on Slide 6. Yesterday, Capstone announced some high-grade copper/silver drill results over 100 holes as well as an extension to the successful program into -- well into 2020. We've added another rig. We're now drilling with 6 rigs and expect to deliver about 10 holes per month till mid- to late 2020.We are really excited with the drill results to date. And since the last mineral resource, we have drilled over 100 holes. I think there's 103 in the press release, and we're adding an average of 10 per month, as I said. As well, we acquired the Portree claimblock, which is located in the middle of our mine, and we have been negotiating on that for over a decade and finally acquired it. So our patience has paid off. Our first test into the middle of the Portree claimblock, U499, was a successful, large step-out from our resource model. So it's not in the previous resource estimates. And I'd ask you to note the high-grade results on the porphyry of the claimblock. For example, hole 384 intersecting 4.5 meters of 3% -- 3.6% copper, the hole 498 intersecting 12 meters of 5% copper. We expect Portree to be a target of significance in the next 12 months, and we will continue to announce more drill results on a regular basis going forward.In addition to opening up more blue-sky, the Portree acquisition also simplifies our mine plan as we no longer need to mine around it since we now own it thereby reducing future development and mining cost and streamlining haulage. We are currently mining on both sides of the block.I'd ask you now, if you're following on the webcast, to turn to Slide 7, which is a beauty. We have used the heat map to illustrate the copper and silver grades times true width, and the recent step-outs are returning better grade times thickness than the current reserve. Basically, what you will see, there's more heat outside of the reserve area than inside. And by comparing the warm orange and red colors in both diagrams, you will notice a very strong correlation between the copper and silver [ minerals ]. So as well as having high grades, the vein is approximately 60% wider in this area outside the reserve than areas inside the reserve. As I said earlier, we intend to drill with 6 drills, keep them busy infilling and further expanding this high-grade resource. It's open in 2 directions, so anything in the white space you see there is a step-out.Our strategy is to both infill and step-out equally as we move through the program. And as I said, we plan to release drill results on a [ regular basis ] as we lead into a reestimate of the mineral resources and the mineral reserves and a technical report by Q4 of 2020.I will now turn the call back over to Darren to explain our near-term organic growth opportunities and upcoming catalysts.

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

Thank you, Raman and Brad. We're now on Slide 8 for those of you following along. And looking ahead to the rest of this year and into the beginning of 2020, at Pinto Valley, we're evaluating potential expansion scenarios to take advantage of the nearly 1 billion tonnes of mineral resources that are currently not in the PV3 pit shell. For the remainder of 2019, PV4 study activities will be focused on further evaluating alternative infrastructure options.And at Cozamin, development of the one-way ramp remains on track for the end of 2020. Our level of confidence in expected post-expansion production, as Brad has outlined, has increased due to the high-grade drill results that Brad just spoke about. We now expect to produce between 50 million and 55 million pounds of copper and 1.5 million ounces of silver beginning in early 2021 and beyond.Based on the recent drill results, we've added another drill rig, and we're now currently up to 6, as Brad spoke about, and that's really maxed out. We're trying to hit this program as hard and aggressive as we can. And as I said, over my -- since 2006 when we began the property, I've never been more excited about the potential at Cozamin that I see now. And more specifically, we're targeting a 30% increase in throughput, which equates to a 50% increase in copper and silver production. And we also want to demonstrate a mine life extended approximately out to 2030. Plus, there's exploration upside, as Brad mentioned, along strike, both to the east and west. And we'll be releasing an updated mineral resource and reserve estimates by the end of 2020.Moving on to Santo Domingo. We continue to see significant interest in the strategic process, which is ongoing. But due to the current uncertainty with the copper price direction, the process is moving more slowly than we originally anticipated. A key for us is to find a strong strategic partner to advance the project. And in the meantime, work continues to update the 43-101 to include the current permit status, new power costs, better gold recovery as well as developing the preliminary business case for producing battery-grade cobalt. We are targeting the release of the updated technical report in Q1 of next year.On to the next slide. In conclusion, I hope we've demonstrated our enthusiasm for Capstone's organic growth in the coming years. We are focused on execution to position Capstone as a leading mid-tier copper producer with strong and sustainable free cash flow at all points of the copper price cycle. We will continue to look for opportunities to flex each of our operations and maximize profitability. And lastly, we will always look for ways to surface value for our shareholders.With that, we are now ready to take questions from the floor.

[Operator]

[Operator Instructions] Your first question comes from Dalton Baretto with Canaccord.

[Dalton Baretto, Analyst]

Congrats on finally committing to upgrading the secondary crushing circuit at Pinto Valley. Can you talk a little bit about what drove this decision now, whether you're going to take any downtime when you're actually doing the switch over and what you're expecting in terms of improvement in availability?

[Mike Wickersham, General Manager of Pinto Valley Mine]

Thanks for that question. This is Mike Wickersham. We're pretty excited about this opportunity. One of the challenges that we have faced is the unreliability in a plant that has aging infrastructure and aging equipment. So this represents a low capital intensity opportunity with very little disruption because the crushers that we have targeted can be adapted to the existing concrete structures that we have inside the building. So for a fairly small amount of downtime, we can install crushers that have more installed horsepower capacity that are more efficient. They deliver a finer particle size, which makes sure the mills are fed with the right material to run at full capacity in the ball mill circuit. And this is a culmination of several studies that have taken place over the last couple of years. I think the time is exactly right for us to make this investment while mining is in a bit of a down cycle and we have access to these pieces of equipment with relatively low lead times.

[Dalton Baretto, Analyst]

So what are you expecting in terms of improved reliability? And like how comfortable are you with guiding to 57,000 tonnes per day?

[Mike Wickersham, General Manager of Pinto Valley Mine]

We're very confident. What we see as we look at the Pareto chart of downtime events, both planned events and unplanned events, this investment in the primary bottlenecks and the value chain, starting with the fine crushing plant, there are also some debottlenecking activities that are taking place in the ball mills, we're very confident this is the solution that the value chain needs to run at full capacity reliably.

[Dalton Baretto, Analyst]

Okay, great. And then just maybe switching gears to Cozamin. Some pretty splashy drill results there last night. On the site, basically, you started guiding to 50 to 55 million pounds from 2021 onward. Can you tie the 2 together for me? Just how much of the 50 million to 55 million is based on some of these new drill results? Do you see upside to that number, maybe mine life extension?

[Bradley J. Mercer]

Well, I think first and foremost, with the opening of the ramp, we know we can hit 50 to 55 with the current reserve. What the drill results really give you is then sustaining that throughput for a longer mine life. And I think key to that is where we are drilling now, the vein is approximately 60% wider than served, so we expect to have a lot of bigger stopes in the future.And if you look at the heat map on Slide 7, as I alluded to earlier, there's a lot more heat outside of the reserve than is inside of the reserve. So we're going to attain the 50 to 55 million tonne -- sorry, pound output by only increasing the throughput to 30%. And that is not -- we believe it's not even coming close to stressing our mill. So it's just a matter of breaking the [ tonne ] surface. We are ahead on all of the access and all of the capital projects, the ventilation to support this, the ramp to support it. We have currently the highest inventory of developed access to ore bodies in the mine's history, so I think we're well set up.

[Dalton Baretto, Analyst]

Okay. Great. And just maybe one last one on Santo. Darren, can you give us some sort of a sneak peek in terms of what you're looking at in terms of shared infrastructure, how much CapEx you're looking to trade for OpEx, that sort of thing?

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

Yes. I mean infrastructure sharing, we've been working on and is ongoing, is around port sharing, water delivery sharing. We're looking at different options in terms of lowering CapEx by trading off, as I said, the CapEx to OpEx in terms of user fees and ports. Obviously, you would be looking at a turnkey build with a fixed price contract. So all those things are kind of -- are in the works. And whatever comes to fruition will be included in the technical report that will be, as I mentioned on the call, coming out in Q1, which will reflect better power costs and some other savings as well as the cobalt project.

[Operator]

Your next question comes from Craig Hutchison at TD Bank.

[Craig Hutchison, Research Analyst]

A few questions for me. Just in terms of the production ramp-up at Cozamin, the target of 50 million to 55 million pounds, when do you guys think you can actually be there? Is that a target for 2021? Or do you think there'll be some more ramp-up time and we're looking more like 2022?

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

Craig, I think it's going to be fairly quick because really, as Brad spoke about, all it is, is a traffic exercise underground. Right now, we currently have our ramps going down the deepest part of the mines and the trucks have to go up and down the same ramp. And so what we're really creating is just a one-way loop for the same amount of trucks to do the same amount of hauling, just in a much more organized fashion. As we said, the mill is already sized and ready to go for up to 4,000 tonnes per day. Really, what we're doing now is we're just not operating the mill for the first 5 or 6 days of the month, and the difference will be filling the mill every day. So there'll be a little bit of, I guess, maintenance practice upgrade because they're going to have to do maintenance more efficiently than they have. And there'll be a traffic exercise underground, but we don't see a large ramp-up because there's really not a lot to do to achieve that difference other than just deliver the ore from underground. So I -- maybe it will be a couple of months max to kind of get things organized, and we're hoping to get the schedule completed a little earlier and give us that time at the end of next year, so we can hit it fairly close to the start of the year at the full rate.

[Craig Hutchison, Research Analyst]

Okay. And just in terms of that target of 50 to 55 million pounds, based on what you guys have seen in the drill results to date, how many years do you think you can produce at those levels? I mean I know your target is sort of to extend the reserves here to 2030. But is it realistic to think you could be in that sort of production range for that period of time?

[Bradley J. Mercer]

Absolutely. We've run a mine plan on the resource and the reserve, treating it equally as an internal exercise to support this capital investment we're making. And we see 8 to 10 years, no problem. And if you look at the Slide 6, there's a lot of white space there. That doesn't include any of the drill holes that are outside of the colored area. So we're aiming obviously to push it beyond 10 years.

[Craig Hutchison, Research Analyst]

And that's at the 50 to 55 million pounds, the 8 years you're talking.

[Bradley J. Mercer]

Yes. That's at that sustained rate.

[Craig Hutchison, Research Analyst]

And then just in terms of -- you're going to be producing a fair bit of silver there, I think, 1.4 to 1.5 million ounces. Would you guys consider a silver stream at today's prices to use some of the proceeds to perhaps buy back stock or to fund some of your organic growth potential at Pinto Valley?

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

We're definitely going to evaluate what stream would bring in for proceeds, what it's worth. Absolutely. There's -- this is a Tier 1 asset with, as you guys know, very low cost profile. It is one of the few assets around that can afford to do a silver stream. So I'm not going to commit to one. But definitely, we are going to evaluate with this new resource and reserve and these drill results that what that value could be because when we look at silver streams out there and the amount, we see in excess of $100 million upfront in terms of silver proceeds. And our market cap isn't much more than that, and that really only equates to 8% of our overall revenue for Capstone. So it's something we definitely have to look at.

[Craig Hutchison, Research Analyst]

Okay, great. And then one last question for me. I think you guys trimmed your CapEx for this year. Could you just provide some context to what was cut out?

[Raman S. Randhawa, Chief Financial Officer]

From a capital guidance perspective, I think our guidance for the Cozamin ramp-up had about $6 million to $8 million, as you know, and then it's spread into 2020 as well. So the Cozamin expansion project now is going to total $5 million to $6 million total. So there are some savings there. And then on Pinto Valley, we reduced and deferred some capital between PCRs, some things that we could push out into next[Audio Gap]for placement.

[Operator]

Your next question comes from Orest Wowkodaw at Scotiabank.

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

Just digging a bit deeper on the Cozamin expansion. I just want to make sure I understand the parameters a little bit better. When you talk about the 50 to 55 million pounds a year, that -- does that assume the expanded mill throughput rate of 3,800? And I guess where I'm going with that, I mean, in order to get that kind of production, we'd need to see, I think, sustainable copper grade above 1.8%, maybe even close to 1.9%. Am I missing something here? Or are you that confident in the higher grade?

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

No, Orest, you're not missing anything. That's exactly what we need to do. And because you'll see by the resource and -- there's 2 things: one, all of the drill results are higher grade than what's in the current reserve; and secondly, remember, right now, we're mining zinc to fill the mill and the zinc is obviously lowering the copper grade. Well, the zinc -- we won't be mining any more zinc. We'll be putting the mill through with just all copper. So that copper grade comes up because it -- although we're doing the same copper content, the grade is diluted with the zinc that's going to the mill currently. But that's the one piece you're probably missing is the zinc will be displaced by more copper.

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

Okay. Okay. But even when I look at your current resource grade, I think it's only 1.5%. So you're basically then expecting to -- that the current drilling is going to significantly improve that. Is that correct?

[Bradley J. Mercer]

That resource includes all resources for the mine, and that includes the zinc ore body as well.

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

Okay. So then post 2021, should we assume effectively 0 zinc, 0 lead?

[Bradley J. Mercer]

It's not exactly 0, but it would be, I think, much less impact. The by-product credits are going to be mostly silver. There will certainly always be some zinc in this but much, much less and very minor amounts of lead.

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

Okay. Do you think you'd get paid? Is there enough to even get paid on the zinc or lead?

[Bradley J. Mercer]

Yes. Absolutely, yes. In our internal calculations, we are looking at zinc as[Audio Gap]

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

Orest, just to go on, one more thing. If you remember, we had discovered San Rafael, which is a zinc-rich zone. And we took advantage of trying to mine more zinc while zinc prices were elevated. And essentially, it was a 3-year program that will be coming to an end. But if you look back historically in the mine, we've always produced a copper con, a zinc con and lead con. And that -- those zinc production will be back down to a much more lower level because there is something with the copper, and we always have produced 3 different concentrates at Cozamin.

[Operator]

Your next question comes from Stefan Ioannou at Cormark Securities.

[Stefan Ioannou, Analyst]

Great to see the cost reduction programs sort of bearing fruit. Just wondering though, the cost -- the quarter-over-quarter cost increase at Pinto Valley, how should we be thinking of that? And is it just sort of onetime blip stuff? Or is it ongoing, prevent -- additional unscheduled maintenance that we may see until that crushing upgrade is fully in and so on and so forth?

[Mike Wickersham, General Manager of Pinto Valley Mine]

What you saw in third quarter is exactly the opportunity we're focused on with this capital investment. The challenge that we have is that if we try to push more tonnes without making this improvement in buying more modern crushing equipment, what we'll see is increased costs over time. So now is the time for us to bring in this new kit that has better reliability and runs at lower cost. And we had a really good cost performance in the first quarter and second quarter, and the mine has been below budget for cost and above budget for tonnes the entire year. But that's the area we need to focus on is in processing with this low-intensity capital investment that really hits the bottom line for delivering more tonnes reliably and lowering maintenance costs.

[Operator]

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

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

Well, thank you, everybody, for all your questions and for joining us today. Please don't hesitate as always to contact us with any further questions. 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.