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Good morning. My name is Kelsey, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Capstone Mining Q3 2021 Financial Results Conference Call. [Operator Instructions] Mr. Annett, you may begin your conference.
Thank you. Good afternoon. I'd like to welcome everyone on the call today. Please note that the news release and regulatory filings announcing Capstone's 2021 third quarter financial and operational results are available on our website and on SEDAR. If you are logged into the webcast, we will be advancing the slides of today's presentation, which is also available in the Investors section of our website. I'm joined today by our President and CEO, Darren Pylot; our Chief Financial Officer, Raman Randhawa; our Chief Operating Officer, Brad Mercer; 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 Darren Pylot.
Thank you, Jerrold, and good morning, everybody. I'd like to start today by acknowledging the outstanding work of our Pinto Valley team that has done to mitigate the effects of extreme weather during the third quarter and the support they have provided to local authorities and the nearby communities of Globe in Miami. As our titled slide shows, we are strengthening communities by building resilient operations around us, which is vital for our long-term success. The wildfires in June that we discussed in our previous conference call burned large extensions of wild terrain close to Pinto Valley, leading scarred areas of compacted and impenetrable soil. This was followed in July and August by a record monsoon rain that caused severe floods and mudslides in the nearby communities of Globe in Miami. Our Pinto Valley team worked with the local authorities and actively participated in remediation efforts to help control the damage. They went above and beyond by restoring vulnerable areas in the Tonto National Forest to prevent future emergencies. And I want to commend them because they invested their own time and effort to support their communities while managing to complete the PV3 expansion project and delivering a solid quarter at Pinto Valley, despite these disruptions. We are committed to climate change action and sustainability and ESG are strategic for our long-term business plans. Wendy will discuss later in the call how we continue advancing our sustainability programs to thrive and achieve our objectives. Turning now to Slide #6. We had a solid third quarter with consolidated copper production of 44.4 million tonnes, a cash cost of $1.96 per payable pound, thanks to another record production quarter at Cozamin, where we continue reaping the benefits of the mine expansion. It has allowed us to push daily throughput in the mill to record levels. The mine produced 14.1 million pounds of copper at cash cost of $0.93 per payable pound of copper. Overall, Pinto Valley had a solid quarter considering the challenging weather conditions they faced and produced 30.3 million pounds of copper at cash cost of $2.44 per payable pound. Productivity and costs were impacted in the first half of the quarter when severe monsoon rains caused wet conditions, which decreased mining and milling rates. Many of our workers had to deal with evacuation and road closures in and around our neighboring communities, which led to high absenteeism. However, our team recovered quickly, and by mid-August, we were back at target milling rates. And then from September to now, we have averaged over 60,000 tonnes per day as the PV3 optimization work is now complete, and we are benefiting from that investment and all the maintenance work as well we performed in Q2 and Q3. So year-to-date, we've produced over 135 million pounds of copper at cash cost of $1.85 per payable pound, which means we're well on track to meet our annual guidance of between 175 million and 190 million pounds of copper at cash cost of between $1.75 and $1.90 per payable pound. Moving on to Slide #7. In the first 9 months of this year, we have generated a record operating cash flow number of $272 million, and that's more than any other full 12-month period in Capstone's operating history. With Q4 expected to be our strongest operational quarter and with the current copper price well above $4 a pound, we should finish the year on a strong note. This cash generation puts us in a great position to execute our internal growth projects at Pinto Valley and Cozamin and also to advance the Santo Domingo project in Chile. On Slide 8, in Q3, we continued building our cash position and finished September with $208 million in cash and short-term investments. This is $36.7 million increase over the previous quarter. We generated adjusted net income of $35.3 million or $0.09 per share, and our operating cash flow before changes in working capital was $67 million during this quarter. Now I'll turn it over to Raman for more details on these financial measures.
Thanks, Darren. We are now on Slide 9. Q3 adjusted EBITDA was $72 million. This figure was impacted by $10 million realized losses on provisional price adjustments and by a lag in sales timing of 3.3 million pounds of copper, which has an additional impact to EBITDA of approximately $6 million. We expect to make up the sales lag in Q4. In addition, Pinto Valley production was impacted by extreme monsoon rains, causing area of floods, which impacted production by estimated 10%, thus also impacted unit costs. Looking at the chart on the right, in Q2, we benefited from a rising copper price environment, which gave us a positive provisional pricing adjustment. This translated actually into a realized copper price of 502 or $0.62 per pound higher than the LME average in Q2 of 440. For Q3, softer copper prices translated to negative provisional pricing adjustments and the impact was a 404 realized price for Capstone, which was about $0.21 per pound lower than the LME average of 425, combined with a lower sales quarter, as mentioned, of 39.6 million pounds. Quarter aside, the year-to-date EBITDA of $319 million for only 9 months of operations is significantly higher than any annualized EBITDA in Capstone's history. Turning to Slide 10. As Darren mentioned earlier, our cash balance increased quarter-over-quarter by $36 million to $208 million as of September 30. We have an undrawn $225 million corporate revolver, which gives us over $430 million of current liquidity and growing in this 4 50 copper price environment. Capstone is efficient in converting cash flow from operations into cash on the balance sheet. This has come as a result of keeping our corporate G&A lowest in the industry and maintaining a debt-free balance sheet. I love the chart on the right side as it illustrates our cumulative operating cash flow from our 2 operating assets over the next 3 years, which accumulates to approximately $1.2 billion at 450 copper.Slide 11. We've generated $371 million in free cash flow from operations and stream transactions in the last year, which sets the company up well for capital reinvestment. We have implemented a formal capital allocation process at Capstone, which identifies investment opportunities, evaluate them against our investment criteria and then move them through a stage gate process for approval or rejection. I'm excited by the organic growth pipeline we have in addition to the transformational Santo Domingo project. We have been evaluating a number of low capital, high-return projects with quick payback at our 2 operating mines. During 2021, so far, we've commissioned the one-way ramp at Cozamin in Q1, which was less than $5 million capital investment, increased production rates by 33%, providing an incremental return already year-to-date of $25 million or 500% over 9 months. Most recently, during Q3, we implemented our PV3 optimization projects at Pinto Valley. Next slide. The PV3 optimization projects targeted at debottlenecking the process plant to achieving 10% higher throughput rates of 58,000 tonnes per day for investments of $31 million during 2020 and 2021. The targeted throughput rate has been exceeded during September to present. One of the next low-capital projects for investment decision at Pinto Valley is the pyrite agglomeration. This targets some increased leach copper production and production of sulfuric acid, which will reduce future asset purchases for investment of less than $10 million. Investment decision on this project will be made by year-end. The PV4 study aims to take advantage of the approximately 1 billion tonnes of resources currently not in reserves and is progressing well, and we expect to release an updated tech report on PV4 in 2020. These low capital, quick payback projects helped reduce unit costs at Pinto Valley, mostly by increasing the denominator, i.e., copper production. On to Slide 13. With respect to the topic of cost inflation, our focus has always been on cost containment strategy. Back in 2019, we eliminated $27.5 million out of the business. In the current operating environment, we have been proactive in managing our key input costs, which have resulted in cost, incurring very minimal inflation to date. We price fixed diesel purchases at Pinto Valley during 2020, which has resulted in $3.3 million in savings year-to-date. We forecasted to save additional $10 million versus current spot prices for the remainder of 2021 and 2022. In addition, we've restarted the Moly plant at Pinto Valley with production expected to ramp up during 2021 to increase byproduct credits next year. In addition, we also entered into foreign exchange pesos, which provided savings of $2 million year-to-date. You will see in the closing slide that despite the fact copper prices have increased 58%, we've actually decreased our cost per pound 3% overall after accounting for a silver stream, which provides a gross margin expansion to 54% directly to our shareholders. Now over to Brad.
Thank you, Raman, and good afternoon, everyone. For your reference, we're now on Slide 14. And I think the point I want to make here is, this speaks very well to an innovation win that we've had at Pinto Valley on our priority projects, and that's our blast fragmentation technology, we have implemented at Pinto Valley, and we are achieving 10% higher throughput through this -- sustainably through this initiative. We are now generating 38% fines on average with each blast versus 25% beforehand, which allows for increased crushing and milling rates and obviously decreases cost. We have a program where we introduced smart drills that create a blastability index based on rock hardness and torque on the drill. And from this, we designed a selective blast pattern to optimize fines generation. We then monitor fines content in the feed using a conveyor CAM technology. Moving on to Slide 15. Cozamin beat the record performance that delivered in Q2, and this quarter, production was 14.1 million pounds and that is a new record. Mill throughput of 3,854 tonnes per day average exceeded our targeted run rate that you know from the technical report of 3,780 tonnes per day. Construction of the dry stack tailings and paste backfill facility is on schedule with expected timeline for completion at the end of 2022. Moving on to exploration at Cozamin. We will be optimizing in 2022 following the completion of the west exploration drift and associated crosscuts and that will allow a more efficient drill targeting from underground with much shorter holes. That decreases exploration costs and increases targeting. I'm excited about ore sorting as well. The trial results show that they could have a very significant impact in Cozamin, a significant resource contained in the narrow veins could be targeted for potential conversion to mineral reserves, if we adopt this technology -- sorry, right now, we're assuming we're adopting this technology. Over to Slide 16, continuing on with ore sorting. Our best bulk sample test results saw a 31% mass rejection with only 1% to 2% metal loss. The copper head grade was upgraded from 1.7% copper to 2.25%. The next critical steps is to pick 1 of the 2 tested technologies, determine the optimal location for the sorting unit and calculate the ancillary capital and operating costs involved in the handling. The most likely location would be underground to minimize hauling rock to surface. Now on to Slide 17. The cobalt feasibility work is progressing well. We drilled 7,600 meters of PQ size core for geometallurgical test work, and we are continuing with drilling in Q4 to generate a larger sample mass for pilot scale testing. In Q3, our technical team visited facilities in Europe to gain insight into sulfide oxidation leach and processing technologies. We expect to finalize the pre-feasibility engineering work in the first half of 2022 and issue a technical report in the second half of 2022, which will include an updated copper iron mineral resource based on the recent drilling and a first-ever cobalt mineral reserve. This is a unique and exciting project that would place Capstone as a leading producer of ethically sourced low-cost battery-grade cobalt. Now over to Wendy King.
Thank you, Brad. Turning to Slide 18. We continue to invest in our sustainability programs and initiatives to weatherproof our operations. At Pinto Valley, we are assessing storm water protection system by restoring and upgrading the mine's water catchment and distribution. Keeping clean water away from at-risk areas can increase water collection during wet seasons to secure processing water during dry season, thereby minimizing the effects of severe weather on our operations. In addition, the PV3 project has improved our ESG performance with higher recovery of processed water in the recently upgraded tailings thickeners. At Cozamin, construction of the new paste backfill and filter dry stack tailings operation is advancing well. Converting Cozamin to dry stack technology will introduce leading responsible tailings management at the mine, while at the same time, reducing the mine's footprint and improving processing water recovery. Here in our corporate office, we've strengthened our ESG team, and we continue developing our sustainability, vision and strategy, which includes a new responsible sourcing project, and I look forward to unveiling those initiatives in 2022. The copper we produce is essential for carbon-neutral energy and clean technologies. We are committed to being part of the solution by tackling climate change and environmental issues while creating value for all our stakeholders. Turning to Slide 19. I'd like to thank our hardworking workforce for taking care of their communities and environments. In August, our Pinto Valley team helps repair Highway 60 to restore connectivity with the Globe and Miami communities after the highway was washed away by flash floods. In September, our team worked with the Tonto National forest to perform remediation work at the abandoned Blue Gate mine after soil stabilization materials were destroyed by fire. On both occasions, our team worked closely with the local authorities, reinforcing the sense of a tightened community where we take care of each other. Thank you to the Pinto Valley team for their dedication to our communities. Now back to Darren.
Thank you, Wendy, and we're on Slide 20 now. I just wanted to reflect on what is an amazing year for Capstone with a year-over-year 60% higher copper price, a 20% increase to copper production and a 3% decline in costs. This has given us a 300% boost to EBITDA. And now I look to the future, and I'm confident we can sustain competitive results, grow our business and strengthen the communities where we operate. With that, operator, we're now ready to take questions from the floor.
[Operator Instructions] Your first question comes from Orest Wowkodaw from Scotiabank.
Darren, can you give us an update on what's happening with the Santo Domingo partnership financing process? Obviously, it's taken longer than you expected last quarter, but where do things currently stand?
Yes. Thanks, Orest. I appreciate the question. You kind of hit the nail on the head. Everything is in this environment -- when I just say this environment, it's just taking longer to get things done. We're still having the discussions with the same parties that we have been, so nothing's changed. For a variety of reasons, COVID, travel, a bunch of things, it's just as you see everywhere else in the world, everything is just seems to be taking longer. And that's about all I can -- how I can comment where we're at, but nothing has slowed down. Still engaged, still strong interest with the same parties we've been interested in over a couple of quarters. So frustrated like you guys are that we haven't been able to get something done yet, but I feel confident, we're on the right track. And again, just being slower.
Okay. Maybe as a follow-up, have you determined which scenario, i.e., ownership is the one moving forward? Or is that still up to debate and you keep -- you mentioned the word parties. Does that imply that you're talking -- you're still talking to multiple potential partners? Or have you narrowed it down to one partner with one scenario, and we're just waiting for, say, documentation and due diligence?
Well, I could say because there is a process, you never really know if it's one party. So there's more than a party. Different options, but I can tell you that Capstone is interested in retaining as much of the project as we can. With -- as Raman spoke about the strong cash flow generation that we are generating in this copper environment, the strong balance sheet we have combined with the tax stability agreement with our DL600 makes us one of the -- we think one of the best project, unbilled projects out there in the world. So yes, we want to retain as much as we can.
Do you -- last question on this. Do you anticipate this coming to a conclusion before the end of the year?
I am extremely hopeful. I don't want to put dates down because I don't want to disappoint our investors and shareholders and stakeholders, but we are in anticipation of concluding this absolutely by year-end. But I just don't want to lock in to a date that I don't have complete control over.
[Operator Instructions] Your next question comes from Stefan Ioannou from Cormark.
I'm just going to take it in a totally different direction. Great presentation. Most of my questions answered. Just -- maybe just for -- on the geology front, I know there was some drilling at the Donovan project down in Mexico. Has anything happened there at all? Or...
Thanks, Stefan. We can always count you for the geology question. I appreciate it. And I'll let Mr. Mercer answer that one since he's on the geology as well.
Yes. We conducted a drill program, and we've received the results, and we've decided not to continue with the project.
Okay. Fair enough. Fair enough. And I mean, I guess in Cozamin proper, there's still a heck of a lot of exploration upside that you guys are very excited about. I guess should we anticipate an update on the geology there anytime soon? Or...
Well, certainly, we are drilling a lot of holes, and we're happy with the results to date. There will be an update coming. I don't think we're at a juncture yet to put out a new resource model, but that is coming in the future. Some -- most likely sometime in 2022. I think we'd have a critical mass of results at that point. We're very excited with the cost cuts we're mining there because in 2022, we're going to be able to vastly increase the number of hits because the drill holes will be much, much shorter. And so obviously, we can accelerate the program towards a new resource.
Your next question comes from Craig Hutchison from TD Bank.
In past presentations, you guys have talked about the district consolidation potential in and around Pinto Valley. Any updates with respect to some of those discussions?
Yes, Craig. Thanks for the question. Yes, we continue strengthening our relationships and discussions with our neighbors. We've had -- we have strategic meetings and continue to investigate, nothing material enough to go out to market, but I would say that the interest and the working together has never been stronger than today in terms of those discussions and those agreements that we've been discussing back and forth.
Can you give us just a general sense of what you're kind of looking for there? Is it acquiring additional land packages, additional resources, potential -- sorry.
I would say, the best way to put it is sharing resources. We have a lot to offer being the only producing mine in that district and the need for disturbed ground, the need for disturbed water -- additional water, sources we could clean. Obviously, there's copper all around, and we have the processing mill. So I think we're looking at helping each other, becoming a greener, more sustainable operation for all of our stakeholders, employees and communities that we -- surround us. So it's a win-win for everybody.
Okay. And maybe just in terms of Pinto Valley, the throughputs now back up to sort of 60,000 tonnes a day. Is that sort of the new sustainable design rate you guys think you can do after all the optimizations work you've done to date?
I think at this point, we're comfortable in the very high 50s on an annual basis, and I think we strive. I think the capital and work has been done to sustain up over 60 in the mill. I think there's other things in our operation that we have to synchronize to that mill to actually be able to annualize at 60 and over. But I think the mill's there and can do it as we've seen here. We came out of some adverse weather in the third quarter, so we wanted to catch up, and we've moved it up over 60 for the last couple of months, and been able to do so fairly easily. So we're feeling confident that, that number is achievable over a year, but haven't done it yet.
Your next question comes from Dalton Baretto from Canaccord.
I was actually going to ask what Craig did in terms of the regional consolidation around Pinto, but maybe I can follow up on that. Just given where the copper price is and given the district that's there. And Darren, you said you've got the infrastructure. Just looking a little bit further afield, are there other sources of ore that you can leverage, [indiscernible] mines, that sort of stuff?
I would say, we're looking at things much closer, Dalton, to where we operate, joining properties, what have you, that we haven't kind of got past that into the other areas. And we don't -- we currently don't see a lot of low-hanging fruit in those areas relative to what we've got kind of right around us is much more attractive. And that's where we're focused right now.
Okay. Great. And then just kind of a bigger picture. Yes, you'll have the study on PV4 late next year, but we don't really know what that's going to look like at this point in time. Your balance sheet is pretty bullet proof at this point. You're generating tonnes of cash. You're going to partner on Santo. Is M&A cropping up again on your radar screen?
Well, I mean, we can't discuss M&A individually, but it's ongoing as a public company. We feel we've got a lot of growth to deliver in the portfolio, and you just mentioned it, right? We've got another potential expansion and another 1 billion tonnes of copper resources that Pinto Valley to hopefully bring into a resource -- into reserve. And we've got a world-class project at Pinto Valley -- at Santo Domingo, excuse me. So lots to look at. We've been inward focused, but in this copper environment, obviously, everybody is looking to grow. Everybody is looking for great jurisdictions such as where we operate Capstone. And so we're always open for business, so to speak, but we're definitely focused on delivering the projects that we've promised to our shareholders.
That's great. And maybe just one last one. I don't even know if this is a fair one to ask you, Darren, but the [indiscernible], your large shareholders, where do they stand now just given where your share price is? And how well they've done? In your conversations with them, are they still long-term shareholders?
Well, yes, thanks for that, Dalton. We have a great relationship with [indiscernible]. They, as you mentioned, been a long, long-term shareholder very aligned with our strategy that we're communicating today on the call and to our shareholders. They are completely aligned with that. And I guess the best kind of way to show you that or show anybody that is, they were -- they bought shares most recently at these copper prices. They've been buyers. So if that doesn't align them to Capstone and then believing in the higher share price for Capstone, I don't know what does. So that's the best way I can answer that one.
[Operator Instructions] Your next question does come from Chris Beer from RBC.
It's another geology question here following up on Stefan. I kind of remember with the further access, some bigger targets, maybe the -- I think a [indiscernible] to the East. Is that still 6 to 9 months away from drilling or something closer rather than just the -- nothing wrong with reserves to resources or resources to reserves with better grade, but just wondering on sort of bigger targets.
Well, we actually developed a new target to the West, and we only have so much capacity to drill. We felt that the West -- well, we were excited about the East target, the results were coming in more zinc dominated than copper dominated. And then we did a reinterpretation and realized that the footwall zone was open to the west. So we started testing that and we got quite a shock because not only is the footwall zone open in that direction, we realized that the main Mala Noche Vein was open down dip. So because we could drill copper dominated target versus a more zinc dominated target and get 2 birds with one stone, we switch priorities from the east to the west. When we get the West side, I guess, exhausted, we will revert back to the East. And the only reason why we're not continuing to drill in the East at this current moment is, it requires underground development as well, and there's only so much underground development you can ascribe to an operating mine. Stay tuned for results in '22.
There are no further questions at this time. Please proceed.
Well, thank you, operator, and thank you, everybody, for all your questions and for joining us today. We expect to release our year-end results in February of 2022, and I look forward to updating you on the progress then. In the meantime, as always, please don't hesitate to contact us with any additional questions you may have, and keep observing your local health officials directive to stay healthy and stay safe. Thank you again, everybody, and have a good day. Bye-bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.