Capstone Copper Corp

TSX:CS

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp. Q4 year-end 2017 Conference Call. [Operator Instructions] Note that this call is being recorded on Thursday, February 15, 2018. I now would like to turn the conference over to Cindy Burnett, Investor Relations. Please go ahead, sir.

[Cindy Lee Burnett]

Thank you. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2017 fourth quarter and full year financial results is available on our website along with the announcement of the sale of our Minto Mine and an updated corporate presentation with summary information on the company and our financial and operating results. Also on the website are webcast slides to accompany our commentary today. With me today are Darren Pylot, Capstone's President and CEO; Jim Slattery, Senior Vice President and Chief Financial Officer; and Gregg Bush, Senior Vice President and Chief Operating Officer.I would like to advise you that this call is being recorded for replay through our conference call provider and is being broadcast live through an Internet webcast system. Following our brief remarks, there will be an opportunity to ask 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 will discuss today will be in US dollars, unless otherwise specified.Now I'll turn the call over to Darren Pylot.

[Darren M. Pylot]

Thank you, Cindy, and good morning, everybody. Welcome to our 2017 year-end financial results conference call. As always, Jim will come on the line soon to review our financial performance, followed by Gregg, who will give you an update on operations. But firstly, I just like to comment on the sale agreement that we announced yesterday to sell our Minto Mine for $37.5 million and extinguishes all of our closure liability. And I'll explain a little bit, there's been a bit of confusion I think out there what liability that is. So on our balance sheet, we have $22 million U.S. closing provision. So that would be completely extinguished upon closing of the transaction. And then we also have an off-balance sheet surety bond for CAD 72 million, of which we'll be carrying 1/3 of that CAD 72 million for a 1-year period. And at that -- at the end of 1 year, 100% of that surety bond is counted as well. But I want to be clear that surety bond is off balance sheet. We also retained 9.9% of the issued shares of Pembridge, which does allow us to participate in the future upside that we -- that they expect to realize by focusing all of their management and financial resources solely directed at Minto as well as obviously the strong copper price environment that we're seeing. Pembridge is significantly experienced on their board and management team with over 200 years of combined experience in the mining and finance industries. And with Minto less than 10% of our net asset value, the sale does allow us to redeploy both our financial and management resources towards internal growth opportunities that, we believe, deliver a better return on investment and obviously, will reduce our consolidated cost profile. It also advances us towards -- the proceeds from the sale advances towards our net debt target of $100 million, well ahead of what we originally targeted by the end of '18. So we're obviously very happy with that. So now I'll turn the call back over to Jim and Gregg. And obviously, be available for questions at the end of the call.

[D. James Slattery]

Thanks, Dan. Our results -- our net income was $29.5 million in the fourth quarter and $55.1 million for the year. The adjustments marginally for the $17 million gain in the sale of our Kutcho development project and the positive $5.9 million impact of tax reform in U.S. We reported adjusted net income for the quarter of $4.4 million. For the year, there were a number of factors, primarily impairment reversals and the impact of the U.S. tax reform that should be adjusted in assessing our normalized loss of $8.5 million for the million -- for the year. And these are disclosed in our MD&A. Our operating cash flow before changes and working capital was $38.2 million for the quarter and $129.7 million for the year. Our focus in the quarter for our free cash flow remained on debt reduction. We repaid another $24 million on our revolving credit facility in the fourth quarter, bringing our total debt reduction for the year to $54 million. Our net debt at year-end was a $158.7 million. And the target, as Darren said, to get that down to around $100 million before the end of this year. At current cost prices, with 100% of our hedges now expired, we intend to make further debt payments in 2018. Combined with the anticipated proceeds from the Minto sale, we expect to achieve our target well before the end of the year.Turning to costs. The fourth quarter in the full year 2017 came in as expected that Pinto Valley and Cozamin were 5 cents higher than planned at Minto for the year on both a C1 and all-in cost basis. This was primarily due to the significant development and stripping cost that we incurred in the second half of the year to extend the operations beyond our previously contemplated 2017 shutdown. Now I'll turn the call over to Gregg for the operational update.

[Gregg B. Bush]

Thank you. Volume of Pinto Valley, production for the fourth quarter was higher than planned on higher grade and recovery. Throughput for the quarter was just over 56,000 tonnes per day, which is the rate contemplated in the PV3 pre-feasibility study. At Cozamin production for the fourth quarter and full year was ahead of our expectations on higher mining and milling rates. Before, our focus in 2017 was bringing up development rates. And the team achieving this target, allowing us to have increased flexibility in the mine for 2018. At Minto, underground production lagged our expectations. As a result, we used oxidized and low-grade certified stockpiles to fill the mill. This impacted the fourth quarter and caused us to have lower rates and recovery in the mill. And as a result, we ended the year about $0.05 above expectations. Also, included in fourth quarter cost was a fairly significant expense development -- development -- underground development costs, and stripping costs that were expensed but were necessary in order to advance the current mine plan.Now I'll turn the call back over to Darren.

[Darren M. Pylot]

Thanks, Gregg and Jim. So to summarize, we're really happy with the fourth quarter. We had a good fourth quarter all around, and especially at Pinto Valley, which allowed us to end the year within our 2017 guidance on production. We obviously closed our [ future ] sale on noncore asset, which allowed us to repay an additional $24 million of debt during the quarter, as Jim mentioned. Our focus for 2018, obviously with the sale of Minto advancing, our -- the balance of our portfolio becomes a top priority.So these -- some of these initiatives that we'll be undertaking will include securing agreements with third parties to allow us to consolidate the regional opportunities at Pinto Valley. We've been working on that for some time now. We think we're getting pretty close to some agreements there. We're going to follow up, obviously, on the success we had -- exploration success we had at Cozamin. So we've got a fairly robust exploration program planned for '18 with the -- obviously, the view to extend the mine life, but we do see a resource update coming there midyear. We're getting very close to completing the underground -- the network and continuing on the underground development at Cozamin to incorporate the San Rafael zinc into our 2018 mine plan in the second half of this year. So we'll have more specific details around that mine plan at the Q1 conference call. But essentially, we've got 700 to 800 tonnes a day of additional capacity at our mill that we're not utilizing. So we're not looking to displace copper. Were just looking to add more zinc into the mine plan. Which will obviously, lower copper cost going forward. And lastly, there's a number of initiatives we're going to undertake at San Domingo that we think will improve the project economics, and define the best path forward for Capstone to realize value from the project that we're obviously not currently getting right now.So at current copper prices, we generate significant free cash flow, which we are directing towards enhancing our internal portfolio and towards debt reduction. With now all of over noncore assets sold, combined with the current copper price environment and the strong balance sheet that we have, we are well positioned to deliver strong results and increase shareholder value. Operator, that concludes our prepared remarks, we are now ready to take questions from the callers.

[Operator]

[Operator Instructions] And your first question will be from Orest Wowkodaw at Scotiabank.

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

I had a question about the Minto sale. Is this transaction, I assume, dependent on Pembridge's ability to raise the funds, to purchase the assets? And assuming, yes, can you give us some insight into how comfortable you are that, that is likely going to happen? I'm not sure if you've been involved in that or not?

[Darren M. Pylot]

Orest, yes. It is completely dependent on Pembridge raising the funds. And it's much -- it's almost exactly the same type of deal that we had with Kutcho. We worked with the team, kind of understood their capabilities. And obviously, at some point in time, you've got to go public before they can actually go and disclose the information about raising the funds. But we feel extremely confident as we did with the Kutcho transaction that they will be able to raise the funds. And that's obviously the reason we went public and have signed the deal. Yes, we do have -- it is dependent, but we feel extremely confident that they will be able to raise the funds to close.

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

Okay. And then, just separately on Pinto Valley, can you give us -- I guess we're halfway through the first quarter. Can you give us an update on how Pinto Valley was doing with respect to throughput in Q1?

[Gregg B. Bush]

Yes, Orest, there's nothing out of the ordinary to comment on Pinto Valley. It's -- throughput's fine.

[Operator]

Next question will be from Stefan Ioannou at Cormark Securities.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Just wondering on the Minto sale, just from a timing point of view, you mentioned, you're hoping to close it in Q2. Could we anticipate that like on a -- from a Capstone financial point of view, we still see kind of full quarter of production on your financial statements? And then obviously, it is spring breakup, and if there is production that's not actually physically ships in or sold into Q3. Does that work into the working capital adjustment or is that just kind of lost in the context of how the deal has been structured?

[Darren M. Pylot]

So, Stefan, my answer is yes and yes. Yes, you'll see a full Q1 for Capstone. And yes, if there's obviously a spring breakup in shipping, schedules change, anything produced in that Q1 would be on a working capital adjustment, netted back to Capstone in future periods.

[Stefan Ioannou, Analyst of Institutional Equity Research]

We'd have it in Q2, though, right? Not Q1?

[D. James Slattery]

Yes. In -- what I mean is up until the close in Q2. There will be a working capital...

[Stefan Ioannou, Analyst of Institutional Equity Research]

Okay. But I guess my question is, do you anticipate that close? When you say Q2, do you think it's going to happen in early Q2 or is it sort of late Q2 so effectively almost a full quarter of Q2 production for you guys?

[Darren M. Pylot]

I can't -- we are expecting to close in Q2, when about? Not exactly sure. But we're -- everybody is planning for it to be by the end of Q2. It's closed, but I can't really give you a time limit between the quarter.

[Operator]

[Operator Instructions] And your next question will be from Pierre Vaillancourt at Haywood.

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

Darren, I was just wondering could you give us a bit of an update on discussions for the area around Pinto Valley, and what we may expect in the months ahead? And just whether that is coming to fruition or not? Or is that's still kind of way off in the future?

[Darren M. Pylot]

Well, Pierre, yes. We had CA signed I can't disclose the parties and what we're looking at. But as I said before, essentially there is more copper next door than we have at Pinto Valley. So we'd like to -- we'd like some sort of agreement that we don't pay any money or anything or assume any liabilities at the beginning, but we're able to go on that ground and run some studies and understand is there some sort of an expansion scenario at Pinto Valley that incorporates those resources into a consolidated area that we're the only producing mill in the area. So we will be logical producer. So we'd like to get some sort of agreement -- option agreement so we can run some studies, find out the economics, what copper prices take to say take Pinto Valley from the current rate of 56,000, 58,000 tonnes a day to something substantially higher. So that's what we've been looking into doing. We have been dealing with these parties for some time. So we would expect an agreement or not to be in place sometime in '18.And then we can get going on studies and start to inform the market what we're seeing next door and what we're trying to do there.

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

But is it safe to say, this is your first priority? I mean, is this the most logical next step or...

[Darren M. Pylot]

Well, we view it you've got a significant amount of copper next door that you don't even have drill out. Most companies have got travel across the world and try to explore to find the copper resource. We've got hundreds of millions of tonnes of resources all around us. So we view the -- obviously, that's a top priority for us.

[Operator]

Next question will be from Oscar Cabrera at CIBC.

[Oscar M. Cabrera, Research Analyst]

I just -- following on Pierre's question. Your strategy to go to 220,000 tonnes of contained copper by 2022. You provide context on how do you -- if you're saying, you're focusing on Pinto Valley or Cozamin. How does Santo Domingo fit into that strategy? And what would be, in your mind, the logical steps to get to that point? And then a follow-up to that would be, how do you think about your capital structure debt to equity, as you're moving towards that target?

[Darren M. Pylot]

So, Oscar, we view -- we'd like to be a true mid-cap producer and have 4 mines in production. And 1 to 2 projects in development/one in construction to be built. We do believe, you have to build projects to lower your cost profile, we're not going to be able to gloat. That's very low probability that we can go out and buy existing producing mines of very -- extremely low-cost profiles. So as you said, the assets in our portfolio are extremely important. We believe that through the exploration efforts that we've been seeing and we even really some drills out at Cozamin, but we're seeing higher grade copper in wider zones. So we believe with higher grade copper and the incorporation of the zinc, it will ultimately end up lowering our cost profile. Cozamin will lower our overall profile. And if we're successful in exploration in the future, there is potential we get more production annually, not just to extend mine life, but actually get more production annually at Cozamin, but obviously, we don't know the answer to that yet. Pinto Valley, we see a potential expansion opportunity, as I spoke with Pierre just before you. There is a huge potential there that we need to evaluate. But we are very, obviously, very happy that there is these resources sitting there and next door. So that, as I mentioned, is a top priority. And then last but not least, there's a number of things that changed. Since we last took Santo Domingo in 2014, power cost has come down quite a bit, in Chile. There's more infrastructure available for sharing. Such as availability in ports -- with ports that will allow us to potentially decrease our capital cost. And so we need -- we want to do some of these -- some of this work to understand the economics of Santo Domingo in this current environment. And understand if it's a project that Capstone wants to build or can build. And so, we're going to start with that and understand what that -- by the end of the year, how does our portfolio look towards advancing towards that 200,000-plus tonnes of copper. With respect to the balance sheet, we've seen an extreme turnaround from just a year ago. We -- look, when you've got such a leverage to copper price, especially at Pinto Valley, you see how much cash was generated quickly with the copper price north of $3. So I think you'll continue to see cash just come on to the balance sheet, we're happy to put it there. We don't need to put it to work until we find an opportunity that has an attractive rate of return. Both whether that's internally or externally, it has to be around double-digit rate of return for us to be able to do something. And we'll be extremely stringent on making sure that happens so that we can deliver value back to the shareholders.

[Oscar M. Cabrera, Research Analyst]

Okay, Darren, that's helpful. If I may just follow-up with one more question. So when do you think you'll be in a position to make a decision on Santo Domingo then?

[Darren M. Pylot]

Well, we're -- like I said, we -- to make a decision, we would need to feel confident that we can secure power at a price that is -- works for the project. So that's our #1 priority this year. We're starting on that now. Secondly, we'd like to get some sort of an agreement on a port. So we're focusing on that. So if we can have those 2 inputs, and then rescope the project so ourselves and the market can understand those economics, then we'll -- once we have those, we'll show everybody and let everybody know what our path forward is. And hopefully, that is by the end of 2018 this year.

[Operator]

Next question will be from Alex Terentiew at BMO Capital Markets.

[Alex Terentiew, Analyst]

I -- just one question on Pinto. And I understand you guys have some CAs signed there. So you know like I mean what you can say. But you guys have any discussions with some of these holders for quite some time now. And what is it that you're looking for or trying to get? What's kind of the hold up, I know environmental liabilities and obligations the one that are outstanding is something that obviously has to be taken into consideration. Is that kind of what you're trying to negotiate first? Or what is that your -- or what's holding up the process? And what you're looking for in terms of hoping to find there?

[Darren M. Pylot]

Well, holding up the process is really just -- I won't comment on the companies. But every company has different priorities and it is safe to say that the stop next door Pinto value is not a higher priority for anybody else but us because it's a closed site. So there is that. What we're looking for Alex is to get on there to have access to the ground so that we can do some studies and understand what sort of economics, what sort of our project would look like at certain copper prices to significantly increase what we have at Pinto Valley. So we are not looking to purchase anything upfront, we're not looking to take on any significant liabilities. We're just looking to go on and have access to the ground for a certain amount of time to do some work and understand if we want to move forward with it.

[Alex Terentiew, Analyst]

Okay, so still quite preliminary? I mean, you haven't seen any sort of drill holes or exploration date or anything like that? It just means that these were fast-producing assets and you really want to get in there, access the opportunities and see what sorts of synergies you can have with Pinto Valley?

[Darren M. Pylot]

Yes, I mean, we've got CA. So with your typical CAs, you're allowed to share information and what have you. So we have CAs. We have information. It's more about taking that information and putting it into studies to understand what's the capital cost, what copper price you need to make something significantly more than what's currently at Pinto Valley.

[Operator]

[Operator Instructions] And at this time, Mr. Pylot, it appears that we have no other questions. I would like to turn it -- I do apologize, we have a follow-up from Mr. Wowkodaw at Scotiabank.

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

Just a quick follow-up on -- from the accounting perspective, Jim. Now that you've announced the sale with Minto, is there any chance that this just moves into like a discontinued operation in terms of the financials, starting as early as Q1?

[D. James Slattery]

That line is correct.

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

That is correct. So it will be stripped out of your adjusted earnings and EBITDA already?

[D. James Slattery]

Not Q1. When the sale -- after the sale has been closed. In the subsequent quarter, you'll see, it's being a discontinued operation.

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

But not ahead of time?

[D. James Slattery]

As long as we are operating it for our benefit which we will until the deal actually closes. Until that time is we kind of look for normally.

[Operator]

And at this time Mr. Pylot, we have no further questions registered, Sir.

[Darren M. Pylot]

Great. Well, thank you, operator, and thank everybody on the call today for joining us. And as always, please don't hesitate to contact us with any additional questions or comments you may have. Thank you very much.

[Operator]

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.