RE:TD Raises Target From .50 To .70 Capstone Mining Corp.
(CS-T) C$0.53
Copper Hedges Locked-in to Alleviate Covenant Concerns
Event
Yesterday, Capstone Mining announced that it has locked-in copper hedges
to support covenant compliance on its Revolving Credit Facility (RCF)
through 2016.
Impact: POSITIVE
Capstone has now hedged 75% of its Q1/16 expected sales at $2.20/lb and
a further 90% of its anticipated Q2/16 sales at $2.24/lb. As a result, the
company now expects to be in compliance with its RCF covenants at copper
prices as low as $1.60/lb in the first half of 2016 and down to $1.70/lb in the
second half of the year. As a reminder, the key covenant of concern on the
$440mm RCF due in 2019 ($343mm drawn at YE2015) was maintaining a
ND/EBITDA ratio of less than 3:1.
Opportunistic hedges given price spike and volatility concerns —
Although earlier we did not expect the company to breach its covenants in
2016, we did expect the company to approach its covenant ratio of 3:1 by the
end of Q2/16. Therefore, we view the company’s decision to take advantage
of the recent strength in the copper price as prudent given the volatility and
uncertainty in the current market.
Based on our copper price forecast of $2.07/lb in the first half of 2016,
the net impact of the hedges is slightly accretive to our EPS and NAVPS
estimates. In our view, the hedges should alleviate concerns that the
company may have to pull one of its previously announced levers to address
any potential liquidity concerns including: prepayment offtake commitments
for copper; non-core asset sales; and an extension of the silver stream sale for
Cozamin beyond 2017. The company remains unhedged in H2/16.
In addition, we have updated our estimates to reflect our recently increased
precious metals price deck. Precious metals represent only 3–4% of near-term
revenues estimates, and therefore the change was not overly material.
TD Investment Conclusion
We have increased our target price to C$0.70 from C$0.50 and are
maintaining our BUY rating. Our higher target price reflects a combination of
the new copper hedges, our revised precious metals assumptions, and higher
target price multiples to reflect the reduced liquidity risk. We continue to
expect 2016 to be a much better year for the company operationally, driven
by throughput gains at Pinto Valley, higher grades at Minto North, and a
return to more normalized mining rates at Cozamin.