Eight Capitals take on CS earnings.... The broader market is almost perfectly flat on the week; the SPX is up a measly 7.5 points since Mondays open. Where SPX goes from here is difficult to tell. But where CS goes, is a different story. If there were a picture in the dictionary next to the word deleveraging, it just might be the Capstone logo.
The more you can de-lever, the more your balance sheet opens up for the future. Optionality, would be the operative word. Their quarter as expected, was a masters course in leverage to a rising commodity price.
Currently, CS is sitting on $75MM in cash, with no debt. Their EV is now US$1.6 billion. At $4.00 coper (spot is $4.48 as I type), they will do ~$400mm of ebitda in 2021, moving higher for 2022/23 with higher grades.
Whether you annualize Q1 like I did below (stock trades at 3.4x ebitda in that scenario), or just take the lower $400mm number (assuming the year is front end loaded), CS is trading at less than 4x… any way you slice it. The big catalyst is the Santo Domingo partnership. Analysts give them 0.4x NAV for this project and I think you'll see numbers go up once the partnership and finance plan is announced mid-year. That would add $700mm of NAV to SD and not part of the 0.4x NAV above.
EXPLORATION UPSIDE + RESERVE GROWTH
Pinto Valley alone already boats 1 billion + tonnes that currently sits in the M&I category – not reserves. Converting these ounces extends mine life by decades and provides unique long term visibility for CS to plan for sustainable growth over the VERY long term. The immediate region is also ripe for consolidation and nobody is better positioned to add strategic land packages when the time comes.
At Cozamin, the 10+ year mine life is more than enough to be excited about. Resource growth will come from two exploration mandates in the East and West targets which remain very much open. 40,000M are being drilled here this year mostly focused on the West Zone – an extension of Vein 20. Surface to start, shifting to underground drilling in 2022.
Another angel NO ONE is talking about yet, is Cobalt.
CS has had so many different catalysts to be excited about, and still does, that few have realized there’s a completely free Cobalt kicker. When we first looked at CS a year ago, we noted Cozamin’s silver kicker had potential to be monetized via a revised streaming agreement. WPM then came in with $150M for the silver.
Santo Domingo, an asset nobody gave CS any value for a year ago, has cobalt optionality – An incremental US$670M in NPV could be realized using a recovery from tailings stream program. Battery grade cobalt would be produced once SD is in production, and not a little bit – Santo Domingo would represent a top 3 producer of refined battery-grade cobalt outside of the DRC. The Wheaton gold stream and port agreement dramatically shifted SD’s perception and I’d argue today’s valuation still doesn’t recognize it at all.
These are early days for a catalyst-rich growth company – growth in production, exploration, NPV, margins, and every other metric that makes stocks go up.