Ormetal on Capstone and Silverstonewww.ormetal.com
Capstone Mining Corp (CS) Capstone Mining Corp (CS) and its spin-off Silverstone Resources (SST) announced last week the closing of their silver deal. For the next 10 years, Capstone will sell all of its silver production from its Cozamin Mine to Silverstone which is expected to be approximately 1.2 million ounces per year once the production upgrade is completed later this year. Capstone is being paid with 1) $US 20 millions in cash, 2) 19,155,310 special SST warrants which are convertible into SST common shares at no cost 3) an annual per ounce payment of $US 4.00. To pay for the deal, Silverstone has issued 22.12 million shares units to a group of insiders including some large names like the Prudent Bear Fund, Scotia Capital’s Prudent Global Gold Master Fund, Front Street Investment Management Inc. and others. Capstone receives a large up front payment and will own a position in a pure silver vehicle. SST shares currently trade at C$2.35 which implies a market value of $C45 millions for the shares CS is acquiring. Capstone will also get cash flows of $4 per ounce in addition to the copper-zinc-lead cash flows it will received by producing and selling 30M pounds of copper, 8.5M pounds of zinc and 3M pounds of lead per year at low cash costs (1Q cash costs were US$0.44 per copper pound counting by-products). Its working capital should end up in the $1.00 per share range. Assuming copper at US$2 in the coming year (we are conservative, because copper is US$3.30 right now), cash flows before income tax could be in the $0.50 per share range while at current metal prices, they could reach $0.75-$1.00 per share. For that reason we would continue to buy the stock on weakness. You might want to take a look at the recent investor presentation on Capstone website (
https:// www.capstonemining.com/) The other party to this deal, Silverstone, instantly becomes sort of a new silver producer as it will receive silver ounces that it will sell at current market prices creating a long term stream of healthy cash flows. This will allow the company to continue exploration at its various silver properties, including Copala, without any additional dilution. Furthermore, it will directly benefit from higher silver prices. At a price of $15 per ounce silver, SST would received US$11 gross profit per ounce (US$15 minus the royalty of US$4) or approximately $C15 millions per year. Not bad for a $2.35 stock with a market value of some $C125 millions. If you have kept your Silverstone shares from last year spin-off, we think you should continue to hold.