Capstone on Minesite UKApril 24, 2008
Capstone Is Already Pumping Out Cash, But Just Wait Until 2010
By Charles Wyatt
After announcing details of first quarter sales and production from Capstone Mining’s Cozamin copper mine in Mexico, chief executive Darren Pylot, took a well-deserved holiday. He’s just returned and within a week will be announcing the financials, but it’s the production figures which tell the story. These are not strictly comparable with those for the previous period, which was just four months to bring the accounts into line with the year end. But it’s not the past which concerns us here, anyhow. 202,656 tonnes were milled in the most recent period, but the mine is being expanded to a capacity of one million tonnes per year, a 36 per cent increase. This expansion should be completed by September. At the moment everything is on schedule, according to Darren, and below budget.
He reckons Capstone should be capable of generating around US$40 million in free cash this year. The mine came into production in 2006 at a rate of 350,000 tonnes per year, on time and under budget, and the following year it had increased throughput to 750,000 tonnes per year at a cost of US$13 million, funded out of cash flow. The company still has no debt and is well funded for this latest expansion. In the meantime Capstone is expected to produce in excess of 30 million pounds of copper, nine million pounds of zinc, 5.1 million pounds of lead, and 1.3 million ounces of silver this year. Those are some pretty significant by-products to go alongside the copper. In 2009, with the expansion under its belt for a full year, Cozamin should produce 40 million pounds of copper, and proportionate increases in the other metals.
The mine itself is only 3.8 kilometres away from Zacatecas city so there is no problem over infrastructure and labour. It covers 2,020 hectares and there is plenty of scope to increase the resources from current levels, which amount to 3.7 million tonnes in proven and probable reserves grading 2.37% copper, 82 gramme per tonne silver, 1.18% zinc and 0.4% lead. Behind this Cozamin has 5.5 million tonnes of measured and indicated resources grading 2.54% copper, 86.56 grammes per tonne, 1.15% zinc and 0.37% lead, and further potential from another three million tonnes of inferred resources. Clearly there is potential to upgrade, and new mineralization should be found as the project’s Mala Noche vein has only been partially explored over 1.5 kilometres of its 5 kilometre strike length. It also appears that the copper-silver phase of mineralization extends to greater depths.
The reason that Cozamin is in such a strong financial position is that it forward sold its silver production to Silverstone Resources back in 2006. The aim was simple, as silver is only a by-product on Cozamin’s grades so it made sense to get money up front to spend on mill development rather than allowing the company to be hostage to bankers. The result was that Capstone sold all silver production over a 10 year period to Silverstone for US$20 million in cash and special warrants. As a result of this Capstone now has 27.6 million shares in Silverstone which are worth C$73.14 million at the present share price. Add to this the US$50 million that Darren claims is in the kitty and you get a flavour of just how strong the finances of this C$300 million company are.
Both companies benefit from the deal as Silverstone has acquired its ticket to buy each ounce of refined silver from the mine for the lesser of US$4.00 per ounce of silver and the prevailing market price per ounce of silver which is currently US$17.3 per ounce. This may look very favourable to Silverstone as the price of silver has risen significantly since the deal. One point should not be overlooked, however. Capstone is carrying out a series of expansions to capacity without having any recourse to a bank. That gives much greater flexibility. Anyway copper would have contributed 75 per cent of revenue in this last quarter, on the assumption that all was sold during that quarter, even taking into account the silver deal.
What is of primary importance to the company is the price of copper. Capstone has already sold 6.9 million pounds of the metal for an average price of US$3.59 per pound. This is just as well as copper production was a bit restricted in February and March as the mill was fed with low grade material from the upper levels while infrastructure was being prepared on the lower high grade levels of the mine to support expansion. The current price of US$3.89 per pound is therefore timely for Capstone. The continuing strike action at Codelco ought to keep prices high, although reports indicate subdued buying from China. John Meyer, in the London office of broker Fairfax, reports that Codelco has had to close down three of its five divisions - El Teniente, Andina and Salvador - which collectively produced over 700,000 tonnes of copper in 2006. That will take time to sort out. Codelco is also looking at the possibility of firing contracting firms who fail to control their workers, which could lead to further trouble.
Capstone is therefore expanding capacity at a propitious time and Mr Pylot sounds very confident in the future. He is on the look-out for acquisitions, but will not be pushed into over-paying. “In fact if we have not made an acquisition by 2010 I will give strong consideration to a generous dividend or a repayment of capital to shareholders”, he says. There aren’t many companies around like Capstone and he doesn’t feel it gets proper recognition in North America. Hopefully he will be coming to London for the first time after the summer, followed by a tour of Europe, which should get the shares on the move. That said, the share price performance since 2004 would in any case make many companies envious.
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