CS/SST on Minesite UK
March 30, 2009
Capstone Mining Is In Growth Mode, And Has A Potential New Relationship With Silver Wheaton
By Our Canadian Correspondent
While many of the large and mid-sized base metal miners struggle with large debt loads and falling commodity prices, Canadian listed Capstone Mining is thriving thanks to some prudent hedging and successful mine expansions.
Capstone's Minto mine in the Yukon and its Cozamin mine in Mexico produced 74.1 million pounds of copper in concentrates in 2008 and more importantly successfully completed expansions on both high-grade copper operations. That means that Capstone can now focus on cashing in on those expansions by producing 95 million to 105 million pounds of copper contained in concentrates in 2009 at total cash costs of approximately US$1.00 per pound. Not bad, especially once you consider that Capstone’s cash flow from operations is enhanced by a robust forward sales program, where 104 million pounds of copper was forward sold at an average price of US $2.52 per pound.
On the development front, Capstone is completing major resource updates for both of its mines, as well as on its Kutcho copper project in British Columbia. At Cozamin, Capstone outlined 7.8 million tonnes of measured and indicated resources running two per cent copper. To put it another way, overall resources have increased since the last estimate, despite the mining out of more than 1.5 million tonnes since operations commenced.
Moving north into Canada, Capstone has found continued exploration success at its Minto operation. In fact since Sherwood Copper, which later merged with Capstone, acquired the project in June of 2005, five high-grade copper-gold zones have been discovered. The latest being the "Minto North" target, located 600 metres north-northwest of the current open-pit mine. This has yielded high-grade mineralization at relatively shallow depths, similar in grade, thickness and style of mineralization to that found in the open pit. This new prospect lies directly on a linear trend that includes the Ridgetop zone, Area 2/Area 118 zones, and Main zone deposits.
In British Columbia, the company is looking to redesign Kutcho with an eye on creating a robust, low-cost operation. The most recent resource estimate pegged the measured and indicated categories at 10.4 million tonnes grading 2.14 per cent copper, 2.85 per cent zinc, 0.36 gram gold, and 32.4 grams silver per tonne. The Capstone team knows how to build smaller, higher-grade operations and this one could be next of its production list.
A big fan of Capstone’s success is Silver Wheaton. The silver royalty company is in the midst of acquiring Silverstone Resources, which has silver stream agreements with Capstone’s Minto and Cozamin mines, as well as Lundin Mining's Neves-Corvo copper-zinc-silver mine in Portugal. Under the proposed transaction, valued at C$190 million, shareholders in Silverstone Resources would receive 0.185 share of Silver Wheaton for each Silverstone share.
According to Silver Wheaton, the Minto mine is one of the highest-grade open-pit copper mines in the world. Not to mention that output has doubled since it went into production in 2007. In 2009, Silver Wheaton expects Minto to produce about 290,000 ounces of silver and 31,000 ounces of gold, which Silverstone has the right to buy for the lesser of US$3.90 per oz. silver and US$300 per oz. gold or the prevailing market price per ounce of silver or gold delivered.
Not to be outdone, Capstone's Cozamin mine has tripled output since it was commissioned in 2006. The high grade underground mine is expected to produce 1.5 million ounces of silver in 2009 and Silverstone has the right to purchase 100 per cent of it until 2017 for the lesser of US$4 per ounce of silver or the prevailing market price per ounce of silver delivered.
Needless to say, with Capstone holding some 26.8 million thinly traded Silverstone shares and special warrants, the miner quickly put its support behind the Silver Wheaton offer. At the end of the day, Capstone will have 4.95 million shares of the much more liquid and broader investment based Silver Wheaton. At the time of writing, these 4.95 million shares would be valued at C$49.5 million. But just as important is the potential relationship that could develop between the two groups on future development projects.
Shares of Capstone have rebounded somewhat from the late 2008 drubbing and have faired better than most but still trade far below their C$4 highs. For long term investors profitable growth during a down cycle should spell excellent returns once demand picks up.