Capstone Copper Corp T.CS

Scotia PT increase $7.25!!!!!! Santo Domingo Baby!!

[Evrytingisawsum]

The Santo Domingo Project Is Now Too Valuable to Ignore

 

OUR TAKE: Positive. Following several material recent de-risking transactions at both the asset and corporate level, we believe that the right Cu-Fe price environment has finally arrived for CS to advance its Santo Domingo (SD) Cu-Fe-Au-Co project in Chile into development. As a result, our base case estimates now assume that the SD project enters construction at the end of 2021/early 2022 at a 70% ownership level, with first production in late 2024. Overall, the addition of the SD project has increased our corporate 8% NAVPS to C$6.72 per share, or by 37%. Most important, we believe that CS can develop the SD project with minimal risk to the balance sheet.

We rate CS shares SO based on an attractive valuation, peer-leading Cu growth and leverage (Exhibits 9-12), and several anticipated catalysts. Our revised 12-month target of C$7.25 per share (from C$6.00) is based on a 50/50 mix of 5.5x our avg. 2021E-2022E EV/EBITDA and 1.1x our 8% NAVPS estimate. CS remains a top pick.

KEY POINTS

 

A Santo Domingo refresher. The fully permitted SD project is located in Chile's Region III at low elevation. SD is an IOCG deposit with large P&P reserves of 392Mt grading 0.30% Cu and 28.2% Fe, containing 1.2Mt of Cu and 75Mt of Fe. Based on a throughput rate of ~60ktpd, we forecast average annual production of 60kt of Cu and 4.2Mt of high grade 67% Fe at very low C1 cash costs of $0.78/lb Cu (AISC of $1.82/lb) over an 18-year mine life. We estimate a fairly balanced LOM Cu/Fe revenue mix of 56%/43% at our long-term prices of $3.25/lb Cu and $85/t 65% Fe. See Exhibits 1-6. Although CS recently increased its ownership to 100% (from 70%), a new partner process is anticipated to conclude shortly, and we expect CS to ultimately retain 70%.

Minimizing balance sheet risk. CS exited Q1/21 with a pristine balance sheet (net cash of $32M). Two recent infrastructure outsourcing transactions have reduced SD's estimated capex to $1.1B (from $1.5B). After factoring in $0.5B in future project debt and a recent $290M Au stream, we estimate CS's attributable (70%) project equity contribution at a very manageable $261M (Exhibit 7). We conservatively assume a 20% capex overrun and only $120M of proceeds for the 30% stake. We forecast strong 2021E-2024E FCF (before growth capex) of $858M and a peak net debt of only $89M.

Positive NAVPS impact. Our 8% NAVPS of C$6.72 increased by 37%, reflecting a maiden SD 10% NAVPS of $389M (70%); SD has an attractive estimated IRR of 22%.