Post by
Number7 on Feb 03, 2022 3:22pm
Top Pick Capstone Mining Corp. Base Metals - Producer
Dalton Baretto, CFA | Analyst | Canaccord Genuity Corp. (Canada) | dbaretto@cgf.com | 1.416.869.7380 Lucas Pamatat | Associate | Canaccord Genuity Corp. (Canada) | lpamatat@cgf.com | 1.416.687.6371 The "Full Mantos" in 2022 Investment Recommendation CS was one of the stars of 2021, with the company’s shares returning 145% vs. the base metal producer group average of 26%. The company benefited from its leverage to copper prices and a number of positive operational and strategic updates, culminating in a transformational merger agreement with private company Mantos Copper (please see our note here). We expect 2022 to be the “year of adolescence” for CS, over which it finally grows into a true mid-cap producer beginning in 2023. We expect the Mantos merger to close at the end of Q1 2022. With the addition of Mantoverde and Mantos Blancos into the fold, we forecast CS’s copper production to increase to ~200kt in 2022 vs. just 84kt in 2021. However, we expect higher AISC over the year, as the Mantos assets are currently going through their high-cost phase. We expect investors to pay less attention to the company’s actual 2022 production and cost, but instead focus more on the progress of the growth projects – MVDP, PV4, Cozamin Impact 23, and Mantos Blancos Phase II. In addition, we expect the company’s shares to significantly re-rate in 2022 as the market begins to better understand the Mantos assets, look ahead to the completion of MVDP in 2023, and understand the scope and economics of PV4. Investment highlights • Copper focus: Copper represents ~97% of CS's 2022 revenue stream on a pro forma basis, vs. 60-80% for its closest peers. • Significant growth profile: Versus 2021, we expect copper production to grow by 13% in 2022, 32% in 2023 and 66% in 2024. We note that this growth is fully funded, and believe is low risk from a technical perspective. • Leverage to copper: We forecast a 23% change in our 2022 EBITDA estimate and a 25% change in our NAV for a 10% change in our copper price deck. We note that our long-term copper price of $3.30/lb is well below the current spot price of ~$4.35/lb. • Portfolio diversity: Following the completion of the merger with Mantos Copper, the company will have four operating mines across three countries in the Americas (Chile, Mexico and USA). • Attractive relative valuation: CS trades at a significant discount to peers as the market has yet to digest the acquisition of Mantos Copper, a private company about which little is known. The company trades at 3.7x 2022E EBITDA and 0.69x NAV, vs. the peer group averages of 4.8x and 0.79x, respectively. • Upcoming potential catalysts: • Closing of the Mantos Copper acquisition and new consolidated guidance - Q1 2022 • Quantification of the synergies between Mantoverde and Santo Domingo - Q3 2022 • A revised mining taxation and royalty regime in Chile • PV4 technical report - Q4 2022 Valuation We reiterate our BUY rating and our C$9.00/sh target price on CS, which remains based on an equal weighting of 6.0x our NTM EBITDA forecast and 1.0x our NAVPS estimate, both measured as at October 1, 2022. Our multiples reflect our thesis that the combined entity will trade at a premium to peer group ave