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Edited Transcript of CS.TO earnings conference call or presentation 26-Apr-17 3:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Capstone Mining Corp Earnings Call

VANCOUVER Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Capstone Mining Corp earnings conference call or presentation Wednesday, April 26, 2017 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cindy Lee Burnett

Capstone Mining Corp - VP of IR & Communications

* D. James Slattery

Capstone Mining Corp - CFO and SVP

* Darren M. Pylot

Capstone Mining Corp - Founder, CEO, President and Non Independent Director

* Gregg B. Bush

Capstone Mining Corp - COO and SVP

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Conference Call Participants

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* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals

* Yan Truong

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Capstone Mining First Quarter Results Conference Call. (Operator Instructions) Note that this call is being recorded on Wednesday, April 26, 2017. I now would like to turn the conference over to Cindy Burnett, Investor Relations. Please go ahead.

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Cindy Lee Burnett, Capstone Mining Corp - VP of IR & Communications [2]

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Thank you. I'd like to welcome everyone on the call today. The news release announcing our 2017 first quarter financial results is available on Capstone's website, along with an updated corporate presentation with summary information on the company and our financial and operating results. Also on the website are webcast slides to accompany our commentary today.

With me today are Darren Pylot, Capstone's President and Chief Executive Officer; Jim Slattery, Senior Vice President and Chief Financial Officer; and Gregg Bush, Capstone's Senior Vice President and Chief Operating Officer.

I would like to advise you that this call is being recorded for replay through our conference call provider and is being broadcast live through an Internet webcast system. Following our brief remarks there will be an opportunity for questions.

Comments made on the call today will contain forward-looking information. This information, by its nature, is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please see Capstone's relevant filings on SEDAR.

And finally, I'll just note that all amounts we will discuss today will be in U.S. dollars unless otherwise specified.

I'll now turn the call over to Darren.

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [3]

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Thank you, Cindy, and good morning, everybody. Welcome to our Q1 call. As always, Jim will start by reviewing the financial performance of the quarter followed by Gregg, who will give you an update on our operations and then back to me for an update on our corporate activities, following then with your questions. So to begin, we will hand it over to Jim.

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D. James Slattery, Capstone Mining Corp - CFO and SVP [4]

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Thank you, Darren. So our results for the first quarter were -- was a net loss of $7.4 million. This included commodity derivative loss of $13.9 million of which $11.6 million was realized and $2.3 million was unrealized. We also had a $1.1 million noncash charge related to the write-down of inventory at PV and a $2 million charge for 2 explorations, which was paid in shares. So the Q1 adjusted net loss was $2 million after removing the effect of these noncash and nonrecurring items. Operating cash flow before changes in working capital was $24.2 million and it's worth noting that all 3 sites, notwithstanding the operational challenges that we had with 2 of them this quarter, generated net earnings from operations despite these challenges.

We also repaid debt of an additional $10 million on our revolving credit facility subsequent to the quarter end. And this reduces our drawn debt to under $300 million and our net debt to under $200 million. At the same time, we achieved a major milestone last week, which was a 2-year extension of our revolving credit facility to April of 2021. At the same time, we rightsized the facility to meet our current requirements. This entailed the step down to $350 million initially and then reduces annually by $25 million until it reaches $275 million. For reference, we're now drawing less than $300 million.

We maintain the current pricing agreement for the current term of the RCF, which starts at LIBOR plus 2.5%, and we're currently at LIBOR plus 2.75%. And then it bumps up 50 basis points for the last 2 years of the term starting -- therefore, starting at LIBOR plus 3%. As we said before, we intend to use all of our free cash flow from operations to reduce debt to a sustainable level at the bottom of the cycle for commodity prices.

In terms of cost, our cost per pound was high in the first quarter and this is largely attributable to the production challenges that Gregg will speak to in a few minutes, and most significantly, obviously, at PV. We expect this to come down over the course of the year as Pinto Valley and Minto return to full production and Cozamin realizes the benefit from the return of the silver stream to Capstone, which took place on the 5th of April this year.

I'd now like to turn the call over to Gregg for our operational update.

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Gregg B. Bush, Capstone Mining Corp - COO and SVP [5]

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Thank you, Jim. Okay. Pinto Valley operational and maintenance issues dominated the quarter. We started the quarter with a major scheduled maintenance program, which required the plant to be shut down for 6 days. The work that necessitated this general shutdown involved repairs to the tailing thickener feed distribution system and repairs to the coffin liners beneath the fine ore bins, although many other maintenance activities were completed concurrently with these repairs. The repair activities were completed without incident. However, during the startup following the shutdown, Pinto Valley received 5 inches of rain over a 2-day period, ultimately resulting in partial flooding of the pit bottom with this rainfall coming at the end of a relatively wet winter at Pinto Valley. This prevented shipping of the high-graded ore planned from the pit bottom during a 2-week period. Additionally, during the short startup period, the long anticipated failure of the lower primary crusher mainframe occurred, likely precipitated by the wet and sticky nature of the ore being fed during that period.

The mainframe replacement was completed over a 2-week period beginning February 25. During the mainframe replacement, 3 portable crushers were brought in, which allowed us to operate at about 30,000 tonnes per day during this time.

Since the crusher repairs were completed on March 9, the plant has operated above planned throughputs, averaging just over 59,000 tonnes per day. Property costs at Pinto Valley were also negatively impacted by the contractor requirements during these shutdown periods. These included maintenance support and contractor -- and the contract crushing activities during the extended shutdown and the spares involved in the mainframe replacement. In the mine, contract mining for the pioneering of the dual fuel pushback had been scheduled to be completed in December of last year, but was delayed in starting. This resulted in expenditures being pushed into the first quarter of 2017. And finally, low production impacted our unit costs.

On the PV expansion, our PV3 expansion, we reached a few major milestones on scheduling and on permitting the pushbacks on the Forest Service land. The Forest Service published a notice of intent to conduct an EIS, which kicked off a 30-day comment period, which ends tomorrow. And public meetings were held in Miami and Superior during March. Everything with the EIS is moving ahead on normal course and in addition, state permit applications relative to the PV3 expansion were submitted and deemed complete during the period.

Moving on to Cozamin. Production and cost were on or slightly above plan. We completed 800 meters of development in -- above what we had planned to complete. However, improved -- well, the additional development pulled some cost forward from later in the year into the first quarter. However, improved dilution controls and higher copper production offset these expenditures. Costs are expected to fall going forward as the full revenue stream from the silver starts in April. And met work and drilling for the zinc zones also continued during the quarter.

At Minto, operation and scheduling changes got us slightly out of sync with our guidance on a quarterly basis. These -- some of these changes included the development to the Minto East ore body, which was not originally planned. These costs were all expensed and prestripping costs in the area to stage 3 pit were all expensed, but produced little ore during the period. And also there was a delay in startup of ore production in the Area 2 lower limbs, which resulted in lower grades milled and forced a higher proportion of partially oxidized stockpile materials into the feed bin. Stockpile evaluation was also higher at the start of the first quarter due to the makeup of the materials and the stock. All of these things will even out over the year. We expect to be back on line on an annual basis with no change to full year production and cost guidance.

On Minto Mine line, we've -- as I previously mentioned, we've already begun development to the Minto East ore body. At current copper prices, we anticipate operating at least until mid-2020. This will entail mining the Minto East and Copper Keel underground deposits, which are currently in our reserve base. The extended mine plan also considers an extension to Minto East underground zone and an underground project to extract a portion of the Minto North ore body that did not ultimately optimize into the open pit. These may require some additional permitting. We are also evaluating bringing the ridge stop in Area 2 stage 4 pits back into reserves, given our lower cost structure and anticipation of better metal prices. These would extend the mine life into 2022.

With that, I'll turn the call back over to Darren.

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [6]

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Thanks, Gregg. Well, there's no question that, hearing from Gregg and Jim, that Q1 was definitely a challenging quarter operationally. However, we're maintaining our consolidated production and cost guidance due to the following. As we heard, all of the planned maintenance and known maintenance at Pinto Valley is now completed for basically the entire year, and we expect throughput to remain above plan at current levels for the rest of the year, with all the major repairs to the crusher now completed and the crusher is operating as per plan.

Secondly, at Cozamin, we're operating -- we plan to continue to operate above budget and plan, and expects similar consistent -- similar performance as we had in Q1 over the balance of the year. And as Gregg mentioned, Minto Mine plan is on plan for the year as well with throughput and grade and will have additional areas of mining that we previously thought we'd be going care and maintenance in early December, will now obviously be running through the end of the year and beyond. So that gives us some extra production at Minto. So those 3 factors give us the confidence that we will be able to come in within guidance on production and, obviously, if we do the pounds, we will be -- our cost will come in line as well.

Some of the key points I'll reiterate. As Jim mentioned, significant positive financing action by extending our credit facility out 2 more years to give us the runway and the cash flow to repay the facility in full based on current commodity prices and consensus commodity prices going forward. We did pay down an additional $10 million, taking our net debt down to below $200 million, so continuing to generate free cash flow and pay off debt at current commodity prices. We've made solid progress on expansions and growth. At Pinto Valley, we've advanced through the public comment stage on our permit application for PV3. As we mentioned, our Minto extension is now -- mine life is now at least out to 2020. And as Gregg mentioned, we'll evaluate mine plans that include Ridgetop and Area 2, stage 4. They are not currently in our reserves and would extend mine life beyond the 2020.

We continued at Cozamin. We continued our zinc drilling and metallurgical work and that's advancing as planned. We -- as Jim mentioned, in early April, we now retained the -- all of the silver starting April revenue that we were previously giving to Silver Wheaton in the silver stream agreement. That's all coming back to us in Cozamin, so cost will drop from April going forward.

And finally, at Santo Domingo, the current environment in Chile has improved considerably since our last -- since the feasibility study was done. The current environment for power is 20% to 30% lower than the assumptions we made in the study. There are now opportunities to share infrastructure such as ports and water, which could reduce both CapEx and OpEx. So we'll continue to have discussions with third parties around these initiatives. We will also complete some trade-off studies within the year to give us a more accurate description of the project in the current market conditions. And this is all really done to increase our option value on the project without any material spending, and I want to be clear that no development decisions will be made until we see a further recovery in copper prices.

We're well positioned to take advantage of the improved copper prices this year, and also we have obviously large leverage to copper prices. We'll enter the second half of the year with approximately 50% of our production not subject to either hedging or any price collars.

So in closing, we're confident that we will be within our 2017 guidance based upon how our operations are currently operating. We've reduced debt by $10 million and expect further debt reductions throughout this year. We've eliminated any short-term financing risk by extending our credit facility out to 2021. And we're looking forward to an increased mine life at Minto, which increases the asset value of the company beyond this year, obviously with operating.

So the 2 things I want to leave you with to make sure you have clear in your minds today in the call is, one, maintenance is completed at Pinto Valley. Pinto Valley is running according to plan and the crusher was really a one-off incident. We're confident we'll be able to run as per plan for the rest of the year. And two, Minto is not shutting down or going on care and (inaudible) maintenance anytime in the near future.

Operator, thank you. That concludes our prepared remarks. And we're now prepared to take questions from the floor.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question will be from Orest Wowkodaw at Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [2]

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Couple of questions. First of all, Jim, in terms of the new credit facility, are there any required prepayments on this? Or is it just that the maximum steps down every year?

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D. James Slattery, Capstone Mining Corp - CFO and SVP [3]

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Just the maximum steps down. It's basically the exact same agreement that we currently have, just with 2 years tacked on and the production in the facility and the change in the rates in the last 2 years.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [4]

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Okay. And then you can -- with excess cash flow, you could just pay this down early?

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D. James Slattery, Capstone Mining Corp - CFO and SVP [5]

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Yes, if we like. And we'll have the option of permanently reducing and saving on the standby fees or not depending on what our requirements are going to be.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [6]

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Okay. That's perfect. And then in terms of Minto, it sounds like you're leaning towards keeping it open beyond this year. Can you give us an idea of what the production profile would look like beyond this year at Minto and kind of what's sort of sustaining capital or kind of what the economics look like beyond 2017?

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Gregg B. Bush, Capstone Mining Corp - COO and SVP [7]

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Well, I think the production profile for -- at least for the next 2 years would look very similar to this year, and the cost as well. The all-in cost that we anticipate from each of the underground ore bodies that I mentioned is all kind of in the same dollar -- high $180 to the mid-$190 range. The open pit pieces, if we bring those in, would obviously be higher cost.

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D. James Slattery, Capstone Mining Corp - CFO and SVP [8]

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Orest, that -- to be clear, that's all-in cost, includes all sustaining capital.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [9]

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Okay. So that's all-in, would be similar production, similar cost. And I just wanted to be clear, have you -- like are you formally saying you're keeping it open now or is that still -- or is it just an option at this point?

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [10]

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We're formally saying that we're keeping it -- we're going to keep running beyond this year. And the reason why we get a bit tricky -- not tricky, but a bit unclear is because there is some deposits that need permitting and some deposits that don't, and we need to understand how to sequence the mine plan. But we have enough reserves based on, obviously, commodity prices as everything is, that we will operate through to 2020. And if we bring in additional reserves that aren't -- that we've previously taken out due to low copper prices, we'll be going for a couple of years -- potentially a couple more years beyond that. So yes, we're clearly operating beyond '17 as of now.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [11]

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Okay. And any ore for next year? Is that already permitted? Where does the permitting issue kick in on the time line?

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Gregg B. Bush, Capstone Mining Corp - COO and SVP [12]

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Yes, it's -- yes, I mentioned 2 ore bodies, the Minto East extension and an underground extension on the Minto North ore body. And I want to clarify that they may require additional permitting as it -- I don't necessarily think they do require permitting. Certainly, we have a precedent, if you recall, the M-zone in Area 2 where it wasn't in -- it -- all it required -- we think all it will require is an operating amendment to our (inaudible) mining license. But until we get through all the evaluation and comment from stakeholders, we won't know for sure.

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [13]

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Let me clear, the stuff we'll be mining next year is not subject to permitting. There's nothing holding us back in '18 from mining, or '19 for that matter.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Equity Research Analyst of Senior Base Metals [14]

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Great.

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Gregg B. Bush, Capstone Mining Corp - COO and SVP [15]

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Yes. That's correct.

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Operator [16]

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(Operator Instructions) And your next question will be from Yan Truong of Crédit Suisse.

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Yan Truong, Crédit Suisse AG, Research Division - Research Analyst [17]

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Just 2 quick questions on Minto again, if I may. Firstly, what is the upfront incremental capital that's required in '17, whether that's expense or capitalized in preparation of production in '18 and '19? And my second question is, given the higher all-in cost nature at Minto, would you ever consider hedging up that production at today's prices? Or are you comfortable with the full exposure?

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Gregg B. Bush, Capstone Mining Corp - COO and SVP [18]

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So the -- 2017, we would expect to see some additional development costs. We haven't really -- since -- our current mine plan would have us actually producing some ore from the Minto East zone before the end of the year. We're just expensing those costs. So we don't expect it to have any impact on the cash cost for the year. There will be enough additional production coming from that zone to offset the development costs that are -- the additional development costs that occurred during the year. And those costs are, I would say, under $5 million altogether, the development in -- the lateral development in the race is to get the area into production.

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [19]

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This -- the second part of your question, Yan, is, currently we're not contemplating any hedging around Minto. We like -- we feel good about the copper market, the environment going forward over the next short to medium term. So we're not currently looking at hedging any more copper that's not already out there and booked for this year.

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Operator [20]

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(Operator Instructions) And at this time, we have no further questions. I would like to turn the call back over to Mr. Pylot.

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Darren M. Pylot, Capstone Mining Corp - Founder, CEO, President and Non Independent Director [21]

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Thank you. And thank you, everybody, for joining us today. And as always, please don't hesitate to contact us for any additional questions or comments that you may have. Thank you.

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Operator [22]

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Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.