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Executives

Cindy Burnett - Vice President, Investor Relations and Communications

Darren Pylot - President, Chief Executive Officer and Director

James Slattery - Senior Vice President and Chief Financial Officer

Gregg Bush - Senior Vice President and Chief Operating Officer

Robert Blusson - Vice President, Finance

Peter Hemstead - Vice President, Marketing and Treasurer

Analysts

Tom Meyer - CIBC

Mark Turner - Scotiabank

Matt Murphy - UBS

Stefan Ioannou - Haywood Securities

Patrick Morton - RBC

Capstone Mining Corp (OTCPK:CSFFF) Q3 2013 Earnings Call October 31, 2013 11:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp's third quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Cindy Burnett, VP of Investor Relations and Communications. Please go ahead.

Cindy Burnett

Thank you. I'd like to welcome everyone on the call today. The news release announcing Capstone's third quarter financial results is available on our website, along with a PowerPoint presentation that contains summary information on the company and the financial and operating results.

With me today are Darren Pylot, Capstone's President and CEO; Jim Slattery, Senior Vice President and CFO; Gregg Bush, Capstone's Senior Vice President and Chief Operating Officer; Rob Blusson, VP of Finance; and Peter Hemstead, VP of Marketing and Treasurer.

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.

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.

Now, I'll turn the call over to Darren Pylot.

Darren Pylot

Thank you, Cindy, and good morning, everybody. First, Jim will review our financial results for the quarter, and then Gregg will update you on the operations and our development activities. We'll then spend the balance of the call talking about Pinto Valley, followed by your questions.

So we'll start by turning the call over to Jim.

James Slattery

Thanks, Darren. Our earnings before interest and taxes, adjusted for foreign exchange and the one-time Pinto Valley transaction cost, were $5 million for the quarter. Operating cash flow before changes in working capital was $12.7 million or $0.03 a share for the quarter and $61.3 million for the year-to-date, which gives us a significant flexibility to fund our capital programs and to continue to grow the company.

Our production for the quarter was 18.2 million pounds of copper in concentrate and our total cash cost for the third quarter was $1.57 per pound of payable copper, net of by-product credits. Our full year guidance remains unchanged at 85 million pounds of copper, plus or minus 5%, and we're maintaining our guidance for 2013 cash cost in the range of $1.65 to $1.75 per pound.

Now, more than three quarters of the way through the year, Minto's production year-to-date is 23 million pounds. We're now getting into a higher grade ore from both the open pit and the underground, but do not believe that we will be able to fully catch-up and are now forecasting that Minto will come in below the low-end of their production guidance. We are expecting the fourth quarter to be very strong at Minto and are seeing grades come up already.

On the cost side, with Cozamin cost at $1.20 per pound for the quarter and $1.17 year-to-date, we expect Cozamin to come in slightly above the high-end of their cost guidance for the full year, which was $1.10 per pound. And at Minto, if we make our fourth quarter production as planned, we expect our cost per pound to be lower than originally guided. On a combined basis, however, we do expect to make our overall corporate range of guidance, both on production and costs.

Now I'll turn to our balance sheet and our cash position. We reported $457 million in cash at September 30. Subsequent to the quarter end, we completed the purchase of Pinto Valley, using a combination of $358 million of cash on hand and $288 million from two credit facilities for a total of $646 million. This represents the purchase price of $650 million less a provisional working capital adjustment that will be trued-up on the basis of the actual working capital balances at closing.

The balance of the $400 million in total credit was used to support letters of credit for reclamation obligations of $24 million at Minto and $87 million at Pinto Valley. Our current cash on hand is approximately $82 million, which provides us with more than enough flexibility to meet our ongoing operating requirements.

Now, I'll turn the call over to Gregg Bush to talk about our operations.

Gregg Bush

Good morning. As Jim mentioned, we expect Minto production to come in just under the low-end of guidance for the year. Mill operations are running well, averaging just under 4,000 tons per day. We put additional manpower and equipment into the open pit mining operation and have begun to see higher grade material. And in early September, we reached the ore lens underground with development ore now going to the mill.

As we mentioned in previous quarters, because of the pit wall failure in the fourth quarter of last year, we started two months behind in our mine plan, and while the measures taken have mitigated the shortfall, we do not expect to fully make it up.

At Cozamin, operations are running very well. As Jim mentioned, cost did fall slightly at Cozamin during the third quarter, however remained at $1.17 per pound year-to-date. Water costs were a one-time cost early in the year and our haulage and contractor costs have been higher than originally planned. The proposed 7.5% mining royalty in Mexico has been passed through the Senate. Once we understand the full scope, we will look to mitigate the impact to the extent that we can.

I'll now turn to the Pinto Valley acquisition. Since we took control of operations three weeks ago, we have been very encouraged and are confident that we'll have the mine operating at design throughput by the end of the year. While we can't provide metrics during the time at BHP-owned mine, what we can provide are details as it relate to our ownership.

While throughput, grade and recoveries have all demonstrated the ability to operate at target levels, what we need to do is improve consistency and reliability. We haven't seen any surprises, and for the month of October, we've operated between 85% and 90% of nameplate capacity; with recoveries running on plan, the grades vary day-to-day.

On an annualized basis, where we're at right now works out to about 120 million pounds of copper and concentrate. And there is nothing we've seen that gives us any reason to believe that we wouldn't achieve full capacity by the end of the year.

We have guided to 22 million to 27 million pounds of copper for a 82 day period of our ownership during the fourth quarter, which represents an annualized rate of just over 100 million pounds or in the 85% range. Once we get a couple of months under our belt, we'll be in a better position to let you know our timeline for reaching full run rate of 130 million to 150 million pounds.

The pre-feasibility study continues to progress, and as of closing, we now have received all the detail we expected to get from BHP. The study is scheduled for completion in the first quarter of 2014, and is intended to imply the economics of 12 years of mine life, which is currently permitted.

Concurrently with this Phase 2 PFS, we will commission a Phase 3 study, which will consider all of the remaining identified resource on the property. We are very optimistic about a potential to extend the mine life meaningfully beyond year 12.

I'll now turn the call back over to Darren.

Darren Pylot

Thanks, Gregg. So we closed the acquisition and took control of the operations on October 11. Our transition period went very well and activities has now turned from preparing for day one to focusing on exiting the transition services agreement that we have with BHP. This agreement provides a bridge between the BHP and Capstone systems at Pinto Valley, and also has additional cost to Capstone.

We're very pleased with what we've seen so far. The safety culture is, we believe, second to none, and the workforce at the mine is very experienced with an excellent work ethic. We're looking forward to getting the operation to steady state and engaging the Pinto Valley team to maximize the full potential of the mine.

Now, moving on to our development and explorations projects. We continue to advance the Santo Domingo project. The feasibility study is on track to be completed by yearend and we have just filed the EIA yesterday. This will now start the formal permitting process, which we expect to take about 15 months throughout the process.

We're optimistic that we can obtain economically price power under a long-term agreement. We have received indicative proposals from providers that can deliver power within the projected development timeline and at a cost that we consider viable for the project.

The next steps will be to receive detailed memorandums of understandings from the parties, with a goal of completing a binding agreement some time in the first half of next year. So essentially we're on track with all the necessary items that we need to be able to put in place for us to make a decision to go forward at Santo Domingo.

Turning to Kutcho. With the acquisition of Pinto Valley, we have determined that Kutcho is no longer material to our growth strategy, does not represent the best allocation of either capital or time resources. We will evaluate strategic alternatives and advise further, when we have anything to report.

And lastly, turning to exploration. We said at the last call in July that we would continue to be optimistic as early stage, low-cost exploration opportunities come before us. In August, we signed an option agreement with SQM, the large fertilizer and industrial chemical producer in Chile, for a 350,000 hectare property block that lies between Santo Domingo and Anglo's Mantos Blancos mine in Northern Chile.

This significant land position has been held by SQM for decades, and only explored for the near-surface nitrates and iodine. It's never been explored for base or precious metals. Never been drilled below 9 meters of depth. We've completed airborne surveys over the block in mid-October and interpretation of the data is underway, and we are intending to have drill-ready targets ready to go before the end of next year.

So in closing, we've completed the Pinto Valley acquisition, which positions us as a leading intermediate copper producer. Our financial position remains strong, and our cash flow is diversified.

Our priority over the coming quarter will be to fully integrate Pinto Valley into Capstone's operations, take the necessary actions to get that operation running at the target capacity, and advance the PV2 pre-feasibility study for completion in the first quarter of next year. We intend to stay disciplined and focused, and maintain the financial flexibility to adjust quickly if opportunities arise or if market conditions warrant.

Operator, that concludes our prepared remarks, and we're now ready to take questions from the floor.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Tom Meyer from CIBC.

Tom Meyer - CIBC

I've just have one quick one, I think. Just as relates to the Pinto Valley off-take, how are you thinking about the value of that off-take now? Are you looking to retain it for perhaps make the funding easier for Santo Domingo at a later date? Or you just want to keep it in the event that you come across any, as I think you called it, opportunities that may be out there?

Peter Hemstead

The approach we're using in marketing the Pinto Valley concentrate is more of a diversified approach. And definitely, we are looking at strategic relationships with end-users of the concentrate in Asia that could potentially assist with the financing of Santo Domingo, but it'll be a blended approach between end-users and traders.

Operator

Your next question comes from Mark Turner from Scotiabank.

Mark Turner - Scotiabank

Just my first question here. Gregg, you had mentioned, I guess just for the short-term improvements here, you're looking for more consistency from sort of the operations. I was just wondering if there was anything specific or a little bit more color you could add there, whether its consistency sort of across the operations or more on the mining side, crushing or that type of thing?

Gregg Bush

I would say that most of the reliability problems that we've seen as we've been there in the crushing circuit, to a lesser extent in the mill. Right now the mine is not really seeing any challenges. It's the ore that's going to the mill that's all been stripped, and it's just basically loading ore and hauling into the surface.

Mark Turner - Scotiabank

And then just, I guess, somewhat related to that. In the short-term, like I know BHP was obviously responsible for the CapEx up until this point. Is there any, even sort of minor amounts of capital that you expect to be putting in to Pinto Valley over the short-term, maybe to resolve like some of these reliability issues?

Gregg Bush

I mean, I don't have a number, I can give to you guys, but yes, I would expect that we'll see some minor sort of corrective maintenance capital through the remainder of the year.

Darren Pylot

Our sustaining capital estimate at Pinto Valley is in the range of around $15 million a year, but there's nothing material this year that's contemplated.

James Slattery

There's no number that we have to put into fix something that we're not. As Gregg said, it might be minor maintenance capital, but nothing that we're seeing that we have to put into fix a specific problem.

Mark Turner - Scotiabank

And then just sort of two more questions here. One, on the study after the PFS, so looking at the sort of post 12 years expansion or post 12 years operation, just for clarity, what's the timing then? Are you looking to commission that sort of after the pre-feasibility study has been released or hoping to have sort of that study done at a similar time in Q1?

Darren Pylot

No. We'll get the PV2 out, which we call Phase 2, the pre-feasibility study to take us to 12 years. And once that study is completed, kind of concurrently at the end of that study we'll begin PV3, which is beyond the 12-year study.

Mark Turner - Scotiabank

And then my final question just on the SQM block and I guess, exploration, you're talking about drill targets being ready for this year. Is it primarily towards copper or are some of the targets also, precious metals that haven't been explored on that large land package?

Darren Pylot

Well we don't have a view on the precious metals. We acquired it, obviously for the copper. There's copper staining all over the surface of the property, so obviously, that's what we're most excited about, but did want to note that it's not been explored for any type of precious ore-based metals at all.

Operator

Your next question comes from Matt Murphy from UBS.

Matt Murphy - UBS

Just a quick one on the Pinto Valley guidance. If I am doing the math right, I think Pinto produced around 26 million pounds in Q3. Is there any sort of maintenance being done or is it just conservative guidance for Q4?

Darren Pylot

Matt, we've had the operation for 20 days now and that's all we've had it for. So we are completely confident that it's going to run as well as it ran the last couple of quarters, and obviously that's where the guidance comes from. We'd much rather, what we're seeing, as we said in the comments, we're seeing no reason why we can't be fully up to nameplate capacity by the end of the year and so there's about 82 days left only. So if you analyze that, annualize that, we feel confident in that guidance. It would rather surprise to the upside rather than put something in that we're not sure about after only being there for 20 days.

Operator

Your next question comes from Stefan Ioannou from Haywood Securities.

Stefan Ioannou - Haywood Securities

I think a couple of my questions have been answered already, but just I guess a quick one. At over at Minto in the underground, just in terms of right now you're into ore now and it's sort of preproduction ore. Going commercial, did that depend on getting sort of the fresh air raise complete or is there sort of a thing that triggers when you can actually legally go commercial there?

Gregg Bush

It does depend on the fresh air raise, but also the second egress, so that raise broke through the surface this week. So now we have to slash it back down to increase the opening and put the ladder way in.

Stefan Ioannou - Haywood Securities

And in the meantime, are you technically are you physically milling those some of that “preproduction” ore from underground?

Gregg Bush

Yes, we have.

Darren Pylot

And, Stefan, it really doesn't matter as much now because we're into the high grade that's in the pit. So we don't really need the underground ore at this point because we've got it from both locations. We were hoping we were going to get one or the two in this quarter to help this quarter's production, but now it's all coming in the fourth quarter from both underground and open pit.

Operator

Your next question comes from Patrick Morton from RBC.

Patrick Morton - RBC

The reclamation liability funded under with the credit facility, $87 million for Pinto Valley. Was that unusually high from your perspective? And if so, what were the items under contention that caused that number?

Gregg Bush

I wouldn't say that it's high, it was the number that we were expecting it to be and I think for the size of that site and the area of impact and the historic mining operation, I don't think it's at all unusual.

Patrick Morton - RBC

And so the purchase price was $650 million plus the $87 million, basically that's funded through the credit facility, right?

James Slattery

Well, yes. I mean the $87 million is a credit, is a LOC, but it so doesn't come out of actual cash because it's funded.

Operator

There are no further questions at this time. Please proceed.

Darren Pylot

Thank you for joining us today everybody. And please don't hesitate to contact us with any additional questions. Thank you very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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