Capstone Mining's (CSFFF) CEO Darren Pylot on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Capstone Mining (CSFFF)

Capstone Mining Corp. (OTCPK:CSFFF) Q2 2014 Results Earnings Conference Call August 8, 2014 11:30 AM ET

Executives

Marlo Hamer-Jackson – Investor Relations Specialist

Darren Pylot – President and CEO

Jim Slattery – VP and CFO

Gregg Bush – Senior VP and COO

Rob Blusson – VP of Finance

Analysts

Sasha Bukacheva – BMO Capital Markets

Peter Campbell – Jennings Capital

Stefan Ioannou – Haywood Securities

Alex Terentiew – Raymond James.

Samar Sidhu – Scotiabank

Operator

Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp's 2014 Second Quarter Financial Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue for your question. (Operator Instructions) I would like to remind everyone that this call is being recorded on August 8, 2014.

I would now like to turn the conference over to Ms. Marlo Hamer-Jackson, Investor Relations Specialist. Please go ahead.

Marlo Hamer-Jackson

Good morning I'd like to welcome everyone on the call today. The news release announcing Capstone's 2014 second 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 COO and Rob Blusson, Vice President of Finance.

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, Marlo. And good morning, everybody. First, Jim will review our financial results for the second quarter followed by Gregg, who will provide you an update, you on our operations. He will also update you on our development and exploration projects followed by your questions.

I'll now turn the call over to Jim to get things started.

Jim Slattery

Thanks, Darren. We recorded net income for the quarter of $16.6 million or $0.04 a share as compared to net income of $9.2 million or $0.02 a share in the second quarter of 2013. Earnings from mining operations at $44.5 million were $32 million higher which more than tripled from the $13.5 million earned in the same quarter one year ago. Profitability of Pinto Valley was a major contributor of both Cozamin and Minto received a profitability recorded in the comparable period.

Partially offsetting the higher earnings from operations were increased explorations expenditures on the Providencia project in Chile as well as higher income tax and finance cost and a large foreign exchange gain that we had in the second quarter a year ago that was not repeated this quarter.

Our adjusted EBITDA was $64.8 million or $0.17 a share an increase of over $36 million or 126% as compared to the $28 million in the second quarter of 2013. This reflects the strong operating results discussed above partially offset by higher depreciation and amortization charges following the incorporation of Pinto Valley into our results.

Operating cash flow before changes in working capital was a record $56.5 million or $0.15 a share for the quarter and $104.7 million or $0.27 a share compared to a year earlier.

Turning to operating cost, both Cozamin and Minto are running at or below their cash cost guidance, both of these mines are seeing the benefits that come through continuity, experience and established leadership teams and are well positioned to meet or exceed guidance for the year. At Pinto Valley however C1 cash cost per pound was $2.13 for the second quarter up from $2.06 last quarter. However, even with the impact of downturn, the experience cost of Pinto Valley are not where we want them to be and Gregg will discuss our cost in more detail in a few minutes.

Lastly, I’ll turn to our balance sheet and cash position. We ended the quarter with $128 million of cash and $311 million of drawn debt. On July 4, subsequent to the quarter end, we repaid $22.2 million of debt, reducing the total debt balance to $284.9 million.

So mow, I will turn the call over to Gregg Bush to talk about our operations.

Gregg Bush

Thank you. From a production volume perspective, Q2 was once again a strong quarter for us and we’re right on track for our production guidance half way through the year. At Cozamin and Minto we once again had loose quarters however fertility at Cozamin in early June was devastating for all of us and particularly for the team at Cozamin.

We have taken a much tougher stance around safety behaviors and we have also modified our rock support standards in all key openings in the mine and an effort to move our risk control measures from administrative – but in behavior of these activities to more rigid engineering controls. These new standards are already in effect.

At Minto, we submitted the water and Quartz Mining License applications to the Yukon Water Board and energy mines and resources respectively on July 2. These are the two permits that we need to mine and process the Minto North deposit. Based on recent discussions we believe it is unlikely that we’ll have our permits in hand from mid August.

Slippage in the schedule will not impact our 2014 mine plan as it already cost a run of mine or it will be augment with stockpile and underground ore in the second half of the year. In addition we have an alternative mine plan for 2015 in the event if Minto North were delayed further.

The more immediate effect of the deferral in Minto North stripping will be the loss of employment with the local mining contractors. We are working hard with both the Yukon government and first nations who very much want to find a way that transitioned mining for the seamlessly incremental North.

At Pinto Valley a ball mill gear failure were 25 days and they impacted the quarter from both production as well as the cost standpoint, however the impact of this was partially offset by hired implant grades and better half of recovery.

As you know our primary focus has been on the stabilization of the operation and with the exception of the May issue was the ball mill we are continuing to make progress. The trends since day one has been steadily moving in the right direction.

As we have improved our understanding of the operations we have identified key operational risk and taken steps to mitigate these with improved maintenance schedules and by identifying appropriate credit as far as inventory.

We have also completed our initial 30-week operational improvement program in the second quarter to target the short end of the controls and the quality of shift handle versus the maintenance execution plans. All of these that have contributed to a steadily improving throughput and recovery.

We also identified significant savings and key consumable contracts that will contribute to the cost reductions going forward.

Moving into the third quarter some of the main task on our list remained focused on reliability. Next on the priority list is a side wise assessment to terminal electric vendor go this primarily in the mill but also across the operation. And moving up to the priority list is the [Moly] circuit which as you know has not been operating reliably.

With some of the major items addressed we are well on hand we will continue to systematically work through each identified area for improvement. What we are not happy with is our cost reduction efforts in Pinto Valley have not been producing impacts that we need. Now that we have more operational stability and better cost information we’re reviewing overhead, overtime cost and contractor cost to understand the needs of our partner any – and reduce spending.

Consumption of fuel and tires is also high which is impacting cost, although our new tire contract going forward is expected to result in significant savings. We are still working through a large inventory of core qualities hires that are being rotated back into stock and into their positions.

And we are addressing our fuel cost as we do our mine planning particularly as we move into PV2. I will now turn the call back over to Darren.

Darren Pylot

Thanks, Gregg. As Gregg mentioned we need to be and will be focused on lowering cost at Pinto Valley for the remainder of the year through reduced overhead and contracts. We’ve not changed our cost guidance and are confident we can reduce cost over the balance of the year at Pinto Valley. Otherwise our operations are running on plan at just past the half way mark of the year. And Cozamin and Minto are running below our cost guidance. We are well underway with implementing the PV3 project and are working on scoping what we are calling PV3 which is the potential extension and expansion to operations beyond the current 12 year mine line.

At Santo Domingo the major milestone this quarter was the completion of the feasibility study which confirmed the value of the project since the release of the study we have submitted our formal response to the first round of comments of the EIS in July and expect the next round of questions in this quarter which keeps us on track for potential approval in early 2015, which is a next stage-gate in our decision making for the project.

The port concession remains pending as does a power agreement. We are in discussions with one power provider that has submitted a proposal consistent with the power cost assumptions in the DFS, and we are proceeding towards securing a power purchase agreement by year end.

I want to remind everybody though that our plan to [advance] Santo Domingo is in very measured and disciplined stages and all the while balancing the advancement with the appropriate amount of risk for the company – for a company of Capstone size, and we have no plans to change that approach.

Early this week we’ve filed the updated Cozamin Technical Report. The net impact was a reduction of approximately $7 million in net asset value. We are continuing our ongoing exploration program and we will do the required drilling to upgrade resource categories Cozamin and fully expect that we will continue to maintained [16-year] mine life there as we have for the past several years.

The major catalysts for us this quarter were the positive Santo Domingo feasibility study and the solid production results at our operations. Looking forward our upcoming 2014 catalyst are lower in cost at Pinto Valley, which we are extremely focused around and permitting and pre-stripping Pinto North to allow the highest grade ore at Minto to be process in mid 2015.

Operator, that’s concludes our prepared remarks. We’re now ready to take questions from the floor.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Sasha from BMO Capital Markets. Please go ahead.

Sasha Bukacheva - BMO Capital Markets

Thank you, operator. Good morning. Can you perhaps provide a little bit of color as to what’s causing the delay in permits and what are you doing to expedite the receipt and when do you think they might actually be receipt. I’m referring to the permits for Minto?

Jim Slattery

Okay. I guess the delay is not so much in permitting -- in the permitting process itself but in YESAB the Socio-Economic Assessment process took quite a bit longer, so we didn’t get our permit applications and which we can’t do until we have that final assessment. So the application went in on June the 2nd. We do actually expect to have our Quartz Mining License in fairly short order and we think we can probably go ahead and strip with that Quartz Mining License.

So, we’re working with – we are working both with the government and first nations to try to get that point. And we’re also working as closely as we can for the Water Board to make sure that we do everything we can to keep everybody working there.

Sasha Bukacheva – BMO Capital Markets

Okay. Fair enough. And then what would be different in grade profile let’s say between [indiscernible] so if you have to sequence underground prior to receive receipt from Pinto North like what would be the differential in grade in 2015 and 2016?

Gregg Bush

I haven’t – I don’t have the numbers right off top of my head. Certainly it would be a slightly lower grade. But I guess the bigger difference would be the cost, the cost of the ore just produced during that period. So – but maybe 15% to 20% lower head grade in 2014.

Sasha Bukacheva - BMO Capital Markets

And the cost differential, same order of magnitude or greater order of magnitude?

Gregg Bush

Sorry, could you say that again.

Sasha Bukacheva - BMO Capital Markets

Sorry, and then cost differential like higher cost by also 15%, 20% or more than that?

Gregg Bush

I would say, yes, I don’t have the numbers, on top of my head. I have to back to you.

Sasha Bukacheva - BMO Capital Markets

Okay. No worry.

Gregg Bush

It would be higher cost per pound.

Sasha Bukacheva - BMO Capital Markets

Okay. And then also it looks like you obviously have stronger production vis-à-vis and your guidance at Minto was over 10,000 tons and then the annual guidance was 18.5. So are you thinking you could actually perhaps produce more this year or what’s your current thinking for what the second half of year is going to look like?

Darren Pylot

Sasha, we were – as we’ve indicated in the press release, we’re not making any change to guidance for the full year.

Sasha Bukacheva - BMO Capital Markets

And so then are you anticipating and I’m just – I’m trying to get it. So do you think you’re going to have lower volumes or is it going to be a function of grades, so why do you think you might have lower production from Minto in the last few quarters?

Darren Pylot

No, Sasha, we don’t expect any production change at all this year. The mine plan is set and Minto North has nothing to do with the 2014 production cost or mine plan. Its about – Minot North is schedule to come in midway through 2015 and if we don’t pre-strip starting in September then that production from Minto North won’t come in until early 2016.

So the second of 2015 would be augmented from underground production and we would have to change the mine plan. But we’re highly confident we will be stripping in September and we will not have any changes to 2014 or the 2015 mine plans for Pinto from Minto.

Sasha Bukacheva - BMO Capital Markets

Okay, okay, thank you very much. I have no further questions.

Operator

Thank you. Your next question comes from Peter Campbell from Jennings Capital. Please go ahead.

Peter Campbell - Jennings Capital

Good morning everybody and thank you very much for taking my phone call. Just one questions from me this morning. Your average realized copper price for the quarter was $3.36? I make the average cash price for copper in the quarter, much lower than that, it quote $3.08, how you are able to get such a good realized price like for your copper?

Darren Pylot

The realized copper price was impacted by provisional pricing adjustment. So for the quarter we would have $0.16 increase related strictly to provisional pricing on a year to-date basis, it was $0.06 a ton.

Peter Campbell - Jennings Capital

$0.16 in the quarter and $0.06 year to-date.

Darren Pylot

Correct. And we show that realized metal price reconciliation on page 12 of our MD&A.

Peter Campbell - Jennings Capital

Okay. Sorry, I didn’t catch that. Thank you very much. That’s all that I have.

Darren Pylot

You’re welcome.

Operator

Thank you. Your next question comes from Stefan Ioannou from Haywood Securities. Please go ahead.

Stefan Ioannou - Haywood Securities

Great. Thanks very much guys. Just trying to the cost down at Pinto Valley through the reminder of this year, I know when we run the site visit there in the spring. It sounded like that you’re about the half way or so through that 30-week program that was actually going very well and sort of ahead of what you anticipated in terms of cost savings?

Just wonder since then you didn’t really generate any more cost savings? And I know you actually in your guidance, but do you think you can actually get it down to sort of sub two bucks for the year with cost reductions for the latter half of this year?

Gregg Bush

Yes. A lot of the savings we were talking about on that when we were on that trip to Pinto Valley were modifications to contract prices on the [consumables]. So those savings wouldn’t necessarily have picked in yet. And the reason we’re still confident we’ll get prices down. As up until now we haven’t had – we got a lot of surprises in Q2 on our cost, because we’re just now starting to get the cost system working. So we’ve got information now.

Stefan Ioannou - Haywood Securities

Okay. And just for the curiosity, do you still have a significant contracted component to your workforce right now or is it also to “owner operated?

Gregg Bush

Yes. There are still quite a few contractors that are particularly I’d say primarily maintenance-related activities.

Stefan Ioannou - Haywood Securities

Okay. If some of that are function of just trying to – is there readily available people you could actually hire full time or is that’s the problem?

Gregg Bush

Its not so much – I mean, there is a component of some key vacancies are some key skill sets that we have vacancies. But a lot of these contractor cost just were reactionary to some of the problems – some of the reliability problems we were having. So, as the reliability improves those contractor costs will definitely come down.

Stefan Ioannou - Haywood Securities

Got it. Got it. Great, well, thanks very much guys. Appreciate it.

Darren Pylot

Stefan, lot of that contractor costs and over time was related to the one ball mills being down for the 25 days for gear failure and obviously subsequent to that month our reliability and our production has increased back up to levels around the optimal rate of the 50,000 tons per day.

Stefan Ioannou - Haywood Securities

Okay. Okay. Great. That helps. Thanks.

Operator

Thank you. Your next question comes from Alex Terentiew from Raymond James. Please go ahead.

Alex Terentiew - Raymond James.

Hey, good morning guys. I just got a couple of questions really on Cozamin here. A lot of tons in reserves for the copper zones and lot of the tons obviously in the San Rafael zinc zone reserves or reclassified as resources. What is your level of confidence or maybe better way to ask it, what needs to be done to get those reserves – sorry get those tons reclassified those reserves and included in the future mine plans?

Gregg Bush

Okay. Well, we lost some or we change classification in number of different areas there in for different reasons. Some of it and I’d say them by far the majority of the copper that came out the mine plan was had to do with some high grade [indiscernible] that we’ve had in the plan, because we always we’re going to recover them and I still think we will.

But we didn’t have a firm mine plan around it. So we thought it prudent to take it out until we’ve got that plan in there. I think we’ve mentioned in previous quarters we’re putting in a tailing thickener right now. So [submitted back field] is certainly an option to go and recover those. It just that we hadn’t developed fully the cost and the plans around that.

So that would explain almost all of the copper that came out of the plan. And most of the rest of it were – we reclassified some of the resource from measured that indicated in – some of the indicated went to unhurt, because they went to unhurt then we couldn’t include that and that in turn left enough gas in there that you could no build a mine plan around them. So, that just a matter of getting enough additional information to increase the classification to bring it back in. so…

Alex Terentiew - Raymond James.

Okay.

Gregg Bush

So, Cozamin, I guess the other thing is the mine life were shorten, because we also increase the throughput. We – and we studied – we’ve kind of leveled out the production profile over the remaining mine life there. So, all of the shortening of the mine life not from tonnage lost. So basically, nothing has really changed there in terms of what we’re doing and we’ve got 6.5 years at the new – at the revise run rate there of 30 – its almost 3500 tones a day now and we’re projecting going forward. And we’ve always had a short mine life there because it’s an underground mine and we always keep adding more years only in.

Alex Terentiew - Raymond James.

Okay. Fair enough. Thanks. Just two more follow-up questions related to that, back on the April trip to the mine to Cozamin, some of the team indicated that you were hoping to get or begin extracting some of the zinc tons from San Rafael zone starting at 2016 mean that wasn’t officially EBITDA was kind of what some guys were hoping for, is that’s – what is the new Tech report? Is that still something you’re considering or have thing changed there?

Gregg Bush

No. I think we’re still – we’re still working around that plant, but I say, as I mentioned, now a new complement of the work that we’ll have to do is enough drilling in there to try to increase the classification of that to bring back into official reserves.

Alex Terentiew - Raymond James.

Okay. And then the last question, you can kind of touch on it earlier. You’ve got your throughput up a little bit higher and there been days where the mine is run at more than 4000 tons a day. Is there still opportunities to get this thing consistently running at higher tons, maybe this is more related to my prior question in a couple of years if you start getting some additional tons from San Rafael bit more working still to underground is that kind of what you need to really get that tonnage up?

Darren Pylot

I mean, we could the tons up there, obviously there’s – there will be a capital cost involved in getting the tons up. So, the decision to do that I think is going to be heat off exploration successes. It doesn’t make a lot of sense at this point to spend money to increase the throughput until we can link them – until we can extend the mine life.

So, we’ve gone from 32 to 35 basically as they’ve gotten more efficiencies in both the mining and the milling operations. And that increase is not a result of any capital investment, it just more consist on operations.

Alex Terentiew - Raymond James.

Okay. That’s great. Thank you.

Operator

Thank you. Your next question comes from Samar Sidhu from Scotiabank. Please go ahead.

Samar Sidhu - Scotiabank

Hi, guys. Thank you for taking my question. Just a quick one on Pinto Valley. Can you provide us with a breakdown on unit operating cost during the quarter versus clean mining cost per ton mine cost, zinc cost in G&A?

Gregg Bush

We don’t have those numbers readily available at the call, but we’re happy to follow up with you directly and try to get you those numbers.

Samar Sidhu - Scotiabank

Okay. But I imagine be able to have been bit elevated in the quarter, because the gear failure for the one of ball mill and do you expect these to go down in the second half as the operations stabilized?

Darren Pylot

Well, we would obviously expect them to go down with the gear failure affecting it in the quarter absolutely. And yes they would be elevated due to that. In fact, that the mill was down for 25 days. Again as we mentioned on the call, the operations has been running back up to optimize level of the 50,000 tons per day and have so for all of June and July.

Samar Sidhu - Scotiabank

Okay. Thanks.

Darren Pylot

Thank you.

Darren Pylot

Thank you. (Operator Instructions) There are not further questions at this time. Please proceed Mr. Pylot.

Darren Pylot

Thanks, operator, and thank you everybody for attaining the call today. And please don’t hesitate to contact us with any additional questions you may have. Thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!