Capstone Mining's (CSFFF) CEO Darren Pylot on Q4 2015 Results - Earnings Call Transcript

| About: Capstone Mining (CSFFF)

Capstone Mining Corp. (OTCPK:CSFFF) Q4 2015 Earnings Conference Call February 17, 2016 11:30 AM ET

Executives

Cindy L. Burnett - Vice President of Investor Relations

Darren M. Pylot - President and Chief Executive Officer

D. James Slattery - Senior Vice President and Chief Financial Officer

Gregg B. Bush - Senior Vice President and Chief Operating Officer

Robert S. Blusson - Vice President of Finance

Analysts

Mark Turner - Scotiabank

Alex Terentiew - Raymond James Ltd.

Stefan Ioannou - Haywood Securities Inc.

Operator

Good morning, ladies and gentlemen and welcome to the Capstone Mining Fourth Quarter 2015 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions] note that the conference is being recorded on Wednesday, February, 17, 2016.

I now would like to turn the conference over to your host Cindy Burnett, Investor Relations. Please go ahead.

Cindy L. Burnett

Thank you. I would like to welcome everyone on the call today. The news release announcing Capstone’s 2015 financial results is available on our 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 CEO; Jim Slattery, Senior Vice President and Chief Financial Officer; Gregg Bush, Capstone's Senior Vice President and Chief Operating Officer; 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. Following our brief remarks, there will be an opportunity for questions. So that everyone gets a chance to ask a question, we would ask that you start with one question and one follow-up and then you can return to the queue, should you still require further 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.

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

Darren M. Pylot

Thank you, Cindy and good morning everybody and welcome to Capstone's Q4 Conference Call. Jim will lead off with a review of the financial performance, followed by Gregg, who will provide us an update on our operations. We will also provide an update on our corporate activities, followed by your questions.

I'll now turn the call over to Jim.

D. James Slattery

Thanks, Darren. We recorded a net loss of $19.5 million in the fourth quarter, which included a loss from mining operations of $11.9 million, and a non-cash mineral property impairment charge of $2.5 million. For the full-year we posted net loss of $251.5 million which included a loss from mining operations of $30.5 million and a non-cash mineral property impairment charges of $201.7 million.

The majority of the impairment charges related to write-downs of our Santo Domingo and Kutcho's development properties and our Minto mine and we're taking in the third quarter as a result of weak metal prices. Operating cash flow before changes in working capital was $12.5 million for the quarter and $60 million for the year.

Both the fourth quarter and the full-year included commodity derivative gains from the $2.60 copper puts that we put in place to protect our 2015 capital program. For the quarter we had a gain of $5.8 million and for the full-year the gain was $24 million, of which almost $16 million was realized and $8 million unrealized as at the end of the year

In addition, at the end of December when copper moved up marginally, we took advantage of that opportunity to lock in 13,000 tonnes of copper at $2.13 per pound, which related to metal sold as at December 31, which was still subject to quotational periods running into the first two months of 2016.

As a result, we have really little at our corporate sales exposed to January and February pricing. And we will continue to be opportunistic around both locking in our cold periods and implementing collars given the current volatility in the market. We exited 2015 in compliance with all the covenants on our revolving credit facility, with the senior secured debt over EBITDA of 2.6 to one, opposite to covenant requirement of not more than three to one.

We're also on side our total net debt over EBITDA and our EBITDA over interest expense covenants by a comfortable margin. During 2015, we responded to weaker metal prices by lowering costs to maintain our financial flexibility. This included a 10% reduction in permanent staff and 5% reduction in full-time contract staff across our operations. In January 2016, we took additional measures and reduced our corporate staff by 22% and our G&A budget by 25% and also placed the San Manuel Arizona Railroad Company on temporary care maintenance.

Our 2016 capital program is 40% less than in 2015 as the investments that we made last year to implement the PV2 mine plan and access to Minto North pit are expected to drive significant reductions, not only in our C1 costs to round it all at 50 a pound, but also in our fully loaded all-in cost which includes all capital interest and taxes to a range of $2.05 to $2.15 a pound.

Our key objectives for 2016 are to ensure that we can maintain value of our current operations while remaining in compliance with all of our debt covenants. We will closely monitor the markets and our liquidity and take action if and when necessary.

Another point is that debt covenant compliance is only considered an issue for us in the first half of 2016. In the third quarter, we expect to get a significant lift from the high grade Minto North production. As a result, our cost should drop and our cash flow should increase to the point where we'll be able to manage our liquidity as prices considerably lower than we're seeing currently.

In the event, if the market gets worse and stays there for longer, we do have a number of other steps we can take as outlined in our MD&A and we're now working to make those available, so that we're well prepared to act quickly if market conditions warrants.

Now, I'll turn the call over to Gregg for our operational update.

Gregg B. Bush

Thanks, Jim. We had a very good fourth quarter from a production standpoint and met both our original 2015 production guidance and our lower cost guidance. Pinto Valley exceeded its production target for the quarter averaging 54,100 tonnes per day with grade and recovery on plan and throughput continuing on plan into the first quarter.

C1 cash cost of that operation was $1.76 per pound of copper produced and $8.64 per tonne milled in the fourth quarter. We've released our PV3 pre-feasibility study in January, which builds on to demonstrated performance by increasing the throughput in the new mine plan by 8% over the PV2 mine plan, without any major capital investment.

With the Pinto Valley operation stabilized, we are now able to focus on optimization and cost reductions with renewed emphasis. In the second quarter, we have a significant overhaul to the primary pressure plan to replace the lower frame, which has been one of our final remaining challenges to the full utilization of our milling capacity.

We are building stockpile inventory ahead of this event, so while we expect lower production during April, the impact should be minimal and will contribute to operational continuity and lower cost moving forward.

Cozamin in production was on plan for the quarter with cost maintained at historical levels. Our focus in 2016 will be on disciplined approach to mine planning, execution and contractor management to build inventory if developed or in the foot-walls, necessary to provide operational flexibility in this higher grade but somewhat less predictable ore body.

Minto continued strong production through year-end and is well advance in the stripping of the Minto North pit reaching the first ore as planned in December. The mine plan calls for high-grade Minto North ore in the mill beginning the second quarter, continuing through the end of Q1 of 2017, at which time we will process the remaining stockpiles before putting that mine on care and maintenance.

So for 2016, our primary operating focus is to keep our mines running on plan and to continue to seek every opportunity to increase the efficiency of operations and lower costs. The central part of the strategy includes negotiating lower costs for our consumables and contracted services wherever possible in this low costs environment.

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

Darren M. Pylot

Thanks, Gregg. As Jim mentioned, our key objectives for this year are to ensure liquidity and covenant compliance, as well as optimizing our existing operations. We invested significant capital over the past couple of years to implement the PV2 mine plan and prepare for the high grade Minto North ore that we will receive this year.

2016 is now setup for reduced operating costs and significantly lower capital. Our production is expected to increase by 20% over 2015 with both our C1 cash costs and fully loaded all-in costs falling by about 25% over last year. As well as our total capital will be reduced by 40%. Whereas last year our mine plan and capital placed us relatively high in the cost curve amongst our peers, this year we're one of the lowest cost producers in that group, providing us with a solid base to weather the current market.

At year-end, we had just under $200 million of total liquidity and had very little of our copper sales exposed to January and February pricing due to the $2.60 copper puts combined with the price fixing that Jim mentioned we did with most of our Q4 sales resulting at $2.13 fixed price. In addition to the cost reduction actions, we have taken and continuing cost improvements, we are seeing at our sites, we had additional levers that we can pull if required.

To maintain covenant compliance and strengthen the balance sheet, they include negotiating temporary covenant relief, financing link to off take commitments for copper, monetization of the silver production at Cozamin beginning in May of 2017 and/or monetization of a non-core asset or potential partnership arrangements. These actions could provide significant relief and allow us to remain in compliance with our covenants, even if commodity prices deteriorated any further and remain at depressed levels for an extended period.

In closing, we are setup operationally in 2016 to handle lower copper prices through lower capital operating programs, combined with the increased grades and throughput. We remain focused on the careful management of our costs and financial resources and we have a financial contingency plan with a number of levers in place should copper prices fall further.

Operator that concludes our prepared remarks and we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you, sir [Operator Instructions] And the first question will be coming from Mark Turner at Scotiabank. Please go ahead.

Mark Turner

Yes, good morning. I guess my first of the two questions, maybe Darren if you can just expand a little on the potential partnerships, I believe that's a new text or new commentary in one of the levers that you could pull to erase additional capital. I'm just wondering if you can expand on that how far those discussions maybe underway or so what’s on the table there?

Darren M. Pylot

Mark, I think partnerships mean any potentially assets that we’re looking at outside of our current portfolio, acquisitions we’ve received inbounds on other companies wanting to potentially buy assets together. And secondly, it would be something along the lines of what we saw with [indiscernible] Morency, maybe selling part of an existing asset to help strengthen the balance sheet as well.

Mark Turner

And certainly the latter part of that is that discussion been sort of underway maybe with your existing corporate partner or is it with new partners as well?

Darren M. Pylot

No, when I listed those levers, those were in order of priorities. So selling parts of our assets would be at the very bottom after all the other levers have been pulled. So those discussions have not been started.

Mark Turner

Okay, can we imagine if we can get the same valuation metrics as Morency that would be received positively?

Darren M. Pylot

Yes, that was obviously good to see and as you can see the industry players that have a much different value on the price of copper long-term has been obviously equity market. So that's what we're looking to see the increase value there.

Mark Turner

Absolutely. And then may be just my second question related to that, the key debt covenant exiting 2015 at 2.6 times. Previously, given color on where you believe the copper price has been in the first half to stay in compliance with that. Are we to I guess sort of gather that maybe at current metal prices you're thinking is that you will need to get temporarily relief in the first part of this year before those higher grades kick in the second half of the year?

Darren M. Pylot

It's a possibility, yes. We've already started negotiating the covenant release and that's well down the track. We feel very comfortable with where that’s at relative to where we may need it at the early part of the year.

Mark Turner

Okay. I know, absolutely to me it's an issue, just wanted to if there's anything, or make sure I was reading through correctly if there is change in thinking in terms of the current copper price. I'll jumped back into the queue with more questions.

Darren M. Pylot

Thanks Mark.

Operator

Thank you. Your next question will be coming from Alex Terentiew at Raymond James. Please go ahead.

Alex Terentiew

Hi, guys. Just a couple of questions, just want to ask you briefly about the exploration potential, of course you guys mentioned the potential to extend that line, can you just give us a little bit thoughts to what the exploration potential there is, because that could obviously have a big impact and how you think you could be getting from that extreme as its earlier today. And the second question is…

Cindy L. Burnett

Alex, may I interrupt you and ask you to speak up, we can’t hear you.

Darren M. Pylot

I guess the question was around the exploration potential at Cozamin, the ability to extend that mine life with and the impact that could potentially have on the value of the stream.

Alex Terentiew

Yes, that's correct.

Darren M. Pylot

Okay.

Alex Terentiew

So, I'll let you answer that one first and I'll go on to the next one.

Gregg B. Bush

Okay. Well, I'll take a stab at answering that. there's really maybe three different aspects to the exploration, one is there's large resource there right now that's not currently in the reserves. So that's one piece of it, it’s just upgrading parts of that. There's also extensions down dip and long strike that we're looking at and then in addition to that there's we think a large zinc resource there that we haven't really taken hard look at before. So we're looking at all three of those things.

Alex Terentiew

Okay.

Gregg B. Bush

And all of those areas that I mentioned there, we're looking at similar silver grade, so what we're currently experiencing, but metallurgy on parts of it may not be a straight forward for the silver.

Alex Terentiew

Okay. So I think it’s probably fair to say that you would want to get a little bit more exploration done first before you're willing to step into a stream, is that a fair assumption?

Darren M. Pylot

Yes, I think Alex, I think the stream would be something that if metal prices were lower than they're today for all of 2016, and we've had covenant release and we've off-take financing and metal prices continue to go lower than we would look in 2017 to may be stream. And so we would spend 2016 in upgrading those resources and getting them confirmed as much as possible before we could go ahead and do that.

Alex Terentiew

Okay, all right thanks. And then just one final question. Pinto Valley had a pretty good Q4 especially in terms of throughput, any update that you guys can give us now that we are almost two months in to the year. I mean prior to Q4 you had period of time where the mine did extremely well followed by a couple of periods where it wasn’t at the par, but like I said Q4 was pretty good, so I'm just wondering if you guys [indiscernible] procure that through into 2016?

Darren M. Pylot

I would say Alex, so far into the 2016, things are running very much according to plan without any surprises, so there is much less variability and much more consistency and according to plan.

Alex Terentiew

Okay, great, thanks.

Operator

Thank you [Operator Instructions] And your next question will be coming from Stefan Ioannou from Haywood Securities. Please go ahead.

Stefan Ioannou

Great, thanks very much guys. My question has already been answered, but maybe just a follow-up on Alex’s regarding the streaming. I guess assuming it sounds you would want to do some more exploration before you sort of got a little more serious on the streaming side. Is it fair to sort of extrapolate from that that you would be looking to stream a significant portion of Cozamin’s remaining silver production profile or could it be something more like a smaller scale Band-Aid a couple of years of production?

Darren M. Pylot

Well I would like to do that. I don’t think it’s possible, but I think this the streaming people would demand a life of mine contract. I mean we look in to that but I would assume it would be for the balance of the life at Cozamin if we had to do it.

Stefan Ioannou

You have a general sense just from your - last time you said it was a 10-year agreement, do you have sort of an idea, sort of the minimal threshold some of these guys are looking for in terms of life of like how many years is reasonable life of mine?

Darren M. Pylot

Well we have an existing partner with silver Wheaton, so obviously they are in a position, they are already there at the mine site. But no, I don’t think it really matters, I think it’s all of about value and how many ounces they are going to get over the life. Those are pretty easy to evaluate what those are priced at off at spot price. So it will be consistent with the other silver streaming deals that you’ve seen out there.

Stefan Ioannou

Fair enough, fair enough, good. And just a real quick question, just in terms of all the stripping that’s going on at Minto North and the mining. So far on that side of thing, because it is sort of very interesting part in the profile this year, are the cost there sort of coming in line with what you expected?

Gregg B. Bush

Yes.

Stefan Ioannou

Okay, great. Thanks very much guys.

Operator

Thank you. Your next question will be a follow-up from Mark Turner at Scotiabank. Please go ahead.

Mark Turner

Yes, thanks. So just, I guess maybe switching gears a little bit. I was wondering if there is any more sort of color or sort of anything you wanted to articulate about the PV3 mine plan before we get the full technical report released. I mean, I guess, I was fortunate to be on the site a few days ago and I guess some sort of talking about some mine plan having more flexibility in the mine maybe more faces, sort of open any original plan so you can source different grade then also just operational flexibility in general. Just trying to think, is there anything additional maybe Gregg that should be articulated that could be added to the short press release?

Gregg B. Bush

No, I mean the differences in the mine plan. Really from - I mean it’s pretty simple ore body they just successfully pushed backs. We have gone in just because of the nature of the way the ore body lies its everything at the top is waste and everything at the bottom’s is ore. So we have gone and split a couple of the phases just to kind of smooth the grades and the tonnage and the fleet requirements out over the life of mine. But that’s really, there is not any twist in this PV3 mine plan. It’s just driving the productivity and the cost down to bring more of that resource in.

Mark Turner

Okay. Does it offer more flexibility in terms of permitting. Like I know you mentioned in the MD&A here that you’re permitting underway for the, I guess the pit and maybe both in the pit under tailings. But do you require - correct me if I'm wrong, do require sort of U.S. Forestry Service land to push back part of the pit. Does this offer additional flexibility or maybe just an update where that permitting process stands.

Gregg B. Bush

Well we stayed within the patented boundary on the pit. But we need a revise plan of operations from the forest service to build the tailings the way we would like to build the tailings. We do have a plan B in the events that there were any issues. But what we’re looking to permit there is a very minor incremental disturbance. So we don’t really anticipate any problem. But having said that almost anything you do on forest service land you know if it more than a half acre anymore requires, or will trigger a need for process. So while we don’t see a lot of risk, there is no shortcut around the timetable.

Darren M. Pylot

But I think Mark when we first acquired the property, we thought we were going to have to do a land swap and require much more land around the pit and the tailings. That has been essentially all of the expansion will happen on our existing patented ground and there is a very small amounts of land parcels we need in and around the tailings and what have you but that’s we feel very low risks in terms of - it’s more around timing than getting it.

Mark Turner

Okay, great. Thanks.

Darren M. Pylot

And Secondly, did you say you were at the site last week, so you may as well tell us what you saw and how the place is running. That way you can say it right from you have just been there.

Mark Turner

No, I mean I put out a note that I think especially since the majority of the analyst were down certainly after you acquired the property that I think a number of improvements across the whole operation have been made and it was sort of clearly evident that you've improved on those. So I was surprised and happily surprised so I was going to say congrats on the good throughput in Q4. And keep it up.

Darren M. Pylot

Yes. Thanks Mark.

Operator

Thank you. Your next question will be from [indiscernible] at Laurentian Bank. Please go ahead.

Unidentified Analyst

Hi guys. Just a bit of clarification on the 2016 capital expenditures, so you mentioned $40.2 million for sustaining and another $37.7 million for capitalized stripping at Pinto Valley and Minto. So that's pretty firm, I guess there's was not a whole lot of flex on those number, is that to be assumed?

Darren M. Pylot

Yes, as Gregg mentioned earlier, we absolutely have to keep with the stripping at Pinto and obviously to expose the high grade at Minto North, we do have to strip that. So really not much there in terms of release there and the rest was sustaining which is fairly low what we obviously have to do that so not a lot of room to reduce capital

Unidentified Analyst

Okay. So I guess, if there is any room with this $8.4 million that you've budgeted for Brown Field and Green Field exploration?

Darren M. Pylot

Correct. That's budgeted and price dependent obviously.

Unidentified Analyst

Okay.

Darren M. Pylot

I would say, it's less when it relates to Cozamin, it's almost part of the all-in cost, because it is so important for us to keep up the exploration at Cozamin, but the rest is all backend loaded in the year and dependant on copper price.

Unidentified Analyst

Okay and just one more on the capitalized stripping, in very broad terms how does that number look going forward into next year, into 2017 and beyond…

Darren M. Pylot

Well, obviously you wouldn’t see any more at Minto because we feel the fresh stripping I believe in August but in terms of the PV3 mine plan, PV2 to PV3, it's pretty - varies a bit, but that's the level of stripping you're going to see throughout - at least the next two years.

Unidentified Analyst

Got you okay. Okay thanks.

Operator

Thank you. As we have no further questions at this time. I would like to turn the conference back over to Mr. Pylot.

Darren M. Pylot

Thank you, operator and thank you everybody for attending the call today. We look forward to a strong Q1 and we will see you at this time again at the end of the Q1. So thanks very much everybody.

Operator

Thank you, sir. Ladies and gentlemen this does concludes your conference call for today. Once again, we thank you for participating. And at this time, we do ask that you please disconnect your lines. Have yourselves a great day.

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