Capstone Mining's (CSFFF) CEO Darren Pylot on Q1 2016 Results - Earnings Call Transcript

| About: Capstone Mining (CSFFF)

Capstone Mining Corp (OTCPK:CSFFF) Q1 2016 Earnings Conference Call April 27, 2016 11:30 AM ET

Executives

Cindy Burnett - VP, IR

Darren Pylot - President & CEO

Jim Slattery - SVP & CFO

Gregg Bush - SVP & COO

Analysts

Alex Terentiew - Raymond James

Stefan Ioannou - Haywood

Ralph Profiti - Credit Suisse

Operator

Welcome to the Capstone Mining Corp. First quarter results conference call. [Operator Instructions]. And I would like to turn the call over to Cindy Burnett, Investor Relations. Please go ahead.

Cindy Burnett

Thank you. I would like to welcome everyone on the call today. The news release announcing Capstone's 2016 first quarter 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 will be an opportunity for questions. So everyone will get the chance to ask a question, we would ask that you start with one question and one follow-up and then return to the queue if you still have additional 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. Finally, I'll just note that all amounts 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. Good morning, everybody. As we always do, Jim will start with the review of our financial performance, followed by Gregg, who will provide an update on our operations. We will also provide an update on our corporate activities, followed by your questions. So I'll now turn the call over to Jim.

Jim Slattery

Thanks, Darren. Despite an 11% decrease in the realized copper price versus the same quarter a year ago, we reduced our net loss by 26%, to $12.8 million, through a combination of lower costs and price fixing and hedging actions. Our adjusted EBITDA increased by more than 60% to $39.3 million for the first quarter. This is significant as directly affects our leverage ratios in covenant compliance. We [indiscernible] and did not draw on our credit facility, allowing to us reduce our net debt by $20 million in the quarter.

The quarter included commodities derivative gains of $3.2 million from the $2.60 copper collars that we put in place to protect our 2015 capital program and the forward contracts that we put in place this quarter to protect our covenant compliance for 2016. We did have a negative provisional revenue adjustment in the quarter of $5.6 million. The majority of this was a result of assay finalizations upon delivery and only $300,000 related to copper price adjustments. A negative adjustment of this magnitude is not common, but does happen from time to time. We exited the quarter in compliance with all of the covenants on our revolving credit facility. The senior secured debt over EBITDA ratio of 2.1 to 1 was comfortably below the covenant requirement of not more than three to one.

The copper price fixing and hedging that we announced in early March will allow us to remain on side all of our covenants throughout 2016, at copper prices as low as $1.65 per pound for the remainder of the year, provided that we meet our guided production and costs. These actions eliminated the need for us to take any of the additional liquidity actions that we have outlined in our 2015 MD&A, preserving the flexibility to use them beyond 2016, should metal markets continue to lower.

Overall, we finished the quarter on or better than our consolidated guidance for production, C1 cash costs for all-in costs and fully loaded all-in costs, including all cost for us, including interest and taxes. Pinto Valley and Cozamin's cost profile is expected to remain relatively steady through the year, while Minto is higher cost in the first part of the year, falling substantially once we reach the high-grade portion of Minto North. Our capital spend was lower than planned for the quarter, but we're not making any changes to guidance for the full year at this point.

So now I'll turn the call over to Gregg for our operational update.

Gregg Bush

Thanks, Jim. In operations we had an excellent quarter, meeting our consolidated operating guidance as Jim mentioned. Pinto Valley exceeded its production target for the second-straight quarter, averaging 55,000 tons per day. The C1 cash cost at Pinto Valley was $1.64 per pound of copper produced, with site operating costs at $8.57 per ton milled. Since our budgets were completed last October, we have continued to see falling costs related to input pricing and we believe we still have a number of opportunities ahead of us at Pinto Valley that we're targeting for potential cost reductions that we're now able to focus on.

As I mentioned last quarter, that we were planning an overhaul to the primary pressure in the second quarter to replace the lower frame. We have all the spares to complete in overhaul. However, we're relying on condition monitoring to indicate when this work is necessary and are monitoring things closely. The pressure is running very well at this time. So we had deferred this overhaul potentially into the first quarter of 2017. At Cozamin we were behind in production for the quarter. The issues were related to development shortfalls and we have made some changes to address these issues. These include adding some additional planning and leadership resources and reimplementing and strengthening the management systems at place at Cozamin.

The key at Cozamin is to continue to get ahead with development to give us the operational flexibility we need. Minto continued its strong production into Q1, with underground production above plan and lower than estimated off site content for Minto North ore, allowing for significantly improved recovery. Recoveries for the quarter were 95% versus 86% planned. Also the stripping in the Minto North pit is on schedule, with grades reconciling well to the block model. Costs above the annual guidance levels at Minto were expected in the first half of the year, due to production profile over the four quarters. However, as at Pinto Valley, we have seen input costs coming down and the site is running very lean and cost focused.

Our costs for the quarter at Minto were well below expectations. We're now into the higher-grade Minto North ore which will ramp up gradually over the balance of the second quarter. Lastly, we had one other operational item of note this quarter. We received the final Santo Domingo port concession in March which was the remaining piece we needed to give us a fully permittable project. This provides significant optionality once copper markets improve and capital becomes available to restart the development projects.

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

Darren Pylot

Thanks, Gregg. Well, with Pinto Valley above plan and our 2016 covenant compliance concerns put to rest, we can turn all of our focus optimizing our operations and continuing to lower costs. The hedging and price fixing actions we took in the first quarter to protect the short term downside and leave us with leverage to the upside in the second half of the year. We have also eliminated the need to use any of our liquidity levers in 2016, preserving the flexibility to use those levers beyond 2016, should metal markets trend lower.

With our lower than planned Q1 costs and opportunistic hedging actions [indiscernible], we need to remain in compliance with our covenants in 2016, continues to fall. And we currently estimate copper prices could fall to an average of $1.65 for the balance of this year, before we have any covenant breach concerns. We have continued to see cost improvements at all of our sites, with costs continuing to come down. In addition to the reductions we've seen in diesel pricing and fuel-linked items, we're working on a number of other initiatives, primarily at Pinto Valley. They include negotiation of various contract terms and pricing to reflect current market conditions, taking actions to increase the efficiency and oil usage and executing asset management programs that allow us to continue to increase the reliability of our equipment. In addition, we've been selling some concentrate on the spot market and have been able to achieve considerably better TCRC rates than budgeted.

So with production running on plan and costs running at or a little better than budgeted, this allows us to add $20 million on to the balance sheet and reduce net debt. The first half price fixing and hedging has significantly reduced our covenant compliance risks for the year. And all of these actions have put us on a very solid footing for 2016 and at copper prices well below where they are now, we expect to continue to generate cash on the balance sheet and reduce debt.

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

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question will be coming from Alex Terentiew at Raymond James. Please go ahead.

Alex Terentiew

Just want to say good quarter there. A couple of good trends to see. First question. At Pinto Valley you've had now costs about $8.60 a ton for the past two quarters. So quite a significant step change, literally looks quite like a step change from Q3 2015. I just wanted to get your thoughts a little bit more on was that more operational or was there cost reduction efforts you guys have done. I just want to get a little bit more detail behind what you guys did over the past six months to get costs down so much.

Gregg Bush

It's a combination of both costs and better operations or more consistent operations. But Pinto Valley is a low-grade operation. And the tons-per-day has a huge impact on our costs there. So keeping the through-put up and keeping the plant operating steady has been it has been the largest impact.

Alex Terentiew

Yes, I can see obviously the production has gone up quite a bit as well, I would expect that would have a positive impact. Another question, maybe just a follow-up on Cozamin. You noted some issues there with mining in Q1. What's your targeted throughput rate there? The mine has been quite variable over the past year anywhere from upwards of 300,000 tons in a quarter, down to as low as 240,000 tons. So what's your target or what's your idea for the rest of this year?

Gregg Bush

Well, our target is roughly 100,000 tons a month. I don't expect that we'll meet that this quarter. Then after that I think things will start to track back on. Our development crews are working much better now. The productivity is much higher. But as always is the case when you get behind on your development, just fixing the development problems is only half, only gets you halfway there, then you have to catch back up. I think it's probably going to take us this quarter to get caught up.

Operator

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

Stefan Ioannou

Just obviously nice to see again the step wise or the continued through-put increase at Pinto Valley. I mean, now that you're sort of at 55,000 tons a day, are you seeing room for even higher throughput or you've sort of reached the limits of what Pinto Valley can do, as of right now?

Darren Pylot

The operator that operated the operation prior to BHP was Magma Copper and they operated significantly for a significant period of time in the 55,000 to 57,000 ton per day range. So we're quite confident that the operation can run up to 55,000. Of course, we're going to continue to push and drive throughput and hopefully we can get a bit more. The plant has operated on a daily rate of up to 61,000, 61,500 tons per day. So we're not exactly sure where the optimized actual rate is. But I think we're pretty confident we can push it a little more than we're at right now.

Stefan Ioannou

Okay. Great. 55,000 tons a day on its own is a great number. So congratulations on that. Just obviously now with the hedging that's in place already and where the balance sheet sits you're pretty comfortable relative to covenants and stuff. Are you still looking actively to add additional hedging or are you putting the brakes on with regards to hedging right now?

Jim Slattery

Well, yes. We have no further hedging other than what's disclosed in our financial statements right now. Obviously we have the much higher grade and much lower cost Minto North coming in the second half of the year. So we're not looking at it quite as intensely as we were. However as we've seen the copper market react pretty volatile over the past couple of months, if we see opportunistic hedging, short term hedging in the second half of the year, that only entails hedging in the year of 2016, we wouldn't hesitate to do that if we saw opportunistic pricing, but not looking aggressively to do so.

Stefan Ioannou

Okay. Maybe just one last question. in terms of getting into the high grade at Minto North, should we expect to see sort of like a full quarter of high grade from Minto North in Q3 or something that's sort of phase-in through Q3?

Gregg Bush

Yes. The last two quarters of the year will both see the will both see the high grade. We're ramping up over this quarter. We'd expect over 2.5%.

Operator

Thank you. Your next question will be coming from Ralph Profiti at Credit Suisse. Please go ahead.

Ralph Profiti

Just one question if I may for Gregg. On the decision to defer the crusher overhaul, was this structure reaching the end of its life? Or I'm just trying to assess the risk of structural weakness or issues as you defer it. As you talk about condition monitoring, is that an issue with ore hardness or more financial metrics that you're watching more closely? Thanks very much.

Gregg Bush

No, it's predictive maintenance watching, the vibration and the heat, the spin on the mantle and brass in the oil and things like that. The problem with that, we're not concerned that we're going to have a catastrophic failure. Our problem is that with less than -- it's pretty much reached the end of its life. But the consequence of that is that it tends to eat a lot more brass than it should, meaning that we have more downtime.

Ralph Profiti

Yes.

Gregg Bush

So but for the last several months, it's been running very well. And so there's no reason to do that change right now. So we're just going to continue to monitor it.

Darren Pylot

Following up on that we have all of the parts and everything we need to do the overhaul. We have the stockpile built up. So if it did need to be done anytime, we could do it. We just don't see the need to do it at this point in time, due to the close monitoring that we're able to do on the equipment.

Operator

[Operator Instructions]. At this time, we have no further questions. I would like to turn the call back to Mr. Pylot.

Darren Pylot

Thank you, everybody, for attending the call today. We look forward to a very solid Q2 to build on to Q1 and we'll see you all at the end of Q2. Thanks very much.

Operator

Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, we'd like to thank you for attending and at this time we ask that you please disconnect your lines. Have yourselves a great day.

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