Capstone Mining's Q4: Great Quarter To Be Followed By An Even Better One

Summary

• Capstone Mining produced 44.4 million lb copper at a C1 cash cost of $1.68/lb in Q4.
• The copper production, revenues, operating cash flow, and net income reached new record highs.
• After the recently completed silver stream sale, Capstone's net debt declined to negative values.
• In 2021, Capstone should produce 175-190 million lb copper, at a C1 cash cost of $1.75-1.9/lb.

Capstone Mining's (CSFFF) Q4 2020 was very good. The company set new record highs in revenues, operating cash flow, earnings, and also in the volume of copper production. The net debt declined and Capstone is progressing with the Santo Domingo development plans.

Capstone produced 44.4 million lb copper in Q4. At the Pinto Valley mine, 34.1 million lb were produced, and at the Cozamin mine, 10.3 million lb were produced. Compared to Q3, Capstone's copper production increased by 15%. The growth is attributable especially to Pinto Valley, where production increased from 27.9 million lb to 34.1 million lb copper. The production growth is the result of a successful implementation of the optimization plan. The second phase of the optimization plan should be completed by the end of this year. The C1 cash cost declined to $1.68/lb, which is 7.7% lower than in Q3 and 14.7% lower than in Q4 2019. Capstone's overall 2020 copper production amounted to 156.9 million lb, at a C1 cash cost of $1.84/lb. It means that Capstone was able to beat the 2020 guidance of 140-155 million lb copper at a C1 cash cost of $1.85-2.0/lb.

Source: Own processing, using data of Capstone Mining

Capstone's copper sales equaled 39.3 million lb. It is slightly less than 39.8 million lb sold in Q3. However, the average realized copper price improved from $3.13/lb to $3.64/lb. Therefore, the revenues grew by 13.5%, to $148.1 million. Also, the operating cash flow increased rapidly, from $27.7 million in Q3 to $67.4 million in Q4. The net income increased from $2.4 million in Q3 to $27.6 million in Q4. Revenues, operating cash flow, and also net earnings reached new record highs. The Q4 EPS equaled $0.07.

Source: Own processing, using data of Seeking Alpha and Capstone Mining

Capstone's cash position improved slightly, from $56.9 million to $60 million. On the other hand, Capstone was able to reduce the debt by $35 million. The net debt declined by nearly $40 million. And following the $150 million silver stream sale that was closed in February, Capstone's net debt turned into negative values. Moreover, the management wants Capstone to get completely debt-free this year.

Source: Own processing, using data of Seeking Alpha and Capstone Mining

The steep share price growth elevated also Capstone's valuation metrics. The company that used to have an extremely low price-to-operating cash flow ratio of around 1.5 and a price-to-revenues ratio of around 0.5, suddenly received a valuation similar to its peers. The current price-to-operating cash flow is 7.93 and the price-to-revenues ratio is 2.57. However, it is important to note that the TTM values are negatively impacted by weaker Q1 and Q2. After using annualized Q4 operating cash flow and revenues, the price-to-operating cash flow stands at 4.33 and the price-to-revenues stands at 1.97. Moreover, even after the recent decline, the copper price remains above $4/lb. It means that the Q1 financial results should be even better compared to Q4. Adding to it Capstone's growth prospects and it is clear that its share price has a lot of space for further growth.

Source: Own processing

The most important event that occurred in Q4 was the announcement of the silver stream sale to Wheaton Precious Metals (WPM). According to the deal, Capstone will be delivering 50% of the silver produced at Cozamin to Wheaton, at ongoing payments equal to 10% of the prevailing silver price. After 10 million toz silver is delivered, the stream will be reduced to 33% of Cozamin's silver production. The stream was sold for $150 million. However, as the deal was completed only on February 19, it is not reflected by the Q4 financials. According to Darren Pylot, Capstone's CEO:

Now that the silver stream is closed, we are in a net cash position and are on track to be debt free in 2021, allowing cash flow to be deployed to high-impact, high-return projects like paste backfill at Cozamin and Eriez HydroFloat coarse particle flotation at Pinto Valley. The pathway to financing Santo Domingo is progressing well with advanced discussions on a port deal, a gold stream and a strategic partnership.

Source: Capstone Mining

Capstone provided also the 2021 production and cost guidance. The company intends to produce 175-190 million lb copper, at a C1 cash cost of $1.75-1.9/lb. The sustaining CAPEX is projected at $68 million, which equals $0.36-0.39/lb. Therefore, the AISC should be approximately $2.1-2.3/lb. Capstone's longer-term aim is to grow to production to 200 million lb copper in 2022 and after the completion of the Santo Domingo mine, in 2024, the production should approach the 400 million lb level (an article can be found here).

During the earnings call, Capstone's CEO provided also some interesting information regarding the Santo Domingo project:

Today’s copper price environment and debt-free balance sheet have given Capstone a stronger bargaining position than we had last year. So we are now evaluating two different scenarios, one with 50% of Santo Domingo and the other which maintains our current 70% ownership position. As Raman noted earlier, at $4 copper we are expecting $1 billion of after-tax cash flow from our current operations over the next 3 years. So the higher percentage of 70% is something we’re very comfortable with. The key in this is that we still have a turnkey fixed price proposal from POSCO and the port and rail deal we have been negotiating with Puerto Ventanas will also significantly de-risk this project by de-risking CapEx attributed to Capstone by up to $400 million reduction. In terms of the port deal and gold stream, we are in advanced discussions and expect to provide an update prior to the end of Q1.

Capstone experienced an impressive bullish trend, that elevated its share price from $0.23, as of March 18, 2020, to $3.35, as of February 25, 2021. Those lucky enough to ride the whole trend could record huge 1,350% gains in less than a year. After such an impressive run, a correction is healthy. And it looks like the time for a correction is here. It took Capstone only three days to decline from the peak at $3.35 to the current share price of $2.85. This decline was caused by the copper price weakness when the price of the red metal declined from $4.35/lb to $4.1/lb. If this correction continues, Capstone may test the support provided by the 50-day moving average. It is at $2.28 now, but if the share price keeps on declining, it will probably encounter the 50-day moving average somewhere in the $2.5 area. If it doesn't hold, another support should be found in the $1.9-2 area. On the other hand, if the copper price stabilizes above the $4 level, or even slightly below it, Capstone should re-test the recent highs, as by now, it seems like the Q1 financial results will be extremely good.

What I like about Capstone's Q4:

• A new record high in copper production was reached.
• The production costs declined.
• Record-high revenues, operating cash flow, and net income was reached.
• The net debt declined.
• The production should increase further in 2021.
• The Santo Domingo financing discussions seem to be progressing well.

What I don't like about Capstone's Q4:

• This time, I don't know what to write here :)

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CSFFF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.