Capstone Mining-Mantos Copper Merger: A Way To Fund Santo Domingo

Summary

• Capstone Mining will merge with Mantos Copper into Capstone Copper.
• The new company will have reserves of nearly 11 billion lb copper and measured and indicated resources of more than 12 billion lb copper.
• The combined 2021 attributable copper production is projected around 355 million lb copper.
• The company is going to more than double its copper production over the next 4-5 years.
• The high cash flows of the merged company will help to fund the Santo Domingo mine construction. Moreover, there should be significant synergies between Santo Domingo and the nearby Mantoverde mine.

Zhanna Hapanovich/iStock via Getty Images

Capstone Mining (OTCPK:CSFFF) and Mantos Copper announced a merger. The two companies will merge into Capstone Copper, a new diversified copper producer with 4 operating mines, robust cash flows, and an aggressive growth path. The merger seems to have several advantages but the biggest one is that Mantos Copper's Mantoverde mine is close to the Santo Domingo project and the companies believe that significant synergies will be realized. Moreover, the strong cash flows of the combined company should help to fund the high Santo Domingo price tag.

The transaction seems to be relatively simple. Mantos Copper will be renamed Capstone Copper and Capstone Mining's shareholders will receive 1 share of Capstone Copper for each share of Capstone Mining. Subsequently, current shareholders of Capstone Mining will own 60.75%, and current shareholders of Mantos Copper will own 39.25% of the new company. The new company will be more diversified and financially stronger. It will have 4 operating mines, namely Capstone's Pinto Valley and Cozamin mines, and Mantos' Mantos mine, and 70%-owned Mantoverde mine. And, importantly, there is also Capstone's world-class Santo Domingo project.

The new company will have sizeable reserves of 10.8 billion lb copper and measured and indicated resources of further 12.1 billion lb. The combined 2021 attributable production of the two companies is projected at 355 million lb copper. But this is just the beginning. The Mantos Blanco mine is in the process of production expansion from 88 million to 117 million lb copper per year. And at Mantoverde, the production should increase from 119 million to 265 million lb copper per year (70% attributable to Capstone Copper). In both cases, the expansion is fully funded and fully permitted, with expected completion by 2024. The overall attributable production of Capstone Copper will grow to 485 million lb copper. But there is also Santo Domingo that will elevate the production to the 750 million lb level, as it should be able to produce as much as 263 million lb copper per year over the first 5 years of its 18-year mine life.

Source: Capstone Mining

Santo Domingo is a world-class project that should be able to produce 140 million lb copper, 4.2 million tonnes of iron ore concentrate, 17,000 toz gold, 10.4 million lb cobalt, and 1.4 million tonnes of sulfuric acid per year on average, at a C1 cash cost of -$1.56/lb copper. But the initial CAPEX is estimated at $2.18 billion if the cobalt circuit is included ($1.51 billion without the cobalt circuit). At metals prices of $3/lb copper, $80/tonne of 65% magnetite iron concentrate, $20/lb cobalt, $1,280/toz gold, and $70/tonne of sulfuric acid, the copper-gold-magnetite after-tax NPV(8%) equals $1.03 billion and the after-tax IRR equals 21.8%. The copper-gold-magnetite-cobalt after-tax NPV(8%) equals $1.66 billion and after-tax IRR equals 23%. The plan is to develop the copper-gold-magnetite operation first, with a production start-up originally expected in 2024 (however, the merger may lead to some delays). The cobalt operation should be developed two years later.

The merger with Mantos Copper and the creation of Capstone Copper should help to finance the Santo Domingo construction. By the way, the project is fully permitted and shovel-ready. The financing is the last missing piece of the puzzle. Capstone Copper should have net cash of $220 million and an available revolving credit facility of $225 million. This is obviously not enough to build Santo Domingo and also to expand the other operations. But as shown in the chart below, Capstone Copper should generate huge cash flows over the next two years, if the copper price remains above $4/lb. At a copper price of $4/lb, the EBITDA should be around $1.3 billion, growing to more than $1.6 billion at a copper price of $4.5/lb. Just a reminder, the copper price is around $4.3/lb right now.

Source: Capstone Mining

Moreover, Capstone Copper will rely also on synergies between Santo Domingo and Mantoverde. The Mantoverde mine is situated only 30 kilometers from Santo Domingo. There is potential to share some infrastructure, including the desalination plant, roads, pipelines, power transmission lines, and port facilities. Moreover, excess SX-EW capacities at Mantoverde can be used to process oxide ore from Santo Domingo. On the other hand, the cobalt plant at Santo Domingo can be used to process materials from Mantoverde. And the sulfuric acid produced at Santo Domingo can be used at Mantoverde which should reduce the operating costs of the mine. The newest corporate presentation mentions also some integrated mining processes and tax synergies. The problem is that it will probably take some additional studies to quantify the full scale and impacts of the synergies. This may delay the mine construction.

Source: Capstone Mining

Conclusion

In general, the merger looks like a good strategic move that will create a stronger growth-oriented copper producer. But the company may become also an important supplier of cobalt, operating outside of the Democratic Republic of Congo. This further boosts the upside potential, as cobalt is highly important for the battery industry, but around 70% of its global production comes from the Democratic Republic of Congo. This is a problem due to the jurisdiction risk, political instability, and also accusations that slave and child work is used at some cobalt mining operations.

Capstone Copper's pro-forma market capitalization is $3.3 billion which leaves meaningful space for growth. For example, the expected EBITDA generated over the next two years is projected at $1.3 billion at a copper price of $4/lb. It would mean an EBITDA of $650 million per year on average, and therefore, a price-to-EBITDA ratio of 5.08. For example, Lundin Mining (OTCPK:LUNMF) has a price-to-EBITDA ratio (TTM) of 4.24, Teck Resources (TECK) of 4.21, and Freeport-McMoRan (FCX) of 5.72. However, none of these companies is going to double production over the foreseeable future. This is why Capstone Copper will be a stock worth considering.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.