Mr. Darren Pylot reports
CAPSTONE REPORTS FIRST QUARTER 2020 RESULTS
Capstone Mining Corp. has released its production and financial results for the three months ended March 31, 2020. Copper production totalled 35.5 million pounds of copper at consolidated C1 cash costs (1) of $2.05 per payable pound produced.
(All amounts are in U.S. dollars unless otherwise specified.)
"I am proud of Capstone's response to the COVID-19 pandemic. Our top priority is to ensure the health of our employees and our communities in which we operate while maintaining the health of our business," said Darren Pylot, president and chief executive officer of Capstone. "Our quick mitigation measures positioned Capstone to weather this current low copper price environment without delaying the 2021 growth targets we have set."
"We were well positioned to face the abrupt economic downturn during Q1 2020, having cut nearly $30-million in annual costs from the business last year," said Raman Randhawa, senior vice-president and chief financial officer of Capstone. "We were fortunate to have the flexibility to defer another $32-million in capital costs this year while having preserved multiple levers that could be triggered to increase liquidity, if necessary. Also, we have taken actions on additional operating cost savings of $22-million, which include locking in contract purchases and hedges on very low diesel prices, transportation and the Mexican peso for the remainder of 2020. This is expected to result in consolidated C1 operating costs and all-in sustaining costs of about $1.80 and about $2.20 per pound, respectively, for the balance of this year."
On April 7, the company safely commenced ramping down operations at Cozamin to comply with a Mexican federal government decree, which was extended from April 30, 2020, to until May 30, 2020. The decree allows for normal operations to resume on May 18, 2020, in municipalities which present low or null transmission of COVID-19. Zacatecas is a low-risk jurisdiction based on current statistics. The company is taking all steps necessary to be able to quickly and safely ramp production back up to full capacity by May 18, 2020.
First quarter 2020 highlights and significant items:
First quarter 2020 copper production of 35.5 million pounds and C1 cash costs (1) of $2.05 per payable pound produced; copper sales were lower at 30.4 million pounds due to timing of shipments at Pinto Valley;
First quarter 2020 net loss of $21.9-million impacted significantly by two items: non-cash inventory writedowns ($6.7-million) and provisional pricing adjustments ($9.8-million) related to COVID-19 (first quarter 2019: net income of $8.3-million);
First quarter 2020 operating cash flow of $6.9-million (first quarter 2019: $28.7-million); operating cash flow was impacted by approximately $10-million
due to one less shipment at Pinto Valley and the buildup of concentrate inventory during first quarter 2020;
In January and April, Cozamin further announced the results from its 2019/2020 stepout and infill drilling program, aiming to double the current reserve base; 177 holes of the 200 planned holes are now released, with updated mineral resource and mineral reserve estimates expected in late 2020; positive drill results are pointing to expected higher grades and wider intercepts than in the current reserve, as well as a potentially expanded high-grade resource;
A positive update to Santo Domingo's feasibility study was
released in February; the update included a higher level of capital and operating cost certainty, the receipt of additional key permits, and the development of a preliminary economic assessment with respect to cobalt production;
World Health Organization declared the coronavirus (COVID-19) a global pandemic in early March; Capstone has taken the following measures in response to COVID-19; refer to the corporate update section herein for more details:
Implemented rigorous control and prevention measures to ensure the health of workers at all the company's offices and operations;
Safely ramped down operations at Cozamin on April 7 to comply with a government decree;
Withdrew its full-year 2020 production guidance, due to Cozamin's temporary rampdown of operations and the continuing uncertainty regarding COVID-19; the company will re-evaluate its full-year 2020 guidance as the pandemic evolves;
2020 cost reduction actions taken to manage liquidity and deliver margins:
Reduced discretionary capital and exploration expenditures by $32-million;
Actions taken by management to reduce operating costs for the rest of 2020 by $22-million; these reductions include lower diesel prices and transportation costs, hedging foreign exchange, and interest rate swaps;
Operating cost reductions are expected to reduce C1 cash costs to $1.75 per pound to $1.85 per pound, thus delivering margins at spot copper prices;
Executed financial hedges on foreign exchange and interest rates to protect approximately half of the company's Mexican peso exposure from August, 2020, through December, 2021, and swapped the floating for fixed rate on the LIBOR (London interbank offered rate) portion of the company's revolving credit facility (RCF) at 0.355 per cent; resulting in estimated expected savings against plan of $4-million and $4-million, respectively, over the term of the contracts.
In response to the World Health Organization declaring novel coronavirus (COVID-19) a global pandemic in early March,
Capstone has taken the following measures to ensure the health and safety of its people and the communities in which it operates:
- The company has a global COVID-19 response team in place and is assessing any potential health and business impacts across all its operations.
The company implemented rigorous control and prevention measures at all its offices and operations to ensure the health of its workers, including remote working from home, where possible, and limiting all non-essential travel.
In response to COVID-19 negatively affecting global markets and putting downward pressure on metal prices, Capstone has taken prudent financial measures to reduce discretionary capital and exploration expenditures by $32-million in 2020.
The company's financial position as at Dec. 31, 2019, was at a position of strength with low net debt/EBITDA (net income (loss) attributable to shareholders before net finance expense, tax expense, and depletion and amortization) of 1.56 times, net debt of $165-million and total available liquidity of $135-million consisting of $90-million undrawn on the revolving credit facility, plus cash and short-term investments of $45-million. As at March 31, 2020, the company had total available liquidity of $112-million consisting of $80-million of undrawn credit on the RCF and cash and short-term investments of $32-million. Subsequent to quarter-end, the company drew $30-million on the RCF as a precautionary measure for working capital purposes. The company is closely monitoring future cash flow projections to ensure that it can take appropriate further actions as required.
On April 7, the company safely commenced ramping down operations at Cozamin to comply with a Mexican federal government decree, which was extended from April 30, 2020, to until May 30, 2020. The decree allows for the normal operations to resume on May 18, 2020, in municipalities which present low or null transmission of COVID-19. Zacatecas is a low-risk jurisdiction based on current statistics. The company is taking all steps necessary to be able to quickly and safely ramp production back up to full capacity by May 18, 2020.
2020 cost reductions
At the end of December, 2019, the company achieved its target of sustainable annualized cost savings of $27.5-million from the business, using 2018 as a baseline.
In response to COVID-19, Capstone has taken prudent financial measures to reduce discretionary capital and exploration expenditures by $32-million in 2020.
In addition, in relation to current financial markets, the company is targeting the following cost reductions in 2020 expected to be reflected in its future operating results. These are additional cost saving measures, which would enable Capstone to reduce its cash operating costs by approximately $22-million over the rest of 2020.
Pinto Valley cost reductions
As a result of these cost reduction measures and expected improvements to production compared with first quarter 2020 (primarily related to grades reverting back to average of 0.31 per cent copper), the company expects the C1 cash costs (1) for Pinto Valley to reduce dramatically in the remaining quarters in 2020, compared with first quarter results, to below $2 per pound. (Refer to the risks and uncertainties section in Capstone's first quarter 2020 management's discussion and analysis and financial statements for updated COVID-19-related risks.)
Pinto Valley: PV3 optimization
PV3 optimization is an initiative that aims to enhance performance through a series of low-capital, quick-payback, high-impact debottlenecking steps and operational tweaks. The goal is to sustainably boost throughput, enhance recovery and lower costs. All required permits are in place to operate at levels up to 79,500 tonnes per day.
The first phase of PV3 optimization aims to increase reliability and improve performance in the fine crushing plant and grinding circuit (phase 1). In first quarter 2020, the first of two secondary crushers and screen decks arrived, and is scheduled to be installed in July. Also in July, the first of two new ball mill shells is expected to be installed, with the second scheduled for first quarter 2021. The second secondary crusher and six tertiary screen decks are scheduled to arrive in fourth quarter 2020. Once completed, the expected result is for throughput to reliably achieve higher throughput levels in the 56,000- to 57,000-tonne-per-day range in 2021. During first quarter 2020, a mineral processing consultant was hired to assist in reviewing historical reports and operational data and identify operational improvements to advance in the short term (phase 2).
Pinto Valley: PV4 expansion
Preliminary work on Pinto Valley's potential future expansion to 100,000-plus tonnes per day continues but at a slower rate given COVID-19 restrictions. The update has been delayed for an indeterminate period. The study is focused on evaluating potential scenarios to take advantage of the one billion tonnes of mineral resources not currently scheduled in the current mine plan pit shell (PV3).
Cozamin: near-term expansion update
In early April, 2020, Cozamin completed two major projects that represent a significant achievement on its path to expanding copper and silver production in 2021. The final key component of this expansion, the Calicanto one-way ramp, continues as scheduled and on budget to be completed in December, 2020. (Refer to the risks and uncertainties section in Capstone's first quarter 2020 MD&A and financial statements for updated COVID-19-related risks.) The 818-metre raisebore was completed 52 days ahead of schedule, which immediately improved ventilation and decreased the temperature in the deepest area of the mine. The second milestone is completion of an upgrade to the underground electrical substation to boost the mine from 7.5 megawatts to 9.5 megawatts. In addition, an additional underground maintenance shop has been completed, increasing fleet maintenance capacity by 50 per cent. Once completed, the underground expansion is expected to increase production to a new annual run rate of approximately 50 million to 55 million pounds of copper and 1.5 million ounces of silver in 2021.
Cozamin: targeting doubling mine life
Updated mineral resource and mineral reserve estimates for Cozamin are still expected to be completed in late 2020. The 2019/2020 stepout and infill drilling program was progressing well at 85 per cent completed and approximately three months ahead of schedule, until it was suspended as a non-essential activity by Mexican national decree. The drilling completed to date will be used to upgrade inferred mineral resources to the indicated category and subsequent conversion to mineral reserves to target doubling the mine life. Positive drill results pointing to higher grades and wider intercepts than in the current mineral reserve estimates were released on Jan. 16, 2020, and April 23, 2020.
Santo Domingo technical report update
In February, 2020, a positive update to Santo Domingo's feasibility-study-level technical report, originally published on Jan. 3, 2019, was released on Feb. 19, 2020, and filed on SEDAR on March 24, 2020. The update included a higher level of capital (capital expenditures) and operating cost (operating expenditures) certainty, receipt of additional key permits, and the development of a preliminary economic assessment with respect to cobalt production. Highlights included:
Higher level of capex/opex certainty due to confirmation of certain capital and operating costs with the negotiation of a power purchase agreement, indicative offers for desalinated water purchase from third parties, firm fixed-price (lump sum) proposal for the construction of plant and mine facilities, and firm actionable quotes for key process equipment;
Base-case copper-iron-gold project has a posttax net present value at an 8-per-cent discount rate of $1.03-billion; initial construction costs are estimated to be $1.51-billion, which includes a $197-million contingency on total costs;
The 2020 PEA opportunity considers a conceptual plan to mine and process copper, iron ore and gold at the onset of the mine; subsequent to the decision of building the copper-iron-gold mine, a follow-on phase to initiate engineering and permitting is presented for a cobalt recovery circuit; the 2020 PEA opportunity assumes two years for additional permitting and detailed engineering; during this development period, the cobalt-laden pyrite will be stockpiled as a high-density slurry; copper, iron and gold are mined for the 18-year mine life and processed over 18 years, and cobalt is mined for 18 years but processed over the last 16 years:
The copper-iron project with the phased cobalt opportunity has an NPV discounted at 8 per cent of $1.66-billion after tax;
Incremental capex for a cobalt refining complex of $670-million, for combined construction costs of $2.18-billion, timed to begin two years after construction begins for the copper-iron-gold plant;
Production of an average of 10.4 million pounds of cobalt per annum in the form of 22,600 tonnes per annum battery-grade cobalt sulphate, at incremental operating costs of $3.70 per pound of cobalt production costs and incremental C1 cash costs (1) of negative $4.11 per pound of cobalt production (including byproduct sulphuric acid produced in the cobalt operation).
Refer to Capstone's first quarter 2020 management's discussion and analysis and financial statements for detailed operating results.
Q1 2020 Q1 2019
Copper production (million pounds)
Pinto Valley 26.8 32.7
Cozamin 8.7 8.7
Total copper production (million pounds) 35.5 41.4
Total copper sales (from continuing operations) (2)
(million pounds) 30.4 35.3
Realized copper price ($/lb) $2.29 $2.99
C1 cash costs (1) ($/lb) produced
Pinto Valley $2.41 $1.79
Cozamin $0.95 $0.70
Consolidated C1 cash costs (1) ($/lb) produced $2.05 $1.56
(1) This is an alternative performance measure.
(2) Sales from continuing operations have been utilized due to the Minto mine
being classified as a discontinued operation in the comparative period until
the point of its sale on June 3, 2019.
Production of 35.5 million pounds was at the lower end of the original guidance range of 140 million to 155 million pounds. Production levels are expected to ramp up through the year as Pinto Valley mined a lower-grade area of the upper portion of the pit during the quarter. A focus on maximizing mill throughput continued in first quarter 2020 following the successful December, 2019, operational test, announced with the 2019 results in February, 2020. A total of 28 days of over 60,000 tonnes per day were realized during first quarter 2020 and an average daily throughput rate during first quarter 2020 of 54,900 tonnes per day, or approximately 5 per cent higher than the three-year average from 2017 to 2019. Sustainable high mill throughput rates are expected in the second half of 2020, helped by the installation of the first of two secondary crushers and screen decks planned for July, 2020. Recoveries during the quarter of 82.4 per cent were impacted by the low feed grade of 0.284 per cent plus an expected higher-than-average oxide component. Grade and recovery are both planned to be higher for the balance of the year.
C1 cash costs (1) were impacted by Pinto Valley costs, overall lower production and less capitalized stripping resulting from the increased ore delivery to the mill.
The realized copper price in first quarter 2020 of $2.29 per pound was lower than the LME (London Metal Exchange) average of $2.56 per pound due to three provisionally priced shipments at March 31, 2020, which were priced at an average of $2.24 per pound. In addition, there was a (10-cent)-per-pound provisional adjustment on prior shipments due to copper prices decreasing throughout the quarter. Sales volumes in first quarter 2020 were lower than production due to timing of shipments at Pinto Valley.
Pinto Valley mine
C1 cash costs (1) of $2.41 per pound in first quarter 2020 were higher than first quarter 2019, primarily due to 18 per cent lower copper production compared with the same period last year, as well as higher operating costs (site costs were $56-million in first quarter 2020 compared with $216-million in 2019 or a run rate of $54-million per quarter). C1 cash costs (1) were also impacted by lower capitalized stripping in first quarter 2020 of $5.3-million or 20 cents per pound.
Property cost per tonne milled (1) of $10.87 was 30 cents per tonne lower (minus 3 per cent) versus the average cost per tonne milled in 2019 and 76 cents per tonne lower (minus 6.5 per cent) than in 2018. This reflects the cost cuts implemented over the course of last year.
During first quarter 2020, the mill was able to achieve mill throughput of 54,899 tonnes per day (highest quarterly total since fourth quarter 2017) as a result of operational improvements tied to maintenance programs.
Production in first quarter 2020 remained consistent at Cozamin compared with first quarter 2019. C1 cash costs (1) of 95 cents per pound were higher than first quarter 2019. The primary cause of this is a decrease in byproduct credits during the quarter due to declining commodity prices as a result of current market conditions, as well as less San Rafael zinc ore mined during the quarter. This was offset by decreases in overall operating costs from cost management efforts, as well as lower treatment and selling costs.
Refer to Capstone's first quarter 2020 MD&A and financial statements for detailed financial results.
Q1 2020 Q1 2019
Revenue (2) ($ millions) $70.4 $108.9
Net income (loss) ($ millions) (21.9) 8.3
Adjusted net income (loss) (1) ($ millions) (3) (17.7) 12.0
Adjusted EBITDA (1, 4) from continuing operations (2, 3) ($ millions) 11.1 35.6
Cash flow from operating activities (2) ($ millions) 6.9 28.7
Operating cash flow before changes in working capital (1, 2) ($ millions) (3.5) 30.7
(1) This is an alternative performance measure.
(2) In accordance with international financial reporting standard 5, Minto's results are
excluded from revenue but included within cash flow amounts in the comparative period.
The Minto mine was sold on June 3, 2019.
(3) Certain prior-period amounts have been restated to conform with current-period
(4) EBITDA is earnings before interest, taxes, depletion and amortization.
Outlook -- 2020 production, cost and capital guidance
In light of the temporary rampdown at Cozamin to comply with a Mexican federal government decree, which was extended from April 30, 2020, to until May 30, 2020, and the continuing uncertainty regarding COVID-19, Capstone has decided to withdraw its full-year 2020 production guidance. The company will continue to target safe execution of its operation plans and will re-evaluate its full-year 2020 guidance as the pandemic evolves.
Prior to the temporary rampdown at the Cozamin mine, Capstone had taken prudent financial measures due to the recent drop in copper prices to reduce discretionary capital and exploration expenditures of $32-million in 2020, as shown in the attached 2020 expenditure guidance table. The company does not expect that these reductions will materially impact its growth plans for 2021 and beyond.
Refer to the corporate update section herein for revised 2020 operating cost expectations.
2020 EXPENDITURE GUIDANCE
Original guidance Revised guidance
Sustaining $28 $18
Capitalized stripping $8 $3
Expansionary $19 $12
Total Pinto Valley capital $55 $33
Cozamin $26 $24
Santo Domingo $9 (3) $6 (4)
Total capital $90 $63
Total exploration $10 $5
(3) On a 100-per-cent basis, the figure is $12-million; ownership is 70
per cent Capstone and 30 per cent Korea Resources Corp.
(4) On a 100-per-cent basis, the figure is $9-million; ownership is 70
per cent Capstone and 30 per cent Korea Resources.
Conference call and webcast details
Date: April 29, 2020
Time: 11:30 a.m. Eastern Time (8:30 a.m. Pacific Time)
Dial-in: North America: 1-877-823-8676 or international: 825-312-2240
The conference call replay will be available until May 13, 2020.
Replay: North America: 800-585-8367 or international: 416-621-4642
Following the replay, an audio file will be available on Capstone's website.
This release is not suitable on a stand-alone basis for readers unfamiliar with Capstone and should be read in conjunction with the company's MD&A and financial statements for the three months ended March 31, 2020, which are available on Capstone's website and on SEDAR, all of which have been reviewed and approved by Capstone's board of directors.
(1) This is an alternative performance measure.
About Capstone Mining Corp.
Capstone Mining is a Canadian base metal mining company, focused on copper. It is committed to the responsible development of its assets and the environments in which it operates. Its two producing mines are the Pinto Valley copper mine located in Arizona, United States, and the Cozamin copper-silver mine in Zacatecas state, Mexico. In addition, Capstone has the large-scale 70-per-cent-owned copper-iron Santo Domingo development project in Region III, Chile, in partnership with Korea Resources, as well as a portfolio of exploration properties.
National Instrument 43-101 compliance
Unless otherwise indicated, Capstone has prepared the technical information in this news release based on information contained in the technical reports, annual information form and news releases available under Capstone Mining's company profile on SEDAR. Each disclosure document was prepared by or under the supervision of a qualified person as defined in National Instrument 43-101 (Standards of Disclosure for Mineral Projects) of the Canadian Securities Administrators. Readers are encouraged to review the full text of the disclosure documents, which qualifies the technical information. Readers are advised that mineral resources that are not mineral reserves do not have demonstrated economic viability. The disclosure documents are each intended to be read as a whole, and sections should not be read or relied upon out of context. The technical information is subject to the assumptions and qualifications contained in the disclosure documents.
Disclosure documents include the National Instrument 43-101-compliant technical reports titled "NI 43-101 Technical Report on the Cozamin Mine, Zacatecas, Mexico," effective Oct. 24, 2018, "Pinto Valley Mine Life Extension -- Phase 3 (PV3) Pre-Feasibility Study," effective Jan. 1, 2016, and "Santo Domingo Project, Region III, Chile, NI 43-101 Technical Report," effective Feb. 19, 2020.
The disclosure of scientific and technical information in this news release was reviewed and approved by Brad Mercer, PGeol, senior vice-president, operations and exploration (technical information related to mineral exploration activities and to mineral resources at Cozamin), Clay Craig, PEng, superintendent mine technical services -- Pinto Valley mine (technical information related to mineral reserves and mineral resources at Pinto Valley), Tucker Jensen, senior technical adviser -- Cozamin mine, PEng (technical information related to mineral reserves at Cozamin), and Albert Garcia III, PE, vice-president, projects (technical information related to project updates at Santo Domingo), all qualified persons under NI 43-101.
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