FINAL TRANSCRIPT Capstone Mining Corp. Third Quarter Results

Transcription

1 FINAL TRANSCRIPT Capstone Mining Corp. Third Quarter Results Event Date: October 31,

2 CORPORATE PARTICIPANTS Cindy Burnett Capstone Mining Corporation Vice President, Investor Relations and Communications Capstone Mining Corporation President and Chief Executive Officer Jim Slattery Capstone Mining Corporation Senior Vice President and Chief Financial Officer Capstone Mining Corporation Senior Vice President and Chief Operating Officer Peter Hemstead Capstone Mining Corporation Vice President, Marketing and Treasurer CONFERENCE CALL PARTICIPANTS Tom Meyer CIBC Analyst Scotiabank Analyst Matt Murphy UBS Analyst Stefan Ioannou Haywood Securities Analyst RBC Analyst 2

3 PRESENTATION Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp. s Third Quarter Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for a question. If anyone has any difficulties hearing the conference, please press *, 0 for assistance at any time. I would like to remind everyone that this call is being recorded on October 31, I would now like to turn the conference over to Ms. Cindy Burnett, VP of Investor Relations and Communications. Please go ahead. Cindy Burnett Vice President, Investor Relations and Communications, Capstone Mining Corporation Thank you. I'd like to welcome everyone on the call today. The news release announcing Capstone's third quarter financial results is available on our website, along with a PowerPoint presentation that contains summary information on the Company and the financial and operating results. With me today are, Capstone's President and CEO; Jim Slattery, Senior Vice President and CFO;, Capstone's Senior Vice President and Chief Operating Officer; Rob Blusson, VP of Finance; and Peter Hemstead, VP of Marketing and Treasurer. 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. 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 US dollars, unless otherwise specified. Now I'll turn the call over to. President and Chief Executive Officer, Capstone Mining Corporation Thank you, Cindy, and good morning, everybody. First, Jim will review our financial results for the quarter, and then Gregg will update you on the operations and our development activities. We'll then spend the balance of the call talking about Pinto Valley, followed by your questions. So we'll start by turning the call over to Jim. Jim Slattery Senior Vice President and Chief Financial Officer, Capstone Mining Corporation Thanks, Darren. Our earnings before interest and taxes, adjusted for foreign exchange and the one-time Pinto Valley transaction cost, were $5 million for the quarter. Operating cash flow 3

4 before changes in working capital was 12.7 million or $0.03 a share for the quarter and $61.3 million for the year-to-date, which gives us significant flexibility to fund our capital programs and to continue to grow the Company. Our production for the quarter was 18.2 million pounds of copper in concentrate, and our total cash cost for the third quarter was $1.57 per pound of payable copper, net of by-product credits. Our full year guidance remains unchanged at 85 million pounds of copper, plus or minus 5 percent, and we're maintaining our guidance for 2013 cash costs in the range of $1.65 to $1.75 per pound. Now more than three-quarters of the way through the year, Minto's production year to date is 23 million pounds. We're now getting into a higher grade ore from both the open pit and the underground, but do not believe that we will be able to fully catch up, and are now forecasting that Minto will come in below the low end of their production guidance. We are expecting the fourth quarter to be very strong at Minto, and are seeing grades come up already. On the cost side, with Cozamin cost at $1.20 per pound for the quarter and $1.17 year to date, we expect Cozamin to come in slightly above the high end of their cost guidance for the full year, which was $1.10 per pound. And at Minto, if we make our fourth quarter production as planned, we expect our cost per pound to be lower than originally guided. On a combined basis, however, we do expect to make our overall corporate range of guidance, both on production and costs. Now I'll turn to our balance sheet and our cash position. We reported $457 million in cash at September 30th. Subsequent to the quarter end, we completed the purchase of Pinto Valley using a combination of $358 million of cash on hand and 288 million from two credit facilities for a total of 646 million. This represents the purchase price of 650 million less a provisional working capital adjustment that will be trued up on the basis of the actual working capital balances at closing. The balance of the $400 million in total credit was used to support letters of credit for reclamation obligations of $24 million at Minto and $87 million at Pinto Valley. Our current cash on hand is approximately $82 million, which provides us with more than enough flexibility to meet our ongoing operating requirements. Now I'll turn the call over to to talk about our operations. Senior Vice President and Chief Operating Officer, Capstone Mining Corporation Good morning. As Jim mentioned, we expect Minto production to come in just under the low end of guidance for the year. Mill operations are running well, averaging just under 4,000 tonnes per day. We put additional man power and equipment into the open pit mining operation and have begun to see higher grade material, and in early September we reached the ore lens underground with development ore now going to the mill. 4

5 As we mentioned in previous quarters, because of the pit wall failure in the fourth quarter of last year, we started two months behind in our mine plan, and while the measures taken have mitigated the shortfall, we do not expect to fully make it up. At Cozamin, operations are running very well. As Jim mentioned, costs did fall slightly at Cozamin during the third quarter. However, remained at $1.17 per pound year to date. Water costs were a one-time cost early in the year, and our haulage and contractor costs have been higher than originally planned. The proposed 7.5 percent mining royalty in Mexico has been passed through the Senate. Once we understand the full scope, we will look to mitigate the impact to the extent that we can. I'll now turn to the Pinto Valley acquisition. Since we took control of operations three weeks ago, we have been very encouraged, and are confident that we ll have the mine operating at design throughput by the end of the year. While we can't provide metrics during the time that BHP owned the mine, what we can provide are details as they relate to our ownership. While throughput, grade, and recoveries have all demonstrated the ability to operate at target levels, what we need to do is improve consistency and reliability. We haven't seen any surprises, and for the month of October we've operated between 85 and 90 percent of nameplate capacity, with recoveries running on plan; the grades vary day to day. On an annualized basis, where we're at right now works out to about 120 million pounds of copper and concentrate, and there's nothing we've seen that gives us any reason to believe we wouldn't achieve full capacity by the end of the year. We have guided to 22 million to 27 million pounds of copper for an 82-day period of our ownership during the fourth quarter, which represents an annualized rate of just over 100 million pounds or in the 85 percent range. Once we get a couple of months under our belt, we'll be in a better position to let you know our time line for reaching full run rate of 130 million to 150 million pounds. The pre-feasibility study continues to progress, and as of closing we now have received all the detail we expected to get from BHP. The study is scheduled for completion in the first quarter of 2014, and is intended to imply the economics of 12 years of mine life, which is currently permitted. Concurrently with this Phase 2 PFS, we will commission a Phase 3 study, which will consider all the remaining identified resource on the property. We are very optimistic about a potential to extend the mine life meaningfully beyond year 12. I'll now turn the call back over to Darren. Thanks, Gregg. So we closed the acquisition and took control of the operations on October the 11th. Our transition period went very well, and activities have now turned from preparing for day one to focusing on exiting the transition services agreement that we have with BHP. This agreement provides a bridge between the BHP and Capstone systems at Pinto Valley, and also has additional cost to Capstone. 5

6 We're very pleased with what we've seen so far. The safety culture is, we believe, second to none, and the workforce at the mine is very experienced with an excellent work ethic. We're looking forward to getting the operation to steady state, and engaging the Pinto Valley team to maximize the full potential of the mine. Now moving on to our development and explorations projects. We continue to advance the Santo Domingo project. The feasibility study is on track to be completed by year-end, and we have just filed the EIA yesterday. This will now start the formal permitting process, which we expect to take about 15 months throughout the process. We're optimistic that we can obtain economically price power under a long-term agreement. We have received indicative proposals from providers that can deliver power within the projected development time line, and at a cost that we consider viable for the project. The next steps will be to receive detailed memorandums of understandings from the parties, with a goal of completing a binding agreement sometime in the first half of next year. So essentially we're on track with all the necessary items that we need to be able to put in place for us to make a decision to go forward at Santo Domingo. Turning to Kutcho. With the acquisition of Pinto Valley, we have determined that Kutcho is no longer material to our growth strategy, and does not represent the best allocation of either capital or time resources. We will evaluate strategic alternatives, and advise further when we have anything to report. And lastly, turning to exploration. We said at the last call in July that we would continue to be optimistic as early stage, low-cost exploration opportunities come before us. In August, we signed an option agreement with SQM, the large fertilizer and industrial chemical producer in Chile, for a 350,000 hectare property block that lies between Santo Domingo and Anglo's Mantos Blancos mine in Northern Chile. This significant land position has been held by SQM for decades, and only explored for the near-surface nitrates and iodine. It's never been explored for base or precious metals; never been drilled below 9 metres of depth. We've completed airborne surveys over the block in mid-october, and interpretation of the data is under way, and we are intending to have drill-ready targets ready to go before the end of next year. So in closing, we've completed the Pinto Valley acquisition, which positions us as a leading intermediate copper producer. Our financial position remains strong, and our cash flow is diversified. Our priority over the coming quarter will be to fully integrate Pinto Valley into Capstone's operations, take the necessary actions to get that operation running at the target capacity, and advance the PV2 pre-feasibility study for completion in the first quarter of next year. We intend to stay disciplined and focused, and maintain the financial flexibility to adjust quickly if opportunities arise, or if market conditions warrant. 6

7 , that concludes our prepared remarks, and we're now ready to take questions from the floor. Q&A Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press *, followed by the 1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press *, followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Tom Meyer from CIBC. Tom, please go ahead. Tom Meyer CIBC Thank you. Good morning. I ve just have one quick one, I think. Just as relates to the Pinto Valley off-take, how are you thinking about the value of that off-take now? Are you looking to retain it for perhaps make the funding easier for Santo Domingo at a later date? Or you just want to keep it in the event that you come across any, as I think you called it, opportunities that may be out there? Peter Hemstead Vice President, Marketing and Treasurer, Capstone Mining Corporation Hi. This is Peter Hemstead here. The approach we're using in marketing the Pinto Valley concentrate is more of a diversified approach. And definitely we are looking at strategic relationships with end users of the concentrate in Asia that could potentially assist with the financing of Santo Domingo, but it ll be a blended approach between end users and traders. Tom Meyer Okay. That's it for me. I'll pass it on. Thanks. Your next question comes from from Scotiabank. Mark, please go ahead. Scotiabank Thank you, and congrats on closing on Pinto Valley. Just my first question here. Gregg, you had mentioned, I guess, just the sort of short-term improvements here; you're looking for more consistency from sort of the operations. I was just wondering if there was anything specific or a little bit more colour you could add there, whether it's consistency sort of across the operations or more on the mining side, crushing or that type of thing. I would say that most of the reliability problems that we've seen since we've been there have been in the crushing circuit; to a lesser extent in the mill. Right now the mine is not really 7

8 seeing any challenges. It's the ore that's going to the mill that's all been stripped, and it's just basically loading ore and hauling it to the surface. Okay. Perfect. And then just, I guess, somewhat related to that. In the short term, like I know BHP was obviously responsible for the CapEx up until this point. Is there any even sort of minor amounts of capital that you expect to be putting in to Pinto Valley over the short term maybe to resolve like some of these reliability issues? Yeah. I mean I don't have a number. I don't have a number I can give you guys, but yeah, I would expect that we'll see some minor sort of corrective maintenance capital through the remainder of the year. Okay... Jim Slattery Our sustaining capital estimate at Pinto Valley is in the range of around 15 million a year, but there's nothing material this year that's contemplated. Okay. Okay. Perfect... There's no number that we have to put in to fix something that we're not as Gregg said, it might be minor maintenance capital, but nothing that we're seeing that we have to put in to fix a specific problem... Okay. Perfect. Just wanted to make sure on that. And then just sort of two more questions here. One, on the study after the PFS, so looking at the sort of post 12 years expansion or post 12 years operation. Just for clarity, what's the timing then? Are you looking to commission that sort of after the pre-feasibility study has been released? Or hoping to have sort of that study done at a similar time in Q1? No. We'll get the PV2 out, which we call Phase 2, the pre-feasibility study, to take us to 12 years. And once that study is completed, kind of concurrently at the end of that study we'll begin PV3, which is beyond the 12-year study. Okay. Perfect. And then my final question just on the SQM block and, I guess, exploration; you're talking about drill targets being ready for this year. Is it primarily towards copper? Or are some of the targets also precious metals that haven't been explored on that large land package? Well we don't have a view on the precious metals. We acquired it, obviously, for the copper. There's copper staining all over the surface of the property. So obviously that's what we're 8

9 most excited about, but did want to note that it's not been explored for any type of precious orebased metals at all. Sounds great. Thanks. Thanks, Mark. Your next question comes from Matt Murphy from UBS. Please go ahead. Matt Murphy UBS Good morning. Just a quick one on the Pinto Valley guidance. If I am doing the math right, I think Pinto produced around 26 million pounds in Q3. Is there any sort of maintenance being done? Or is it just conservative guidance for Q4? Yeah. Matt, we've had the operation for 20 days now, and that's all we've had it for. So we are completely confident that it's going to run as well as it ran the last couple of quarters, and obviously that's where the guidance comes from. We d much rather we're seeing, as we said in the comments, we're seeing no reason why we can't be fully up to nameplate capacity by the end of the year. And so there's about 82 days left only. So if you analyse that annualize that, we feel confident in that guidance, and would rather surprise to the upside rather than put something in that we're not sure about after only being there for 20 days. Matt Murphy Definitely. It makes sense. Okay. Good Luck. Thank you. Your next question comes from Stefan Ioannou from Haywood Securities. Please go ahead. Stefan Ioannou Haywood Securities Okay. Thanks, guys. I think a couple of my questions have been answered already, but just I guess a quick one. At over at Minto in the underground, just in terms of right now you're into ore now and it's sort of preproduction ore. Going commercial there, did that depend on getting sort of the fresh air raise complete? Or is there sort of a thing that triggers when you can actually legally go commercial there? Well, yeah. It does depend on the fresh air raise, but also the second egress. So that raise broke through the surface this week. So now we have to slash it back down to increase the opening and put the ladder-way in. 9

10 Stefan Ioannou Okay. In the meantime, though, are you technically are you physically milling, though, some of that preproduction ore from underground? Yes. We have. Stefan Ioannou Okay. Great. Thanks very much, guys. And, Stefan, it really doesn't matter as much now because we're into the high grade in the pit. So we don't really need the underground ore at this point because we've got it from both locations. Stefan Ioannou Sure. Fair enough. Yeah. No, good point. We were hoping we were going to get one or the two in this quarter to help this quarter's production, but now it's all coming in the fourth quarter from both underground and open pit. Stefan Ioannou Okay. Great. Thanks again. Thanks. Ladies and gentlemen, as a reminder should you have a question, please press *, followed by the 1. Your next question comes from from RBC. Please go ahead. RBC Hi, guys. The reclamation liability funded with the credit facility, $87 million for Pinto Valley, was that unusually high from your perspective? And if so, what were the items under contention that caused that number? I wouldn't say that it s high. It was the number that we were expecting it to be. And I think for the size of that site and the area of impact and the historic mining operation, I don't think it's at all unusual. And so the purchase price was $650 million, plus the 87 million basically that's funded through the credit facility, right? Well, yeah. I mean the 87 million is a credit, is a LOC... Yeah. 10

11 So it doesn't come out of actual cash because it's funded by... Right. Right? Gotcha. Okay. But absolutely when we yeah. Great. Thanks, guys. Appreciate it. As a last reminder, ladies and gentlemen, if you have a question, please press *, followed by the 1. There are no further questions at this time. Please proceed. Thank you for joining us today, everybody, and please don't hesitate to contact us with any additional questions. Thank you very much. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines. ***** 11