CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) MARCH 31, 2014 and 2013 (Expressed in US Dollars) 1
Capstone Mining Corp. Condensed Interim Consolidated Balance Sheets (unaudited) (expressed in thousands of US dollars) March 31, 2014 December 31, 2013 ASSETS (Recast - Note 3) Current Cash and cash equivalents (Note 14) $ 135,744 $ 103,996 Receivables 22,286 26,926 Inventories (Note 5) 128,169 142,729 Other assets 8,258 8,334 294,457 281,985 Mineral properties, plant and equipment (Note 6) 1,473,656 1,497,345 Promissory note receivable (Note 7) 42,449 44,563 Other assets 11,103 21,016 Assets classified as held for sale (Note 8) 60,289 62,574 Total assets $ 1,881,954 $ 1,907,483 LIABILITIES Current Accounts payable and accrued liabilities $ 61,153 $ 75,166 Current portion of long term debt (Note 9) 88,889 66,667 Other liabilities 4,150 2,779 154,192 144,612 Long term debt (Note 9) 219,829 242,031 Deferred revenue 20,129 22,777 Deferred income tax liabilities 48,436 49,007 Provisions 132,051 131,169 Other liabilities 8,112 8,225 Total liabilities 582,749 597,821 EQUITY Share capital (Note 11) 822,210 818,519 Reserve for equity settled share based transactions 45,822 45,536 Investment revaluation reserve (1,496) (1,309) Foreign currency translation reserve (27,303) (17,467) Retained earnings 241,360 245,464 Total equity attributable to equity holders of the Company 1,080,593 1,090,743 Non-controlling interest 218,612 218,919 Total equity 1,299,205 1,309,662 Total liabilities and equity $ 1,881,954 $ 1,907,483 Subsequent event (Note 9) ON BEHALF OF THE BOARD: (Signed) Darren M. Pylot, Director (Signed) Dale C. Peniuk, Director See accompanying notes to these condensed interim consolidated financial statements. 2
Capstone Mining Corp. Condensed Interim Consolidated Statements of (Loss) Earnings Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share and per share amounts) 2014 2013 Revenue (Note 12) $ 160,793 $ 57,668 Operating costs Production costs (Note 5) (102,418) (28,620) Royalties (1,795) (1,698) Depletion and amortization (39,498) (14,036) Earnings from mining operations 17,082 13,314 General and administrative expenses (6,444) (6,014) Exploration expense (Note 6) (1,094) (659) Share-based compensation (Note 11) (2,777) (2,962) Earnings from operations 6,767 3,679 Other income (expense) Foreign exchange (loss) gain (743) 6,128 Gain on disposal of investments 288 - Loss on disposal of equipment and mineral property interests (15) (3) Earnings before finance costs and income taxes 6,297 9,804 Interest and other income 244 609 Interest on long term debt (Note 9) (2,097) (132) Other interest expense (1,082) (555) Earnings before income taxes 3,362 9,726 Income tax expense (Note 10) (7,773) (2,799) Net (loss) earnings $ (4,411) $ 6,927 Net (loss) earnings attributable to: Shareholders of Capstone Mining Corp. $ (4,104) $ 7,330 Non-controlling interest (307) (403) $ (4,411) $ 6,927 (Loss) earnings per share - basic (Note 13) $ (0.01) $ 0.02 Weighted average number of shares - basic 380,483,867 380,073,773 (Loss) earnings per share - diluted (Note 13) $ (0.01) $ 0.02 Weighted average number of shares - diluted 380,483,867 381,549,217 See accompanying notes to these condensed interim consolidated financial statements. 3
Capstone Mining Corp. Condensed Interim Consolidated Statements of Comprehensive (Loss) Income Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars) 2014 2013 Net (loss) earnings $ (4,411) $ 6,927 Other comprehensive loss Items that may be reclassified subsequently to profit or loss Change in fair value of available-for-sale securities, net of tax loss of $0 (2013 loss - $6) (136) (188) Earnings reclassified to net earnings on realization, net of tax of $1 (2013 - $nil) (51) - Foreign currency translation adjustment (9,836) (15,058) Total items that may be reclassified subsequently to profit or loss (10,023) (15,246) Total other comprehensive loss for the period (10,023) (15,246) Total comprehensive loss $ (14,434) $ (8,319) Total comprehensive loss attributable to: Shareholders of Capstone Mining Corp. $ (14,127) $ (7,916) Non-controlling interest (307) (403) $ (14,434) $ (8,319) See accompanying notes to these condensed interim consolidated financial statements. 4
Capstone Mining Corp. Condensed Interim Consolidated Statements of Cash Flows Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars) 2014 2013 Cash provided by (used in): Operating activities Net (loss) earnings $ (4,411) $ 6,927 Adjustments for: Amortization of deferred revenue (2,336) (2,778) Inventory write-down (Note 5) 9,996 210 Depletion and amortization 39,662 14,137 Share-based compensation (Note 11) 1,778 2,303 Shares issued for compensation (Note 11) - 99 Unrealized loss (gain) foreign exchange 285 (442) Gain on disposal of available-for-sale securities (288) - Loss on disposal of mineral properties, plant and equipment 15 3 Net finance costs 2,935 78 Current income tax expense 8,356 5,745 Deferred income tax recovery (583) (2,946) Interest received 26 944 Interest paid (2,089) (97) Income taxes paid (6,205) (4,036) Payments on reclamation and closure cost obligations (10) (41) Changes in non-cash working capital (Note 14) (4,046) 719 43,085 20,825 Investing activities Mineral properties, plant and equipment additions (17,459) (23,277) Purchase of Pinto Valley net assets (Note 3) (6,679) - Proceeds on disposal of mineral properties, plant and equipment 31 - Proceeds from sale of available-for-sale securities 9,503 - Other assets - 25 (14,604) (23,252) Financing activities Repayment of KORES promissory note (Note 7) 2,100 2,179 Repayment of finance lease obligations (246) - Proceeds from issuance of share capital (Note 11) 2,199 - Shares repurchased and cancelled (Note 11) - (5,746) Financing fees (Note 9) (182) (302) 3,871 (3,869) Effect of exchange rate changes on cash and cash equivalents (661) (8,171) Increase (decrease) in cash and cash equivalents 31,691 (14,467) Cash and cash equivalents - beginning of period (includes $231 classified as held for sale at December 31, 2013) 104,227 499,890 Cash and cash equivalents - end of period (includes $174 classified as held for sale at March 31, 2014) $ 135,918 $ 485,423 Supplemental cash flow information (Note 14) See accompanying notes to these condensed interim consolidated financial statements. 5
Capstone Mining Corp. Condensed Interim Consolidated Statements of Changes in Equity (unaudited) (expressed in thousands of US dollars, except share amounts) Number of shares Attributable to equity holders of the Company Reserve for equity settled Investment Foreign currency share based transactions revaluation reserve translation reserve Retained earnings Non-controlling interest Share capital Total Total equity December 31, 2013 (Recast - Note 3) 379,863,523 $ 818,519 $ 45,536 $ (1,309) $ (17,467) $ 245,464 $ 1,090,743 $ 218,919 $ 1,309,662 Exercise of options 1,109,158 3,691 (1,492) - - - 2,199-2,199 Share-based compensation (Note 11) - - 1,778 - - - 1,778-1,778 Change in fair value of available-for-sale securities - - - (136) - - (136) - (136) Reversal of fair value on disposal of available-for-sale securities - - - (51) - - (51) - (51) Net loss - - - - - (4,104) (4,104) (307) (4,411) Foreign currency translation - - - - (9,836) - (9,836) - (9,836) March 31, 2014 380,972,681 $ 822,210 $ 45,822 $ (1,496) $ (27,303) $ 241,360 $ 1,080,593 $ 218,612 $ 1,299,205 December 31, 2012 381,507,382 $ 826,953 $ 41,900 $ (559) $ 4,984 $ 254,660 $ 1,127,938 $ 230,420 $ 1,358,358 Share-based compensation (Note 11) - - 2,303 - - - 2,303-2,303 Shares issued for compensation (Note 11) 40,213 99 - - - - 99-99 Change in fair value of available-for-sale securities - - - (188) - - (188) - (188) Shares repurchased and cancelled (2,263,100) (4,958) - - - (788) (5,746) - (5,746) Net earnings (loss) - - - - - 7,330 7,330 (403) 6,927 Foreign currency translation - - - - (14,996) - (14,996) - (14,996) March 31, 2013 379,284,495 $ 822,094 $ 44,203 $ (747) $ (10,012) $ 261,202 $ 1,116,740 $ 230,017 $ 1,346,757 See accompanying notes to these condensed interim consolidated financial statements. 6
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) 1. Nature of operations Capstone Mining Corp. ( Capstone or the Company ), a Canadian mining company publicly listed on the Toronto Stock Exchange, is engaged in the exploration for and production of base and precious metals in Canada, United States of America ( US ), Mexico, Chile, and Australia. Minto Explorations Ltd. ( Minto ), a wholly owned Canadian subsidiary, owns and operates the copper Minto Mine located in Yukon Territory, Canada. Pinto Valley Mining Corp. ( Pinto Valley ), a wholly owned US subsidiary, owns and operates the copper Pinto Valley Mine located in Arizona, US. Capstone Gold, S.A. de C.V. ( Capstone Gold ), a wholly owned Mexican subsidiary, owns and operates the copper-silver Cozamin Mine located in Zacatecas, Mexico. Capstone Exploraciones, S. A. de C. V., a wholly owned Mexican subsidiary, is performing exploration for base metal deposits in Mexico. 0840559 B.C. Ltd., a wholly owned Canadian subsidiary, is performing exploration for base metal deposits in Canada. Capstone Mining Chile SpA, a wholly owned Chilean subsidiary, is performing exploration for base metal deposits in Chile. 0908113 B.C. Ltd. ( Acquisition Co. ) is a 70% owned subsidiary of Capstone and 30% owned by Korea Resources Corp. ( KORES ). Through Acquisition Co. s wholly-owned Canadian subsidiary, Far West Mining Ltd. ( Far West ), the Company is engaged in the exploration for and production of base and precious metals in Chile and Australia. Minera Santo Domingo SCM ( Santo Domingo ), a 70% owned Chilean subsidiary, is advancing the Santo Domingo copper-iron-gold project in Chile towards a production decision. Kutcho Copper Corp. ( Kutcho Copper ), a wholly owned Canadian subsidiary, is advancing the Kutcho copper-zinc project in British Columbia, Canada towards a production decision. Far West Exploration S.A., a 70% owned Chilean subsidiary, holds active exploration properties in Chile. Far West Mining Pty Ltd. ( Far West Australia ), a 70% owned Australian subsidiary, holds active exploration properties in Australia. The head office, registered and records office and principal address of the Company are located at 999 West Hastings Street, Vancouver, British Columbia, Canada and the Company is incorporated in British Columbia. These financial statements were approved by the Board of Directors and authorized for issuance on May 7, 2014. 2. Significant accounting policies a) Basis of preparation and consolidation These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting using the same accounting policies and methods of application as the audited annual consolidated financial statements of the Company for the year ended December 31, 2013 which were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ( IFRS ). Accordingly, certain information and footnote disclosure normally included in annual financial statements have been omitted or condensed. 7
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended December 31, 2013. The following standards were applied effective January 1, 2014 and had no significant effect on the Company s financial performance and disclosures: Amendments to IAS 32, Financial Instruments: Presentationclarifies the application of the offsetting rules and requires additional disclosure on financial instruments subject to netting arrangements. IAS 36, Impairment of Assets modifies some of the disclosure requirements regarding the recoverable amount of non-financial assets. IFRIC 21, Levies provides guidance on when to recognize a liability for a levy imposed by a government, other than those levies within the scope of other standards. b) Translation of foreign currencies The functional currency of the Company and each of its subsidiaries is as follows: Name Functional currency Capstone US dollar Pinto Valley US dollar Minto Canadian dollar Capstone Gold US dollar SMARRCO US dollar Capstone US Mining Corp. US dollar Capstone Services S.A. de C.V. US dollar Capstone Mining S.A. de C.V. US dollar Capstone Exploraciones, S. A. de C. V. US dollar Kutcho Copper Canadian dollar 0840559 B.C. Ltd. Canadian dollar Capstone PV Mining Corp. US dollar Capstone Mexico Mining Corp. Canadian dollar Capstone Finance Ltd. US dollar Capstone Luembourg Finance Sarl US dollar Capstone Mining Chile SpA US dollar Acquisition Co. US dollar Far West US dollar Santo Domingo US dollar Far West Exploration S.A. US dollar Far West Australia Australian dollar The presentation currency of the Company is the US dollar. Financial statements of subsidiaries are maintained in their functional currencies and converted to US dollars for consolidation of the Company s results. The functional currency of each entity is determined after consideration of the primary economic environment of the entity. 8
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Transactions denominated in foreign currencies (currencies other than the functional currency of an operation) are translated at the exchange rates on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at reporting date exchange rates and any gain or loss on translation is recorded in the statement of earnings as a foreign exchange gain (loss). On translation of entities with functional currencies other than the US dollar, statement of earnings items are translated at average rates of exchange where this is a reasonable approximation of the exchange rate at the dates of the transactions. Balance sheet items are translated at closing exchange rates as at the reporting date. Exchange differences on the re-translation of the foreign currency entities at closing rates, together with differences between statement of earnings translated at average and closing rates, are recorded in the foreign currency translation reserve in equity. Prior to January 1, 2014, the Company considered the functional currency of Acquisition Co., and Far West to be the Canadian ( C ) dollar. The change in the denomination to US dollar of the KORES and Capstone promissory notes effective January 1, 2014 (Note 7) has increased Acquisition Co. s and Far West s exposure to the US dollar considering: Repayments of the promissory notes are now demandable in US dollars; Their cash inflows and outflows are now predominantly in US dollars; and, Cost associated with the Santo Domingo project are predominantly in US dollars. Consequently, effective January 1, 2014, the US dollar was adopted as Acquisition Co. s and Far West s functional currency on a prospective basis. 3. Purchase of Pinto Valley On October 11, 2013, the Company completed an acquisition to acquire a 100% interest in the Pinto Valley copper mining operation and the associated San Manuel Arizona Railroad Company (collectively, the Acquired Business or the Pinto Valley Mining Operation ) from BHP Copper Inc., a subsidiary of BHP Billiton Ltd. (collectively BHP ) for total consideration of $650 million, plus a working capital adjustment of $2.6 million. Purchase Consideration: The purchase price was paid in cash from Capstone s $200 million Senior Secured Revolving Credit Facility ( SSRCF ) ($88 million was borrowed) and $200 million from the Senior Secured Reducing Revolving Credit Facility ( SSRRCF ) ($200 million was borrowed), with the remainder funded from cash on hand. In addition, $87.2 million of credit under the SSRCF was used to support two letters of credit related to reclamation obligations assumed in the acquisition (Note 9). The purchase agreement stipulated that there would be an adjustment of the purchase price based on the working capital of the Pinto Valley mining operation as at the acquisition date. The purchase price was adjusted upward by the excess of the working capital at the acquisition date over an agreed amount. 9
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) The purchase price has been allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. Fair values were determined based on third party appraisals, discounted cash flow models, and quoted market prices, as deemed appropriate. The acquisition is a business combination and has been accounted for in accordance with the measurement and recognition provisions of IFRS 3, Business Combinations. IFRS 3 requires that the purchase consideration be allocated to the assets acquired and liabilities assumed in a business combination based upon their estimated fair values at the date of acquisition. The following tables summarize the preliminary consideration and purchase price allocation reported in the Company s 2013 year-end financial statements and the updated consideration and purchase price allocation, with the applicable recast adjustments made upon adjustment of the purchase consideration relating to working capital during the first quarter of 2014. The recast figures capture a net adjustment of $2.7 million of which $3.5 million was allocated to concentrate inventories and $0.7 million to liabilities. The $3.5 million allocated to inventory was subsequently recognized in production costs in the statement of earnings as all the concentrate inventories acquired were sold in the year ended December 31, 2013. Purchase consideration Preliminary Adjustments Recast Base price $ 650,000 $ - $ 650,000 Working capital adjustment (121) 2,744 2,623 Consideration $ 649,879 $ 2,744 $ 652,623 Purchase price allocation: Receivables $ 217 $ - $ 217 Inventories 65,008 3,457 68,465 Mineral properties, plant and equipment Mineral properties 423,869-423,869 Property, plant and equipment 268,215-268,215 Accounts payable and accrued liabilities (35,195) 3,366 (31,829) Provisions: Post-retirement employee benefits (5,660) - (5,660) Other employee liabilities - (4,079) (4,079) Reclamation and rehabilitation (66,575) - (66,575) Net Identifiable assets acquired $ 649,879 $ 2,744 $ 652,623 The following table summarizes the Company s recast and previously reported December 31, 2013 consolidated balance sheets: December 31, December 31, 2013 (Recast) 2013 (1) Liabilities and Equity Accounts payable and accrued liabilities $ 75,166 $ 71,708 Other liabilities 2,779 3,418 Deferred income tax liabilities 49,007 49,345 Retained earnings 245,464 247,945 (1) As previously presented in the consolidated financial statements for the year ended December 31, 2013. 10
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) The following table summarize the Company s recast and previously reported year ended December 31, 2013 consolidated income statements: 2013 (Recast) 2013 (1) Revenue $ 332,050 $ 332,050 Operating costs Production costs (203,729) (200,271) Royalties (6,759) (6,759) Depletion and amortization (67,858) (67,858) Earnings from mining operations $ 53,704 $ 57,162 (Loss) earnings from operations (2,844) 614 Earnings before finance costs and income taxes 6,188 9,646 Earnings before income taxes $ 2,735 $ 6,193 Current income and mining tax expense (18,593) (19,232) Deferred income tax recovery 3,998 3,660 Net loss $ (11,860) $ (9,379) Net loss attributable to: Shareholders of Capstone Mining Corp. $ (10,923) $ (8,442) Non-controlling interest (937) (937) $ (11,860) $ (9,379) Loss per share Basic and diluted $ (0.03) $ (0.02) (1) As previously presented in the consolidated financial statements for the year ended December 31, 2013. As at March 31, 2014, the allocation of the purchase consideration has not been finalized. The Company is currently in the process of determining the fair values of identifiable assets acquired and liabilities assumed. Management anticipates that the allocation of the purchase consideration will be finalized during the fourth quarter of 2014 4. Financial instruments At March 31, 2014 the levels in the fair value hierarchy into which the Company s financial assets and liabilities are measured and recognized on the Consolidated Balance Sheets at fair value on a recurring basis are categorized as follows: Level 1 Level 2 Level 3 Total Cash (includes $174 classirifed as held for sale - Note 8) $ 135,918 $ - $ - $ 135,918 Concentrate receivables - 8,580-8,580 Promissory note receivable (Note 7) - 52,530-52,530 Available-for-sale securities (included in other assets in the Condensed Interim Consolidated Balance Sheet) 678 - - 678 $ 678 $ 61,110 $ - $ 61,788 11
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) At March 31, 2014, there were no financial assets and liabilities measured and recognized at fair value on a non-recurring basis. The Company s policy for determining when a transfer occurs between levels in the fair value hierarchy is to assess the impact at the date of the event or the change in circumstances that could result in a transfer. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2014. Valuation methodologies for Level 2 financial assets accounts receivable arising from sales of metals concentrates The Company s metal concentrate sales contracts are subject to provisional pricing with the selling price adjusted at the end of the quotational period. At each reporting date, the Company s accounts receivable on these contracts are marked-to-market based on a quoted forward price for which there exists an active commodity market. There has been no changes in the three months ended March 31, 2014 as to how the Company categorizes its financial assets and liabilities by fair-value through profit or loss, available-for-sale, loans and receivables, and other financial liabilities. Fair value of financial assets and liabilities not already measured and recognized at fair value on the Condensed Interim Consolidated Balance Sheets At March 31, 2014, the carrying amounts of accounts receivable not arising from sales of metal concentrates, accounts payable and accrued liabilities, and other assets and liabilities are considered to be reasonable approximations of their fair values due to the short-term nature of these instruments. The carrying value of the promissory note receivable approximates its fair value due to its demand nature. The fair value of the Company s loan facilities is $313 million. Financial instruments and related risks The Company s activities expose it to financial risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks to which the Company is exposed are commodity price risk, credit risk, foreign exchange risk, liquidity risk, and interest rate risk. The Board of Directors has overall responsibility for the establishment and oversight of the Company s risk management framework and reviews the Company s policies on an ongoing basis. There have been no significant changes in the Company s exposure to these financial risks in the three months ended March 31, 2014. 5. Inventories Details are as follows: March 31, 2014 December 31, 2013 Consumable parts and supplies $ 43,657 $ 40,625 Ore stockpiles 17,060 32,260 Concentrates 65,387 65,347 Cathode 2,065 4,497 Total inventories $ 128,169 $ 142,729 12
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) During the three months ended March 31, 2014, concentrate and cathode inventories recognized as production costs amounted to $92.7 million (2013 $28.4 million). During the three months ended March 31, 2014, the Company recorded a non-cash charge of $10.0 million (2013 - $0.2 million) in cost of sales related to the write-down of Minto s ore stockpile inventories to net realizable value. 6. Mineral properties, plant and equipment Details are as follows: Mineral properties Depletable Non-depletable Producing mineral properties Deferred stripping At December 31, 2013 $ 531,625 10,875 Plant and equipment Subject to amortization Mineral exploration and Mill development development Plant & properties costs equipment $ $ 6,132 335,386 Facilitites & equipment under finance Construction leases in progress Total $ $ 44,466 $ 1,497,345 $ 560,116 $ 8,745 Additions - - 4,420-186 - 11,217 15,823 Disposals - - - - (48) - - (48) Rehabilitation provision adjustments - - - - (49) - - (49) Reclassifications 8,391 - (8,470) - 2,845 - (2,766) - Reclassified as held for sale - - (46) - - - - (46) Depletion and amortization (11,888) (10,481) - (305) (9,675) (927) - (33,276) Foreign currency translation (758) (394) (1,486) (67) (1,760) (330) (1,298) (6,093) At March 31, 2014 $ 527,370 $ - $ 554,534 $ 5,760 $ 326,885 $ 7,488 $ 51,619 $ 1,473,656 At December 31, 2013: Cost $ 629,684 $ 81,564 $ 560,116 $ 17,701 $ 423,511 $ 29,121 $ 44,466 $ 1,786,163 Accumulated depletion and amortization (98,059) (70,689) - (11,569) (88,125) (20,376) - (288,818) Net carrying amount $ 531,625 $ 10,875 $ 560,116 $ 6,132 $ 335,386 $ 8,745 $ 44,466 $ 1,497,345 At March 31, 2014: Cost $ 636,553 $ 78,473 $ 554,534 $ 17,358 $ 421,946 $ 28,017 $ 51,619 $ 1,788,500 Accumulated depletion and amortization (109,183) (78,473) - (11,598) (95,061) (20,529) - (314,844) Net carrying amount $ 527,370 $ - $ 554,534 $ 5,760 $ 326,885 $ 7,488 $ 51,619 $ 1,473,656 The Company s exploration costs incurred during the period were as follows: Three months ended March 31, 2014 March 31, 2013 Exploration capitalized to mineral properties $ 3,128 $ 5,968 Exploration expensed to the statement of (loss) earnings 1,094 659 Total exploration costs $ 4,222 $ 6,627 At March 31, 2014, construction in progress relates to capital costs incurred in connection with sustaining capital at Pinto Valley, Cozamin and Minto Mine. 13
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) As at March 31, 2014, bank borrowings (Note 9) were secured on mineral properties, plant and equipment with a net carrying value of $1,020.0 million (December 31, 2013 $1,045.3 million). 7. KORES promissory note Details of changes in the balance of the promissory note receivable are as follows: Balance, December 31, 2013 $ 54,630 Repayment of KORES promissory note (2,100) Balance, March 31, 2014 $ 52,530 March 31, 2014 December 31, 2013 KORES promissory note $ 52,530 $ 54,630 Less: current portion (10,081) (10,067) Long-term portion $ 42,449 $ 44,563 The current portion of the promissory note represents management s best estimate of the portion of the note that will be repaid by March 31, 2015. Effective January 1, 2014, the denomination of the outstanding balance of the promissory note as of that date was changed from Canadian dollars to US dollars. Under the terms of the shareholders agreement between Capstone and KORES, it is acknowledged that cash calls will be funded to the extent possible, first by way of repayment of the promissory note. Since September 2011, KORES has funded cash calls totaling $21.5 million, reducing its outstanding balance on the promissory note to $52.5 million as at March 31, 2014. 8. Held for sale assets Following the acquisition of Pinto Valley, the Company announced that its Kutcho project was no longer of the size and scope required internally to warrant further development. As such, management developed and initiated a formal plan to dispose of the asset. Concurrent with that decision, management performed a market assessment of fair value less cost to sell, determining that there was no impairment of the asset. The Kutcho project is included in the Other operating segment in the Segmented Information - Note 15. 14
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) The major classes of assets and liabilities of the Kutcho project are as follows: March 31, 2014 December 31, 2013 Cash $ 174 $ 231 Receivables 3 18 Mineral properties 60,112 62,325 Assets classified as held for sale $ 60,289 $ 62,574 Accounts payable and accrued liabilites $ 65 $ 76 Deferred income tax liabilities 418 437 Reclamation and closure cost obligations (included in other long term liabilities) 45 47 Total liabilities associated with assets classified as held for sale $ 528 $ 560 Net assets classified as held for sale $ 59,761 $ 62,014 9. Long term debt Details are as follows: March 31, 2014 December 31, 2013 Long term debt 312,814 312,814 Financing fees (4,096) (4,116) Total long term debt $ 308,718 $ 308,698 Less: current portion (88,889) (66,667) Long term portion $ 219,829 $ 242,031 Bank of Nova Scotia loan facility In October 2013, the Company amended and restated its $200 million senior secured corporate revolving term facility ( SSRCF ) with The Bank of Nova Scotia, Bank of Montreal ( BMO ), HSBC Bank Canada ( HSBC ), and Wells Fargo Bank, N.A., by adding a new $200 million senior secured reducing revolving corporate credit facility ( SSRRCF ). Lenders in the new SSRRCF include The Bank of Nova Scotia, Canadian Imperial Bank of Commerce, BMO, HSBC, Wells Fargo, Citibank N. A., JP Morgan Chase Bank N. A., Mizuho Corporate Bank Ltd., and Export Development Canada. The SSRCF was renewed for four years with a maturity date of October 4, 2017, while the SSRRCF has a two and a half year term, with reduction of the credit limit on the SSRRCF commencing after six months in equal amounts of $22.2 million. Both the SSRCF and the SSRRCF carry an interest rate of US LIBOR plus 2.50% (adjustable in certain circumstances) and a standby fee of 0.56% on the undrawn balance of the facility. 15
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Details of the reducing limit for the SSRRCF facility are as follows: Date SSRRCF Limit October 4, 2013 $ 200,000 April 4, 2014 177,778 July 4, 2014 155,556 October 4, 2014 133,333 January 4, 2015 111,111 April 4, 2015 88,889 July 4, 2015 66,667 October 4, 2015 44,444 January 4, 2016 22,222 April 4, 2016 - In 2014, the Company incurred $0.2 million (2013 - $0.3 million) of fees associated with the amended SSRCF and the new SSRRCF, which are being amortized to the statement of earnings over the respective terms of the facilities. During the first quarter of 2014, a total of $0.2 million (2013 $0.1 million ) was amortized and recorded in other interest expense. Both the SSRCF and SSRRCF are secured against the present and future real and personal property, assets and undertakings of Capstone (excluding certain assets, which include Acquisition Co., Far West, Santo Domingo, Far West Exploration S.A. and Far West Australia and subject to certain exclusions for Capstone Mining Chile SpA and Capstone Exploraciones, S. A. de C. V.). The credit facility requires certain financial ratios relating to debt and interest coverage. Failure to meet these covenants would result in a default under the facilities. Capstone is in compliance with these covenants as at March 31, 2014. In October 2013, the Company drew $288.0 million in connection with the purchase of Pinto Valley (Note 3), with an additional $87.2 million of credit used to support two Letters of Credit related to the reclamation obligations of Pinto Valley. Additionally, in October 2013, the Company arranged for Zurich Insurance Company Ltd. to issue a Surety Bond of $2.3 million as collateral for the purchase of power for the Pinto Valley Mine. In December 2013, a Letter of Credit for C$23.9 million drawn against the SSRCF was replaced with a Surety Bond issued by Zurich Insurance Company Ltd. The Surety Bond is in favour of the Yukon Territory Government and relates to the reclamation obligations of the Minto Mine. Following the release of this credit from the SSRCF, the Company drew down the remaining balance of $24.8 million in cash for working capital purposes. On April 4, 2014, the Company repaid $22.2 million on the SSRRCF, reducing the total long term debt balance to $290.6 million. 16
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) 10. Income taxes Income tax expense differs from the amount that would result from applying the Canadian federal and provincial income tax rates to earnings before income taxes. These differences result from the following items: Three months ended March 31, 2014 March 31, 2013 Earnings before income taxes $ 3,362 $ 9,726 Expected income tax rates 26.00% 25.75% Income tax expense based on the above rates 874 2,504 Increase (decrease) due to: Non-deductible expenditures 744 662 Effects of different foreign statutory tax rates on earnings of subsidiaries 496 521 Mexican mining royalty tax 792 - Impact of impairment on inventories 2,600 52 Change in unrecognized deferred tax assets 3,276 159 Foreign exchange and other translation adjustments 170 (537) Other (1,179) (562) Income tax expense $ 7,773 $ 2,799 Current income and mining tax expense $ (8,356) $ (5,745) Deferred income tax recovery 583 2,946 Income tax expense $ (7,773) $ (2,799) 11. Share capital Authorized An unlimited number of common voting shares without par value. Share issuances During the three months ended March 31, 2014, a total of 1,109,158 (2013 nil) common shares of the Company were issued upon the exercise of options at prices between C$0.67 and C$2.99 (2013 - nil) per option for total cash proceeds of $2.2 million (2013 nil). As a result of these exercises, $1.5 million (2013 nil) was transferred from reserve for equity settled share based transactions to share capital. During the three months ended March 31, 2014, there were no common shares of the Company issued for compensation. During the three months ended March 31, 2013 there were a total of 40,213 common shares of the Company were issued for compensation at an average price C$2.48 per share for total deemed consideration of $0.1 million. 17
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Normal course issuer bid During the three months ended March 31, 2013 the Company purchased 2,263,100 (2012 nil) common shares in the open market for a total consideration of $5.7 million (2012 nil). The Company returned to treasury and cancelled the common shares allocating $5.0 million (2012 nil) to share capital and $0.7 million (2012 nil) to retained earnings. Capstone s NCIB was suspended in April 2013 and expired in December 2013. The Company does not currently intend to renew the program. Stock options Pursuant to the Company s stock option plan approved by the shareholders on March 16, 2011, directors may, from time to time, authorize the granting of options to directors, officers, employees and consultants of the Company to a maximum of 10% of the issued and outstanding common shares at the time of grant, with a maximum of 5% of the Company s issued and outstanding shares reserved for any one person on a yearly basis. Options granted under the plan have a term not to exceed 5 years and vesting periods that range from zero to 2 years. The continuity of stock options issued and outstanding is as follows: Weighted average Options outstanding exercise price (C$) Outstanding, December 31, 2013 20,380,735 $ 2.81 Granted 3,371,489 2.88 Exercised (1,109,158) 2.17 Expired (100,076) 3.72 Forfeited (68,858) 2.62 Outstanding, March 31, 2014 22,474,132 $ 2.85 As at March 31, 2014, the following options were outstanding: Exercise prices (C$) Number of options Weighted average exercise price (C$) Weighted average remaining life (years) $0.67 66,175 $ 0.67 4.8 $1.30 - $1.90 1,983,547 1.63 2.7 $2.13 - $2.99 16,859,410 2.68 3.4 $3.00 - $3.88 455,000 3.31 2.3 $4.34 - $4.48 3,110,000 4.47 1.8 22,474,132 $ 2.85 3.1 18
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) As at March 31, 2014, the following options were both outstanding and exercisable: Exercise prices (C$) Number of options Weighted average exercise price (C$) Weighted average remaining life (years) $0.67 66,175 $ 0.67 4.8 $1.30 - $1.90 1,816,178 1.61 2.5 $2.13 - $2.99 12,796,244 2.70 3.1 $3.00 - $3.88 455,000 3.31 2.3 $4.34 - $4.48 3,110,000 4.47 1.8 18,243,597 $ 2.90 2.8 The Company uses the fair value method of accounting for all share-based payments to directors, officers, employees and consultants. The portion of share-based compensation recorded is based on the vesting schedule of the options. During the three months ended March 31, 2014, the total fair value of options granted was $3.5 million (2013 $4.5 million) and had a weighted average grant-date fair value of C$1.16 (2013 C$1.05) per option. The fair values of the stock options granted were estimated on the respective grant dates using the Black-Scholes option pricing model. Volatility was determined using daily volatility over the expected life of the options. Weighted average assumptions used in calculating the fair value of options granted during the period were as follows: Three months ended March 31, 2014 March 31, 2013 Risk-free interest rate 1.34% 1.26% Expected dividend yield nil nil Expected share price volatility 51% 57% Expected forfeiture rate 4.62% 4.72% Expected life 4.0 years 4.3 years Option pricing models require the input of subjective assumptions including the expected price volatility. Changes in the assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company s stock options. Other share-based compensation plans The Company has other share-based compensation plans in the form of Deferred Share Units ( DSUs ), Restricted Share Units ( RSUs ) and Performance Share Units ( PSUs ). Units granted under these sharebased compensation plans are recorded at fair value on the grant date and are adjusted for changes in fair value each reporting period until settled. The expense, and any changes which arise from fluctuations in the fair value of the grants, is recognized in share-based compensation in the statement of earnings with the corresponding liability recorded on the consolidated balance sheet in other provisions. Deferred Share Units The Company has established a Deferred Share Unit Plan (the DSU Plan ) whereby DSUs are issued to Directors as long term incentive compensation. DSUs issued under the DSU Plan are fully vested upon issuance and entitle the holder to a cash payment only following cessation of service on the Board of 19
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Directors. The value of the DSUs when converted to cash will be equal to the number of DSUs granted multiplied by the quoted market value of a Capstone common share at the time the conversion takes place. Compensation expense related to DSUs is recorded immediately and is adjusted at each reporting period to reflect the change in quoted market value of the Company s common shares. Restricted Share Units and Performance Share Units The Company has established a Share Unit Plan (the Plan ) whereby RSUs and PSUs are issued to Executives as long term incentive compensation. RSUs issued under the Plan entitle the holder to a cash payment at the end of the three-year vesting period equal to the number of RSUs granted, multiplied by the quoted market value of a Capstone common share on the completion of the vesting period. PSUs issued under the Plan entitle the holder to a cash payment at the end of a three-year performance period equal to the number of PSUs granted, adjusted for a performance factor and multiplied by the quoted market value of a Capstone common share on the completion of the performance period. The performance factor can range from 0% to 150% and is determined by comparing the Company s total shareholder return to those achieved by a peer group of companies. Compensation expense related to RSUs and PSUs is recorded over the three-year vesting period. The amount of compensation expense is adjusted at each reporting period to reflect the change in quoted market value of the Company s common shares, the number of RSUs and PSUs expected to vest, and in the case of PSUs, the expected performance factor. The continuity of DSUs, RSUs, and PSUs issued and outstanding is as follows: DSUs RSUs PSUs Outstanding, December 31, 2013 420,348 1,132,866 792,453 Granted 196,176 1,258,690 389,795 Forfeited - (17,828) - Outstanding, March 31, 2014 616,524 2,373,728 1,182,248 During the three months ended March 31, 2014, the total fair value of DSUs, RSUs, and PSUs granted was $4.8 million (2013 $3.6 million) and had a weighted average grant-date fair value of C$2.88 per unit. Share-based compensation The share-based compenstation expense of the period is comprised of: Three months ended March 31, 2014 March 31, 2013 Share-based compensation expense related to stock options $ 1,778 $ 2,303 Share-based compensation expense related DSUs, RSUs, and PSUs 999 659 $ 2,777 $ 2,962 20
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Employee share purchase plan ( ESPP ) The Company has an ESPP which allows certain employees to purchase the Company s shares in the market through payroll deductions. Employees may contribute up to a maximum of 7% of their annual base salary and the Company will match 50% of the employee s contribution. 12. Revenue The Company s revenue breakdown by metal is as follows: Three months ended March 31, 2014 March 31, 2013 Copper $ 175,369 $ 53,046 Zinc 3,605 3,891 Lead 826 718 Gold 2,775 2,917 Silver 4,694 2,883 Total gross revenue 187,269 63,455 Less: treatment and selling costs (26,476) (5,787) Revenue $ 160,793 $ 57,668 Sales from the Company s Pinto Valley and Cozamin Mines are to different customers depending on the finished good (copper, lead or zinc concentrates and copper cathode), whereas sales from Minto Mine are to a single customer as per the off-take agreement. Customer details are as follows: Three months ended March 31, 2014 March 31, 2013 Customer #1 $ 59,768 $ 35,971 Customer #2 43,330 20,966 Customer #3 23,129 - Customer #4 19,593 718 Customer #5 19,325 - Customer #6 19,279 - Other 2,845 5,800 Total gross revenue $ 187,269 $ 63,455 21
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) 13. Earnings per share Earnings per share, calculated on a basic and diluted basis, is as follows: Three months ended March 31, 2014 March 31, 2013 (Loss) earnings per share Basic and diluted $ (0.01) $ 0.02 Net (loss) earnings Net (loss) earnings available to common shareholders - basic and diluted $ (4,411) $ 6,927 Weighted average shares outstanding Weighted average shares outstanding - basic 380,483,867 380,073,773 Dilutive securities Stock options - 1,475,444 Weighted average shares outstanding - diluted 380,483,867 381,549,217 Weighted average shares excluded Stock options 22,474,132 12,677,019 14. Supplemental cash flow information The components of cash and cash equivalents are as follows: March 31, 2014 December 31, 2013 Cash $ 135,744 $ 103,996 Cash classified as held for sale (Note 8) 174 231 Total cash and cash equivalents $ 135,918 $ 104,227 The changes in non-cash working capital items are comprised as follows: Three months ended March 31, 2014 March 31, 2013 Receivables $ 4,469 $ 8,450 Inventories (3,955) (5,947) Other current assets 56 772 Accounts payable and accrued liabilities (4,263) (1,418) Other liabilities (353) (1,138) Net change in non-cash working capital $ (4,046) $ 719 22
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) The significant non-cash financing and investing transactions during the period are as follows: Three months ended March 31, 2014 March 31, 2013 Capitalized mineral properties, plant and equipment expenditures included in accounts payable and accrued liabilities $ 7,489 $ 7,079 Fair value of stock options allocated to share capital upon exercise (Note 11) $ 1,492 $ - Fair value of shares issued for compensaton (Note 11) $ - $ 99 15. Segmented information The Company is engaged in mining, exploration and development of mineral properties, and has operating mines in the US, Mexico and Canada. The Company has five reportable segments as identified by the individual mining operations of Pinto Valley (US), Cozamin (Mexico), and Minto (Canada), as well as the Santo Domingo development project (Chile) and Other. Segments are operations reviewed by the CEO who is considered to be the chief operating decision maker. Operating segment details are as follows: Three months ended March 31, 2014 Santo Pinto Valley Cozamin Minto Domingo Other Total Revenue $ 84,526 $ 35,106 $ 41,161 $ - $ - $ 160,793 Production costs (56,787) (15,840) (29,791) - - (102,418) Royalties - (1,152) (643) - - (1,795) Depletion and amortization (12,227) (4,630) (22,641) - - (39,498) Earnings (loss) from mining operations 15,512 13,484 (11,914) - - 17,082 Exploration expenses - - - (134) (960) (1,094) General and administrative expenses, and share-based compensation (55) (163) - - (9,003) (9,221) Earnings (loss) from operations 15,457 13,321 (11,914) (134) (9,963) 6,767 Other income (expense) 188 (446) (92) (85) (35) (470) Earnings (loss) before finance costs and income taxes 15,645 12,875 (12,006) (219) (9,998) 6,297 Net finance (costs) income (449) (15) (165) - (2,306) (2,935) Earnings (loss) before income taxes 15,196 12,860 (12,171) (219) (12,304) 3,362 Current income and mining tax expense (1,018) (6,688) (577) - (73) (8,356) Deferred income tax (expense) recovery (2,529) 2,260 952 - (100) 583 Net earnings (loss) $ 11,649 $ 8,432 $ (11,796) $ (219) $ (12,477) $ (4,411) Mineral properties, plant & equipment additions (includes $0.1 million in other classified as held for sale - Note 8) $ 1,987 $ 1,793 $ 9,088 $ 2,839 $ 116 $ 15,823 23
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) Three months ended March 31, 2013 Santo Cozamin Minto Domingo Other Total Revenue $ 36,287 $ 21,381 $ - $ - $ 57,668 Production costs (13,424) (15,196) - - (28,620) Royalties (1,249) (449) - - (1,698) Depletion and amortization (5,139) (8,897) - - (14,036) Earnings (loss) from mining operations 16,475 (3,161) - - 13,314 Exploration expenses - - (329) (330) (659) General and administrative expenses, and share-based compensation (162) - (1) (8,813) (8,976) Earnings (loss) from operations 16,313 (3,161) (330) (9,143) 3,679 Other income (expense) 1,064 291 51 4,719 6,125 Earnings (loss) before finance costs and income taxes 17,377 (2,870) (279) (4,424) 9,804 Net finance (costs) income 34 (72) - (40) (78) Earnings (loss) before income taxes 17,411 (2,942) (279) (4,464) 9,726 Current income and mining tax (expense) recovery (5,507) 10 - (248) (5,745) Deferred income tax (expense) recovery 1,613 1,307 95 (69) 2,946 Net earnings (loss) $ 13,517 $ (1,625) $ (184) $ (4,781) $ 6,927 Mineral properties, plant & equipment additions $ 3,069 $ 14,671 $ 3,979 $ 1,245 $ 22,964 24
Capstone Mining Corp. Notes to Condensed Interim Consolidated Financial Statements Three Months Ended March 31, 2014 and 2013 (unaudited) (expressed in thousands of US dollars, except share amounts) As at March 31, 2014 Santo Pinto Valley Cozamin Minto Domingo Other Total Mineral properties, plant and equipment (includes $60.1 million in other classified as held for sale - Note 8) $ 698,557 $ 112,708 $ 147,731 $ 509,649 $ 65,123 $ 1,533,768 Total assets (includes $60.3 million in other classified as held for sale - Note 8) $ 815,289 $ 175,678 $ 226,767 $ 515,562 $ 148,658 $ 1,881,954 Total liabilities (includes $0.5 million in other classified as liabilities associated with assets classified as held for sale - Note 8) $ 139,476 $ 67,860 $ 47,717 $ 2,797 $ 324,186 $ 582,036 As at December 31, 2013 Santo Pinto Valley Cozamin Minto Domingo Other Total Mineral properties, plant and equipment (includes $60.3 million in Other classified as held for sale - Note 8) $ 709,521 $ 115,499 $ 160,394 $ 506,862 $ 67,394 $ 1,559,670 Total assets (includes $62.6 million in Other classified as held for sale - Note 8) $ 823,664 $ 167,979 $ 235,395 $ 514,070 $ 166,375 $ 1,907,483 Total liabilities (recast - Note 3) (includes $0.6 million in Other classified as liabilities associated with assets classified as held for sale - Note 8) $ 151,481 $ 67,831 $ 51,087 $ 3,177 $ 324,245 $ 597,821 25