FINAL TRANSCRIPT. Capstone Mining Corp. Second Quarter Results Conference Call August 1, 2018

Transcription

1 FINAL TRANSCRIPT Capstone Mining Corp. Second Quarter Results Conference Call August 1,

2 CAPSTONE MINING CORP. PARTICIPANTS Cindy Burnett Vice President, Investor Relations and Communications President and Chief Executive Officer Jim Slattery Senior Vice President and Chief Financial Officer Raman Randhawa Vice President, Finance, Financial Planning & Analysis Gregg Bush Senior Vice President and Chief Operating Officer CONFERENCE CALL PARTICIPANTS Canaccord Genuity Analyst Oscar Cabrera CIBC World Markets Analyst Stefan Ioannou Cormark Securities Analyst 2

3 PRESENTATION Cindy Burnett Vice President, Investor Relations and Communications, Capstone Mining Corp. Thank you. I d like to welcome everyone on the call today. The news release announcing Capstone s 2018 second quarter financial results is available on our website along with an updated corporate presentation with summary information on the Company and our financial and operating results. Also on the website are webcast slides to accompany our commentary today. With me today are, Capstone s President and CEO; Jim Slattery, Senior Vice President and Chief Financial Officer; Gregg Bush, Senior Vice President and Chief Operating Officer; and Raman Randhawa, Capstone s Vice President of Finance, Financial Planning & Analysis. 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. Following our brief remarks will be an opportunity for questions. 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. 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 Corp. Thank you, Cindy, and good morning, everybody, and welcome to our Q2 conference call. Jim and Raman will start off by reviewing our financial performance, followed by Gregg, who will give you an update on operations, and then it ll be back to me, and I ll summarize and answer your questions. So, Jim and Raman, over to you. Jim Slattery Senior Vice President and Chief Financial Officer, Capstone Mining Corp. Thank you, Darren. As Cindy indicated, joining us on this call is Raman Randhawa. Raman joined us in April of this year as Vice President of Finance, Financial Planning & Analysis, with a view to becoming the CFO when I retire from Capstone at the end of this year. This is all part of an orderly succession plan for my position that started in early Direct responsibility for the financial reporting, the treasury and corporate finance, and financial planning and analysis functions has already been transitioned to Raman, with the rest to follow later this year. Raman has extensive financial experience and operational background, with maturity of larger companies, as he joins us from Goldcorp. This is all exactly what the Company needs as it continues to focus on optimizing its existing operations and on future growth. So, with that brief introduction, I will turn the call over to Raman for his comments on our financial performance for this past quarter. 3

4 Raman Randhawa Vice President, Finance, Financial Planning & Analysis, Capstone Mining Corp. Thank you, Jim. I m very excited to have joined Capstone and look forward to working with the team to, first off, optimize the existing operations; in particular lowering the cost per pound at Pinto Valley, whilst at the same time growing the Company to capitalize on the expected copper bull market. Turning to Q2. Q2 saw improved consolidated copper production of 16,900 tonnes, at C1 cash cost of $1.84 a pound. We saw strong realized copper prices of $3.15 a pound for the second quarter, which generated $28.8 million of operating cash flow or $0.07 per share, and $61.6 million or $0.16 per share for the year to date of operating cash flow. This was an increase of 600 percent compared to Q2 2017, and 130 percent compared to year to date With higher grades expected in the second half of the year at Pinto Valley, we are comfortable with our consolidated production and C1 guidance of $1.75 to $1.85 per pound. We expect Pinto Valley costs to be slightly higher due to maintenance costs to date, offset by lower production cost and higher by-product revenue at Cozamin. We are laser-focused on cost and efficiency optimization at Pinto Valley, which will provide for significant leverage to copper prices. With that, I ll turn the call over to Gregg for further operational details. Gregg Bush Senior Vice President and Chief Operating Officer, Capstone Mining Corp. Thanks, Raman. So first going to Pinto Valley operations. As expected, higher grade and recoveries supported higher copper production in the quarter. These grades will continue and slightly increase in the second half of the year. And the copper recovery issues that we experienced in the first quarter have been resolved, leaving Pinto Valley on track to meet our production guidance for the year. Mill throughput at Pinto Valley continued below our expectations. And as indicated in the last call, these issues are related to our maintenance program and not to the age of the facility. A number of significant developments at Pinto Valley during the quarter will contribute to improved throughput and lower cost for the remainder of the year. First of these, we have completed a series of management changes at Pinto Valley and are now confident that we have a team in place with the necessary focus on operations and maintenance improvements that we will need to carry the operation forward. Also, we successfully negotiated a new four-year collective bargaining agreement that took effect on June 1. This new agreement removes a number of barriers that were preventing us from attracting skilled tradesmen into the organization and remove antiquated work practices that elevated our costs, and which severely limited the Company s ability to manage the workforce. We have also initiated an asset reliability program aimed primarily at the plant, reducing planned and unplanned down time and drastically reducing their use of contract labour in electrical and mechanical maintenance activities. We expect the benefits to be apparent in the third quarter and continuing to ramp up in the fourth quarter. Therefore, our guidance reflects the ramp-up time for these project improvements and partially reflects spending cuts anticipated as a result of these improvements. Turning now to Cozamin. Development ore from the San Rafael zone started to hit the mill in the quarter. Copper and zinc recoveries were as expected for the zinc component of the 4

5 ore in the blend. We also released our updated Mala Noche Footwall Zone resource during the quarter, and we re targeting an updated reserve for Cozamin before year-end which will incorporate the additional resource in the Footwall Zone and the San Rafael zinc zone. As part of this work, we re evaluating materials handling upgrades that will capitalize on increased resources to reduce mining cost and increase our production moving forward. Exploration activities are also continuing in the Footwall Zone, and we re continuing to meet with success both along strike and up dip in the footwall structure. So, I ll now turn the call back over to Darren. Thanks, Gregg, Raman, and Jim. So again, to reiterate, overall copper production for the quarter came in as planned and a number of key activities took place within the quarter. Most notably at Pinto Valley, including identification of all the optimization opportunities in the mill around maintenance, so we re now in the implementation phase as Gregg mentioned. Over Q3 and Q4, we should see an increase in throughput and better maintenance practices now that we ve got the project defined and starting to implement it. The renegotiation of the collective bargaining agreement, the new four-year agreement. I can t emphasize enough how much more flexibility we have to manage our workforce. What that really translates into is allowing us a much lower reliance on outside, more expensive contractors. We ll start to see immediate benefits from that, starting obviously in this quarter and over the next four years, as we have that agreement in place. So we re very excited about that. Recoveries and grade also increased over the first quarter, as we guided and communicated to you. And as Gregg mentioned, we expect those grades to be slightly higher in the second half over what we re seeing currently in this quarter, and recoveries are back on track. At Cozamin, we re very excited there. Actually, the most excited we ve ever been since having the property. You saw in the quarter we announced an updated resource estimate, but that obviously will turn into additional reserves later this year. And then obviously, since that resource update, we continued to drill and we re continuing to have very significant exploration success, both up dip and along strike. So there ll be additional resource and reserve updates and additional exploration drilling continued throughout this year. And we re seeing the system actually get wider and higher grade, as those resources that we announced indicate. So very excited. And all of that, of course, leads into a materials handling study that hopefully will allow us more underground ore to come through the mill that we re currently not filling. As you know, we re running about 2,300 tonnes to 2,400 tonnes a day through that mill, and it has the capacity to up to, say, 3,700 tonnes a day. So, more copper without any real additional capital, other than what it would cost us to get more out from underground. Some milestones. Again, over the balance of this year, we should see some cost savings come through, both through the optimization and through the new CBA at Pinto Valley. Grade will increase over the year. And so we do expect to meet the production target for the year with what we know today. At Cozamin, I mentioned there ll be a reserve update coming over the balance of this year. Potential mine expansion and materials handling study will get delivered as part of this reserve update, and the goal there is obviously to reduce cost and increase production. Also happy that we ve been able to get that San Rafael zinc zone completely developed, and as Gregg 5

6 mentioned, in Q1, we started to see some development ore. In Q2, we re getting the actual higher grade production of the zinc, and we will continue to see that ramp up through the balance of this year. And, obviously, that will contribute more by-product credits to our cost profile at Cozamin. At Santo Domingo, we are on track to deliver the updated feasibility study by year-end. I think I mentioned this on the call previously, but we have received the mining permit, the first of the four permits we need to start to develop the project. We expect the remaining three permits to come in throughout 2018; and certainly by the end of 2019, we expect to have all the permits in hand. So the plan there would be to get this feasibility study completed, understand the updated capital numbers, and then align our ownership structure with what s comfortable for us to finance with the balance sheet that we have at Capstone at this time. At Minto, the transaction is now expected to close sometime in the third quarter. Obviously, these current market conditions have put a halt on equity financing for the purchaser. They do have a large cornerstone investor, so we are confident they will get their required financing to close the transaction. But at this time, the equity is on hold until the fall. So we ll continue to operate Minto throughout, until the transaction closes. So in closing, we re well aware of the potential impact of the abrupt fall in copper prices toward the end of Q2. We have, the Cozamin mine that operates well below the current price environment and at Pinto Valley, with what we talked about today in the cost reductions and maintenance, we expect to be able to lower our cost there as well. So we do see a minimal effect from the fall in copper prices, as we did budget $2.75 copper at the beginning of this year. We will continue to be very conservative with our cash and grow our balance sheet, which we see as building a strong balance sheet for the growth that we have within our portfolio. Operator, that concludes our prepared remarks. We re now ready to take questions from the floor. Q&A Canaccord Genuity Hi. Good morning, guys. I just want to talk a little bit about this new CBA at Pinto Valley. Can you give us a little bit more detail in terms of this flexibility that you keep talking about? Like, what do you actually have? And maybe talk a little bit about what you ve had to give up to get it? Gregg Bush This is Gregg. So as far as the flexibility, we inherited a collective bargaining agreement that had essentially never been changed since 1970, and the only modifications it had over the years were in the form of amendments. So, it was a very unwieldy contract, very difficult to manage. And because Pinto Valley has a group of unions that all work as one union, we ended up with a bunch of different bargaining units there, so lines of promotion were restricted to those bargaining units, even though it all acted as one union. So it kind of limited the pool for promotion. It was very difficult to develop people and offer people opportunities for advancement under the 6

7 old contract. And our wages were a bit out of whack because we hadn t had a new agreement for quite a number of years there. So, you asked what we gave up. Obviously, there was a significant wage increase, which we re very happy about because it was needed. But in balance, the new agreement s going to lower our cost because the way that contract worked. It was extremely difficult to manage the workforce efficiently with the rules - who could do what work, and that sort of thing. So the higher wages will be more than offset by our ability to eliminate contractors and to more efficiently utilize the workforce. And Dalton, just to summarize in general, with the lower wages, we could not attract some skilled trades to Pinto Valley. So what that means is we would have to call in contractors to do the work, and under the old agreement, you had to have a union person stand there, called shoulder-to-shoulder, and watch the contractors do the work because they couldn t perform it. So, we had significantly heavy reliance on contractors, who obviously mark up their services to make a profit. So, we ve been able to reduce the amount of contractors by putting our own people in and not having our own workers stand around and watch them do the work. So the shoulder-toshoulder, all the work rules that were related to that old contract are gone, and we re able to now pay the going rate on skilled trades, therefore hire them at Pinto Valley and not use the contractors. That s great. That s actually a big win. Can you tell us just approximately how much the wages went up by? There s a range depending on where, anywhere from 5 percent to 25 percent. And I will say that on the immediate benefit analysis, we re in a net gain, so we take the increased wages and offset with the differences in the overtime and the shoulder-to-shoulder, and all of the other benefits that were being received under the old contract. When you go apples-to-apples, it s a net savings per year, and that does not include all of the productivity gains that we re going to see from the contract as well, which is not factored into the initial analysis of the positives and negatives. Okay. Understood. And then just maybe one quick one on Minto and one on Santo Domingo. In terms of Minto, what gives you comfort that Pembridge can actually close all of the financing? Well, they don t have to do very much they have a large cornerstone, very well-known investor that is the significant bulk of the financing. They need a very small amount of equity, but with what s going on week to week and with trade wars and tariffs, they just decided to put it on hold until September when hopefully we get a more normalized market. But I m confident because it s such a low amount relative to what they ve got in place already. Okay. And then maybe one last one on Santo Domingo. You talked about aligning your ownership structure after the feasibility. Any initial indications, first of all any sniffs of interest 7

8 from other parties? And secondly, do you have a sense for where you d be comfortable, in terms of ownership structure? Well, we do have interest from other parties. Obviously, what we see on next year being a fully permitted, shovel-ready project. So we have two choices: we either move it forward and take less. We re at 70 percent now of the project, we think we re going to have to come down closer to 50 percent. At that number, we think we re comfortably able to finance it with our internal cash flow and debt facilities. And that s when you factor in the lower copper prices than what we re seeing. So, we d rather move forward quicker with the project and own more than have it sitting in inventory. Okay. But you d still be looking to build the actual thing? Well, no. I mean, that depends who the partner is and depends what the structure is. But our plan is to get this study out, so that everybody can see the value the current value. And then have some sort of a process to understand who s interested and at what level. And then make the decision that s best for Capstone to move forward with it. Perfect. That s all for me. Thanks, guys. Oscar Cabrera CIBC World Markets Thank you, Operator. Good morning, everyone. Darren, I m just trying to reconcile the comments on improved throughput rates and recoveries at Pinto Valley with the statement you had in your guidance where it says your guidance for the high end of the $2.50 to $2.60 a pound. So could you provide some context around that, please? Yeah. So improved recoveries and improved grades at Pinto Valley over the first quarter. We definitely saw that. We didn t see improved throughput. We need to improve the throughput over the second half of the year, which is coming through better maintenance practices that we have contracted this firm to help us with. We re finishing implementation phase and now on to the project. So we expect better throughput in the second quarter, and we expect recoveries to be the same in the third quarter. We expect recoveries to be as was in the second quarter, and we expect grades to be slightly better. So you ve got a little bit better grade and better throughput in the second half of the year, which is going to get us to our copper guidance. But because we had such a high-cost Q1 and elevated in Q2, we re going to be to the higher end of the range on the costs. Oscar Cabrera Just to be clear, that it s the higher end of the range is just because of what s already happened, but you re expecting improvements in the second half of the year? Exactly. Yeah. The second half of the year the costs and the production will both be lower than the first half of the year [Post call correction: Meant to say lower costs and higher 8

9 production H2 over H1], to get us to the range that we re talking about. So everything will be improved in the second half of the year; we re set up to do that. Like I said, two of the three issues have been resolved in terms of grades come up, which was the plan, and recoveries are back on track. It s now just the throughput issue, and we re very confident we ve got all the plans and programs in place to improve that maintenance and therefore drive that throughput higher. Oscar Cabrera Okay. Thank you. And then moving on to Santo Domingo. As you near completion of the feasibility study, have you talked to your partners, Korea Resources, to see if they are still interested in participating in the project? I understand that there is the potential for that company to focus on other types of businesses later on. It s just mandated by the Korean government. Yeah, that s a good question. And they re in town as we speak here, to meet on Santo Domingo to get an update. So they re very engaged. I don t think the whole KORES business unit as a group has decided on what they want to do. We feel that with KORES in or if they want to exit, we think the value s there to bring in another partner, to take them out and be our partner or bring a partner in with KORES. Either way, we re going to move the project forward. KORES remains interested and definitely flexible on that, so we re working with them. We have a good relationship with them and we ll be moving forward one way or the other. Oscar Cabrera Okay. Thank you very much. And then last but not least, just want to wish Jim well in his retirement and good luck to Raman. Jim Slattery Thank you very much. Stefan Ioannou Cormark Securities Thanks very much, guys. I m just kind of curious, just given with the sort of slip in metal prices, copper prices, and obviously higher costs at Pinto Valley. Just to the strategy to effectively, immediately pay down debt when you finalize the Minto sale, does that still hold? Or is there any thoughts of maybe keeping some of that cash on hand for a bit, just to sort of provide an additional buffer until you have lower costs coming out of Pinto Valley, and/or metal prices improve? Well, Stefan, when we say reduce debt, it s we have a revolving credit facility, so there s no point in keeping excess cash on the balance sheet because we re just paying more interest costs than we need to. Stefan Ioannou Sure. But we can draw on that. So, I guess a better way to put it is, we have no plans for any additional capital programs other than what we ve guided. So that cash will all be conserved on the balance sheet, and as you mentioned, we do expect that cost profile at Pinto Valley to come down, but we will be mindful of the metal prices as we implement those programs at Pinto Valley. Stefan Ioannou Okay. Okay. Great. Thank you very much, guys. 9

10 Thank you, everybody, for participating in the call today. Please don t hesitate to contact us with any questions. We re always available to answer. Thank you very much and have a good day, everybody. ***** 10