May 9, 2014
Executives
Marlo Hamer-Jackson - Investor Relations & Communications Specialist Darren Pylot - President, Chief Executive Officer, Director Jim Slattery - Chief Financial Officer, Senior Vice President Gregg Bush - Chief Operating Officer, Senior Vice President Peter Hemstead - Vice President - Marketing, Treasurer
Analysts
Tom Meyer - CIBC Matt Murphy - UBS Mark Turner - Scotiabank Patrick Morton - RBC Stefan Ioannou - Haywood Securities Pierre Vaillancourt - Macquarie Oscar Cabrera - Bank of America Peter Campbell - Jennings Capital
Operator
Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp's First Quarter Results Conference Call. At this time, all lines are in a 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 for your questions.
(Operator Instructions) I would like to remind everyone that this call is being recorded on May 8, 2014. I would now like to turn the conference over to Ms.
Marlo Hamer-Jackson. Please go ahead.
Marlo Hamer-Jackson
Good morning I'd like to welcome everyone on the call today. The news release announcing Capstone's 2014 first 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 Darren Pylot, Capstone's President and CEO; Jim Slattery, Senior Vice President and CFO; Gregg Bush, Capstone's Senior Vice President and COO; Rob Blusson, Vice President of Finance; and Peter Hemstead, Vice President 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. Finally, I'll just note that all amounts we will discuss today will be in U.S.
dollars, unless otherwise specified. Now, I'll turn the call over to Darren Pylot.
Darren Pylot
Great. Thanks, Marlo.
Good morning, everybody. First, Jim will review our financial results for the quarter followed by Gregg, who will update you on our operations and will also give you an update on our development and exploration projects followed by your questions.
Now I'll turn the call over to Jim to get things started.
Jim Slattery
Thanks, Darren. The net result for the quarter was loss of $4.4 million or approximately $0.01 a share as compared to net income of $6.9 million or $0.02 a share in the first quarter 2013.
The major factors affecting income this quarter on a comparative basis included a significant decrease in copper prices, non-cash charges at Minto both, from depletion and amortization and an inventory write-down as well as increased financing charges associated with the Pinto Valley acquisition that and a foreign exchange that we recorded last year. This was partially offset by the incorporation of Pinto Valley in our results this year and by the strong production shipments at all of our operations.
Operating costs were well contained and are consistent with guidance previously provided. Our adjusted EBITDA was $55.5 million or $0.15 a share as compared to $23.6 million in first quarter 2013, an increase of 135%.
This comprises $28 million from Pinto Valley, $16 million from Cozamin and $20 million from Minto, offset by G&A and other costs of approximately $8 million. Minto reported particularly strong EBITDA due to timing of sales and an exceptional fourth-quarter production that continued in the first quarter of this year.
Operating cash flow before changes in working capital was $47.1 million or $0.13 a share. This is 134% increase over the $20 million recorded in the comparable quarter 2013.
Our results were largely by the contribution of Pinto Valley as well as strong operations in [each of] Cozamin and Minto. As mentioned, our net loss included a non-cash inventory write-down at Minto of $10 million reflecting valuation adjustment to ore stockpile inventories.
In addition, depletion and amortization for the quarter of Minto was $22.6 million, was elevated as compared to the $8.9 million recorded in the first quarter 2013, as we amortized the remainder of the deferred stripping associated with Area 2, where mining is now complete. Turning specifically to Pinto Valley, earnings from mining operations for the quarter were $15.5 million, with a C1 cash cost per pound of $2.06, including a $0.09 of non-recurring transition service agreement charges.
Without the TSA costs, our normalized C1 cash cost of Pinto Valley would have been $1.97 per pound and for the rest of the year other than a small adjustment expected in the fourth quarter going forward, the cost you see will be for Capstone's systems alone and we should also start to see the effect of cost efficiency measures that we (Inaudible). Now, I will turn to our balance sheet and cash position.
We ended the quarter with $136 million of cash and $313 million of drawn debt. On April 4, subsequent to the quarter end, we repaid $22 million of debt, reducing the total debt balance to [$206 million].
As anticipated we remained well-positioned from a standpoint of our financial flexibility. At this point, we are making no changes to the production, cost or capital expenditure guidance for the full-year that we previously provided.
Now, I will turn the call over to Gregg Bush to talk about our operations.
Gregg Bush
Thank you. From an operating standpoint, this was a strong quarter for us.
All three operations met or exceeded our expectations and are running very well. At Pinto Valley, first quarter copper production once again exceeded our expectations.
As you know, our primary focus has been on the stabilization of the operation. We are steadily working through the list of operational items to enhance production and are seeing the results from these improvements.
In terms of progress toward the ramp up to 50,000 tons per day, we recorded the first-quarter average throughput of 46,800 tons per day. How that broke down month-by-month, that was 45,900 tons per day in January, 46,600 in February, 47,800 in March.
In April, we averaged just under our goal of 50,000 tons per day and anticipate stabilizing now at 50,000. The reliability processes and programs we have put in place are now paying off and we are focused on the sustainability of these improvements.
With the reliability and stability of the operation now at target levels, and with the transition to our own operating systems in the first quarter, we now have the tools to implement continuous cost and efficiency improvement programs to build and to build on the $2.6 million of annualized procurement savings are already realized. Where we are at operationally and with PV2 prefeasibility study completed, during the first quarter extending the mine life out to 2026, we are very happy with the transition just a little over six months following the purchase.
At Cozamin and Minto, we exited the quarter on plan for both, production and costs, so I don't have too much to report about either of these operations other than to say the things are running very well. At Minto, development in the underground zone is completed and will be a mining production ore beginning in mid-May.
Looking ahead, we are waiting on permitting for Minto North, which we hope to have to be able to start pre-stripping in the first quarter. The asset has completed its evaluation and issued its report and now Energy, Mines and Resources is in the process of writing the final decision document which will support the licensing process.
Although, we do not currently anticipate any delays in the licensing, slippage in this schedule would not impact our 2014 mine plan as it already calls for running mine ore to be augmented with both stockpile and underground ore during the second half of the year. Any impact of the delay in permitting would result in future years although we do have some ability to adjust plans to mitigate much of that impact.
Now, I will turn the call back over to Darren.
Darren Pylot
Thanks, Gregg. For the highlights this quarter along with the strong operating performance at all three of our operations was definitely be PV2 prefeasibility study.
It extended the mine life of past 12 years and demonstrated and after-tax NPV in $738 million which confirmed the $650 million purchase price. Most importantly, it provides a longer-term platform that Pinto Valley needs to motivate the retained qualified workforce for the long-term and provide the big incentive to the team there to deliver on the indentified efficiencies at the mine.
We are currently about 24 weeks into our 30-weeks initial improvement program and the focused we have the stability as Gregg mentioned is delivering the results that we are expecting. One significant factor to note is the 12 years included the PV study only considers about 16% of the total measured and indicated resources which provides with a tremendous platform to advance the work on engineering and permitting to extend the mine line and possibly expand productions as well beyond the 12 years.
This work is now commencing and plan to have an internal scoping level study completed by year end. I was pleased; we were able to exit the transition services agreements four months ahead of the original schedule, which provides a significant cost savings.
Those agreements were very important in the early days to ensure the uninterrupted continuity of the operations, but they were expensive and they were also a limiting factor to the operating efficiencies we wanted to realize. With these system changes, Pinto Valley is now fully integrated into the Capstone portfolio.
With the transition work completed, we can now direct our full attention towards the areas that will bring us the most value to Capstone, namely garnishing as much operational efficiency as we can out of the operation, implementing the PV2 mine plan and starting work on the PV3 study to take us well into the future. Now that we are operating on a normalized basis, we will see a true and clean cash cost going forward from Pinto Valley.
Moving on to Santo Domingo, we received the first round of comments back on the EIS that was filed last October. The response was as expected with no surprises.
As we anticipated, the bulk of the comments were around dust, water and employment, and none are anticipated to create any material issues for the project. The next step for us is to submit the responses by the mid-July deadline.
The port concession is pending, and our submission has been challenged by one commercial party. We are in discussions with that party and do not expect a major material, monetary or schedule impact to the project.
Power discussions are also ongoing. While we don’t see a breakthrough in the very near-term, the situation is definitely improving.
We have made considerable progress having received two indicative power purchase proposals and are expecting to receive two more this quarter which we believe will put us in a good position to execute an agreement when we are ready. The definitive feasibility study is undergoing final review and will be completed and filed by the end of the second quarter.
We have completed all the metallurgical work which was the last technical work for the feasibility study. This will provide us with a solid basis to continue to work in areas such as project execution planning, marketing, financing and to assess the means and timing of plans to maximize the value of this project for our shareholders.
We are very encouraged by the progress that we are making on the project and the potential opportunity it represents for Capstone. I do want to assure you, however, that we are looking at Santo Domingo through the same disciplined, balanced and measured lens that has guided us to this point.
Turning to exploration, a significant amount of work was completed this quarter on the 350,000 hectare property we auctioned from SQM in Chile. In Q1, the 13,800 kilometer airborne VTEM survey was completed and a preliminary mapping and the first stage of soil sampling is underway with over 2,800 samples completed thus far.
We expect to be drilling in the second half of this year and have budgeted about 15,000 meters of drilling for 2014. Lastly, I will update you with the status of the Kutcho process.
As you know, a sale process is well underway on which we have received considerable interest. We expect the process will be ongoing at least until mid-year, so the major catalyst for us this quarter was the positive Pinto Valley PV2 pre-feasibility study and our solid operational performance, which has allowed us to remain on plan for both, cost and production guidance for 2014.
Looking forward, our upcoming 2014 catalysts are continuing to lower costs at Pinto Valley, updating reserves at Cozamin and permitting the high grade Minto North pit, as well as completion of the Santo Domingo feasibility study. Operator, that concludes my prepared remarks, and we are now able to take questions from the floor.
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session.
(Operator Instructions) Your first question comes from Tom Meyer from CIBC. Please go ahead.
Tom Meyer - CIBC
Thank you and good morning. I have a question or more, I guess, a clarification on the Minto permitting process and the final stages, so you have the decision document as of April the 25th, and I would like to know, does this require you to do additional work based on some of the comments in that document or is it simply, I don’t want to say it simply to make it sound too simple, but is it really just a bureaucratic process from here on?
Gregg Bush
Well, there are two permits that we will need to get, but the first thing that needs to happen is that we don’t have the decision document as yet. We have the evaluation document.
On the basis of that evaluation, Energy, Mines and Resources will write a decision document and that provides the framework for the subsequent licensing process.
Tom Meyer - CIBC
Through this final licensing process, is there any additional work that you foresee that you will need to complete it or is it the work?
Jim Slattery
Well, yes. I mean, there will be some.
The evaluation is done on the basis of somewhat more conceptual engineering and the licensing requires more detailed engineering, so that process has been ongoing all the way through the assessment process, but there's still some work to be completed.
Tom Meyer - CIBC
Is the work like a critical path item or is there something else?
Jim Slattery
No. None of the outstanding engineering work is on the critical path.
It's just more around the timing of the process.
Tom Meyer - CIBC
Okay. That's perfect.
Thank you very much. I'll pass it on.
Operator
Thank you. Your next question comes from Matt Murphy from UBS.
Please go ahead.
Matt Murphy - UBS
Good morning. I guess it has just been a month since the site visit, but just wondering at Pinto Valley, how the hiring effort is going?
I know you have taken some costs down maybe gotten rid of some more contractors. Have you had success in replacing with full-time employees?
Jim Slattery
Yes. I mean, we still have a mix and it's progressing towards where we want to be in terms of the permanent workforce.
Gregg Bush
I think, more of the decrease comes from just raising that throughput and more copper production. There's a lot opportunities around replacing those contractors and hiring that permanent workforce, which will hopefully lower costs further.
Matt Murphy - UBS
Okay. Thanks.
Operator
Thank you. Your next question comes from Mark Turner from Scotiabank.
Please go ahead.
Mark Turner - Scotiabank
Yes. Thanks, guys.
A number of questions, but I'll just ask a few here at the beginning and then hop to the back of the queue. You provide a little teaser on Pinto Valley's throughputs in April.
Just wondered if you can provide any sort of more color, and I guess specifically around if the recovery rates has been able to hold up as you push those additional tons and if the grade has been sort of above plan as it was in last quarter.
Darren Pylot
Yes. We are continuing to have, I would say mild positive surprises in the grade.
On the recovery, it may be a bit counterintuitive, but as the tons have gone up, the recovery has actually gotten better. It's just because the tonnage increase is coming from more stability in the operation and that always helps the flotation circuit.
Mark Turner - Scotiabank
Okay. Then just one last question on Pinto Valley, the CapEx for this year, a large chunk of that is for, I believe, for shovel.
Just wondering on the timing of that. One, I guess from the cash flow perspective of the spend on the shovel.
Two, after it's been assembled like maybe when we can see some sort of cost improvements from that, if that’s not going to be until the middle part of next year or sooner rather than later?
Darren Pylot
Yes. I recall the shovel would go into service, I believe, in Q1 of 2015.
We would not see any benefit from it this year.
Mark Turner - Scotiabank
Okay, so the capital outflow then probably would be more in the middle of this year than by the time it's assembled in '15 really?
Darren Pylot
Yes.
Mark Turner - Scotiabank
Okay. Just two other quick questions then, at Minto, just so I understand.
If the copper price was to go back up to like, call it, 320 or under - are we going to have to see a write-up of that stockpile in terms of its value? Is it purely just a function of the copper price right now or is there something else that is leading to the cause in the write-down of that stockpile?
Darren Pylot
Mark, there were two factors. One of them would certainly be the copper price.
If the copper price were to go back up, we would see that net realizable value certainly increase. The other factor was, over the course of the quarter, the grade that was contained within the stockpile was drawn down, so there was a factor that was basically related to the contained metal in the ore stockpile, and the significant driving factor would have been the price.
Mark Turner - Scotiabank
Okay, so it's conceivable that, yes, if the price goes back up or you will have to write it back up.
Darren Pylot
Absolutely.
Jim Slattery
If copper price stays where it is, we would not expect any further write-downs to the stockpile.
Mark Turner - Scotiabank
Right. Okay.
Then just one last question on towards more Santo Domingo and KORES. I've been fielding a number of calls lately on whether like KORES is reviewing their position either at the project level of even the equity stake that they have in Capstone, and I'm not sure if that's driven by them potentially - reviewing other project stakes that they have or just market speculation that the amount of capital they have to spend on a number of projects over the next few years here, but just any sort of update you have with your discussions with KORES, what gives you comfort that they are still there?
Jim Slattery
Sure. Well, I can tell you that the members of the JV board, which we have 70% , they have 30% of the project.
They were all in Vancouver, here in person last week for our board meetings as well as the KORES Capstone board representative was here and all unequivocally reaffirmed their commitment to the project, both at Santo Domingo project partner, as well as a Capstone shareholder. I can't answer into the future, but as of when they were here, absolutely 100% in support of the project and the company as a whole.
Mark Turner - Scotiabank
Great. Thanks, guys.
I'll get in the back of the queue.
Operator
Thank you. Your next question comes from Patrick Morton from RBC.
Please go ahead.
Patrick Morton - RBC
Hi, guys. Question relating to the treatment and selling costs at Pinto Valley has been about $0.47, $0.48 a pound for the past couple of quarters.
Is that a reasonable number going forward? If so, how much of that relates to treatment charges on the copper con versus the moly?
Peter Hemstead
Sure. It's Peter here.
It's all related to the treatment and selling costs related to the copper concentrates. We actually didn’t sell any of molybdenum in Q1, and the TCRC rates that you are seeing are really tracking along with the benchmark at this point.
The annual benchmark for 2014 is slightly above 90 and 9, and that's where the Pinto Valley TCRCs are coming in.
Patrick Morton - RBC
Great. Thanks, guys.
Operator
Thank you. Your next question comes from Stefan Ioannou from Haywood Securities.
Please go ahead.
Stefan Ioannou - Haywood Securities
Hi, guys. Just maybe a little bit more on the moly.
I know it's a very small component of Pinto Valley, but just wondering if you can maybe comment on how the performance of that circuit is doing, namely recoveries?
Darren Pylot
There has been some improvements into the plant that they are working through, mainly having to do with installing new pumps and things like that. They are gradually working through that, so the plant is operating more time now and it is also being helped out by having a more stable operation on the copper side, so it's gradually getting there.
Stefan Ioannou - Haywood Securities
Okay. I mean, in terms of getting towards something close to even 20% recovery, is that something we might see late this year or is that sort of a while out yet?
Darren Pylot
No. I think, we will start to see that here in, especially in the third quarter, but I think we will get much closer to that in the second quarter.
Stefan Ioannou - Haywood Securities
Okay. Great, Maybe just one more quick question.
Going back to Cozamin, you mentioned in the disclosure that with the New Mexican mining duty, the effect on your financials was about $1.4 million in the income taxes. Just there was a table somewhere in your MD&A where it lists that that particular cost is only about $792,000.
Just wondering what the difference is between those numbers?
Darren Pylot
The difference between those two would simply be taking the deferred tax impact which was a recovery and offsetting against the current tax, so the current tax or the cash tax portion is collectively stated at $1.4 million.
Stefan Ioannou - Haywood Securities
Okay. Got it.
Thanks very much guys.
Operator
Thank you. Your next question comes from Pierre Vaillancourt from Macquarie.
Please go ahead.
Pierre Vaillancourt - Macquarie
Yes. Hi.
Just wanted to get a sense with the feasibility study nearing completion for mid-year 2014. Also, in the context of the EIA, the power supply, the port development issues.
Where does that put you with respect to a go forward decision on this? How are you positioning this for actual development and commitment to constructing the project?
Darren Pylot
Well, as you mentioned the feasibility study is nearing completion, and that's just one major milestone that we need to achieve in order to get towards making a decision to go forward. As you mentioned, power is another big one.
The amount of engineering that needs to be done is another one, so although we will knock-off one milestone at mid-year here, we don't expect to have them, the other milestones completed by the end of the year, so we are looking at a go-forward decision sometime in 2015, but a more detailed schedule and plans will be announced as part of this feasibility study that's coming out here in another month or so.
Pierre Vaillancourt - Macquarie
Okay. Sounds like it could drag on.
I mean, if there is no resolution on any of those issues it could go past 2015, then?
Darren Pylot
Well, it's more like we need to get the feasibility study done to assess a number of other objectives such as what is the current financing market there for this project and we can't assess that until we have the feasibility done. I think, as I mentioned, in terms of power, where six months ago we were trying to get one indicative proposal, we now already have two and we are getting two more, so things are definitely brightening up in the power situation and we feel very confident that we can get economically priced power available when we need to when we are built, so it's more just assessing the market and understanding when is the best time to Capstone to go-forward, we can't do that at this point in time.
Pierre Vaillancourt - Macquarie
Okay. Can you give us a sense on this green field port, what is a rough?
I know you mentioned that it's within the $1.5 billion to $1.8 billion capital estimate, but how much does the port cost take?
Darren Pylot
I can't. I can't really disclose any major components of the study until we get it out here.
As I said, we have given that range of total capital and as you mentioned, the port and everything else is included in that number. At this point, we can't start giving specifics about certain components.
Pierre Vaillancourt - Macquarie
Okay. Thanks.
Darren Pylot
Thanks.
Operator
Thank you. Your next question comes from Oscar Cabrera from Bank of America.
Please go ahead.
Oscar Cabrera - Bank of America
Thank you. Good morning or afternoon, everyone.
Interested in comments you had with regards to the comments you received back from the authorities in Chile, specifically employment. I was wondering if you could provide more color around those.
Darren Pylot
Yes. Oscar, the comments that came back in the first addendum for the EIS had to do with making sure that there was a local spill on from the employment, and in subsequent meetings with the new government, both locally and in Santiago, I would say there is a pretty intense level of interest in that project right now for the potential jobs it could bring to the third region.
Oscar Cabrera - Bank of America
Right. As we know, Gregg, the new government in Chile is instituting new policies at different levels, so my next question has to do with your thinking in terms of - I believe that Santo Domingo will take a little bit longer to get developed, but as you are ramping up Pinto Valley and generating more free cash flow, at what point do you either decide to give some of that back to shareholders or try to move in strategically to add to your portfolio in another project?
Jim Slattery
Oscar, it is Jim. At this point, we are still in a growth phase as an organization.
We have organic growth through the Santo Domingo project, we have got organic growth through PV3 project and we have possibilities of making other acquisitions. At this particular time, we are not contemplating any kind of a dividend policy or return of capital.
Oscar Cabrera - Bank of America
Okay. Thanks, Jim, that's helpful, but if you could prioritize the different elements that you mentioned based on the schedule that you have for Santo Domingo.
Jim Slattery
Well, those decisions, the priorities will be established based on a risk adjusted return on capital, and the projects which return the highest value to shareholders, will be the ones where we are going to continue to focus on. Those could be projects within the current number that we have discussed.
It could be other projects as well. I mean, we are focused on growth, we are focused on value-accretive growth.
Oscar Cabrera - Bank of America
Great. Thank you.
Operator
Thank you. Your next question comes from Peter Campbell from Jennings Capital.
Please go ahead.
Peter Campbell - Jennings Capital
Good morning, everybody. Thank you very much for taking my phone call.
Just one quick question, I am not sure I completely understand the mechanics of the write-down on the ore stockpile or the ore inventory at Minto. You said that the grade was drawn down in the quarter and that was in part, anyways, what led to the write-down of the stockpile.
Is it a matter that you have put ore from the stockpile through the mill and now the value of the stockpile is less?
Darren Pylot
It is partly a function of that and it is partly a function of the ore that was released from mining activity and Q1 was lower grade. Subsequently, when we combine that with the drop in the spot copper price that we use as one of the key inputs for the valuation analysis, that's what's generally driving the write-down.
Peter Campbell - Jennings Capital
I see, so is it a case that in the future when you do mining from the stockpile, the value of the stockpile will be continually written down?
Darren Pylot
No. Quite the opposite.
As we take it out of the stockpile, we should see a potential reversal of that in a scenario where you see an increasing copper price.
Peter Campbell - Jennings Capital
Okay. Perfect.
That's my understanding. Thank you very much.
That's all I have.
Operator
Thank you. (Operator Instructions).
Our next question comes from Mark Turner from Scotiabank. Please go ahead.
Mark Turner - Scotiabank
Yes. Sorry, guys.
(Inaudible) call any longer. Just quick question on the underground mining costs at Minto.
Now that you are moving into that end zone and are going to be sourcing ore from that in the middle part of this quarter. Any sort of update you can provide there?
Darren Pylot
Well, we have had no surprises either in the cost or the rate of development in the end zone. As I mentioned in my remarks, that entire zone is now developed.
We are dropping in the first slot raise right now, so we will be mining production ore out of there within the next week or so. It's tracking on plan.
Despite the higher grade in the underground, it will be higher cost than some of the lower-grade material from open pit just because of the higher mining costs.
Mark Turner - Scotiabank
All right. Okay, but the mining costs are in line with previous expectations?
Darren Pylot
Yes. They are.
Mark Turner - Scotiabank
Perfect. Thank you, guys.
Operator
Thank you. Mr.
Pylot, there are no more questions at this time. Please proceed.
Darren Pylot
Great. Thanks, operator, and thank you everybody for joining the call and your questions.
Please don't hesitate to contact us with any further questions you may have. Thank you very much.