Apr 29, 2015
Executives
Cindy Burnett - Vice President, Investor Relations and Communications Darren Pylot - President, Chief Executive Officer and Director James Slattery - Senior Vice President and Chief Financial Officer Gregg Bush - Senior Vice President and Chief Operating Officer Robert Blusson - Vice President, Finance
Analysts
Ian Parkinson - GMP Securities Sasha Bukacheva - BMO Cliff Hale-Sanders - Cormark Securities Stefan Ioannou - Haywood Securities Matt Murphy - UBS Oscar Cabrera - Bank of America Mark Turner - Scotiabank
Operator
Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp. first quarter 2015 financial results conference call.
[Operator Instructions] And I would like to turn the conference over to Cindy Burnett, Investor Relations.
Cindy Burnett
Thank you. I'd like to welcome everyone on the call today.
The news release announcing Capstone's 2015 first quarter financial results is available on our website, along with an updated corporate presentation, and summary information on the company and our financial and operating results. Also on our website are webcast slides to accompany this commentary today.
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 Chief Operating Officer; and Rob Blusson, VP of Finance. 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
Thank you, Cindy, and good morning, everybody. Jim will lead off of the call this morning with a review of our financial performance, followed by Gregg, who will provide us with an update on our operations.
We will also provide an update on our development projects and corporate activities, followed by your questions. So I now turn the call over to Jim.
James Slattery
Thank you, Darren. Now, while copper prices settled in the first quarter, we managed our business in a manner that resulted in our debt remaining essentially unchanged, and we remain comfortably within all of our debt covenants.
The net loss for the quarter was $17.4 million, which included $6.2 million of non-cash write-downs and $3.3 million of one-time costs related to the operational restructuring at Pinto Valley and contractor standby fees at Minto. With copper prices bouncing off the January lows, we pressed ahead with our 2015 capital program, as originally planned.
Capital additions for the first quarter totaled $40.5 million with just over half of that spend at Pinto Valley on the PV2 expansion. We are however continuing to manage capital spending very closely, and have $24.4 million remaining of our 2015 capital spending plan that is potentially discretionary and could be deferred or canceled should the need arise.
At copper prices in the $2.60 to $2.70 range, however, we're confident in executing our 2015 capital program as planned, while at the same time being prepared to react quickly, if there is a further significant downward movement in prices. Consolidated C1 cash cost came right in on guidance, benefiting primarily from Minto's strong performance as a result of grade, the weaker Canadian dollar and better than targeted underground productivity.
At Pinto Valley, lower mill productivity was mitigated by higher grade ore, resulting in cash costs that met guidance. And at Cozamin, our highest margin operation, cash costs was above guidance due to lower grade despite a reduction in cost per ton milled.
This quarter, we also started reporting more complete measures of unit costs to provide a better understanding of the economics of our operations. In the MD&A you will find all-in sustaining cost, all-in cost and fully loaded all-in cost, with detailed tables providing comparative amounts as well as a full breakdown of the calculations.
I do want to note that breaking out capital spending can have the effect of adding to volatility of these costs quarter-over-quarter. So using these figures and assessing our fundamental profitability will some times require interpretation.
For example, the PV2 development spending was heavily weighted to the first half of this year, which explains the relatively high impact of $0.71 per pound in the first quarter, which is compared to the expectation that's going to average about $0.35 a pound for the full year. For 2016, when capital spending is expected to be primarily sustaining in nature at Pinto Valley, the impact of the PV2 development capital would be only around $0.03 a pound with respect to reporting the all-in cost.
With that done, I'll turn it over to Gregg for operational updates.
Gregg Bush
Thanks, Jim. With some agile planning and some luck, we successfully ended the first quarter on guidance for copper production.
At Pinto Valley, after steady improvements in mill stability throughout 2014, accommodating in December 2014 monthly throughput record, performance of this area in Q1 was a decline in mechanical availabilities in the mill and the crushing circuits. We were able to take advantage of flexibility in the mine plan to offset the throughput shortfall.
This, together with better than predicted grade compared to the block model, offset the shortfall and mill throughput. Because of some opportunities to optimize the mine plan at Pinto Valley and developed while it was not in the PV2 mine plans, this rescheduling is not expected to have a material impact on future periods.
We also implement leadership changes in Pinto Valley in late 2014, and with input from the management team, we completed the restructuring of the salary workforce in Q1 of this year. The new structure eliminated 60 positions from the salaried organizational structure and will better align the organization to our production and maintenance goals.
Due to a higher increase implemented in 2014, there were a numbers of vacancies at the site at the time of the restructuring. So the number of people directly impacted by the reduction in force, as a result, was 41 people.
As a result of the reorganization, we also finalized the closure of the Tucson office, which have been BHP North America base metals headquarters, and a location in a number of finance and administration staff. We continued with a maintenance reliability program we started last year, and have identified several root cause issues, including weaknesses in the organizational alignment, gaps and training and organizational learning gaps and a lack of follow-through on process implementation.
As part of this program, we completed a gap assessment on processory maintenance program, utilizing the help of maintenance reliability specialist with a wide range of experience across a number of industries. The issues are very and are impacting both the crushing plant and the grinding circuit.
So the project scope of work is twofold, the more urgent priority is related to supporting our team to prioritize and work through a backlog of critical reliability issues and help identify incorrect/correct training gaps in our maintenance teams. The second objective is to deal with the sustainability of the improvements.
We have identified gaps in our systems that need to be corrected in order to have an efficient maintenance program. And we have a systematic program focused on activities, such as verifying and updating plant documentation, verifying and updating drawings, equipment lists, catalogs, inventory related to critical spares as well as streamlining the procedure to capture and analyze, data related to maintenance KPIs and implemented a stronger change management process.
The two project objectives are staffed with different teams to ensure that neither of these equally important initiatives are delayed due to the lack of resources, but the two teams are working very closely together. So while we know what we need to do and we now have to operate the organization set up for success, there are no quick fixes and we continue in a methodical and systematic way to ensure that we have an end-to-end process that works for the long-term.
We are starting to see a more disciplined approach to the maintenance activities and a steady improvement and performance as a result. At Minto, we significantly outperformed our plan, as a result of some very positive grade reconciliations in the underground block model, and more ore from retreat mining of the area to switch back in the M-zone crown pillar than we had expected to be able to mine.
Also, right after we told you that last quarter that the timing of the advancement of the water license amendment was uncertain, we were pleasantly surprised to have a hearing date call right after our conference call. The hearing concluded on March 10 and while there are no legislative timelines to issue the revised permit, the quick movement to the hearing gave us optimism that we will be able to continue operating the mill uninterrupted.
We have generated mine plans for Minto North that contemplate the delay in the Water Use License. They could still deliver Minto North ore to the mill near yearend, provided an acceptable items we just received in the coming weeks.
The backup plan contemplates the change in the way we strip Minto North to a staged approach. So we will confirm any reduction in our 2015 deferred shipping guidance.
And if that approaches, yes, we are going to take it, once we have further information from the Yukon Water Board. At Cozamin, we implemented new ground support standards in the first part of 2014, which resulted in a slower development rates through the latter part of 2014 and into this year.
We have brought additional training support for the development crews and additional development contractor and they're providing training to all of our mine development crews. This training is producing good results with both, development rates and long-hold recovery on an upward trend, our long-hold inventory on an upward trend, while maintaining good adherence to our ground support and ventilation standards.
So with that, I'll turn the call back over to Darren.
Darren Pylot
Thanks, Greg. So our priorities for the quarter are centered around careful management of our financial resources and maintaining flexibility in our operations to ensure we remained on guidance.
On our growth projects, we are moving forward with the spending for the PV2 mine life and PV3 extension project at Pinto Valley with a capital cost of about $53 million total for the year. Once the capital is spent in 2015, 2016 capital drops to a much more modest and sustaining level for '16 and beyond.
At the same time, we advance work on our PV3 Pre-Feasibility Study as planned in the first quarter with the completion expected in the third quarter of this year. We continue to believe that the potential for mine life extension or expansion at Pinto Valley represents significant value for Capstone.
At Santo Domingo, we continue to advance at a pace that is prudent for our financial position, based on our operating capital requirements and the current copper price environment. During the first quarter, POSCO advanced towards Stage-Gate 1, with the bulk of their work focused on project review, validation and due diligence.
As of now, there have been no major admissions identified. We also continue to advance permitting, and expect to receive approval of the EIA during the second quarter.
At which time we'll be in a position to determine our next steps to advance the Stage-Gate 2. There is some potential for delay, however, given the interruption of work at the various government agencies in Chile due to the recent flooding.
However, completion of the EIA is not critical path for us. And to reiterate our pro rata share for the 2015 base case spending remains at $11.8 million for the year.
And finally, I want to briefly touch on a couple of disclosure additions we made this quarter. As Jim mentioned previously, moving forward we will be reporting our all-in cost in direct response to invested demand for that information.
And secondly, at the end of the quarter, we published our inaugural sustainability report. This report is a combination of a program we ended to establish tracking systems within our businesses in order to report meaningful data externally.
We plan to implement and track additional sustainable initiatives that will improve our business, which will be reported in the future as we move forward from our inaugural base line report. In closing, 2015 is a year of significant investment in the future of our company and capital spending will revert to normal sustaining levels in 2016, when both the PV2 expansion and Minto North pre-stripping will be behind us.
In the near-term, our key catalysts are the receipt of the water license at Minto, which will allow us to get to the stripping of Minto North and is expected in the second quarter. The Santo Domingo EIA is expected in the second quarter as well, and the PV3 pre-feasibility study scheduled for Q3.
For the balance of the year, our focus is on stabilize mill throughput at Pinto Valley, increasing high-grade ore development in Cozamin, and advancing Santo Domingo on a basis that our free cash flow allows in this current market. Operator, that concludes our prepared remarks, and we're now ready to take question.
Operator
[Operator Instructions] And your first question will be coming from Ian Parkinson of GMP Securities.
Ian Parkinson
Just a couple of quick ones. The restructuring cost from Pinto Valley, are they all behind us now or any of those are going to flow through the Q2 items?
Gregg Bush
Yes, they are.
Darren Pylot
Yes, they're all behind us.
Ian Parkinson
What's your view on hedging going forward, whether be diesel or copper prices?
Darren Pylot
I think that on the diesel side, it's something that we are actively considering. And there's a bunch of things that you can do.
You can just simply buy long from an existing supplier or you can put on financial heads. And we're looking at both.
Certainly, there's an advantage in locking in some of the cost benefits that we've received from the drop in petrol prices up to this point. And on copper hedging, we're looking that as well.
It's something, which is something we don't want to do. And because we have positioned our brand in the market as being an unhedged company, so we can take advantage of the upside.
However, as we've said in the past, with the capital spend that we have this year, it could, well, make some sense to put some no cost protection on the downside. And so that's something that we are looking at, but we haven't made any decision this time.
Ian Parkinson
So currently you're unhedged on both the revenue and the expense?
Darren Pylot
At this particular call point, we are unhedged, yes.
Ian Parkinson
And just one quick one on the Cozamin exploration. The target areas, do they fall within your existing operating lessons like are they, depending on success, are they quick areas to access or is there a permitting process involved as well?
Gregg Bush
Well, the areas we're focusing on this year primarily are with -- it's upgrading resources that don't make the cut for reserves. So a lot of it's within or immediately adjacent to current reserve blocks.
There is some step out, but that's a minor part of the program this year.
Operator
Your next question will be coming from Sasha Bukacheva of BMO.
Sasha Bukacheva
So it was encouraging to see higher production of Pinto Valley in Q1 even despite lower throughput, higher grades here were helpful. What I am wondering though is going forward are you counting on increase in throughput as a result of maintenance initiatives or are you going to be looking to higher grade to meet production targets this year?
Also, how do you expect any impact on your mine plan grades in 2016 from mining higher grade this year?
Gregg Bush
We were able to juggle some things around to get a boosting grade for the first quarter, but we wouldn't be able or we wouldn't want to do that on an ongoing basis. So, yes, we do need to get our throughput back up to where it belongs.
And as far as any impact on future periods, we were able to incorporate some reserves that weren't in the PV2 mine plan. So even though we juggled some areas around to get some higher grade, we'll be able to replace that with this order that wasn't in the mine plan.
So we don't anticipate that we were robbing from the future to save Q1.
Sasha Bukacheva
And then what are your targets to see throughput normalizing at design? Are you still expecting the improvements to come through this quarter or next quarter or what are you targeting?
Gregg Bush
We expect by the end of this quarter to be back up where we need to be. That won't necessarily get our average for the quarter up where we need to be, but certainly for the latter half of the year we expect to be on step.
Operator
Your next question will be from Cliff Hale-Sanders at Cormark Securities.
Cliff Hale Sanders
Just one quick question. Just on Minto, given the better than expected results in Q1, you haven't touched the guidance for the full year.
Just wondering what we should expect there or are you just being conservative at this point pending clarity from the Water Board, what's going to actually happen there?
Gregg Bush
I think, yes, we're being conservative that we don't know what's going to happen with the Water Use License, and we are later -- the best case scenario, we're already behind our schedule, so we were able to cut the mine plan into two stages and get some order early. But I think its early days to be changing our guidance there.
Operator
And your next question will be coming from Stefan Ioannou from Haywood Securities.
Stefan Ioannou
Maybe just a follow-up on Cliff's question. Just hypothetically assuming that you were to get the Water Use License at Minto in Q2, can you just sort of remind us as to sort of what the timeline is to pre-strip it and actually get Minto North sort of flowing through the mill?
Is that something that we could see by as early as Q4? Is it more of a 2016 story in terms of Minto North production?
Gregg Bush
We expect right now that we'll see some ore into the mill in late December, maybe the last half of December, but its not going to have a material impact on 2015.
Operator
And your next question will be Matt Murphy at UBS.
Matt Murphy
Just had a question about the Pinto Valley reorg, what drove it? Is it just cost cutting or do you think it can drive operational improvements going forward as well?
Gregg Bush
No, it's definitely the latter. We're anticipating much more cost savings and just the direct cost of the manpower reduction.
Operator
And your next question will be coming from Oscar Cabrera of Bank of America.
Oscar Cabrera
Could you remind us, in terms of just stage-gating in Pinto Valley, also in Pinto Valley in Santo Domingo, what's the next stage? And just perhaps review your thoughts on capital allocation as you are trying to save money now, are you still willing to sell Santo Domingo for the right price or can you just put context around that please?
Darren Pylot
Oscar, well, Stage-Gate 1 is target to be the completion of EIA and port concession. So we're still waiting for those two initiatives.
But that's what establishes Stage-Gate 1. And then being successful on the Stage-Gate 1, we would move to Stage-Gate 2, which is to get the project 50% engineered, which we expect to happen some time in early 2016.
So that's Stage-Gate 1 and 2. Our budget for this year remains the same, as I mentioned, at $11.3 million, I believe, our portion of that budget and that has not changed.
And again, as I said in the call that's based on current market conditions in terms of copper price as well as our capital requirements, which is our first priority at our operating assets. So making sure that all the PV capital, PV2 capital spend, making sure that we have the appropriate resources to put into the mill and maintenance programs at Pinto Valley to get that operation running at the optimized level.
And then any free cash flow beyond that would be used to advance Santo Domingo. But that's obviously a lesser priority than our operations.
But at this time, we don't have any plans or sales processes for selling Pinto Valley. We're going to saw it for Santo Domingo and we remain focused on advancing that asset as an optional project for us and creating more value for our shareholders.
Operator
Your next question will now be coming from Mark Turner of Scotiabank.
Mark Turner
I hopped on the call a little bit late, but I just heard, I guess, some great responses to Pinto Valley throughput this quarter. And I guess the comment that you hope to exit the quarter, where you need to be in terms of reliability on mine time and throughput.
Is that where you need to be closer to 52,000 tons per day or sort of back to I guess for the end of last year, which was closer to 50,000 tons per day per calendar day.
Darren Pylot
We expect to be exiting the quarter at being able to sustain the 52,000.
Operator
And at this time Mr. Pylot it appears we have no further questions.
Please proceed. End of Q&A
Darren Pylot
Great. Thank you operator and thank you everybody for joining us today on the call.
And please don't hesitate to contact us with any additional questions or information. Thank you.
Operator
Thank you, sir. Ladies and gentlemen, this concludes your conference call for today.
We thank you for participating and ask that you please disconnect your lines. Have yourself a great day.