Apr 26, 2017
Executives
Cindy Burnett - IR Darren Pylot - President and CEO Jim Slattery - SVP and CFO Gregg Bush - SVP and COO
Analysts
Orest Wowkodaw - Scotiabank Yan Truong - Credit Suisse
Operator
Good morning, ladies and gentlemen, and welcome to the Capstone Mining’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 [Operator Instructions]. Note that this call is being recorded on Wednesday, April 26, 2017.
I now would like to turn the conference over to Cindy Burnett, Investor Relations. Please go ahead.
Cindy Burnett
Thank you. I would like to welcome everyone on the call today.
The news release announcing our 2017 first quarter financial results is available on Capstone’s 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 Darren Pylot, Capstone's President and Chief Executive Officer; Jim Slattery, Senior Vice President and Chief Financial Officer; and Gregg Bush, Capstone's Senior Vice President and Chief Operating Officer. 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, there 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.
And finally, I'll just note that all amounts we will discuss today will be in U.S. dollars, unless otherwise specified.
I'll now turn the call over to Darren.
Darren Pylot
Thank you, Cindy, and good morning everybody and welcome to our Q1 call. As always, Jim will start by reviewing the financial performance for the quarter followed by Gregg, who will give you an update on operations and then back to me for an update on our corporate activities following then with your questions.
So to begin we’ll hand it over to Jim.
Jim Slattery
Thank you, Darren. So our results for the first quarter was a net loss of $7.4 million.
This included commodity derivative loss of $13.9 million, of which $11.6 million was realized and $2.3 million was unrealized. We also had a $1.1 million non-cash charge related to the write-down of inventory at PV and a $2 million charge for two exploration, which was paid in shares.
So the Q1 adjusted net loss was $2 million after removing the effect of these non-cash and non-recurring items. Operating cash flow before changes in working capital was $24.2 million and it’s worth noting that all three sites notwithstanding the operational challenges that we had in two of them this quarter generated net earnings from operations despite these challenges.
We also repaid debt of an additional $10 million on our revolving credit facility subsequent to the quarter end. And this reduces our drawn debt to under $300 million and our net debt to under $200 million.
At the same time we achieved a major milestone last week, which was a two year extension of our revolving credit facility to April of 2021. At the same time we right sized the facility to meet our current requirements.
This entailed a step down to $350 million initially and then reduces annually by $25 million until it reaches to $275 million. For reference we are now drawing less than $300 million.
We maintain the current pricing grids for the current term of the RCF, which starts at LIBOR plus 2.5% and we are currently at LIBOR plus 2.75%. And then it bumps up 50 basis points for the last two years of the term, therefore starting at LIBOR plus 3%.
As we said before, we intent to use all of our free cash flow from operations to reduce debt to a sustainable level at the bottom the cycle for commodity prices. In terms of costs, our cost per pound was high in the first quarter and this is largely attributable to the production challenges that Gregg will speak to in a few minutes and more significantly obviously at PV.
We expect this to come down over the course of the year as Pinto Valley and Minto return to full production, and Cozamin realizes the benefit from the return of the silver stream to Capstone, which took place on the 5th of April this year. I’d now like to turn the call over to Gregg for operational update.
Gregg Bush
Thank you, Jim. Okay, at Pinto Valley operational and maintenance issues dominated the quarter.
We started the quarter with a major scheduled maintenance program, which required the plant to be shut down for six days. The work that necessitated this general shutdown involve repairs to the tailing thickener feed distribution system and repairs to the coffin [ph] liners beneath the fine ore bins.
Although many other maintenance activities were completed concurrently with these repairs. The repair activities were completed without incident, however during the startup following this shutdown Pinto Valley received 5 inches of rain over a two day period, ultimately resulting in partial flooding of the pit bottom with this rainfall coming at the end of a relatively wet winter at Pinto Valley.
This prevented shipping of high graded ore plants in the pit bottom during a two week period. Additionally during the startup period the long anticipated failure of the lower primary crusher mainframe occurred, likely precipitated by the wet and sticky nature of the ore being fed during the period.
The mainframe replacement was completed over a two week period beginning February 25. During the mainframe work replacement three portable crushers were brought in which allowed us to operate at about 30,000 tons per day during this time.
Since the crusher repairs were completed the March 9th, plant is operated above plant throughputs averaging just over 59,000 tons per day. Property cost at Pinto Valley were also negatively impacted by the contractor requirements during these shutdown periods.
These included maintenance support and contractor in the contract crushing activities during the extended shutdown and the spares involved in the mainframe replacement. In the contract mining for the pioneering of the [indiscernible] push back had been scheduled to be completed in December of last year, but was delayed in starting.
This resulted in expenditures being pushed into the first quarter of 2017. [indiscernible] and finally low production impacted our unit costs.
On the PV expansion, our PV3 expansion we reached a few major milestones on scheduling and on permitting the push backs on the forest service land. The forest service published a notice of intent to conduct the EIS, which kicked off a 30 day comment period which end tomorrow.
And public meetings were held in Miami and superior during March. So everything with EIS is moving ahead on ahead on normal course.
And in addition state permit applications relative to the PV3 expansion were submitted and deemed complete during the period. Moving on to Cozamin production and cost were on or slightly above planned.
We completed 800 meters of development above what we have planned to complete. However, improved while the additional development pulls some cost forward from later in the year into the first quarter.
However improved dilution controls and higher copper production offset these expenditures. Costs are expected to fall going forward as the full revenue stream from the silver starts in April.
And network and drilling for the zinc zone also continued during the quarter. At Minto operations scheduling changes that gotten slightly out of sync with our guidance on a quarterly basis.
Some of these changes included the development to the Minto east ore body which was not originally planned. These costs were all expensed and pre-stripping cost in the area to the stage three pit were all expensed but produced little ore during the period.
And also there was a delay in startup of ore production in the area to lower lens, which resulted in lower grades milled and forced the higher proportion of partially offset our stockpile materials into the feed. Stockpile valuation was also higher at the start of the first quarter due to the makeup of the materials in the stock.
All of these things will even out over the year we expect to be back online on an annual basis with no change to full year production and cost guidance. On Minto mine life, we've as I previously mentioned, we've already begun development to the Minto east ore body.
At current copper prices we anticipate operating at least until mid-2020. This will entail mining the Minto East and copper heal underground deposits, which are currently in our reserve base.
The extended mine plan also considers an extension Minto East underground zone and an underground project to extract a portion of the Minto North ore body, that did not ultimately optimized into the open pit. These may require some additional permitting.
We're also evaluating bringing the rich top in area two stage four pits back into reserves. Given our lower cost structure and anticipation of better metal prices, these would extend the mine life into 2022.
With that I'll turn the call back over to Darren.
Darren Pylot
Thanks, Greg. Well there is no question that hearing from Greg and Jim that Q1 was definitely a challenging quarter operationally.
However, we're maintaining our consolidated production and cost guidance due to the following. As we heard all of the planned maintenance and known maintenance at Pinto Valley is now completed for basically the entire year.
And we expect throughput to remain above planned at current levels for the rest of the year with all the major repairs to the crusher now completed and the crusher is operating as per plan. Secondly, at Cozamin we're operating -- we plan to continue to operate above budget and plan and expect similar performance as we had in Q1 over the balance of the year.
And as Greg mentioned, Minto mine plan is on plan for the year as well with throughput and grade and we'll have additional areas of mining that we previously thought we would be going care and maintenance in early December. We'll now obviously be running to the end of the year and beyond.
So that gives us some extra production at Minto. So those three factors give us the confidence that we will be able to come in within guidance on production and obviously if we do the pounds our cost will come inline as well.
Some of the key points I'll reiterate, as Jim mentioned, significant positive financing action by extending our credit facility out two more years to give us the runway in the cash flow to repay the facility in full based on current commodity prices and consensus commodity prices going forward. We did pay down an additional $10 million taking our net debt down to below $200 million.
So continuing to generate free cash flow and pay-off debt at current commodity prices. We've made solid progress on expansions and growth.
At Pinto Valley we've advanced through the public comment stage on our permit application for PV3. As we mentioned our Minto extension is now -- mine life is now at least out to 2020.
And as Greg mentioned we'll evaluate mine plans that include rich top and area two stage four they're not currently in our reserves. And would extend mine life beyond the 2020.
We continued the Cozamin, we continued our zinc drilling, and metallurgical work and that's advancing as planned. We -- as Jim mentioned in early April, we now retain the all of the silver starting April revenue that we previously giving to Silver Wheaton in the silver stream agreement that's all coming back to us in Cozamin.
So cost will observe from April going forward. And finally at Santo Domingo, the current environment in Chile has improved considerably since our last -- since the feasibility study was done.
The current environment for power is 20% to 30% lower than the assumptions we made in the steady. There are now opportunities to share infrastructure such as ports and water, which could reduce both CapEx and OpEx.
So we’ll continue to have discussions with third parties around these initiatives. We’ll also complete some tradeoff studies within the year to give us a more accurate description of the project in the current market conditions.
And this is all really done to increase our option value on the project without any material spending and I want to be clear that no development decisions will be made until we see a further recovery in copper prices. We’re well positioned to take advantage of the improved copper prices this year and also we’ve obviously large leverage to copper prices.
We’ll enter the second half of the year with approximately 50% of our production not subject to either hedging or any price cohorts [ph]. So in closing, we’re confident that we’ll be within our 2017 guidance based upon how our operations are currently operating.
We’ve reduced debt by $10 million and expect further debt reductions throughout this year. We’ve eliminated any short-term financing risk by extending our credit facility out to 2021.
And we’re looking forward to an increased mine life at Minto, which increases the asset value of the company beyond this year obviously with operating. So the two things I want to leave you with to make sure you have clear in your minds that in the call is one, the maintenance is completed at Pinto Valley.
Pinto Valley is running according to plan and the pressure was really a one-off incident and we’re confident we’ll be other run as per plan for the rest of the year. And two, Minto was not shutting down or going care and maintenance anytime in the near future.
Operator, thank you that's concludes our prepared remarks. And we are mow prepared to take questions from the floor.
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Orest Wowkodaw Scotiabank.
Please go ahead.
Orest Wowkodaw
Hi, good morning everybody. A couple of questions, first of all, Jim, in terms of a new credit facility, are there any required prepayments on this or is it just that the maximum steps down every year?
Jim Slattery
Just the maximum steps down. Basically it’s the exact same agreement as we currently have just with two years tacked on and the reduction in the facility and the change in the rates in the last two years.
Orest Wowkodaw
Okay. And then you can with excess cash flow you can just pay this down early?
Jim Slattery
Yes, if we like.
Orest Wowkodaw
Okay.
Jim Slattery
And we’ll have the option to permanently reducing and saving on the standby fees or not depending on what our requirements are going to be.
Orest Wowkodaw
Okay, that's perfect. And then in terms of Minto, it sounds like you’re leaning toward keeping it open beyond this year.
Can you give us an idea of what the production profile would look like beyond this year at Minto? And kind of what sort of sustaining capital or kind of what the economics looks like beyond 2017?
Darren Pylot
Well, I think reduction profile for at least the next two years would look very similar to this year and the cost as well. The all in cost that we anticipate from each of the underground ore bodies that I mentioned is all kind of in the same dollar high 180 to the mid-190 range.
Orest Wowkodaw
Okay.
Darren Pylot
The open pit pieces if we bring those would obviously be higher cost.
Jim Slattery
Or to be clear that's all in cost includes all sustaining capital.
Orest Wowkodaw
Okay. So, that's all and would be similar production, similar cost.
And I just want to clear, have you like are you formally saying you are keeping it open now or is that still, or is it just an option at this point.
Jim Slattery
No, no as we are formally saying that we are keeping it, we’re going to keep running beyond this year and the reason why we get a bit tricky, not tricky but the bit, unclear because there is some deposits need permitting and some deposits that don’t and we need to understand how to sequence the mind plan, but we have enough reserves based on obviously commodity price as everything is that we will operate through the 2020 and if we bring an additional reserves that we previously taken out due to low copper prices, we were going for a couple of year, potentially a couple of years beyond that. So yes, we are clearly operating beyond 2017 as of now.
Orest Wowkodaw
Okay, and any ore for next year is that already permitted. What is the permitting issue kick in the timeline?
Jim Slattery
As I mentioned two ore bodies the metal east extension and an underground an extension on the - four body and I wanted to clarify they may require additional permitting as it, I don’t necessarily think they do require permitting certainly we have a president if you recall the M zone an area to where wasn’t in -- it all require we think all of were require is an operating amendment to our - mining license. But you know until we get through all the evaluation and comments from stakeholders we won’t move for sure.
Orest Wowkodaw
Okay. Thank you very much.
Jim Slattery
Might be clear that’s the stuff we would be mining next year is not subject to permitting, nothing holding us back in 2018 from mining on 2019 for that.
Orest Wowkodaw
Great.
Jim Slattery
That’s correct.
Orest Wowkodaw
Thank you.
Operator
Thank you. [operator instructions] And your next question will be from Yan Truong of Credit Suisse.
Please go ahead.
Yan Truong
Thank you for taking my questions. Just two quick questions on Minto again if I may.
Firstly, what is the upfront incremental capital that’s required in 2017, whether that’s expense or capitalize in preparation of production in 2018 and 2019? And my second question is, given the higher all-in-cost nature at Minto, would you ever consider hedging out that production at today’s prices are you comfortable to full exposure?
Thank you.
Jim Slattery
So, 2017 we would expect to see some additional development cost, we hadn’t really since though our current mine plan would have us actually producing some more from the Minto Eastern and for the end of the year we are just expensing those cost. So we don’t expect to have any impact on the cash cost for the year, there will be enough additional production coming from that zone to offset the development cost, that are the additional - cost incurred during the year.
And those cost are I would say under $5 million all together the development in that the lateral development in the raises to get the area into production.
Darren Pylot
Just the second part of your question Yan is that currently we are not contemplating any hedging around Minto, we like -- we feel good about the copper market the environment going forward over the next short to medium term. So, we are not currently looking at hedging any more copper that’s not already hope there and work for this year.
Yan Truong
Understood. Thank you, very helpful.
Operator
Thank you. [Operator Instructions] And at this time we have no further questions.
I would like to turn the call back over to Mr. Pylot.
Darren Pylot
Thank you and thank you everybody for joining us today and as always, please don’t hesitate to contact us for any additional questions or comments that you may have. Thank you.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today.
Once again thank you for attending.