Aug 5, 2018
Executives
Cindy Burnett - VP of IR & Communications Darren Pylot - President and CEO Jim Slattery - CFO and SVP Raman Randhawa - VP of Finance, Financial Planning & Analysis Gregg Bush - Senior VP & COO
Analysts
Dalton Baretto - Canaccord Genuity Oscar Cabrera - CIBC Stefan Ioannou - Cormark Securities
Operator
Good morning, ladies and gentlemen, and welcome to Capstone Mining Corp., Second Quarter Results Conference Call. At this time, all lines are in listen-only mode.
Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, August 1, 2018.
I would now like to turn the conference over to Cindy Burnett, Investor Relations. Please go ahead.
Cindy Burnett
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 Web site along with an updated corporate presentation, with summary information on the company and our financial and operating results. Also on the Web site are webcast slides to accompany our commentary today.
With me today are Darren Pylot, 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 and Analysis. I would like to advise you that this call is being recorded for replay through our conference call provider and is being broadcasted live through an Internet webcast system.
Following our brief remarks, there'll 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 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, and welcome to our Q2 conference call. Jim and Raman will start off by reviewing our financial performance, followed by Gregg, which will -- who will give you an update on operations and then it will be back to me, and I will summarize and answering -- answer your questions.
So Jim and Raman, over to you guys.
Jim Slattery
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 and Analysis, with a view of becoming the CFO when I retire from Capstone at the end of this year. This is all part of an orderly succession plan from my position that started in early 2017.
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 fall later this year. Raman has an extensive financial experience and operational background with majority of larger companies as he joined 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.
Raman Randhawa
Thank you, Jim. I'm very excited to have joined Capstone and I look forward to working with the team to first off, optimize 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 an improved consolidated copper production of 16,900 tons at a C1 cash cost of $1.84 a pound.
We saw a strong realized copper prices of $3.15 a pound for the second quarter, which generated $28.8 million of operating cash flow at $0.07 per share and $61.6 million or $0.16 per share for the year-to-date of operating cash flow. This is an increase of 600% compared to Q2 2017 and 130% compared to year-to-date 2017.
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 cost to be slightly higher due to maintenance cost to date, offset by lower production cost and higher byproduct revenue at Cozamin.
We are laser-focused on cost and efficiency optimization at Pinto Valley, which will provide for a significant leverage to copper prices. With that, I'll turn the call over to Gregg for further operational details.
Gregg Bush
Thanks, Raman. So first of all, to Pinto Valley operations.
As expected, higher grade in recovery supported higher copper production in the quarter. These grades 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 PV continued below our expectations. And as indicated in the last call, these issues are related to -- are related -- they're 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 an improved throughput and lower cost for the remainder of the years -- 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 4-year collective bargaining agreement that took effect on June 1. This new agreement removes a number of barriers that were preventing us from attracting skill trades within the organization.
It removed 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 at primarily at the plant, reducing planned and unplanned downtime and drastically reducing the use of contract labor 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 costs anticipated as a result of these improvements.
Turning now to Cozamin. Development work from San Rafael zone -- 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 ore and the blend. We also released our updated Mala Noche Footwall Zone resource during the quarter and we are 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 material handling upgrades that will capitalize on increased resources to reduce mining costs 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.
Darren Pylot
Thanks, Gregg, Raman and Jim. So again, just to really 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 of the optimization opportunities in the mill around maintenance at Pinto Valley.
So we're now in the implementation phase. As Gregg mentioned, over Q3 and Q4, we should see an increase in throughput and lower -- and better maintenance practices now that we've got that project defined and starting to implement it.
The renegotiation of the collective bargaining agreement, the new 4-year agreement, I can't emphasize enough how much more flexibility we have to manage our workforce and what that really translates into is allowing us a much lower reliance on outside more expensive contractors. And so we'll start to see immediate benefits from that starting, obviously, in this quarter and over the next 4 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, I'm very excited there.
Actually, the most excited we've ever been since having the property. 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 a very significant exploration success, both up dip and along strike. So the 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 I'm very excited.
And all of that, of course, leads into a materials' handling study that hopefully will allow us more underground ore that comes to the mill that we're currently not filling. As you know, we're running about 2,300 or 2,400 tons a day through that mill, and it has a capacity to up to, say, 3,700 tons 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, really, 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, a potential mine expansion and materials handling study will get delivered as part of this reserve update.
And the goal there is obviously to reduce costs and increase production. Also happy that we'll be able to get that San Rafael zinc zone completely developed.
And as Gregg mentioned, in Q1, we started to see some development, or 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 byproduct 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 first -- 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 a lining of what's comfortable for us to finance with the balance sheet that we have at Capstone at this point.
At Minto, the transaction is now expected to close sometime in the third quarter. Obviously, these current market conditions have put a hold on equity financing for the purchaser.
They do have a large cornerstone investors so we are confident they will get the 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 this last past Q2. We have, obviously, the Cozamin mine that operates well below the current price environment.
And at PV, 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 falling 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 is 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.
Operator
Thank you. [Operator Instructions] Your first question is from Dalton Baretto from Canaccord.
Dalton, please go ahead.
Dalton Baretto
Hey, 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, what do you actually have? And maybe talk a little bit about what you've had to give up to get it?
Gregg Bush
Yes. This is Gregg.
So as far as the flexibility, we inherited a collective bargaining agreement that have to have essentially never been changed since 1970 and the only modifications it had over the years were in form of amendment. So it was a very, 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 in this area. So lines of promotion were restricted to those bargaining units, even though it all acted as one union.
So it kind of -- it limited the pool for promotion. It was very difficult to develop people and offer people opportunities for advancement under the old contract it was.
Of course, we had -- 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 agreements kind of lower our cost because we -- there are -- just because -- this is the way that contract work.
It was extremely difficult to manage the workforce efficiently just 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.
Darren Pylot
Just to summarize, Dalton. 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 a 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 these shoulder-to-shoulder, all the work rules that were related to that old contractor gone and we're able to now pay the going rate on skilled trades. Therefore, higher than the Pinto Valley and not use the contractors.
Dalton Baretto
That's great. That's actually a big win.
Can you tell us just approximately how much the wages went up by?
Darren Pylot
There is a range depending on where anywhere from 5% to 25%. And I will say that on the immediate-benefit analysis, we're in a net gain.
So when you take the increased wages and offset with the differences in the overtime and the shoulder-to-shoulder and all 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.
Dalton Baretto
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 Pembroke can actually close all the financing?
Darren Pylot
Well, they don't need to do very -- 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 they just -- obviously with what's going on week-to-week and with trade wars and tariffs, they just decided to put it on hold until September, but hopefully, we get a more normalized market.
But I'm confident because it's such a low amount relative to what they have got in place already.
Dalton Baretto
Okay. And then, maybe one last one on Santo Domingo.
I know you talked about aligning your ownership structure after the feasibility. Any initial indications, first of all, any snips of interest from other parties?
And secondly, do you have a sense for where you'd be comfortable in terms of ownership structure?
Darren Pylot
Well, we do have interest in other parties. Obviously, this is going to be a -- what we see our next year being a fully permitted shovel-ready project.
So we have two choices, either move it forward and take less of risk, 70% now of the project. We think we're going to have to come down closer to 50 and then at that number, we think we're comfortably able to finance with our internal cash flow and debt facilities and that's when you factor in lower copper prices than what we're seeing.
So we would rather move forward quickly with the project than own more and have it sitting in inventory.
Dalton Baretto
Okay. But you'd still be looking to build the actual thing?
Darren Pylot
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 is interested and at what level and then make the decision that's best for Capstone and move forward with it.
Dalton Baretto
Perfect. That's all for me.
Thanks guys.
Operator
Thank you. Your next question is from Oscar Cabrera from CIBC.
Oscar, please go ahead.
Oscar Cabrera
Thank you, operator. Good morning everyone.
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 can you provide some context around that, please?
Darren Pylot
Yes. So sorry, if I -- improved recoveries and improved grades at Pinto Valley over the first quarter.
We definitely saw that. We didn't see an improved throughput.
We need to improve the throughput over the second half of the year, which is coming through this -- the better maintenance practices that we have contracted this firm to help us with that were 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 as in the third quarter -- excuse me, we expect recoveries to be as was in the second quarter and we expect rates to be slightly better.
So you 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 in Q1 and elevated in Q2, we're not -- we're going to be higher -- to the higher end of the range on the costs.
Oscar Cabrera
Let me just to be clear that it's -- the higher end of the range is just because of what's already happened that you're expecting improvements in the second half of the year?
Darren Pylot
Exactly, yes. The second half of the year, the cost and the production were both be lower than the first half of the year to get us to the range that we're talking about.
So everything will be improved in the second half of the year, we are set up to do that. Like I said, two to 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 that 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're nearing 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 some -- the potential for that company to focus in other type of businesses later on is just mandated by the Korean government.
Darren Pylot
No, 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 with them want to -- if they want to exit, we think the value is 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 will be moving forward one way or the other.
Oscar Cabrera
Okay. Thank you very much.
And then last, but not the least just want to wish Jim well in his retirement and good luck to Raman.
Jim Slattery
Thank you very much.
Operator
Thank you. Your next question is from Stefan Ioannou from Cormark Securities.
Stefan, please go ahead.
Stefan Ioannou
Great. Thanks very much guys.
I'm just kind of curious just given with the sort of slip in, in metal prices, copper prices and obviously, higher costs at Pinto Valley, just sort of the strategy to effectively -- immediately pay down debt when you're seeing -- when you finalize the Minto sale. Is that still hold?
Or is there any thoughts to 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?
Darren Pylot
Well, Stefan, that when we say reduced debt, it's really -- we have our revolving credit facilities. So there is no point keeping cash -- excess cash on the balance sheet because we're just paying more interest costs and we need to, but we can draw on that.
So I guess, the better way to put is, we have no plans for any additional capital programs other than what we've guided. So like cash, it will all be conserved on the balance sheet.
And as you mentioned, we do expect that cost profile at PV to come down but we will be mindful of the metal prices as we implement those programs at Pinto Valley.
Stefan Ioannou
Okay, great. Thank you very much guys.
Operator
Thank you. [Operator Instructions] There are no further questions at this time.
Please proceed.
Darren Pylot
Thank you, everybody, for participating in the call today. Operator, thank you, as well.
Please don't hesitate to contact us with any questions. We're obviously always available to answer.
And thank you very much and have a good day everybody.