Oct 26, 2016
Executives
Cindy Burnett – Investor Relations Darren Pylot – President and Chief Executive Officer Jim Slattery – Senior Vice President and Chief Financial Officer Gregg Bush – Senior Vice President and Chief Operating Officer
Analysts
Orest Wowkodaw – Scotiabank Dalton Baretto – Canaccord Alex Terentiew – Raymond James Stefan Ioannou – Haywood Securities Shane Nagle – National Bank Financial Ralph Profiti – Credit Suisse
Operator
Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp's Third 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, October 26, 2016.
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 Capstone's 2016 third 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; 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. So that everyone gets a chance to ask a question, we would ask that you start with one and one follow-up, and then return to the queue if you still require further 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. Now, I'll turn the call over to Darren Pylot.
Darren Pylot
Excuse me. Thank you, Cindy, and good morning everybody.
As always, Jim will start with the review of our financial performance followed by Gregg, who will provide an update on our operations. Today, we will also provide an update on our corporate activities, followed by your questions.
So, now I'll turn it over to Jim.
Jim Slattery
Thank you, Darren, and good morning everybody. We recorded net income for the third quarter of $11.2 million and operating cash flow before changes in working capital of $41.5 million, which demonstrates our ability to continue to generate positive operating cash flow even at depressed copper prices.
In the quarter, we recorded revenue and average copper price of 2.21/lb while the average LME price was $2.16/lb for the same period. Over 80% of the Q3 sales that were subject to final settlement at the end of the quarter have been price fixed at $2.21/lb.
In terms of hedging, the August and September hedges were settled for approximately 2.24/lb against LME average of 2.16 and 2.14/lb respectively. We recorded a realized gain of $2 million on these hedges in the third quarter.
The open hedge contracts also at 2.24/lb, but we still have -- future quotational periods will be matched against Q4 and Q1 2017 sales. As a result, with the price fixing and hedging combined, we protected about half our total Q3, Q4, and Q1 2017 forecast sales at prices between 2.20 and 2.24/lb.
We exited the quarter well in compliance with all the covenants on our revolving credit facility, with our senior secured and total leverage ratios falling to 1.7 times, a bump pricing down 25 basis points under the credit agreement, bringing us down to LIBOR plus 3%, starting October 1. We also generated free cash flow during the quarter of approximately $20 million.
And subsequent to the quarter end, we used that cash flow to make a $20 million payment on a revolving credit facility, reducing our drawn debt to $329 million. At the same time, we reduced the credit available under that facility from $440 million to $420 million, which will reduce our cost a further 25 basis points, bringing our interest cost from the drawn portion of the credit facility down to LIBOR plus 2.75% for an annualized interest savings at over 11.5 -- sorry, $1.5 million.
With the benefit of the Minto high grades and strong performance at Pinto Valley, we anticipate that we will generate additional free cash flow in the coming quarters even at lower copper prices, which we will continue use to reduce our debt. We continued on a very positive production trend above our plan at both Pinto Valley and Minto, which in turn has lowered unit cost.
As a result, lower cost of those mines are expected to offset the higher cost at Cozamin, allowing us to remain within our consolidated guidance for C1 cash cost, all-in cost, and fully loaded all-in costs, which latter include interest in taxes. Minto's unit costs are expected to remain low in the fourth quarter as we will continue to process Minto North ore from stockpile as surface mining is now completed.
So, now I'll turn the call over to Gregg for our operational update.
Gregg Bush
Okay. Thanks, Jim.
We had another strong result or another strong quarter operationally with Pinto Valley exceeding our production target for the fourth straight quarter. Quarterly throughput averaged 57,000 tonnes per day year-to-date, and year-to-date we've averaged 56,000 tonnes per day above our target for the year, which was 54,000.
The C1 and all-in cost at Pinto Valley year-to-date remained below our guidance and we expect to end the year below our guided cost. At Cozamin, we are consistently achieving the development rates now that we need in orders to sustain production going forward.
Additional changes we made in this quarter include consolidating development under a single contract with a firm and sufficient capacity and flexibility to meet our needs. Our costs are expected to remain elevated through the year as we are increasing development and continuing with additional support and management controls.
And finally, Minto had an exceptional quarter performing ahead of plan on all production metrics, which has contributed to lower unit costs. The success we had in the first half of the year in extending underground mining operations has continued.
With the mining of the Minto North open pit deposit now complete, we will be processing the stockpile at Minto North ore supplemented with underground ore, and we expect operations continue into the second half of 2017. Extraction of the upper lens of the area to underground will be completed in the fourth quarter of 2016, and development has now reached the lower lens of that zone, with development mining in that zone continuing in the fourth quarter supplying high grade ore to the mill through mid 2017.
Beyond that, we are currently reviewing the economics of continuing to another stage of mining in the area to open pit that continuously take us through 2017. I'll now turn the call back over to Darren.
Darren Pylot
Thanks, Gregg and Jim. We are extremely happy with the results that Pinto Valley and Minto, as both those operations outperformed our expectations.
We are continuing to realize efficiencies at Pinto Valley, and work to evaluate the potential the low cost expansion opportunities is ongoing. In addition, we are advancing our review, regional opportunities in the vicinity of Pinto Valley as well.
At Cozamin, we've always been at the mine that we've processed the San Rafael zinc resource following depletion of our copper deposit. Though zinc price rising and some recent network indicating that both silver and zinc recoveries increase with copper in the system, we have reallocated some of our exploration budget to upgrade our confidence in the zinc resources both in the Mala Noche zone and the San Rafael areas.
When drilling and network has been completed, our goal is to include additional zinc production into our mine plan possibly in the later part of 2017. And finally at Santo Domingo, we commissioned a scoping study this quarter that will look at the economics that's combining Santo Domingo with another copper deposit in the region.
In closing, with each of our operations posting positive net income for the quarter, we were able to take advantage of the free cash flow -- excuse me, free cash flow, we generated to reduce our outstanding debt even at these low copper prices. With the benefit of Minto North for the next two quarters and the efficiencies at Pinto Valley, we should continue to generate free cash flow to de-lever our balance sheet.
We are also excited about the regional potential at both Pinto Valley and Santo Domingo, and we are looking forward to daylighting the zinc potential at Cozamin. We will continue to protect our assets during this downturn and continue to lock-in copper prices when opportunities exist to keep us protected in the short-term.
We are spending time internally on the growth opportunities within our portfolio, and we are positioned to take advantage of the eventual upturn in copper prices. Operator, that concludes our prepared remarks, and we're now ready to take questions from the floor.
Operator
Thank you, sir. [Operator Instructions] And your first question will be from Orest Wowkodaw at Scotiabank.
Please go ahead.
Orest Wowkodaw
Hi, good morning everybody. A couple of questions, first of all, your Cozamin silver stream expires early next year, I'm curious where your head might be out in terms of whether you plan to sign a new contract or whether you just want to take the savings from reduced operating costs going forward?
Darren Pylot
Well, Orest, I commented a little bit around the -- some of the exploration work we're going to be doing and closing over the next six months, and that's around the drilling of the San Rafael zinc resource, which has silver in it as well. So I guess the quick answer is that we don't -- we can't really quantify right now how much silver we have, because we have drilling to do, but I think by the time the silver stream expires in April, we will have a much better handle on some of the current resource reserve there.
So we haven't made a decision firmly around whether we are going to further do a stream or not, I guess it will depend on our silver resources as well as the silver price at the time. So it's still kind of out there up for discussion.
Orest Wowkodaw
Okay, thank you. And then just in terms of some of your forward contracts, your slide indicates that -- I guess you got about 50% protection moving forward for Q4 and Q1, can you give us some of the details around the Q1 '17?
I just can't seem to find it in your disclosure, in your financials. In terms of how many pounds at what price?
Jim Slattery
We have -- everything is disclosed, it's -- everything that we have in places is covering around D&A, or if you want you can have a look at that, and I think we can follow-up after the call.
Orest Wowkodaw
Okay, thank you.
Operator
Thank you. Your next question will be from Dalton Baretto of Canaccord.
Please go ahead.
Dalton Baretto
Hey, good morning guys. My questions are primarily around Minto.
First of all, can you give us a sense going forward through the middle of '17, in terms of the MLB, what proportion is coming from the underground versus the stockpiles, and do you expect that to change going forward?
Darren Pylot
It will depend on whether or not we do this next open pit stage, but I think the underground will probably continue to contribute about 25% over MLB next year. The remainder will come from Minto North stockpiles and previously existing low-grade stockpiles.
Dalton Baretto
Okay, great. And then just in terms of the recoveries, you know, there was the line in the MD&A that said you saw high recoveries and expected because of the lower proportion of oxidized ore, do you expect that to continue?
Darren Pylot
Well, to the extent, yes, I mean for that stockpile from Minto North, yes, we do expect that to continue. That's where we saw the difference.
Otherwise the stockpiles are behaving pretty much as expected.
Dalton Baretto
Okay, great. And then maybe lastly just switching gears to your revolver.
So, you paid down $20 million of it. Can I assume that the extension to the $60 million extension is still available?
Jim Slattery
Yes, the recording is still there. Yes.
Dalton Baretto
Okay. That's great.
Thank you very much. Those were all my questions.
Operator
Thank you. Next question will be from Alex Terentiew of Raymond James.
Please go ahead.
Alex Terentiew
Hey, good morning guys. I just wanted to follow-up a question there on Minto.
You talked about mining higher grades, I'm just starting to get a handle on what sort of grades that is you're putting through, if I look at your reserves for year-end last year and then look at what sort of tonnes, it could be mined this year and next, you still end up with about 3 million tonnes in reserves and most of that is from the underground. So I guess I'm really trying to wonder how much of that makes sense and makes the cut at current copper prices, so that tonnaging is a great question there I guess?
Darren Pylot
I mean we keep -- we originally ask folks that -- I guess the answer we didn't anticipate that we'd be operating in underground at current prices and we kind of surprised ourselves a bit. So the idea is to keep going, but the next underground deposit after the area to lower lands requires a fairly lengthy development to get there.
So we haven't made that decision yet, certainly we would like to -- we would like to continue operating the underground, but we just haven't made that decision yet.
Alex Terentiew
Okay. So what's changed then?
Last quarter you guys I think said Q3, now you're saying up until July, so that's almost a full-year extension, so what's changed over the past few months that you guys have been more positive?
Darren Pylot
I guess, better cost performance, and also we were re-looking at the grade in some of these underground deposits, and that's the changed the equation a bit. Every deposit at Minto is modeled kind of using very similar parameters.
And so, historically when we mined open pit, we tended to see a little bit higher tonnage and little bit lower grade coming from the open pits, but when you mine those same deposits underground with the higher selectivity, we are seeing just the opposite, we are seeing lower tonnage and higher grade. So, as a result of that, we've gone back and looked at our -- look at some of our assumptions around the underground mining, and the guys have been able to prove those up, you know, through mining this upper lens and now they are coming into the lower lens.
So, that -- I think that's probably the biggest reason we've extended the life and we hope to keep -- we hope to keep doing that.
Alex Terentiew
Okay. And sorry, just final one, just on Minto again, and then I will get of the queue, but down this area to open pit, is this something that would require much stripping, or is it -- I believe you guys mined part of that pit in the past, I'm just wondering what's left there too to get out?
Darren Pylot
Well, it is the next phase on that pit. Yes, fairly high strip, I believe it's about six to one.
So, we haven't made up our mind yet whether or not we're not going to do that, it just depends on what it's going to cost us to mine it and what the copper price is doing, but it's starting to look like we can. But one thing we liked about it is there is kind of an add-on benefit that we can use a lot of the stripping from that to do some reclamation work.
So, the stripping -- some of that stripping was sort of paid for itself. And the other thing is -- I guess, the other thing that's important is mining that will not add anything to our reclamation liability for visit, it all goes into an existing footprint, but that is all the ways we would go with an existing footprint.
Alex Terentiew
Okay, great. Thanks.
Operator
Thank you. Next question will be from Stefan Ioannou at Haywood Securities.
Please go ahead.
Stefan Ioannou
Great, thanks very much. I just have an question on Pinto Valley, just looking at the cost, it's obviously great to see the throughput go so high, and everything doing well there, but just on the cost themselves, they are up slightly from Q2 levels.
I'm just wondering if that's just the optics of having lower grade going through, or some of the actual input costs trending upwards that the operation -- whether it'd be fewer or whatever?
Darren Pylot
Yes. I guess the lower grade is a factor, but I think it's probably a smaller one I think.
The most important thing is this is the cyclical nature of our power cost with our contract. So, we see -- as an example, in Q3, our power cost were 50% higher than -- or little more than 50% higher than Q1, and those will start cycling back down now in Q4 and then Q1 will look the similar cost to Q1 of this year.
So that's probably the biggest piece of it, and may be the other is in the end of the first quarter we were behind in our stripping, and we are starting to catch up. So, we're seeing more tonnes moved.
Stefan Ioannou
Got it, yes, yes. Okay, for sure.
And then just maybe can you just provide maybe a little bit detail on the Santo Domingo's parallel study with the neighboring friendly project? Can you just give some maybe even just like timing for that when we might start to see some more information on that?
Jim Slattery
Yes. We should see some primary reports coming from the third-party at the end of November, early December.
So I would say there should be somewhat of an update at the next quarter, at the year-end quarterly call, but that being said, it is a scoping level study, so we are limited to the amount of information we can release, because it won't 43 101 compliant at the…
Stefan Ioannou
Okay. You guys are beginning this internally, not necessarily being able to release to the public then?
Darren Pylot
Yes. It's more just to see if it's worth actually, you know, going forward and you're doing some more work, but we definitely hope to be able to signal the market which way we are going to go by the end of the year.
Stefan Ioannou
Okay, great. Thanks very much guys.
Darren Pylot
Thanks.
Operator
Thank you. Next question will be from Shane Nagle at National Bank Financial.
Please go ahead.
Shane Nagle
Thanks, Operator. Guys, just next year at Pinto Valley, I think specifically the back half of the year, you are looking at some grades coming down and the strip ratio increasing.
I think on the last call you mentioned that you were kind of looking at the mine plan and revisiting, you know, trying to smooth out that transition to some lower grade higher strip material. What work has been done to that effect and kind of what kind of decline should we be modeling in for next year at Pinto Valley?
Darren Pylot
Well, I mean we're still -- we still are in the planning process for next year. We have looked at a number of different scenarios, but we don't have an approved plan at this point, but I will say it's a higher throughputs, it gets more and more difficult to smooth that difference and grade out, so…
Shane Nagle
Okay. So yes, modeling similar or slightly higher throughputs may offset some of that great decline and some of that being looked at with the PV3 expansion studies as well?
Darren Pylot
Sorry. What was that?
Shane Nagle
It's just that kind of lower grade profile, could that be potentially impacted by the 10% expansion studies that you're looking at as well or kind of those grades? I think it was 0.33 or 0.32 in the original 43 101, and we could expect those similar even at higher throughput levels, or would that grade be potentially…
Darren Pylot
Yes, I mean I think -- yes, I -- you know, to the extent that we are able to increase the throughput is going to make that -- the dip and grade that you see in the PV3 technical report. And to the extent that we increase the throughput what you're going to see is that's going to come faster and it's going to be steeper.
And then we'll come out of it. We'll come out of it quicker.
Right? Well, I'd say we're still looking, you know, we're still looking at the entire resource there to try to figure out what's the new cost structure, if there's some other sequence that would optimize, but we haven't finished that work yet.
Shane Nagle
Okay, great. Thanks, Darren.
Operator
Thank you. [Operator Instructions] And next we have a follow-up from Alex.
Please go ahead.
Alex Terentiew
Hey, guys. Yes, I just want to ask one more question on Cozamin here.
If you get some more tonnes from San Rafael, how many incremental tonnes you think you could mine there? And I guess related type question is you know, what do you see the mill capacity being?
Darren Pylot
Well, I'll answer your last question first. Cozamin has always been mine-constrained not mill-constrained.
We probably have mill capacity in excess of 4000 tonnes a day. So the idea with this ore is to try to utilize some of that -- some of that mill capacity that we can't currently fill mining in the footwall zone.
So -- but I wouldn't expect -- at least in the very near term I wouldn't expect it to be a really large number. We're hoping in the future that we can step that up, but we're still kind of in the early planning stages.
Alex Terentiew
Okay, fair enough.
Operator
Thank you. Next question will be from Ralph Profiti of Credit Suisse.
Please go ahead.
Ralph Profiti
Good morning. Thanks for taking my question.
Just one from me, Gregg, when did the power contract at Pinto Valley expire? And how much money could you save, or how much could volatility be reduced under a new deal?
Thanks.
Gregg Bush
Yes. Well, we are currently under a contract that's renewed on an annual basis, not a long-term contract, where we are in the process of looking at options to get a long-term power contract in place.
That's something that's ongoing right now.
Ralph Profiti
Okay, fair enough. Thanks, Gregg.
Operator
Thank you. And at this time, Mr.
Pylot, we have no other questions. So I would like to turn the call back over to you.
Darren Pylot
Thank you, Operator, and thank you everybody for attending our call this morning. If there's any follow-up questions, please don't hesitate to contact us directly.
Thank you, and have a good day.
Operator
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today.
Once again thank you for attending. And at this time we do ask that you please disconnect your lines.
Have yourselves a great day.