Oct 28, 2017
Executives
Cindy Burnett - VP IR & Communications Darren Pylot - President, CEO & Director Jim Slattery - SVP & CFO Gregg Bush - SVP & COO
Analysts
Alex Terentiew - BMO Capital Markets Stefan Ioannou - Cormark Securities Inc. Robert Reynolds - Credit Suisse Craig Hutchison - TD Securities
Operator
Good morning ladies and gentlemen and welcome to the Capstone Mining Corp 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] This call is being recorded on Friday, October 27th, 2017. I now would 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 2017 third quarter financial results is available on our 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 CEO; Jim Slattery, Senior Vice President and Chief Financial Officer; and Gregg Bush, 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.
Now I’ll turn the call over to Darren Pylot.
Darren Pylot
Thank you, Cindy and good morning everybody. Jim will start off by reviewing the financial performance; followed by Gregg, to give us an update on our operations; and then I’ll comment on our corporate activities followed by your questions.
So, to get started, I'll turn the call over to Jim.
Jim Slattery
Thank you Darren. Our net income of $20.2 million in the third quarter and adjusted for $13.6 million gain on sale of marketable securities and $20.6 million impairment reversals at Minto to reflect mine life extension.
We reported an adjusted net loss of $11.4 million. Operating cash flow before changes in working capital of $41.4 million and $91.6 million.
We repaid another $14 million on our revolving credit facility subsequent to quarter end. We think that total debt was actually about $64 million.
$20 million of proceeds from the sale of our Kutcho project [Technical Difficulty]. Now I’ll turn the call over to Gregg Bush for the operational results.
Gregg Bush
Thanks Jim. Starting with Pinto Valley, production was lower than planned for the quarter and we experienced downtime due to electrical outages in both August and September.
[Technical Difficulty]. The new circuit will be commissioned in the next couple of days without any process interruption.
[Technical Difficulty] Part of sustaining capital will be directed towards electrical system upgrades over the next few years. We will complete an external review of electronic infrastructure [Technical Difficulty] we will also continue to have good results for brownfield drilling and this quarter announced a new transaction with Endeavour Silver.
[Technical Difficulty] At Minto we did fell behind with underground mining [Technical Difficulty] this pushed costs up significantly and we invested at Minto. We’re back on track and are advancing our extended mine plan.
With that I’ll turn the call back to Darren.
Darren Pylot
Thanks Gregg and Jim. So just summarizing the key points in the third quarter having three mines definitely contributes to flexibility with Cozamin outperforming, and Minto and Pinto Valley underperforming but we do still expect to make the lower end of our production guidance range for the year but no changes to our costs at PV and Cozamin.
We’re behind at Minto with higher costs as a result as Gregg mentioned work is well underway at Minto for the mine life expansion, but the new mine plan already to be worked into our 2018 guidance at a higher 2017 costs don’t forget also include the developments and infrastructure costs have all be expense to-date and some of those costs will benefit in future periods. We can to have exploration success at Cozamin and as Gregg mentioned we obtained access to additional highly perspective ground through agreements with neighboring property owners.
Subsequent to the quarter we repaid another $14 million of debt bringing our total debt reduction to $64 since we began the program back in the fourth quarter of 2016 and we’re on track to meet our net debt target of a $100 million by the end of 2018 at these current metal prices. So as we move into the fourth quarter and next year our operations are all setup for obviously extended mine lives and extended operations.
We’re very pleased with the excellent exploration results today to Cozamin and those results are increasing our confidence from mine life extension there. We do expect to increase exploration expenditures next year given the positive results of the joint program this year.
We’re also very optimistic of our closing of Kutcho property sale that we expect to take place in Q4 of this year and we will continue to direct any free cash flow from the proceeds of that sale or from our operations towards any excess cash flow towards our debt reduction targets. The last of our hedging program rolls off in December of this year we’ve no plans to put any additional hedges in places in 2018 or beyond that would cap our upside which positions us to a 100% exposure to our copper upside starting in January of next year and beyond.
So operator that concludes our prepared remarks and we’re now prepared to take any questions that’s out there.
Operator
Thank you. [Operator Instructions] And your first question is from Alex Terentiew from BMO Capital Markets.
Alex please go ahead.
Alex Terentiew
Hi guys, good morning. Here is few questions and I’ll just ask a couple of them and then I’ll get back in the queue.
But when I charter Pinto Valley I remember a couple course or few course ago you guys had talked about looking at some of the properties nearby, I think are they BHP properties adjacent to Pinto Valley and that seeing there are opportunities there, is that still something you guys are looking at or what’s become of that process?
Darren Pylot
Good morning, Alex. Yes, we’re still looking at perspective ground next door as we said before there is a couple of systems who have lot of property next door that production was taking offline and in the early 70s when copper was obviously a lot lower than it is now.
So there is a lot of perspective ground that comes with environmental issues and a lot of other things that we’re working through kind of understand so it’s a longer term process but we definitely like the region and we like obviously the neighboring grounds so we’re still continuing on that program.
Alex Terentiew
Great, thank you. And I will save the Minto for later and I’m sure somebody else may ask some questions on that but just on Cozamin then, you guys got an exploration success, you talked about extending the mine life, are you, was your priority now or what you think your focus maybe on, would it be looking at more zinc tons to maybe add to 2018 or beyond and are you rather just focused on finding more copper tonnage and expanding the mine life by another few years or both?
Darren Pylot
Alex actually we’re focused on both, we’ve been doing obviously a drill program on our San Rafael. Zinc area that we’re now finalizing a last bit of network that needs to be done before we can put it to the mine plan.
The goal is to get some of it into the mine plan at the end of next year and beyond, so we’re working on this and you can feel confident that there will be additional zinc relative to what we’ve been producing previously into the mine plan in 2018 and beyond. And as well, we’re going to step up the exploration program for more copper following our former successes that we’ve had to-date this year at Cozamin.
So we’ve had some fairly large step out drills intersect nice copper grades and width so we obviously want to follow up on that as well, so we’re going to do both.
Alex Terentiew
Alright, great, thanks guys.
Operator
Thank you. Your next question is from Stefan Ioannou from Cormark.
Stefan please go ahead.
Stefan Ioannou
Thanks very much. Just in case from a marketable security side, do you guys have any more sort of investments that you may be looking to liquidate here to help to bring some natural cash and pay down more debt or is that kind of done now?
Jim Slattery
That’s mostly done now.
Stefan Ioannou
Great. Just on the timing of Kutcho sale, like just hypothetically if you do sort of close that this quarter on your time, would we see the debt repayment actually happen this quarter or just given the mechanics that would have been more like a Q1 thing?
Darren Pylot
I think that whenever, depending on the timing of close, if it’s closed at the end of the year and it’s Christmas timing, it might be in January, but as soon as we can put the proceeds onto the revolving facility, we would to lower our interest cost, we can always draw the debt back if we need to use it, so there is no point of us keeping in excess of kind of $80 million to $100 million on the balance sheet, so aiming above that automatically goes at the end of each month so to speak onto the – would go onto the revolving facility to bring it down.
Stefan Ioannou
Okay, great. And just on Minto, just given the increase in the cash cost guidance so sort of just the outlook going forward, I mean, obviously copper has had a nice run here sort of if it a coming on sort of, what sort of breakeven copper price you actually comfortable with for the Minto’s profile through call it 2021?
Darren Pylot
Well Stefan, with the higher cost mine as you said, it does bring an higher expectation to copper although if you had, I know you guys have been busy, so none of you had the time to read the notes that we adjusted the silver weakness precious – silver precious metals agreement to allow for more gold if copper goes below $2.50 a pound. So if copper does drop below $2.50 we end up getting essentially a higher price for the copper with the more gold credit.
So it gives us the confidence to invest in Minto over the next four to five years with what we see with mine life and know that if the copper price drops we’re still helping that margin to continue to operate.
Stefan Ioannou
Okay, great, thanks very much guys.
Operator
Thank you. Your next question is from Robert Reynolds from Credit Suisse.
Robert please go ahead.
Robert Reynolds
Good morning guys, I guess couple of questions. My first one is just on the I guess hedging strategy, I see your hedges are running off in Q4 this year, but sitting at above $2 pound copper I’m wondering what your thoughts are around I guess walking in with this price for next year until you get the balance sheet down to at least where you want it to be on a longer term basis?
Jim Slattery
Our intention is not to do [Technical Difficulty]
Robert Reynolds
Okay. And just on the Minto mine life expansion, I guess it’s extended another year to 2021 from 2020, could you just about I guess there is a number of zone coming in I think there is some permits required along the way what’s critical path for you to expand Minto over the next 12 months to 18 months?
Gregg Bush
We don’t any permits for the next 12 months to 18 months. If we do forget full mine life after 2021 there is couple of underground that will need to be [indiscernible] and we’re working on those now.
So we don’t anticipate that to be the critical path. A critical path on Minto is, it is the timing [indiscernible] so the timing on getting the development started on each phase.
Robert Reynolds
Okay. And just in terms of the cost cadence for Minto in 2018 versus 2017, I guess my impression last quarter was there is a lot of stripping going on this year to setup for better cost and cash flow 2018.
But what should we be thinking at it in terms of the fully loaded or all in cost at that asset next year because it sounds like there might be additional underground development now or any color there would be helpful?
Jim Slattery
Well certainly the underground development will continue next year and with another – to be developed. We’re currently developing another basin area that will start producing a small amount of work in December, most of the work you will see in the first quarter of next year and second.
The cost next year we’re not ready to give guidance [indiscernible].
Robert Reynolds
Okay that’s helpful that’s it from me. Thanks.
Darren Pylot
Ryan following up on Jim’s question on the hedging we exceeded the quarter at one point two times of that EBITDA so we consider a balance sheet very strong and essentially where we would like it. We’ve come up with this $100 million net debt target because we think that the operations, with three operations producing the kind of copper we do, we want to be at no more than two times that EBITDA at what we think is a floor price of somewhere between $2 and $2.25 copper.
So that’s our target but we consider our balance sheet very strong with the debt that we’ve been able to repay over the last five quarters and which allows us not to have to worry about hedging in the future.
Robert Reynolds
Okay, thanks.
Operator
Thank you. [Operator Instructions] And your next question is a follow up from Alex Terentiew from BMO Capital Markets.
Alex please go ahead.
Alex Terentiew
Hi guys again, I just wanted to follow up on Minto there. So I understand you’re putting a new mine plan together you’re coming out with guidance for next year but just some longer term perspective, is 2017, 2016 1,000 ton number kind of a run rate that we could expect plus or minus for the next few years or would this be a declining profile towards 2021?
Jim Slattery
[Indiscernible]
Alex Terentiew
Okay that’s good to hear and I guess that’s a great driven primarily from the underground?
Jim Slattery
Yes.
Alex Terentiew
And then one question on the cost I know we will step in as per the – kind of to get a breakeven number, but is the stream reach extreme there $2.50. Is $2.50 kind of the all in number where below that maybe we can imply that below that with order stream adjustment, does this really doesn’t make sense maybe that’s kind of another way of looking at the breakeven, is that the fairway of looking at it?
Darren Pylot
Yes, I would say we now have the numbers in front of us, but yes, we’re on that that’s why we did it. I mean, as you know when an underground mine requires significant investment before you can recoup that capper to production because you have to develop, so far I had it, when you actually get to produce that we wanted some insurance and around that we obviously picked that $2.50 number because that’s the number we think is about breakeven.
So with that agreement it allows us, when we calculate that it was always down to something like $2 copper would allow us to operate at Minto with that adjustment to the streaming here.
Alex Terentiew
Okay, I don’t know if you can silver weakness precious that also same but the new terms on that stream are you, I think right now it’s a 100% of the silver gold is that dropped to, I don’t know, can you tell us what those details are or is that not possible?
Darren Pylot
Well, I mean, we’re happy to go through but I don’t have the details, it is a sliding scale depending on gold and copper price it just allows us to share more gold so we’re happy to explain that – give Cindy a call and we will line up a outline if you don’t mind.
Alex Terentiew
Sure. Thank you.
Operator
Thank you. And your next question is from Craig Hutchison from TD Securities.
Craig please go ahead.
Craig Hutchison
Hi good everyone. Question on the Kutcho sale, you said you’re quite confident it closes in Q4, so what gives you that exact confidence and your net debt target to end 2018, I think you said $100 million does that include the sale of Kutcho?
Darren Pylot
So first question is just dealing with obviously the party that’s purchasing the asset and understanding how they’re raising the finances has been coming along giving us the confidence that they will be able to close in Q4 that’s the first answer. The second one is that does not include the proceeds of the Kutcho sale that’s just dropping in our forecast for 2018 of our copper production costs and the current copper price.
So that would be [$21 million] on top of what we’re thinking.
Craig Hutchison
What sort of price are you using to kind of get to that $100 million net debt is it spot prices or, I’m just counting spot?
Jim Slattery
It has current spot [Technical Difficulty]
Craig Hutchison
Alright, thanks guys.
Operator
Thank you. Those are all the questions that we’ve for today.
I’ll now turn it back over for closing remarks.
Darren Pylot
Well, thank you everybody for joining us today and as always please don’t hesitate to contact anyone with any additional questions you have. Thank you very much.
Operator
Ladies and gentlemen, this concludes today’s conference call, we thank you for participating and we ask that you please disconnect your lines. Have yourselves a great day.