Capstone’s Pinto Valley ‘doing better than expected’

Capstone Mining (TSX: CS; US-OTC: CSFFF) shares got a boost after the Vancouver-based firm said its recently acquired Pinto Valley copper–molybdenum mine in Arizona could produce more than the targeted 22 million to 27 million lb. copper in the fourth quarter.

“Based on our operations to date, we expect to hit the high-end, or exceed the guidance of the 27 million lb., so we’re doing a little better than what we’d expected,” Darren Pylot, the company’s president and CEO, said at the Scotiabank Mining Conference on Dec. 3. Capstone gained 7%, or 19¢, to close the day at $2.80, near its 52-week high of $2.94.

So far the Pinto Valley purchase has been well-received. Capstone paid BHP Billiton (NYSE: BHP) US$650 million for the producing asset in mid-October. It financed 55% of the sale with cash-on-hand, and the rest through debt.

Pylot notes BHP had invested US$190 million to restart the open-pit mine in 2012, including spending US$60 million on a new mining fleet, US$50 million on the crushing system and upgrading the mill, and US$11 million on infrastructure. Capstone also retained 98% of BHP’s workforce at Pinto Valley.

“We get a BHP-built asset, and we’ve really just taken over the running of that asset. It was restarted and commissioned in January this year, and it’s running at 90% throughput design,” Pylot said.

Capstone plans to bring Pinto Valley’s throughput to the targeted 50,000 tonnes per day by year-end. Since assuming control of the asset on Oct. 11, Pinto Valley has produced 18.8 million lb. copper, while throughput has averaged 45,200 tonnes per day. Capstone hasn’t provided a cost guidance, but BHP estimated the mine would produce between 130 million and 150 million lb. copper a year at cash costs of US$1.80 per lb., net of by-product credits. Pylot says Capstone is working to lower mining costs.

It anticipates publishing a prefeasibility study (PFS) by early next year to expand Pinto Valley’s five-year mine life to 12 years. “We have all the permits necessary and facilities on-site to be able to mine for those 12 years,” Pylot said. “There is nothing holding us back, other than just converting resources to reserves for [those other] seven years of mine life.”

Pinto Valley has 968 million measured and indicated tonnes grading 0.35% copper and 0.009% moly, for 3.4 million tonnes copper and 188 million lb. moly. It has another 45 million inferred tonnes at 0.33% copper and 0.009% moly for 146,000 tonnes copper and 9 million lb. moly.

After the PFS, Capstone will begin permitting to extend the mine life beyond 12 years using the property’s remaining resources.

Along with the Pinto Valley mine, Capstone operates the Cozamin copper–silver–zinc–lead mine in  Mexico and the Minto copper–gold–silver mine in Yukon. The two are forecast this year to produce a combined 85 million lb. copper concentrate at C1 cash costs of US$1.65 to $1.75 per lb., net of by-product credits.

Next year Capstone plans to produce 230 million lb. copper from its three mines, marking a 170% growth over its 2012 pre-Pinto Valley guidance. Pinto Valley is slated to contribute 60% of the total, while Cozamin and Minto should each bring 20%.

In its development pipeline, the miner has the Santo Domingo iron oxide–copper–gold project in Chile and the Kutcho copper–zinc project in B.C. At Santo Domingo, it recently submitted an environmental-impact assessment and expects to finish a feasibility study by year-end. Capstone aims to nail down a power-purchase agreement next year before making a construction decision by late 2014 or early 2015.

So far, it has received a couple of bids from power providers, with rates lower than 15¢ per kilowatt hour, “which is what we expected and need to move the project forward,” Pylot said.

“It’s definitely a project that we feel is robust, but we want to be clear that it needs to be built at the right time, and we are under no pressure at Capstone to build that ahead of when it needs to be built, and that is when all the risks are either mitigated or taken away,” he added.

Capstone holds 70% of Santo Domingo, and Korea Resources Corp. (Kores) owns the rest. Kores also owns 11% of Capstone.

While Capstone is cautiously moving ahead with Santo Domingo, it has labelled Kutcho as a non-core asset and is looking to either sell or shelve it until zinc prices pick up.

But Pylot remains bullish on copper, dismissing forecasts of a surplus in 2016. “We’re skeptical and we are not sure that surplus is going to come as advertised. And we’re convinced it is setting up for a stronger and longer bull run in copper. So that said, Capstone we think is well poised to take advantage of that bull run with our immediate growth at Pinto Valley, as well as our longer-term growth with Santo Domingo, and our exploration portfolio.”

Capstone has exploration targets in Chile, Mexico and Canada. In August, it signed an option agreement with Sociedad Quimica y Minera de Chile to earn up to 70% in a large land package in Chile’s Region II that has been under-explored for base metals and precious metals. Drilling on the package should start in mid-2014.