Capstone buys BHP’s Pinto Valley

VANCOUVER — Most of the world’s mining majors are selling non-core assets so that they can optimize key operations, shore up earnings and cut back capital outlays. The shift follows a few years of overspending spurred by commodity price projections that haven’t come true — a sector-wide mistake that has resulted in $60 billion in recent writedowns.

It makes for a mining market full of “for sale” signs, and that spells opportunity for smaller companies with that essential yet elusive asset: cash to spend.

Capstone Mining (CS-T) is one of few small- to mid-tier miners with cash-on-hand, and the copper producer is seizing the opportunity to buy in a market that’s aligned in its favour. For US$650 million the company just added a third operating mine to its portfolio, in a stable jurisdiction that will boost Capstone’s copper production by 160%.

The mine is Pinto Valley and the seller is BHP Billiton (BHP-N, BLT-L). Located 125 km east of Phoenix in Arizona’s historic Globe-Miami copper district, Pinto Valley was first built in the 1970s. It was shuttered in the 1990s when copper prices fell and remained silent until 2007, when BHP brought it back into production. Unfortunately the restart was poorly timed and the weak copper prices of 2008 forced another shutdown.

Then BHP did it right. The major spent $194 million last year to bring Pinto Valley back to life, a goal it achieved late in the year. Most of BHP’s monies were used to buy a new mining fleet and overhaul the mill and processing plant. Operations are ramping up, with throughput expected to reach design capacity of 50,000 tonnes per day by September.

At that point the mine will churn out 130 million to 150 million lb. copper in concentrate plus 10 million lb. copper cathode annually, along with by-product molybdenum and silver. The mine is expected to produce a pound of copper for a cash cost of US$1.80, net of by-product credits, during its first five years of operation. Darren Pylot, Capstone’s president and CEO, says the strip ratio for those first five years is essentially zero, which helps keep costs down.

At present, there are only enough reserves at Pinto Valley to support five years of operation. However, mine life is one part of Pinto where Capstone sees major potential.

“This deal puts our balance sheet to work and gives us another producing mine,” Pylot says. “What really attracted us to this asset though is the significant potential for an extension to the publicly reported mine life.”

While announcing the deal, Capstone also released an updated resource estimate for Pinto Valley, which outlines 968 million measured and indicated tonnes grading 0.35% copper and 0.009% moly, plus 45 million inferred tonnes of similar grade.

“That’s 3.4 million tonnes of contained copper,” Pylot says. “That’s what we’re really excited about. That’s what motivated us to move forward and purchase this operation.”

Capstone is already advancing a prefeasibility study to convert Pinto Valley’s sizeable measured and indicated resources into reserves. The company expects the study will be finished before year-end.

Once that prefeasibility study is complete, Pylot says Capstone will move on to study the potential of delineating new resources at Pinto and extend, or potentially expand, the operation from there.

Pinto Valley is designed for this type of long-term outlook, in that the mine’s permits extend well beyond its current five-year outlook. The mine is authorized for 12 years of operation, and the tailings facility is designed to last at least that long. If more resources are found, Capstone would have to apply for permit amendments.

Pylot likes Pinto Valley’s potential, but he is equally pleased that the Pinto deal will not drain all of Capstone’s cash reserves. The company has $485 million in the bank, with $350 million going towards the $650-million purchase price. To finance the rest of the deal Capstone is tapping into its $200-million credit facility — of which $176 million is available — and into a new $200-million credit facility.

After the deal closes, Capstone will still have $135 million on hand. Its debt load, which is just $24 million, will stand at $300 million. But to go along with its bigger debt Capstone will have significantly more copper to sell.

In 2012 Capstone produced 79.6 million payable lb. copper from its two mines, which are the Minto mine in the Yukon and the Cozamin mine in Zacatecas State, Mexico. Starting in 2014, once Pinto Valley has ramped-up to capacity, Capstone expects to produce 250 million lb. copper annually.

Market reaction to the deal was muted. Capstone’s share price rose and then fell, ending the day down 7¢ at $2 on 4.7 million shares traded. Capstone has a 52-week trading range of $1.84 to $3, with 379 million shares outstanding.