Capstone cuts spending, suspends work at Santo Domingo in Chile

VANCOUVER — Capstone Mining (TSX: CS; US-OTC: CSFFF) is the latest copper producer to announce spending cutbacks and strategy shifts in light of weakening metal prices. It now plans to slash capital expenses at its operating mines in the Yukon, Mexico and Arizona by nearly US$18 million, and suspend all work at its Santo Domingo development project in Chile.

Capstone’s overall production guidance remains unchanged at 90,000 tonnes of copper in 2015, though it will lean more heavily on its Minto copper mine in the Yukon, where it has enjoyed a relatively strong year-to-date performance. Company-wide cash costs are an estimated US$1.90 to US$2.05 per lb. copper.

Minto was slated to produce 13,000 tonnes copper this year at cash costs of between US$2.75 to US$2.85 per lb., but now it anticipates 15,500 tonnes copper at cash costs ranging from US$2.55 to US$2.65 per lb. Capital expenses at the mine have decreased to US$18 million from US$35 million, largely due to deferring capitalized stripping into 2016.

The production boost at Minto is being offset by a drop at Capstone’s Cozamin operation in Mexico, which is scheduled to generate 15,500 tonnes copper at cash costs of US$1.55 per lb. The mine was expected to account for 18,000 tonnes copper at cash costs of US$1.40 per lb. Spending at Cozamin has been chopped by US$5 million to US$10.7 million.

Capstone’s guidance at its Pinto Valley open-pit mine — 125 km east of Phoenix, Ariz. — remains unchanged at 59,000 tonnes copper, while cash costs have fallen US10¢ to US$2 per lb. The company cut sustaining capital at the project, but overall expenses have risen nearly US$4 million to US$90 million due to increased stripping.

“As copper prices deteriorate, we have looked at a range of actions to preserve our financial flexibility. We’ve taken steps to reduce our overall capital expenditures and have reduced operating costs in order to enhance our financial position and provide sufficient liquidity to execute our operating plan in the current market environment,” president and CEO Darren Pylot said in the release.

“This includes reducing and deferring capital expenditures at our operating mines, suspending all work on the Santo Domingo project, eliminating non-essential operating and general and administrative expenses, and reducing exploration expenditures,” he added.

Capstone’s large-scale Santo Domingo iron oxide copper-gold joint venture lies 130 km northeast of Copiapo in Chile’s prolific Region III. The company holds a 70% interest in the project alongside state-owned Korea Resources (KORES). The move isn’t surprising given Santo Domingo’s significant capital requirements and economic sensitivity to low copper prices.

The company released a feasibility study on Santo Domingo in June 2014, which models a US$1.7-billion development that would produce 128 million lb. copper (58,000 tonnes) annually over 18 years. The conceptual mine was based on proven and probable reserves of 392 million tonnes of 0.3% copper, 28.2% iron and 0.04 gram gold per tonne. Contained metals total 2.6 billion lb. copper, 75.1 million tonnes iron and 506,300 oz. gold.

Capstone’s base case used a US$2.85 per lb. copper price, which resulted in a 17.9% after-tax internal rate of return (IRR) and US$797-million net present value (NPV) at an 8% discount rate. At US$2.57 per lb. copper, the project yielded a 15.2% IRR and US$584-million NPV.

Capstone will reduce its previously disclosed US$19.4-million budget at Santo Domingo by US$2.5 million, including downsizing its Chilean operations. It says “holding and community relations” costs could average $2 million annually on a 100% basis, and it will incur a one-time restructuring charge of US$2 million in the third quarter.

“While we believe that Santo Domingo is an excellent project, a number of factors — including uncertainty over the direction of copper prices and our financing capacity for the project — make capital preservation a priority at this time,” Pylot said.

BMO Capital Markets analyst Aleksandra Bukacheva said the latest moves by Capstone are “highly appropriate, given current market conditions.” BMO has an “outperform” rating on Capstone with a $2.50-per-share target price. Bukacheva had “previously ascribed a negative value to Santo Domingo and did not include production in its forecasts for [the company], or copper supply-demand forecasts.”

Bank of America Merrill Lynch has a much more bearish outlook on Capstone, with an “underperform” rating and a price objective of 40¢ per share. Analysts Oscar Cabrera and Matthew Griffiths noted on Sept. 4 that due to a “revised earnings outlook and metal price forecast, it is difficult to see Capstone move forward with its Pinto Valley expansion. Given [the company’s] high-cost copper production and few actionable catalysts, we expect [Capstone shares] to underperform its mining peers.”

Since May Capstone shares have fallen 60%, or 93¢, as copper prices took a dive. Shares have traded within a 52-week window of 55¢ to $2.58, and closed at 62¢ at press time.

The company has 382 million shares outstanding for a $237-million market capitalization.