Capstone reports mixed results

Capstone Mining’s (CS-T) first quarter operating results were a bit of a mixed bag.

Combined production from its Cozamin and Minto mines came in at 18.6 million lbs of copper in concentrates, while by-product production came in at 4.9 million lbs of zinc, 402,272 oz. of silver and 937,000 lbs of lead in concentrates. The company’s final gold production isn’t yet known, due to the fact that assaying is done off-site, but it estimates it will come in at 3,500 oz. for the quarter.

While the standalone numbers look impressive enough, results from Cozamin weren’t as strong as in previous quarters. That was because the mine was affected by an ongoing drought in Central Mexico that led to water shortages in February. The company managed to secure additional sources of water in the latter part of the quarter, and it expects to make-up for any production shortfall in the second quarter.

The drought wasn’t the only issue the company had to contend with at the mine, as the copper grade was also lower than expected. Capstone says the reason for the lower grade was a delay in mining the high grade 11C block caused by the need for more ground support in the area.

It says mining has since resumed at the block and that copper grades will improve going forward. The delay at 11C did lead to higher than anticipated zinc and lead grades, as the alternate zone mined while work was being done on 11C contained higher grades of the two base metals.

Those higher grades from the by-product metals helped the company compensate for the lower copper production at Cozamin and keep costs in line with full year guidance.

One of the main benefits of having two mines is the hedge that one asset can offer to the other. So while Cozamin had its challenges and slightly underperformed, its Minto mine ran better than expected on both production levels and costs.

The mine’s success came from its ability to recover from a pit wall failure in the fourth quarter of last year. Ore that was deferred from the fourth quarter was accessed in the first quarter, and mining is now fully operational along the west wall.

Overall the company’s production numbers came in slightly worse than Jennings Capital analyst Garnet Salmon had predicted. Salmon expected 20.8 million lbs of copper production at a cost of US$1.64 per lb copper, compared to the actual numbers of 18.6 million lbs at cash costs of US$1.72 per lb.

Salmon expects to see the higher cash costs continue through the first half of the year as the company transitions into underground mining at Minto in the third quarter.

Capstone stuck by its earlier guidance of 85 million lbs of copper production for the full year at cash costs of between US$1.65 and $1.75 per lb.

“We believe this is justified as the company proceeds with mining of higher grade ore material from the 11C block at Cozamin and underground at Minto in the second half of this year,” Salmon wrote in his research note.

He also believes that future growth for the company should come via acquisitions.

“With an approximately $500 million cash balance, we believe the company has a tremendous opportunity to make accretive acquisitions, adding significant pounds to its production profile in the near-term,” Salmon writes. “With the Inmet deal completion, and the expectation of further consolidation in the copper space, Capstone has the potential to become a more meaningful player.”

Jennings Capital has a ‘buy’ recommendation with a 12-month target price of $3.40 per share.