Santo Domingo prefeas a feather in Capstone’s cap

Vancouver – Capstone Mining (CS-T) has released a prefeasibility for its 70%-owned polymetallic Santo Domingo project in Chile that shows relatively low capital costs for a project of its scale, just as costs are on the rise for its two producing mines.

The Santo Domingo study estimates total capital costs of US$1.24-billion for the 63,500-tonne-per-day open pit operation, thanks in part to the project’s location in a built-up part of northern Chile. In a conference call Capstone president and CEO Darren Pylot had to defend the low estimate to inquiring analysts.

“We’ve had some comments on capex and comments that it would seem a little low for the size and scale of this project,” said Pylot. “I just want to reiterate due to the location of the infrastructure, being the road and the power, we feel very comfortable with the capex number that we’ve come out with today.”

Stefan Ioannou, an analyst with Haywood Securities, said in a phone interview that the numbers were probably less than most expected, as he was looking at a capex closer to US$1.3 billion if not US$1.5 billion.

“The numbers on paper do look good,” said Ioannou, “it makes for a pretty compelling project that it makes a lot of sense to go forward with.”

Other financials are also encouraging, with an after-tax net present value of US$1.09 billion, an after-tax internal rate of return of 22% and a simple payback period of 3 years, all using a long-term copper price of US$2.25 per lb. And, thanks to healthy magnetite iron and gold credits, the company expects to produce copper at 11¢ per lb. over the life of mine.

Pylot noted that the results were as good as or better than the due diligence numbers the company came up with before it made the move to acquiring Far West Mining and its Santo Domingo project in April.

Mining-wise, the study looked at an 18-year mine life with annual production of 144 million lbs. copper, 4.1 million tonnes iron concentrate and 15,000 oz. gold, with much higher copper production in the early years of the mine. Total reserves stand at 418 million probable tonnes grading 0.32% copper, 0.04 gram gold per tonne and 73 million tonnes of metal magnetite concentrate.

The project benefits from being just a km from a paved highway, 6 km from the town of Diego de Almagro and its 220-kilovolt power lines, and, sitting roughly 75 km from the ocean, the company will be able to pipe in seawater for processing and is close to a port for exports.

Of course, even coming in under estimates, US$1.24 billion is still significant amount of money, but on that front Capstone is benefitting from its partnership with Korea Resources Corp., or KORES, which owns the other 30% of Santa Domingo.

As part of their joint acquisition of Far West’s assets, KORES committed to securing 65% of the capex, or roughly US$800 million, through favourable debt financing. Of the remaining US$400 million or so, Capstone is only on the hook for about US$300 million, which it can fairly easily cover thanks to its over $500 million in cash on hand.

Ioannou noted that were it not for KORES, Capstone would have had a much tougher sell on the Far West acquisition and its attempts to develop the Santa Domingo project.

“I think most people when they saw Capstone was taking over Far West the gut reaction was this was something completely out of left field for Capstone,” said Ioannou. “All their other operations can sort of be characterized as low tonnage, high grade, low capex, very small, manageable operations, and this is the exact opposite end of the spectrum…The one saviour to it from the Capstone side is having KORES there as a partner to put a realistic financing mechanism in place.”

With both project financials and financing looking good, Capstone is progressing with permitting, a full feasibility study, and one of the bigger challenges going forward: labour. With a lot of projects going on in the country the company admits that the skilled labour situation is tight, though it doesn’t anticipate significant problems staffing up the project.

Meanwhile at Capstone’s Yukon-based Minto mine and its Mexico-based Cozamin mine, production is going largely as planned though with higher-than-expected costs at Cozamin.

Second quarter results showed payable copper production of 20.5 million lbs., an increase of 3.2 million lbs. compared with last year, which, combined with higher prices, led to gross sales revenue of US$78.9 million for the quarter compared with US$69.2 million for the same quarter last year.

Net earnings, however, were significantly lower at US$15.5 million compared with US$44.7 million for the second quarter last year, due in large part to the US$21.1 million it took in through derivative instruments and US$11 million through disposal of investments in the second quarter of 2010.

Costs have escalated compared with last year at Minto as the company processes low-grade stockpiles and prepares a second pit for mining in 2012, but the rise was expected. Contract crushing is going well and exceeding targets. At Cozamin, the company has successfully opened a lot more working faces and eliminated bottlenecks, but labour negotiations and concessions have led to higher overall cash costs.

For the year, Capstone emphasised it was keeping its full-year guidance at 80 to 85 million lbs. copper, while raising  cost estimates from between US$1.30 and US$1.35 to US$1.45 and US$1.50.

Capstone’s share price dipped 4¢ on the day to $3.23 on a million shares traded. The company has a 52-week share price range between $2.29 and $4.99 and 373 million shares outstanding.