Sherwood and Capstone to merge (September 15, 2008)

VANCOUVER — So long as shareholders at S h e rwo o d Copper (SWC-V, SWOPF-O) bless the marriage, Sherwood and Capstone Mining (CS-T, CSFFF-O) will merge to form a single company with about a half billion dollar market capitalization.

“It’s exactly what shareholders are looking for,” Sherwood president Stephen Quin says. “They didn’t want us to go blow the company on some big project that ends up not getting permitting.”

Although the deal will see Venture-listed Sherwood becoming a subsidiary of TSX-listed Capstone, it is essentially a marriage of equals. For each Sherwood share, Sherwood shareholders will be issued 1.566 shares of Capstone. In total, Capstone will issue about 84 million shares or 105% of its current 82.5 million shares.

“This doesn’t happen very often.

It’s really a true merger,” Quin says.

The new company will operate as one, pooling resources and sharing the same office, and will put Capstone president and CEO Darren Pylot into the chairman and CEO position and install Quin as president and chief operating officer.

With Sherwood’s assets in Canada’s North and Capstone’s assets in Mexico, it’s clear that benefits from the merger won’t come from a decrease in production and shipping costs, or the price it gets for concentrates.

The chief benefit? “It really comes down to the diversification of risk, the increase in capital and the enhanced balance sheet,” Quin says.

Sherwood operates the Minto mine in the Yukon and owns the Kutcho property in northern B. C., while Capstone operates the Cozamin mine in Mexico.

The companies’ operations are similarly sized and focused on small-tonnage, high-grade and low-cost copper resources. In the last quarter, Capstone produced 6.7 million lbs. of copper and Sherwood 12.8 million lbs.

The costs per pound to produce that copper were about the same, US90 for Capstone and US96 for Sherwood.

As for reserves, Capstone reported in 2007 that Cozamin hosted 3.7 million proven and probable tonnes grading 2.37% copper, 0.4% lead, 1.18% zinc and 82 grams silver per tonne. In 2006, Sherwood’s reserves at Minto came in at 9.13 million tonnes grading 1.93% copper, 0.74 gram gold per tonne and 7.73 grams silver.

And as for that enhanced balance sheet — Capstone has about

$49 million cash and no debt versus Sherwood’s $52 million of debt. As Quin puts it, “At Sherwood, we followed the debt approach (to bring Minto online), whereas Capstone took the equity approach and went for a silver royalty.”

If Sherwood and Capstone’s production forecasts come in on target, the combined company will produce 85 million lbs. of copper this year and 110 million lbs. in 2009, as well as gold, silver, lead and zinc byproducts. It will also continue to advance exploration programs at its existing operations and at Sherwood’s Kutcho property, which is near a production decision.

Adjacent to its open pit at Minto, Sherwood has been drilling at Area 118 and Ridgetop to upgrade inferred resources there. Sherwood has so far outlined 6.6 million inferred tonnes grading 0.97% copper, 0.27 gram gold and 3.07 grams silver at Area 118, and 4.9 million tonnes grading 0.85% copper, 0.23 gram gold and 2.01 grams silver at Ridgetop.

Likewise, Capstone plans to release an updated resource for Cozamin from a 32,000-metre drilling campaign that has been assessing the potential to expand operations in the Mala Noche vein. Its current resources sit in a 1.5-km section of a 5-km-long strike length that Capstone controls.

At Kutcho, about 300 km north of Smithers, B. C., Sherwood recently released high-grade copper numbers from its 2008 drill program.

Starting 122.9 metres below surface, hole 103 cut 15.8 metres grading 3.86% copper, 4.16% zinc, 0.97 gram gold per tonne and 62.4 grams silver. Hole 128 cut 18.3 metres starting at 38.5 metres depth grading 2.54% copper, 0.77% zinc, 0.79 gram gold and 65.6 grams silver.

Adding to the 221 holes drilled up to 2007, Sherwood plans on updating the resource estimate for the Main zone by the end of this year and including the new numbers in its ongoing feasibility study.

As part of a preliminary economic assessment completed in June 2008, Sherwood announced 17.3 million tonnes grading 1.56% copper, 2.12% zinc, 0.29 gram gold and 26 grams silver at Kutcho.

Of that, the Main zone made up 15.65 million tonnes grading 1.65% copper, 2.15% zinc, 0.32 gram gold and 26.1 grams silver.

If the project goes ahead, Sherwood has said it would target this zone, putting in a starter pit at its eastern extension — the area where Sherwood drilled hole 128. With a mine life of 7.3 years, Sherwood plans on processing 4,000 tonnes a day.

“Minto could be duplicated at Kutcho,” Sherwood chief operating officer Kevin Weston says.