2023-11-29 10:30:00 ET
Summary
- Capstone Copper Corp. Q3 results show a net loss of $42.3M, largely due to a hefty tax bill and the impact of Chilean mining royalty legislation.
- The completion of the Mantoverde Development Project is nearing, which is expected to significantly boost copper production and cash flow for Capstone Copper.
- Capstone Copper is also exploring the potential expansion of the Mantoverde project and the development of the Santo Domingo asset, which could further increase production and profitability.
Introduction
The copper price and the share prices of copper equities have been under pressure lately, but I do see this as an opportunity to further increase my exposure to the commodity as I do believe in the long-term prospects of the metal. One of the copper producers on my shortlist is Capstone Copper Corp. ( CS:CA , CSCCF ). As I explained in a previous article, Capstone’s current performance isn’t great, but I am expecting a lot from the Mantoverde Development Project, which should be completed by the end of this year.
The company currently has a market capitalization of approximately US$2.75B.
The Q3 results: more of the same
Capstone produced just over 40,000 tonnes of copper in the third quarter of this year, of which just under 30% was cathode production. It sold about 38,700 tonnes, and the company fetched an average price of $3.77 per pound. And as you can see below, the total production cost was approximately $2.88 per pound on a C1 basis (the pure cash production cost, excluding any (sustaining) capex).
The total revenue generated by the company during the third quarter was approximately $322M, which resulted in a profit from mining operations of just $12M and an operating profit of $3.2M.
Needless to say, the company was operating at a loss: the pre-tax income was slightly boosted thanks to the $18M FX and derivatives gain, but the $45.5M tax bill pushed the bottom line into dark red territory: there was a net loss of $42.3M of which $32.9M was attributable to the shareholders of Capstone Copper.
Perhaps the hefty tax bill needs an explanation. As you can see below, the company recorded a $31.5M charge related to the Chilean mining royalty legislation.
The new law contains two components: and the company has recorded a deferred income tax expense related to the impact of the new law on its taxes.
Secondly, the $45.5M tax bill also includes a $10.6M adjustment to taxes in prior years. As there was a $8.5M benefit in the first semester, we should consider that adjustment to be a non-recurring item as well. This doesn’t mean the third quarter would have been great without these elements, but it does put things in perspective. The image below shows the impact of the new royalty level on the mine operating margin ("MOM").
While the company reported a total operating cash flow of $56.8M and just over $42M after deducting the lease and interest payments, this was not sufficient to cover the total capex. As you can see below, Capstone spent $173M on capex and $17.5M on capitalized finance costs.
The majority of the capex was spent on the MVDP project which is nearing completion (see later). As of the end of September, Capstone had access to almost $425M in liquidity, including its almost $130M in cash and cash equivalents while it is able to draw down an additional $295M from its revolving credit facility.
The countdown is now really on
All eyes have been and still are on the Mantoverde Development Project which reached a completion factor of 93% at the end of September. According to Capstone Copper, the project remains on track for construction completion by the end of this year, where a six month ramp-up period has been scheduled before it reaches the nameplate production capacity of 32,000 tonnes per day. The company has already stockpiled 5 million tonnes of rock, which provides a stockpile for almost six months at full production capacity.
Capstone has now spent $763M on the asset and has now increased its total capex guidance to $870M, which is approximately 5% higher than the previous estimate of $825M due to inflation ($20M), improvements ($20M), and additional costs that are expected to be incurred during the commissioning phase ($5M).
As a reminder, this phase of the mine will allow Capstone Copper to boost its copper production by 80,000 tonnes per year to 260,000 tonnes while the C1 cash cost should decrease from $2.70 in 2023 to around $200 when MVDP is in operation. Meanwhile, the company continues to work on a study focusing on expanding the MVDP concentrator once again. This study should be ready in the first half of next year, and it will be interesting to see the capital intensity of an expansion.
The image above also identifies Santo Domingo as a potential asset to further boost the production rate to 380,000 tonnes per year. An updated feasibility study is in the works, and the report should be published in the first half of 2024 as well. Should Santo Domingo get the thumbs up, it would make even more sense for Capstone Copper to work on making this area in Chile a cobalt district as both Mantoverde and Santo Domingo contain cobalt. Capstone estimates it could potentially produce 4,500-6,000 tonnes of cobalt per year, which would make it one of the largest and lowest cost cobalt areas outside of China and the DRC.
Investment thesis
Capstone Copper Corp. is reaching a pivotal moment in the company’s history. It is now getting ready to start copper production at the Mantoverde Development Project and I hope it can avoid teething problems. The incoming cash flow from this new mine will definitely help Capstone Copper Corp. to execute its growth plans, and the next few catalysts I am looking forward to are the publications of the updated studies on both MVDP (with a focus on the expansion plan) and Santo Domingo. The incoming cash flow from Mantoverde could subsequently be used to fund the construction of those plans.
At $3.50 or $3.70 copper, Capstone Copper’s financial performance won’t be great yet. But as I expect the copper price to exceed $4 per pound in the next decade, Capstone Copper is one of the companies I am keeping close tabs on.
For further details see:
Capstone Copper: 40% Production Increase Is Around The Corner