2023-05-12 08:00:00 ET
Summary
- Capstone Copper is a mid-tier copper producer aiming to expand its production in 2024 after completing an expansion of an existing mine.
- This will push the annual copper production rate to in excess of 500 million pounds per year.
- Once the expansion is completed, the consolidated production costs will come down as well.
- While the stock isn't cheap, if the current weakness continues, it may become attractive again as the completion date of the expansion is coming closer.
Introduction
The share price of Capstone Copper ( CS:CA ) ( OTCPK:CSCCF ) has increased by approximately 20% since my previous article was published in December . Perhaps a bit surprising as I didn't really expect Capstone's performance to pick up until its MVDP expansion will be completed in 2024. As argued in my previous article, once the sulphide expansion will be completed, the annualized copper production will increase from 185,000 tonnes (just over 400 million pounds) to 260,000 tonnes (close to 600 million pounds) at a much lower operating cost per pound of copper. As Capstone Copper has released its Q1 results, I wanted to check up on its financial status, the incoming cash flow and the progress towards completing the sulphide expansion at MVDP.
The incoming cash flow in Q1 helps to fund the expansion plans
The first quarter of the current year is pretty incomparable to Q1 last year as Capstone Copper added the attributable output from the Mantos Blancos and Mantoverde projects to the consolidated assets. This helped boost the consolidated production from 22,500 tonnes to 40,700 tonnes as the production on those two assets increased from 2,200 tonnes in Q1 2022 to 22,600 tonnes and as you can see below, the production on the Capstone 'legacy' mines (Pinto Valley and Cozamin) decreased a little bit.
During the first quarter, the average copper price was approximately $4.05 per pound but Capstone was able to report a realized price of $4.17 as it benefited from an increase in the realized and unrealized pricing adjustments. I explained how this mechanism works in my previous article .
The total revenue during the first quarter came in at US$336M (Capstone reports its financial results in US Dollar) and this resulted in a total of $44.4M in mine operating earnings. That's a decrease from the Q1 2022 results mainly because of the very high production costs at Mantoverde where the C1 cash cost came in at approximately $4/pound. This means that mine contributed to the top line, but had absolutely no impact on the operating income (or perhaps even a negative impact as the depreciation and depletion expenses are not included in the C1 cash cost calculation). Fortunately the expansion of that mine should be ready in 2024 resulting in a substantial production increase while the operating costs will come down. So although the performance of the Mantoverde mine is for sure weighing on the financial performance and the company's margins, it definitely isn't a 'hopeless case'.
The net operating income fell from almost $79M to just over $25M and as you can see in the image above, the bottom line actually showed a net loss of almost $29M of which approximately $20M was attributable to the shareholders of Capstone Copper.
As the company is in the middle of a substantial investment program, I obviously wanted to know how much operating cash flow the company is generating and what percentage of the expansion capex could be funded with the internally generated cash flow.
As you can see below, the company reported an operating cash flow of almost $42M, including a $19.7M cash tax payment although there was a tax benefit in Q1 2023. This means the underlying operating cash flow was closer to $47.5M after adding back the excess cash taxes and deducting the lease and interest payments.
The total capex was $186.6M in the first quarter (including $12.3M in capitalized interest expenses related to the MVDP expansion program) and this obviously clearly indicates the company was most definitely free cash flow negative.
A substantial portion of the capex was spent on the Mantoverde Development Project ('MVDP'). The total capex is estimated at US$825M (the majority of the capex is based on a turn-key contract with Ausenco so there should be no major negative surprises when it comes to the initial capital expenditures) and approximately $654M has already been spent. This means the remaining cash requirement is just $171M.
That being said, even if we would completely exclude the MVDP expansion capex from the equation, the total capex would still have come in at almost $75M, predominantly due to the capitalized stripping: the total amount of capitalized stripping on Mantoverde and Mantos Blancos combined exceeded $46M and looking at the full-year guidance , Capstone expects the sustaining capex to be $140M for this year.
Investment thesis
Investors in Capstone Copper are obviously counting down until the MVDP expansion will be completed as that will provide a major boost to the company's cash flow metrics. During the Q1 conference call, management sounded pretty upbeat about further increasing the production rate. By the end of this year, Capstone wants to release a study to boost the daily throughput at MVDP from 32,000 tonnes per day to 45,000 tonnes per day while it evaluates its options on the Mantos Blancos project where it has outlined a plan to increase the annual throughput from 7.3 million tonnes to 10 million tonnes. And although the Santo Domingo project has been gathering dust on the shelf, Capstone plans to release an updated feasibility study by the end of this year as well.
This seems to indicate Capstone is getting ready to fire on all cylinders. But at a market cap of C$3.8B, the stock isn't cheap anymore and even as a call option on the copper price and the production expansion in 2024 Capstone is getting a bit pricey after its 30%+ share price increase since my previous article was published. Although the expansion plans make sense, I wouldn't chase the stock at the current levels and rather wait for weakness. The 10% share price decrease we saw yesterday, May 11th, could provide an attractive entry opportunity if the weakness persists. The temporary drop in the copper price doesn't worry me too much, but it could mean the company will generate less free cash flow to self-fund the MVDP expansion program.
I'm on the sidelines, but looking to get back in on weakness.
For further details see:
Capstone Copper: Counting Down To The MVDP Expansion In 2024