Capstone Mining: Evaluating Copper-Only Phase in Santo Domingo Stage Gate Process

Following approval of the Environmental Impact Assessment (EIA) for its 70%-owned Santo Domingo project obtained on the plans outlined in the 2014 Feasibility Study (FS), Capstone Mining Corp. (TSE:CS) is continuing to evaluate the project within the stage-gate approach re-scoped given market conditions.

As the original plan for SD prioritized copper recovery over iron, we think a reasonably accurate forecast of how the project may be developed, and the economics, can be evaluated in the absence of CS being able to provide notable detail of its internal study under NI43-101 regulations. Developed as a copper-only project, we think SD has the possible to be a 16 year operation producing 123 Mlb/yr (100% basis) with an average C1 cash cost of $1.77 life-of-mine (LOM) at a 35,000 tpd mill throughout rate. We forecast a project NPV8% of $493 million and IRR of 19.1% (100% basis, unlevered and after-tax) assuming preliminary capex of $1.0 billion and under our LT copper price estimate of $3.00/lb. Discounted to today (end of second quarter of 2015) and comprising additional spend to advance the project prior to assumed construction start in early 2017, and commercial production in 2019, we forecast Company’s derivable unlevered NPV8% to be $215 million.

We think preliminary capex to be on the order of $1.0 billion in today’s dollars. Review of the 2014 FS and according to the firm, suggests $310 million of capital costs directly related with the iron recovery facilities (magnetic separation circuit, concentrate pipeline, port facilities, etc.) would be removed from the FS $1.7 billion forecast. Halving design mill throughput to 30-35 ktpd (35 ktpd optimal by our analysis), we think an additional $400 million of preliminary capital would be eliminated given reductions at the mill and of the mining fleet. Initial capex of $1.0 billion, or $28,570 of installed per tonne of mill capacity per day, we think reasonable considering the project characteristics compared with and in context of the select greenfield projects in Exhibit 1. We continue to think that SD’s close proximity to regional infrastructure (power, rail, port locations, and road) at low elevation ( 1,000m ahead of sea level) mitigates the risk of capital cost blow-out experienced by numerous other projects for these civil-related items.

Assuming essentially the same mine plan envisaged in the 2014 FS but halving the planned annual mining rates, such that mining would match the new mill requirements, we forecast that the project would produce an average of 123 Mlb of copper per year over a 16 year life. Annual mining rates would shrink to an average of 54,750 tonnes of material mined per year so as to supply the mill at 35,000 tpd (12.8 million t/yr). As with the 2014 FS mine plan, preliminary copper head grades are inclined to be 0.70% before reducing to 0.28% in year 15, after which copper-only grades would be uneconomic to exploit at our $3.00/lb estimate copper price. We forecast the LOM C1 cash cost to average $1.77 per payable pound of copper produced. As with the 2014 FS mine plan, meaningfully greater copper head grades in the preliminary years are anticipated to result in significantly greater copper production, and lower C1 cash costs, that the LOM averages.

We think the development and operating partnership with KORES has significantly reduced project funding risk, and in particular Company’s pro-rata share. In our perspective, this is reduced further under the lower capex option of developing SD’s copper-only phase. In addition to the 10.6% equity stake in company it perseveres to hold, KORES owns 30% of the SD project. While seeking to divest its interest in Cobre Panama, KORES appears to be committed to CS and the SD project. CS perseveres to sell a portion of its Pinto Valley concentrate to KORES, further strengthening this relationship. We continue to model 65% of the SD’s preliminary capex, now derived from our $1.0 billion forecast, to be project debt financed. Under this scenario, Company’s equity contribution requirement of $245 million, and project funding as a whole, in our opinion, is more appropriately sized to Company’s balance sheet.

We reiterate our “Sector Outperform” rating and have reduced our target price to C$3.00 per share from C$3.15 per share. While our un-risked net asset value per share forecast has lowered materially with revision to our estimate for SD, down 23% to $3.11 from $4.03, our target price reduction has been more modest given our valuation methodology. Our target price perseveres to be derived from 50/50 5.0 times 2016 estimate Enterprise value/EBITDA (implies C$2.82/sh), and NAV8% plus 1.0 times net cash items (implies C$3.11/sh). We continue to apply target NAV multiples of 1.0 times to Pinto Valley and Cozamin operations, 0.9 times to the Minto operation given the near-term uncertainty on the mine plan, and 0.2 times to the development-stage SD project; all in-line with multiples we ascribe across our coverage universe. Noting that the weighted average of these multiples has raised to 0.9 times, from 0.75 times, resultant of the development stage SD project now having a much lower contribution to our un-risked NAV forecast.

In 2016, we estimate Company’s production to gain 14.9% year-over-year to 103.5 kt, and cash costs to decline 10.0% year-over-year to $1.85/payable lb copper produced as the average grade at PV is anticipated to return to 0.38% copper and the high-grade Minto North pit is to be exploited. In addition, we estimate 2016 capex to decline 60% year-over-year, exclusive of capex likely spent on Santo Domingo (SD) should the project be given the go-ahead, such that Company’s fully loaded all-in sustaining costs (FLAISC) shrink 19.7% year-over-year to $2.46/payable lb.


Jeremy Bullard, MBA, is investment analyst and focuses Services, Financial & REIT and Industrial Goods sectors. Prior joining Broadway Leader, Jeremy Bullard worked with Telsey Research. If you have a great story idea for Jeremy Bullard, you can write at [].


The Broadway Leader
845 3rd Avenue, New York, NY 10022
Phone: 1-845-262-3176