Capstone Copper Corp. (CS) Earnings Call Transcript & Summary

Good morning. My name is Anis, and I will be your conference operator today. At this time, I would like to welcome everyone to Capstone Mining and Mantos Copper's Business Combination Conference Call. [Operator Instructions] Mr. Jerrold Annett, you may begin your conference.

Good morning. I would like to welcome everyone on the call today. Please note that the news release announcing the business combination of Capstone Mining and Mantos Copper is available on our website and on SEDAR. We have also posted a short video introducing Mantos Copper's 2 operations located in Northern Chile on our website. If you are joining us through the webcast, we will be advancing the slides. For those joining us via telephone, you can access the presentation on our website, and we will indicate as we move through the slides. Please be advised that comments made on the call today will contain forward-looking information within the meaning of applicable securities laws. This information, by its nature, is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information on the risks and uncertainties pertaining to our business, please see Capstone's most recent filings, which are available on our website and on SEDAR. And finally, I'll just note that all amounts we will discuss today are in U.S. dollars unless otherwise specified. I'm joined today by Capstone's Founder, President and CEO and Director, Darren Pylot; the Executive Chairman and Founder of Mantos Copper, John MacKenzie; Capstone's Chief Financial Officer, Raman Randhawa; and Capstone's Senior Vice President of Corporate Development, Jason Howe. Following Darren's and John's remarks, there will be a question-and-answer session. Now I'll turn the call over to Darren Pylot.

Thank you, Jerrold, and we're on Slide #5 now everybody, and good morning. We have the pleasure of welcoming John MacKenzie today to discuss the combination of Capstone and Mantos into Capstone Copper Corp., Canada's premier copper company. His extensive leadership in mine building and operations will prove to be invaluable as we embark on a path of transformational growth. From my perspective, the key highlights of this combination are the following: it adds immediate scales out of the gate with 2 long-life operating mines in Chile at low altitude near strategic infrastructure; results in over 45% production growth by 2024 to approximately 260,000 tonnes of copper per year, and a future growth of 45% to 380,000 tonnes per year with the development of Santo Domingo; it results in cumulative consolidated EBITDA of $1.3 billion at $4 copper expected over the next 2 years; it provides strengthened -- a much strengthened management team with extensive mine building and operating experience in South America; it enables potential for district scale synergies between Mantoverde and Santo Domingo; and unlocks the true value of Santo Domingo, bringing technical and further financial strength to the table without the need to dilute ownership at the asset level. Turning now to Slide 6, we will start with a brief overview of the transaction that we announced this morning. This deal is structured as a plan of arrangement. Upon completion of the transaction, Mantos Copper will be renamed to Capstone Copper Corp. and all existing Capstone shares will be exchanged for newly issued Capstone Copper shares. In accordance with the exchange ratio, Capstone shareholders will own 60.75%, and Mantos shareholders will own 39.25% of Capstone Copper, respectively. Capstone Copper will apply to the TSX to trade under Capstone's existing ticker of CS. Capstone's senior officers, the Board of Directors as well as our largest shareholder, together representing 26.5% of the issued shares, have entered into voting support agreements. The transaction will be subject to a 66 2/3 percentage approval by our shareholders, and we expect to mail out an information circular to close the transaction in the first quarter of 2022. As is customary, nonsolicitation covenants as well as a termination fee of CAD 75 million under certain circumstances will apply. Now on to Slide #7, on-strategy transformational transaction. With some of the basics of the deal structure now out of the way, I'd like to stress how excited we are about this combination. This transaction fits perfectly with our strategy of building a multi-asset copper portfolio in the Americas. Mantos Copper comes with 2 large, long-life operations in close proximity to our Santo Domingo project located in Northern Chile. In fact, Santo Domingo is only 30 kilometers east of Mantos' Mantoverde mine. This transaction allows us to integrate Santo Domingo with Mantoverde and self-finance the construction based on an underlying core of 4 cash-generating mines. One of the things that attracted us most about Mantos Copper is its long operating history and the fact that they're in the midst of very significant growth, which you'll hear me reference throughout this presentation this morning. This deal also gives an opportunity to use the same principles in expansion, innovation and optimization that we successfully applied at Pinto Valley and Cozamin over the recent years. Each of our 5 assets has significant growth and compelling projects underway to surface stakeholder value, and this combination enables more growth opportunities due to the synergies between Mantoverde and Santo Domingo given their very close proximity. I'm now to Slide #8. What excites me most about this deal is that we have deepened our senior leadership team with extensive mine building and operational experience, particularly in South America. This combination will add 2,500 employees and contractors to Capstone's existing workforce, and they're led by a Chilean management team with hundreds of years of cumulative operating experience. Our expanded team with complementary skill sets will execute on Capstone's fully permitted production growth of over 45% by 2024 and beyond that we expect to accomplish a further 45% growth with Santo Domingo coming in. Future low CapEx intensity in attractive return expansion projects are under study, and organic growth should be a key narrative for Capstone as our large resource base will provide a lengthy runway of growth opportunities. This brings me to our financial strength, which is imperative to support our growth pathway. With the Mantos Blancos mill expansion currently in ramp-up, over the next 2 years, our cumulative consolidated EBITDA is expected to be over approximately $1.3 billion at $4 copper. Mantoverde development project is fully financed along with a strong partner in Mitsubishi. Capstone will have ample liquidity and internal cash flow generation to self-finance the development of Santo Domingo once the integrated development plan has been established, which maximizes all of these district synergies. On the subject of synergies, one of the most exciting aspects of this combination is that it enables a district approach for Mantoverde and Santo Domingo. This is a high priority project that will allow efficient deployment of capital for power, water and offsite infrastructure while potentially expanding the opportunity for cobalt and by-product sulfuric acid production. An integrated mine and process approach will also be considered on how to maximize both assets, including, for example, utilizing excess electrowinning capacity at Mantoverde with the oxides that we currently have over at Santo Domingo. With respect to ESG, I believe both Mantos and Capstone have similar strategies as we are both investing in our operations to make them resilient with a long and prosperous future to look forward to for all stakeholders. Copper has played a role in improving people's lives for ages. Today, the demand for copper from EVs, renewable energy technologies and electrification more broadly is growing rapidly. The world needs more copper supply to fight climate change, and Capstone is competitively positioned to increase responsible production. Now on to Slide #9, the transaction highlights. On the close of this transaction, Capstone will have 4 operations in a transformational growth project, all located in prolific mining jurisdictions in the Americas. We expect a combined production of 175,000 tonnes of copper in 2021 with a fully permitted pathway to 380,000 tonnes of copper production, driven by executing the Mantoverde development project and by building our fifth mine, Santo Domingo. The average reserve life for all the assets is 18 years, with opportunities to grow production and extend mine life. Following construction and ramp-up of the Mantoverde development project in 2024, Capstone's all-in sustaining cost is expected to be under $2 per pound of copper, and consolidated all-in sustaining cost for the company is expected to be driven under $1.60 per pound once Santo Domingo enters production. Santo Domingo remains a transformational project for Capstone, and this combination enables its most efficient development by unlocking district synergies at its full potential, which includes the cobalt and the sulfuric acid opportunity. And we'll talk more about this a few slides later on. Now on Slide #10. There haven't been many mines in the copper industry built over the past decade. Therefore, mine builders are scarce, in my opinion. And we're fortunate now to have 2 mine builders leading this company, which is benefiting given how many projects we have in our portfolio. John MacKenzie will be Capstone Copper's Chief Executive Officer and will ensure the continuity of Mantos operations. While our growth plan will be spearheaded by Cashel Meagher, who will be the President and Chief Operating Officer. Cashel was most recently Senior Vice President and Chief Operating Officer of Hudbay Minerals, where he oversaw the build and ramp-up of the large-scale Constancia project in Peru and the Lalor project in Canada. The pro forma Board is expected to be composed of the following directors: George Brack, Lead Independent Director; myself as Executive Chair; John MacKenzie, CEO and Director; Alison Baker; Bob Gallagher; Anne Giardini; and Peter Meredith. And now I'll turn the call over to John MacKenzie.

Thanks, Darren, and good morning, everyone. Let me start by saying how excited I am about the combination of Mantos Copper and Capstone Mining. Our companies, our assets and our teams are highly complementary. We share a common vision around the responsible production of copper. Our assets are focused on the Americas, and our teams are driven to achieve operational excellence from existing production and through the execution of our peer-leading growth. I believe that we've got an incredible opportunity in front of us to create a leading Canadian copper-focused champion that creates significant value for all of our stakeholders through the advancement of our strategy, growing our responsible copper production in the Americas. Slide 12. Capstone Copper will be a significant Americas-focused copper producer from day 1, with 2021 expected production from Mantos and Capstone combined at 175,000 tonnes of copper. Pinto Valley and Cozamin had recently been optimized and expanded, and construction of the Mantos Blancos debottlenecking project has also been completed with ramp-up underway. The company has a solid foundation of cash flow from all 4 operations as it progresses with its growth plan. The fully financed and in-construction Mantoverde development project is the big near-term focus of this growth plan and is expected to contribute an additional 85,000 tonnes of copper production by 2024. Significant upside exists across all operations. Phase 2 expansions at Mantos Blancos and Mantoverde already being studied and further opportunities exist around the underutilized SX-EW plants with around 60,000 tonnes per year of copper capacity installed as we've been doing for several years now for both operations. The potential to leach copper from higher-grade historic waste piles, consistent with our existing practice, and from the potential application of Jetti catalytic leach technology. Further opportunities exist from cobalt and magnetite recovery at Mantoverde. Capstone Copper will have 125,000 hectare land package at low altitude in the world's best copper address in Chile. Exploration will continue to be a key focus for the company going forward. Slide 13. Capstone Copper is expected to produce 175,000 tonnes of copper production in 2021, which has been illustrated on the slide as the first stage of growth. The second stage of growth is expected to generate copper production of 260,000 tonnes by 2024, which is around 45% growth over this year's expected production. Beyond this, we expect to deliver another 45% growth to 380,000 tonnes per annum with Santo Domingo with further expansion opportunities throughout the combined portfolio. You can start to see that Capstone Copper is expected to have an exciting growth trajectory, and this doesn't factor in the robust pipeline from other growth initiatives that we've referenced, including PV4, the Phase 2 expansion project at Mantos Blancos and Mantoverde and the cobalt production. Our fully permitted growth provides the opportunity to lead from our peers and move into larger cap territory as a premium copper company with growth. Slide 14. About 15 years ago, Canada's base metals industry was hollowed out through takeovers of industry giants like Inco, Falconbridge and Alkane, to name a few. The intermediate base metal space was also consolidated during the last comparable cycle with takeovers of all resources, INMET and Quadra FNX. This has created an opportunity to create a Canadian-based copper champion, and we believe we have the talent, asset base and balance sheet to deliver. Our pro forma market cap of $3.3 billion should grow as we execute on our growth plan and are compared to larger cap companies that enjoy higher valuations. Our pro forma 2021 copper production ranked favorably versus our peers and will be supplemented by leading copper production growth as we execute upon our projects. Our reserves and resources, on a permitted basis, will be amongst the highest in our peer group. Slide 15. I mentioned earlier how these 2 companies are complementary, and that's also very visible from the close proximity of Mantoverde and Santo Domingo. It's rare to have an opportunity to engineer and build in a high-impact design, develop various capital savings strategies and streamline management to maximize synergies before constructing a major project. We have this opportunity with Santo Domingo as we look to take a district approach, with Mantoverde only 30 kilometers away. During the first 6 months after closing, we will conduct a synergy study and will provide guidance once the plan has been established. Numerous opportunities for synergies need to be evaluated. Of course, there's a potential to share in infrastructure and leverage the team that is currently building in Mantoverde. Additional opportunities exist around the potential to process oxide ore from Santo Domingo and Mantoverde, and optimizing production of cobalts and sulfuric acid, which is a by-product on Santo Domingo's potential cobalt line and also an input to oxide copper production at Mantoverde. Before leaving this slide, I'd also like to point out the excellent access to infrastructure at our Mantoverde operation, which will also be a great benefit to Santo Domingo. We're located at relatively low altitude of around 900 meters above sea level and approximately 45 kilometers on the coast, which is, of course, the location of our wholly owned desalination plant. The desalination plant is currently providing all of the water for the existing Mantoverde oxide operation and will soon be expanded to also provide all of the water required for the Mantoverde development project. Further expansion opportunities exist beyond that. Slide 16. The list of synergies is extensive. It covers efficiencies for capital, cost savings in operations and management, taxes and enables expanded production for copper with the development of Santo Domingo oxide leaching, cobalt and iron production with Mantoverde cobalt and magnetite recovery. We have a unique opportunity to integrate Mantoverde and Santo Domingo from day 1 versus reengineering districts after capital deployments on both sides. The vision will be to operate both mines as one integrated mining district, which maximizes the value of metals and optimizes mining and processing while minimizing our environmental footprint. The detailed synergy study will advance additional construction savings for Santo Domingo, including desalination plants, power, ports, camp, procurements and pipeline. Mantoverde has a world-class owners team and EPC in Ausenco, and we look forward to expanding and integrating Santo Domingo. Now back to Darren.

Well thanks very much, John. And on to Slide 17 now. Capstone will retain a strong balance sheet enhanced with strong cash flow. Over the next 2 years, prior to Mantoverde's mill expansion completion in 2024, the company is expected to deliver $1.3 billion of EBITDA at $4 copper. And given Mantoverde is fully financed with a turnkey fixed cost contract with EPC provider, Ausenco, there is sufficient liquidity to advance Santo Domingo following our synergy study work and even other smaller projects in the portfolio that are high impact, high return. Slide #18. Capstone is in the process of developing a comprehensive ESG strategy that will be rolled out in 2022. Our purpose of strengthening communities by building resilient operations will be supported by science-based targets, and this strategy will cover: energy, to drive down our emissions; water, to reduce and reuse water, which is especially important to us at Capstone as we operate in arid environments; tailings management; investing in our workforce for a technology-driven industry; and green copper innovation, which is looking at investments in technology, pilots and partnerships for applied research. On Slide 19, we clearly have a plethora of projects. We can demonstrate a growth pathway unlike any of our peers, and our projects have common themes, that is: district consolidation opportunities with available synergies; expansions recently completed or are underway and further expansions being studied; use of new technologies and optimization to drive productivity and cost reductions; exploration upside in prolific mining districts and near existing infrastructure; and as well, underutilized SX-EW plants and the opportunity to fill these plants with capacity. On Slide 20, another illustration of our growth pathway to 380,000 tonnes of copper production at all-in sustaining costs of under $1.60 per pound. Further expansion should come with low CapEx intensity and lower execution risk. This list of projects will no doubt keep our mine-building team busy for many, many years. Now that Mantos Blancos is in ramp-up, our mine build team is focused on Mantoverde and will be engaged in the synergy study with Santo Domingo. Now we're on Slide 21, which is the last slide before questions. I believe we have shown an exciting copper company with incredible permitted growth opportunity, district synergies to unlock value and experienced leadership supported by a deep talent pool to execute. Our high-quality asset base will be buttressed by a very strong balance sheet and cash flow. Lastly, we are committed to the highest standards of ESG as we strengthen the communities we operate in by building resilient operations. It is the right time to be in copper, and it's an exciting time to be part of Capstone Copper. Operator, that's our remarks. We'll now open the floor to questions.

[Operator Instructions] Your first question comes from Dalton Baretto with Canaccord.

Congratulations on an absolutely outstanding transaction. Also congratulations for bringing Cashel on board. Just looking at this deal, it's clear that the bulk of the incremental value is going to come from synergies between Mantoverde and Santo Domingo. And I just -- I have a couple of questions on that. Number one, John, did you say we would see an update in 6 months?

Yes, Dalton, that's correct. 6 months after the closing, that's what we estimate to be the time needed to do the sort of proper in-depth review of those synergies.

Okay. And then are you in a position at this point in time to kind of ballpark the potential synergies based on the work you've done ahead of the transaction?

Dalton, I'd prefer not to at this stage. We've obviously done some work on it. But I think we do see those synergies as being significant. But I think we'd prefer before sort of putting numbers out there to have sort of completed that synergy study.

Okay. That's fair. And then do you need to slow down the construction of the Mantoverde development project at all while you look to optimize? Or can this continue at the planned schedule?

No. The Mantoverde project will continue at -- sort of as per its current schedule. And as we stand here right now, the project is around 22% complete, and it's currently on schedule and on budget.

Okay. And then from a combined entity perspective, will you have the appetite to take on PV4 as an example while Mantoverde development projects are being constructed and while Santo is being optimized?

Dalton, it's Darren. I'll take that one. Yes, they sequence in quite well. Mantoverde -- and Blancos is in ramp-up. So that's essentially complete from the construction side. The team moves over to Mantoverde, as John mentioned, and then onto Santo Domingo in Chile. And then after that, what we'd slot in PV4, we still have to come up with a study and have a bunch of permitting to do. So that would not compete with the Chilean construction projects at all.

Okay. Great. And then just maybe one last one for me. Darren, now that you guys are a proper kind of mid-tier producer, are you looking to pursue another listing like the U.S. listing like some of your peers? Or are you only going to continue to trade on TSX?

We haven't -- I don't have a definite answer to that, but I guess the answer is we will consider all avenues to increase liquidity for our shareholders. And so if the U.S. listing is something that would do that, we absolutely look towards that. But we haven't considered it like intensely at this point in time.

Your next question comes from Craig Hutchison with TD Securities.

Just a follow-up on Santo Domingo. Does this mean that there's -- you're not pursuing any further potential partnerships on that project? Would you consider selling minority stake to somebody else? Or are those off the table now?

Craig, it's Darren here. We obviously have the best partner we could possibly think of in Mantos Copper with Mantoverde within 30 kilometers away. So that's the ultimate partnership. Now Mitsubishi is a partner in Mantoverde so that's something we'd look at there. So no, it doesn't preclude us from taking on a partner. But we do believe with these strong copper prices, we'll be able to self-finance Santo Domingo and we do want to own as much of it at as we can. But as you know, we always maintain a very strong balance sheet with low levels of debt. So that will be kept in mind as well. So we're not under any pressure to have a partner. But if it's opportunistic and it works for us, we would do so.

Okay. And then in terms -- I know Santo Domingo had a taxability agreement. I think was good for 15 years. Is there any similar taxability agreements at Mantoverde or Mantos Blancos?

No, there's not. Those 2 operations originally did have them, but that's sort of expired.

[Operator Instructions] Your next question comes from Stefan Ioannou with Cormark.

Congratulations on the deal. It's fantastic. I'm just curious with Santo Domingo on the cobalt side of things, I think there was some brief mentioned just with Mantoverde, that there may be a cobalt opportunity there. Is cobalt something that goes a bit to the back burner for now until you get sort of the upfront parts figured out? Or how does that sort of play into the strategy going forward?

Darren, do you want for me to take this?

Yes. That would be great, John. Just the cobalt opportunities at -- what you see out of Mantoverde.

Yes. So what's interesting here is both Santo Domingo and Mantoverde are pretty richly endowed with cobalt. We took a decision at Mantoverde to first construct the sort of copper and gold concentrator, and there's sort of been a study work underway to develop the cobalt. There's obviously been sort of significant studies done at Santo Domingo for the cobalt. And so I think this will form part of the synergy study at looking how best this one sort of develop the cobalt -- sort of expect the cobalt from both. At this point, the current plan is that the cobalt at Mantoverde would just be going into the tailings. So clearly, that's a very straightforward opportunity to remove that beforehand. But the optimal way of doing so between both operations is obviously a key part of that synergy study. I think the one other thing which I would just observe in it is that quite a lot of the cobalt is associated with pyrite. And what that means is when one process is it, one would produce a by-product of sulfuric acid. And that obviously with our oxide leach operations that we'll be continuing at Mantoverde in the future, we would be at further synergy as well. So I think there's some quite interesting sort of opportunities around that.

Your next question comes from Shane Nagle with National Bank.

Just a quick question on the balance sheet and then on the CapEx plan just so we can have a bit more familiarity with the timing of some of these expenditures at Mantoverde. I know there was a large project funding package put in place. Does the EBITDA generation now at the pro forma company mean you may not need to draw on that facility as much? Or maybe what -- just a bit more color on the -- what the pro forma balance sheet is going to look like here and maybe anticipated CapEx spend at Mantoverde.

Sure, Shane. Maybe Raman will comment on the first part, and John, obviously, on the construction side of Mantoverde.

Yes. Just from a capital perspective, the whole capital -- $520 million is the project debt that's on there. So if you look at capital spend over -- they're already into flight, as John mentioned, 22%. So next year is roughly $400 million. And then there's a small tail in 2023 of $100 million. And then when you do the net debt, like there's a $150 million loan outstanding, which we'll repay. So really, you're looking at outstanding debt that will draw on the project debt of $520 million over those EBITDA numbers, which takes our net debt to EBITDA at less than 1, so at 0.8.

Okay. Perfect. And then just on the Orion block, can you just remind us what fund that sits in? Obviously, they've acquired these assets. I mean does that have to be -- is there like a date where that has to be monetized or maybe any risks on that -- I believe it's 32%, which would be the pro forma ownership.

Yes. I can -- sorry. Go ahead, Darren.

Go ahead, John. No, you go ahead, sorry.

Yes. What I can say is that it's contained in a number of the different Orion funds. And so they aren't under any urgency to actually sort of have a realization. So they have been sort of long-term investors in Mantos and they continue to, I think, sort of see the potential of this business going forward. And so from my discussions with them, they remain really enthusiastic shareholders in the combined entity.

Yes. And I'll just add that they are in a 12-month lockup agreement where they don't sell any shares for 6 months. And then there's a portion of shares they can sell at the beginning -- at the second part of the year should they choose to. But as John mentioned, they've been very supportive in this transaction and continue to be -- want to be long-term shareholders in growing the business.

Thank you. There are no further questions at this time. You may proceed.

Well, thank you, everyone, for attending the call to hear how Capstone is becoming a peer-leading mid-cap copper producer with fully financed and permitted growth for decades to come. And please feel free to follow up with any additional questions you have. We're always available to get on the phone and talk. Thank you, everybody. Have a great day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.