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

Good morning. My name is Joelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Capstone Copper Q1 2023 Results Conference Call. [Operator Instructions] Thank you. Mr. MacKenzie, you may begin your conference.

Thank you. I'm just going to pass the call to Jerrold Annett for some introductory comments.

Good morning. I'd like to welcome everyone to Capstone Copper's Q1 2023 Conference Call. Please note that the news release and regulatory filings announcing Capstone's Copper's 2023 first quarter financial and operational results are available on our website and on SEDAR. If you are logged into the webcast, we will advance the slides of today's presentation, which is also available in the Investors section of our website. I'm joined today by our CEO, John MacKenzie, our President and COO, Cashel Meagher; our Chief Financial Officer, Raman Randhawa, and our Senior Vice President, Risk, ESG and General Counsel, Wendy King. Following our brief remarks, there will be an opportunity for questions. Please note 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. Now I'll turn the call over to John MacKenzie.

Thanks, Jerrold, and good morning, everyone. We're pleased to present our first quarter 2023 results and achievements. Most importantly, and we're now on Slide 5, -- we're pleased to report that construction at our transformational Montvale development projects or MVP, remains on time and on budget with nearly 3 million tons of sulfide ore stockpile to date ahead of our ramp-up commencing late this year. The first on the left shows some of the overall construction progress on the processing plants. While on the right, we can see sulfide ore being mined for the first time at Mantoverde. This year is pivotal for Capstone as we expect to complete MVDP construction in Q4, setting the stage for a doubling of consolidated cash flow and positioning us well for future growth. I would also like to highlight that last week, we reached a new collective agreements with the 2 labor unions at Mantos Blancos. This follows successful agreements with our labor unions at Mantoverde and Pinto Valley over the past 12 months. So for all of these operations, we now have agreements in place that cover the next 3 years. Turning to Slide 6. From an operational standpoint, we experienced a challenging Q1 2023, marked by heavy rainfall at our Pinson Valley mine in Arizona. As a result, we produced a total of 4,700 tonnes of copper at consolidated C1 cash costs of $2.96 per payable pound of copper produced. In addition to the weather-related challenges at Pinto Valley, advances Bankers in Chile, an emphasis on preventative maintenance resulted in more downtime and lower throughput. However, we were encouraged by very strong recoveries and continued strong grades. At Mantoverde, we mined lower grade oxides during the quarter, which had higher asset consumption. Furthermore, carryover inventory with sulfuric acid at elevated prices. Although for the balance of this year, we are fixed for approximately 80% of topic acid consumption at Mantoverde at $140 per tonne. Spot prices recently have decreased to below $100 per tonne versus prices above $280 in 2022. Should prices hold at the current levels of $100 per tonne, our C1 cost for oxides could decline by as much as $0.40 per pound next year. Lastly, at Cozamin, we were focused on developments and the ramp-up of the pace backfill plant. Despite the slow start and turning to Slide 7 now, we're reiterating our 2023 consolidated production, cost and capital guidance. We anticipate production to increase sequentially quarter-over-quarter for the remainder of the year, with a commensurate decrease in costs. At Pinto Valley, the operations improved sharply in March, and the operation is now set up well with no planned major shutdowns over the rest of 2023. At the same time, grades and throughputs are forecast to increase, which can also be said for Cozamin. Lastly, at Mantos Blancos, we anticipate higher throughput over the rest of the year. Now I'll pass over to Raman for our financial results.

Thank you, John. We are now on Slide 8. In Q1, we recorded copper sales of 37,500 tons, which includes a sales lag of approximately 2,400 tons due to the timing of shipments in Chile. We expect to catch up on those sales in Q2. LME copper prices during Q1 averaged $4.05 per pound, up 12% compared to $3.63 per pound in Q4 2022. Given our QP hedging program hedges N+1 tied to our commercial contracts, our realized copper price of $4.17 a pound was slightly above the LME quarterly average. As a result, we recognized revenues in the quarter of $336 million. Adjusted EBITDA in Q1 of $65.2 million was impacted by the sales lag, lower production and higher costs due to heavy rainfall in Arizona and a carryover of higher Q4 2022 sulfuric acid inventory into Q1 2023. The adjusted EBITDA figure also includes realized foreign exchange losses of approximately $9 million and derivative losses of $8 million without the FX and derivative losses plus the sales lag EBITDA would have been approximately $85 million. Moving on to Slide 9. On the left-hand slide, we summarize our available liquidity, which as at March 31 was approximately $529 million, including $101 million of cash and short-term investments and $428 million of undrawn amounts on our $600 million corporate revolving credit facility. We are fully drawn on the $520 million project debt facility as well as the $60 million cost overrun facility with our Mantoverde partner, Mitsubishi Materials Court. As John mentioned earlier, we remain on track and on budget for completion of the Mantoverde development project by the end of the year. We ended Q1 with a consolidated net debt balance of $651 million and attributable net debt balance of $492 million. The chart on the right-hand side of the page illustrates our EBITDA sensitivity at various copper prices. You can see that 2023 is overshadowed by the EBITDA generation with Mantoverde sulfides at full run rate production. At $4 per pound copper, we expect to generate approximately $400 million of EBITDA in 2023 and over $1 billion of annual EBITDA when Mantoverde development project is online. Although the Santo Domingo is currently unsanctioned the project has potential to further increase our EBITDA generation to about $2 billion per annum with metal prices at current levels. The EBITDA generation associated with Mantoverde will enable an accelerated opportunity to delever our balance sheet and be below 1x net leverage at copper prices between $3.50 and $4 per pound, which provides additional liquidity to advance our future growth pipeline. Now I'll hand it over to Cashel for the operations review.

Thanks, Raman. On Slide 10. Pinto Valley produced 12,800 tons of copper at a C1 cash cost of $3.09 per payable pound during Q1, which is below our expectations, largely due to weather-related challenges, specifically heavy rainfall in February led to stickier wet ore, which is more challenging to process and impacted throughput. But most important, it also prevented us from accessing some of the lower benches in the pit with some higher grades. Looking ahead, we are encouraged by strong production through April, and we are reiterating our guidance as we expect sequential improvements quarter-over-quarter. We also note, as John mentioned, that we have no significant maintenance scheduled over the remainder of 2023. in terms of our growth at Pinto Valley, we are increasingly enthusiastic about district consolidation potential. As a result, our efforts are now focused on analyzing the impacts of potential district opportunities, and we have deferred our PV4 study. Moving to Slide 11. Cozamin Mine had a transitory-- transitionary production quarter, producing 5,200 tonnes of copper at C1 cost of $1.72 per payable pound. Over the remainder of the year, we expect throughput and grades at Cozamin to increase. Today, we have also released an updated technical report at Cozamin to reflect changes in the mining method that we disclosed last quarter. The technical report features average copper production of 20,000 tons at a C1 cash cost of $1.51 per pound and a higher average of 24,000 tons at a C1 of $1.46 per pound in the first 5 years. The new mine sequencing includes a combination of [ long-hole stopping and cut and fill ]. We've moved to this based on our experience with the ore body to date, and we believe this will provide for greater mining recovery than if we had continued utilizing only long-hole mining methods. We also believe there are several opportunities to improve the life of mine plan, including exploration, refinement to cut and fill in order to reduce dilution and have the possibility of drift-and-fill methods to increase pillar and post recovery. On the exploration side, the Mala Noche Footwall Zone deposit is still open to the Northwest, Southeast and down dip. Our Mantos Blancos asset is highlighted on Slide 12. Total sulfide and cathode production yielded 14,100 tons of copper and a blended C1 cash cost of $2.68 per payable pound. The sulfide operation produced their strongest quarter to date led by higher grades and recoveries. Work now is focused increasing overall reliability and improving production uptime. On that note, production and costs were impacted by unplanned maintenance and process improvement initiatives in the quarter. In terms of growth, design work is ongoing with respect to Mantos Blancos Phase II. Now on to Mantoverde, Slide 13. Q1 2023 oxide production was 8,500 tons of copper in cathode at elevated C1 cash costs of $4.02 per payable pound. As John had mentioned, costs were impacted by lower production and carryover of high-cost sulfuric acid in inventory. Most important significant progress was achieved at MVDP during Q1. Project progress now stands at 83% with $654 million spent as of March 31, with many of the classical major escalator risk behind us and/or materially diminishing, the total expenditure for the project remains at $825 million and on schedule for year-end 2023 wet commissioning. The Mantoverde development project will deliver blended C1 cost of below $2 per pound and produce 120,000 tonnes of combined cathode and copper and concentrate with over 30,000 ounces of gold per year. Slides 14 through 18 show construction progress at several key areas of the Mantoverde development project. Slide 14 shows the primary crusher with the retaining wall and conveyances advancing well. Structural steel erection is also advancing well as evidenced from the progress on the copper filtration building, column cells and rougher cells. All major components are procured and on-site and are now in the final tie-in stages. Slide 15 shows the copper concentrate factor and a different perspective on the copper filtration and load-out facility. The picture on the right clearly displays the advancement of the assembly of SAG and ball mills. The next Slide 16 shows the truck shop and the photo on the right shows the core solar stockpile and the reclaim tunnels in preparation for the construction of the geodesic dome for dust control. On Slide 17, we highlight the interior of the desalination plant on the left, where the expansion to 380 liters per second is on track for completion in Q2. The tailings facility can be seen on the right. Now over to Wendy King for the sustainability review.

Thank you, Cashel. We're now on Slide 18. In March, we were very pleased to announce our new sustainability development strategy, including specific greenhouse gas emission targets. The development of the strategy was a structured 12-month process with company-wide stakeholder participation and aligned with our purpose and values. We have a robust governance process for oversight and execution of the strategy. The strategy is a reflection of our firm commitment to sustainability and sets out our priorities, actions and targets over the next 7 years focused on 5 initial priorities: climate, water, tailings, biodiversity and communities. In the climate priority, our target is to reduce greenhouse gas emissions from fuel and power by 30% by 2030 compared to the 2021 baseline levels. For tailings, we target 100% of our tailings storage facilities to be independently assured for conformance with the global industry standard for tailings management by year-end 2026. Turning to Slide 19 and reviewing our quarterly sustainability highlights. At Mantos Blancos and Mantoverde, we have completed the self-assessment state for the Copper Mark assurance process, allowing us to move forward with the independent review in Q2. We have also completed the human rights assessment update and our annual review of grievance mechanism completed the Copper Mark gap assessment and began planning projects to formally fill any identified gaps to proceed with the Copper Mark assurance process at Pinto Valley. At Mantoverde, we've implemented retainers for concentrate shipments, which are considered best practice in the industry. [ Routineers] are an ESG-friendly transportation solution as they provide for a dust-free operation. The concentrate container is fitted with ISG's passive removable hard lid and sealed. The design also ensures no contaminants to build up and accumulate on the exterior of the containers. And at Pinto Valley, we have a donation program with the Navajo reservation whereby some of our nonsaleable copper is used for constructing jewelry and other crafts. We received the photo on the bottom right recently, showcasing some of the crafts created by students at the reserve. Our inaugural combined sustainability report, growing responsibly is well underway and will be published in early Q3. We are working to incorporate more climate discussions in our mainstream disclosure documents beyond the sustainability report to deepen our disclosure on the 4 TCFD areas, governance, strategy, risk management and metrics and targets. And with that, I'd like to turn it back to John.

Thanks, Wendy. On Slide 20, we highlight the significant catalysts we have over the next 2 years that supports our sector-leading growth plans with further upside beyond this across our portfolio. We have a talented technical team in place and are working with strong engineering firms to execute on these studies, and we look forward to releasing the results in the time line shown on the slide. Specifically, by year-end, we plan to release our MVDP OPTIMIZE study, which is targeting increasing throughput from 32,000 tons per day to up to 45,000 tons per day with no major capital equipment upgrades required. We're also contemplating a potential further expansion, which could include the installation of a second processing mine. We're busy at Mantos Blancos evaluating the potential to increase throughput from the installed 7.3 million tonnes per annum to 10 million tons by the existing underutilized ball mills and processing equipment. And to round out the year, we plan to release an updated feasibility study for Santo Domingo in December. And to conclude on Slide 21, we reiterate that we are in the midst of a transformational year for Capstone. We remain laser-focused on the execution of our near-term growth profile, increasing copper production of 45% to approximately 260,000 tons following the ramp-up at the Mantoverde development project. After this, we have the fully permitted Santa Domingo project, which unlocks district synergies and generates an additional 45% of copper production to 380,000 tons per year with further upside and expansions across our portfolio. With that, we're now ready to take questions.

[Operator Instructions] Your first question comes from Orest Wowkodaw with Scotiabank.

Nice to see the progress at the Mantoverde sulfide project. Given that you're, call it, within 9 months of completion, can you maybe just walk us through sort of what the critical path here is and where you see the biggest risk to that year-end start-up time line at this point?

And I would sort of start off by just sort of reiterating the fact that most of the kind of classical risks are behind us. The infrastructure is in place. The major equipment on site, the major equipment is actually installed already. We're now into the sort of the pipe installation, the electricals, all of those pieces. But certainly, what we see at this stage is nothing that gives us concern in terms of the time line. I think projects can kind of spring surprises on you, but I think we feel that sort of we've got all of those elements under control, and we've basically sort of derisked sort of on all the possible kind of contingencies that we could see arising. I'll just pass across to Cashel, if you'd like to add anything further to that.

I think you've outlined it well. The major risks we see in projects that are being executed in the last few years are usually -- the major one is usually a geotechnical risk. And we've made quite great progress in the major material movement required there. And so while we still watch that and evaluate that, we feel we're in a very good stead that the tailings dam and the associated geotechnical works are progressing really well. And then the other one, classically we saw during the pandemic period was electrical and instrumentation, and I'm happy to say the electrical e-rooms have arrived, most of them, and they're in progress and being delivered. So what I would say is the major risks that we have seen in projects in the last few years are sort of behind us. So now they're the classical or the more rudimentary man hours, pulling cable, placing pipe and bore in place and those types of things, which are just the effective man-hours and efficiency of those man hours on a project. I would say, right now, we're at the boring risks with a project, and it's just getting the work done.

And I guess maybe one final comment is, obviously, the other element that one always looks at is ramping up the mine itself. And our final pieces of additional mining equipment arrived some months ago, we're sort of fully now ramped up, and we're now actually stockpiling sulfide ore ahead of the plant. And I think we said earlier, we've got around 3 million tons of sulfide ore stockpiled already. So I think that also gives us a lot of confidence in terms of the subsequent ramp-up.

Just as a follow-up, and by the way, boring is good on projects like this. What do you plan to do with the construction team once you finish here at [indiscernible]? I assume you're going to pause before starting Santo Domingo. But do you demobilize and then remobilize in the future? How do you think about that right now?

I think that's a really good question, Orest. And we've obviously got sort of 2 elements to that. The one is our owners team and we certainly intend to keep our owners team intact. I think we obviously -- I think for us, the sort of next step as we move to Santo Domingo is obviously ensuring we have Mantoverde fully ramped up. We obviously want to complete the financing of Santa Domingo and new one to sort of have a look at the macro environments at the time. And those 3 items will sort of guide our timing on decision-making to sort of take a full notice to proceed on Santo Domingo. But I think we can certainly keep our full project team well occupied during that time. I think whilst we might not take a decision for full notice to proceed, that certainly doesn't stop us from progressing the engineering work, which in any event is the sort of first stage of a project to really moving the engineering work and increasing the confidence in all the parameters within the project. I think the other element is our key contractor and I don't know if you're aware, but recently, we've changed contractors at Santo Domingo. We've moved from POSCO to [ Ausenco ] with the same contractor that we have at Mantoverde and the intention there is also to ensure that continuity of experience and people from Mantoverde cross to Santo Domingo. So I think certainly, the core elements of both teams the intent is to have retained for the Santo Domingo project.

Your next question comes from Bryce Adams with CIBC.

Just one from me. I wanted to ask on [ Ausenco ] and the lump sum contract for Mantoverde. When we were on site last November, there was a discussion around inflation such that Capstone was less inflation because of the lump-sum contract and that [ Ausenco ] would be more exposed, but they were maintaining margin because of favorable FX, right? [ Ausenco ] have changed since November. And I was wondering if that dynamic where the has also changed and if there was any increased counterparty risk from the change in FX, obviously, the best contract is a win-win contract. So is that still the case with your partner?

Yes, it is, Bryce. And I think very fortunately, Ausenco had also locked in a lot of it's basically sort of underlying costs. So sort of all of its equipment, subcontracts, et cetera. And a lot of the I guess, sort of main exposure to FX, I think, was sort of -- was earlier on in the project. So at this stage, we certainly -- I fully agree with your comment that despite being a lump sum turnkey contract, it's always important that everybody is making money. And certainly, from what our discussions with Ausenco show is that the project is still working well for them.

Next question comes from Craig Hutchison with TD Securities.

Just one question for me as well. Just on Mantos Blancos, -- you guys have sort of bumped around the 15,000 to 16,000 tons per day for the last several quarters and recognized in your MD&A disclosed that you had, I think, 18 days at design of 20,000 tons per day, and there were some preventive maintenance done in the quarter. But can you just give some context as to what that preventative maintenance is and whether you feel confident that we can get to that 20,000 tons per day during Q2 or the next quarter or so?

Thanks, Craig. And I'll refer that question across to Cashel.