Capstone Mining Reports In-line 2015 Operational, Capex Guidance

After market closed on Tuesday, Capstone Mining Corp. reported its 2015 operational and capex guidance, which is nearly in-line with our expectations. We noticed that, 2015 copper production outlook of 90kt is directly in line with our previous forecast of 89.3kt. We have made moderate revisions to our assumed grade and recovery profiles and now forecast 90.2 kt of copper production for the year.

As copper grades are anticipated to return to higher levels in 2016 (0.38% at PV, and 1.9% at Minto) we estimate a 16% year-over-year production raise to 104.7kt. Consolidated cash cost outlook of $2.00-$2.10/payable lb of copper production is in-line with our $2.10 forecast, which remains constant. Primarily due to higher grades, we forecast the 2016 cash cost to fall 11% year-over-year to $1.87/payable lb.

However, planned capital expenditures of $155 million, comprising development capex at SD and capitalized exploration at Cozamin, are higher than our previous forecast of $128 million. Our underestimation of planned capex owes mainly to PV where $8 million is budgeted to be spent on the PV3 prefeasibility study (PFS), focused for completion in third quarter of 2015, in addition to the $78 million on sustaining capex (purchase of a second hydraulic shovel, tailings management work, and capitalized strip). Notably, $36 million of total capex has already been identified to be deferred or cancelled should the recent copper price environment persist, and we anticipate this could grow if necessary.

We are updating our forecast to $154 million, in-line with outlook. We reiterate our “Sector Outperform” rating and C$3.30 per share target price. Our target price continues to be based 50/50 on 5.0 times 2015/16 estimate Enterprise value/EBITDA (implies C$2.65 per share) and 0.7 times Mine Site net asset value8% plus 1.0 times net cash items (implies C$3.79 per share). Our 0.7 times mine site net asset value8% target multiple is the weighted average of 1.0 times applied to the PV, Cozamin, and Minto operations, and 0.2 times to the development-stage SD project. For 2016 we forecast production to rise 16% year-over-year to 104.7kt, and cash costs to decrease 11% year-over-year to $1.87/payable lb copper produced, as grades at PV return to 0.38% copper and the high-grade Minto North pit is exploited. In addition, capital expenditures are expected to fall following the intensive years of 2014 estimate and 2015 estimate.

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