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Good morning, ladies and gentlemen, and welcome to Capstone Mining Corp. First Quarter 2018 Financial Results Conference Call and Webcast. [Operator Instructions] This call is being recorded on Wednesday, April 25, 2018. I would now like to turn the conference over to Cindy Burnett, Investor Relations. Please go ahead.
Thank you. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2018 first quarter financial results is available on our website, along with an updated corporate presentation with summary information on the company and our financial and operating results. Also on the website are webcast slides to accompany our commentary today. With me today are Darren Pylot, Capstone's President and Chief Executive Officer; Jim Slattery, Senior Vice President and Chief Financial Officer; and Gregg Bush, Senior Vice President and Chief Operating Officer.I would like to advise you that this call is being recorded for replay through our conference call provider and is being broadcast live through an Internet webcast system. Following our brief remarks will be an opportunity for questions.Comments made on the call today will contain forward-looking information. 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 these risks and uncertainties, please see Capstone's relevant filings on SEDAR.And finally, I'll just note that all amounts we will discuss today will be in U.S. dollars, unless otherwise specified.Now I'll turn the call over to Darren Pylot.
Thanks, Cindy. Good morning, everybody. As always, Jim is on the line with me to review the financial performance, followed by Gregg, which -- who will give you an update on our operations, and then I'll return to summarize and, obviously, take questions from the floor. So at this point, I'll hand it over to Jim.
Thank you, Darren. This quarter was definitely mixed. We saw a strong copper market and really good pricing, and this is something that we anticipate continuing and building in strength over time, barring any major international trade or geopolitical event. And being unhedged is a big positive for us as we are realizing the benefits from this improved market. The sale of Minto is also a real positive for us, for the purchaser, for the asset and for its employees. It will become a flagship asset for Pembridge and the start of a new copper company. The accounting for this sale was a little more -- was more than a little complicated, as is reflected in the financial statements and MD&A for the quarter in accordance with IFRS. We have a complete table on Page 4 of the MD&A that gives detail where Minto is included and where it is not, and this should help you as you work through your models. We are now anticipating the deal will close before the end of June 2018. There will be cash received of $37.5 million for the plant equipment and resource as well as a payment for the working capital as at March 31, 2018. Cozamin has operated exceptionally well. It has done better than last year and our plan in production cost and profitability. The results of the exploration work done there, we'll see reduced costs through the introduction of more zinc into its production and extension of the mine as copper resources and reserves are introduced into the mine plan in 2019 and beyond. We're also in very good shape on our debt, which has long ceased to be an issue. For the second quarter and beyond, with the sale of Minto and planned reduction of our debt levels, we should be able to achieve our net debt target of $100 million this year. So for the second quarter and beyond, Pinto Valley is an area of focus for us all. It is by far the most important asset, and we are all working, as Gregg will outline, to achieve the targets we have set forth. We'll also be closing the Minto transaction at the end of the quarter and using the proceeds to reduce our net debt levels, further building our financial flexibility. Now I'll turn the call over to Gregg for further details.
Thanks, Jim. So overall production was lower at Pinto Valley, and that was somewhat offset by another solid quarter at Cozamin. During the quarter, Pinto Valley experienced several unrelated maintenance and reliability issues in the plant, which impacted the throughput, mostly in the latter part of the quarter. These were mostly -- they're generally -- they were one-off problems, in some cases unforeseeable, but we fully recognize that we've got some issues with our maintenance program, and we're lacking sufficient follow-through to achieve the availability and productivity of the plant that we planned. So in response to those issues, we reorganized the maintenance structure, and the processing department will be bringing in an external resource to facilitate a quicker turnaround on our asset management systems and practices. And in addition to the -- some of the reliability issues, we also experienced a recovery issue in January that was largely resolved by the end of January. It was related to a change in the reagent suite that was moved to kind of full scale before it was fully vetted. And it took a number of weeks there to kind of -- to purge that reagent out of the system and get the recoveries back where they belong. So one last point on Pinto Valley, certainly not least, the -- our grade for the quarter, 0.27, was by far the lowest grade we've ever posted for a quarter at Pinto Valley. I want to reiterate that, that was exactly on plan. It was as expected that our grades do trend up through the remainder of the year, to average 0.3 over the full year. So with that, turning to Cozamin. Operations in the first quarter continue to outperform our expectations. Our head grade was better than planned, partly due to continued focus on dilution control. We also had some unplanned development ore in the extension zone of the footwall that added some additional grade. And the big -- the -- I think the bigger swing, and particularly in cost at Cozamin, is we've started some zinc production that was not in our original plan. That drove our cash cost down -- higher zinc grades and lower -- or higher zinc grades and higher silver grades and recoveries benefited our costs in the first quarter. So looking forward at Cozamin, our technical report will not be out for a number of months yet, but we have advanced the work sufficiently that we're actually in there mining, so we're trying to give some guidance for the remainder of the year. And as we previously suggested around the San Rafael deposit that we -- the philosophy with that deposit is to use that ore to occupy unused mill capacity with our current mining production in the footwall zone. So it will represent about 25% of our mill feed. In the latter part of this year, it's going to take a little bit of time to ramp that fully up to that level. We'll be ramping up to that level in this quarter. So we expect over the next several years to see 7 million to 12 million pounds of additional zinc production and somewhere between 200,000 and 300,000 ounces of silver above what we had originally planned to produce, and there's also a bit of maybe another 1 million to 1.5 million pounds of lead. And so with those remarks, now I'll turn the call back over to Darren.
Thanks, Gregg. So as you heard from Gregg and Jim, overall, definitely a mixed quarter operationally, with Pinto Valley underperforming and Cozamin overperforming. I want to reiterate management is very focused on making the necessary improvements operationally at Pinto Valley. As Gregg mentioned, we started to make some of those changes in the quarter with the reagent suite returning back to original mix and seeing those recoveries trend up throughout the balance of the quarter, and we're seeing that continue to trend up in the second quarter. We're very pleased with the success at Cozamin. Happy that we're able to get that zinc San Rafael deposit developed and start actually producing that zinc according to plan both -- in terms of pounds, and seeing that recovery as expected. When you bring in additional zinc, we weren't sure how the recovery was going to react in the overall plant, but happy to see it performing as expected and look to be able to ramp up, as Gregg mentioned, the zinc production throughout the balance of this year. We do expect and feel good about the completion of the Minto sale this quarter. And as Jim mentioned, we will direct those additional resources to lower risk and much higher value projects that we have within our portfolio, most notably at Pinto Valley and Santo Domingo. So again, I just -- on the close, on the takeaway, I want to make sure that everyone on the line knows how important Pinto Valley is to the company and to the management here. We understand that's the single biggest driver for shareholder value, and we can assure you that the management team is actively engaged in supporting the operational improvement at Pinto Valley. We also continue to make progress at Santo Domingo in defining that path forward. Last year, we submitted 4 long lead permitting items, being the mine plan, the processing plan, the waste dump and the tailings permit. Those are all in process as we expect, and we do expect to have those permits granted this year, which leads us to then submitting our closure plan following that, and that's the longest lead item. So we'll continue to advance the permitting. We've had several discussions this quarter with power providers in Chile, and they have confirmed our expectations of significantly lower power prices by -- up to or in excess of 30%, less than what we used in our feasibility study. We've also had discussions with owners of existing infrastructure and ports as well as parties looking to build ports, and are confident that there are some very competitive options that exist for our project, and we'll be able to determine which path is best for us to move that project forward this year. So we're confident that we'll have enough information to update the economics and make some decisions around that project on how to move forward by year-end. So although, we have a lot of work to do at Pinto Valley, we're -- as I said, we're completely aware of this, and we understand what we need to do to get our throughput up and our reliability up as well, and we will do so throughout this quarter. Operator, that concludes our prepared remarks, and now we'll take questions from the floor.
[Operator Instructions] Your first question is from Stephanie (sic) [ Stefan ] from Cormark Securities.
It's Stefan. Just on the reliability maintenance issues at Pinto Valley, I mean, could we or should we anticipate from, I guess, reliability issue, could there be any sort of large CapEx-type items like in terms of major equipment replacements that are involved in this? Or is it strictly just maintenance and sort of a better schedule?
Yes, Gregg here. No, our maintenance program for the year does include a number of sustaining capital items. We don't expect that we're going to have any projects that were not initially foreseen there, at least not any significant ones. And the issues are related to asset management, not -- it's not capital spending-type problems.
Your next question is from Orest Wowkodaw from Scotiabank.
Just following up on the previous question as well. When we think about Pinto, can you give us a sense how April went and whether we had a recovery this month? And also I'm curious whether there's any more planned maintenance for the rest of this year that we should be aware of.
Well, yes, certainly there's a lot of planned maintenance for the remainder of the year. April has been mixed. I think we've identified -- we kind of identified where the rock is in our shoe and we're busy trying to get it out. But I've said before, we went through some of these maintenance issues in 2014 and 2015. Turning around a problem like that is not something that happens from one day to the next, so we -- I'm definitely seeing some improvements. I think we've taken the right steps, but I don't expect an immediate turnaround there.
Okay. So we -- how confident then do you feel about the guidance that was issued then for Pinto for the year?
Well, we haven't lowered our guidance. I said -- the reason I made the point about the grade, I think the grade had a big -- a much bigger pull on Q1 than maybe people anticipated, and that was as planned. It's not to say that we don't have -- we're fully aware that we've got some issues there that we need to get sorted out, but we haven't felt it was necessary to revise our guidance at this point. I still don't believe that's necessary.
Okay. And in terms of maintenance, are there any big chunks of planned maintenance that will impact on a couple of quarters or just sort of days here and there?
No, it's -- there's no -- there's absolutely nothing going on that I am aware of or anyone at Pinto Valley is aware of that this is going to require any kind of an extended shutdown, right? It's -- I mean, a lot of -- quite frankly, a lot of our issues are backlog that hasn't been taken care of. And a lot of it also -- I don't know. I don't remember if -- I've spoken about this before, but that's -- it's a fairly old plant design, with 6 grinding lines. So -- and then you've got a primary crusher that's sort of independent from -- it's got a stockpile. And then you've got the secondary, tertiary crushing, and then there's fine ore bins. So you've got these 3 kind of big unit operations there that have some buffering capacity in between. And in order to hit the kind of targets that we have set for our ourselves there, it's very important that all that maintenance between those 3 major components is very well synchronized. And I think that's probably the largest sin that we've committed over the past couple of quarters, is we've gotten a bit out of sync with that, and we've got to get it back to sync. But there's not something that we're going to take a major shutdown here and fix. It's just getting the things done that should have been done over the last few quarters.
Okay. And then just finally for me, a question for Jim. Is there a cash that is going with Minto in terms of that transaction? I seem to recall seeing something about discontinued cash, and I'm just -- I don't know if I'm mistaken. Or can you give me some color on that?
We get -- as I said earlier, we get $37.5 million for the fixed assets in the resource. In addition, we get -- we are being paid for the working capital, which is described in Note 8 of the financial statements. So we get that full payment for the working capital as at March 31, 2018.
Right. So you're -- so you've taken out -- I think we're trying to...
Sorry, Orest. Looking at that note, there was $25.8 million of cash, which is included in the payment that we will receive when we close the transaction on -- Orest, on top of the $37.5 million.
Right. So you've stripped out that $25.8 million from your current cash balance because it's now part of the discontinued for now, right?
That is correct.
[Operator Instructions] Your next question is from Dalton Baretto from Canaccord Genuity.
I've got a couple of questions. I wanted to start off with mining costs at both Pinto Valley and Cozamin. At Pinto Valley, it sounds like the issues in the quarter were mostly plant-related, but you recorded a mining cost of $0.56 a pound. That's even higher than it was in Q1 '17 when you had the rainfall issues and the pit issues. Well, what's driving that higher mining cost?
Yes, Gregg here. A couple of things. Our strip ratio is higher this year than it's been in past years as per the PV3 mine plant. So that's partly what's driving it. And also there's certainly an impact from the rising cost of diesel that we're seeing this year at all of our sites. So -- but other than the diesel, everything is going pretty much as planned. We're pretty happy with the performance at the mine at Pinto Valley, where we're on track with our stripping.
[Operator Instructions] Your next question is from Pierre from Haywood Securities.
I'm just wondering if you could give me a sense of the potential from San Rafael. The -- you mentioned the additional zinc resource of sort. What kind of contribution does that make longer term?
Yes, Gregg here again. Well, we've -- in our press release, we've given some indication what we would expect over the next 2 to 3 years. Beyond that, I think it's going to depend to some extent on what happens with the other exploration work we're doing in the footwall zone. So how long -- because our philosophy with that San Rafael resource is to use it to fill unused capacity in the mill. So how much of that ultimately comes into our mine plan is going to depend on what the rest of the mine plan looks like. It's got -- the geotech in the San Rafael zone itself will be a factor. That zone is -- it's a pretty wide zone, but it's got a waste RIB through the middle of it. So we -- so far, we've been very cautious about how we're approaching that and the assumptions we're making about what we -- can recover. So I will suggest that later in the year, we'll be having -- we'll be releasing an updated technical report that'll have all of those kinds of information in it, and I would prefer that we just wait for that.
Your next question is from Alex Terentiew from BMO Capital Markets.
Just a quick question on Cozamin. You talked about that was a good performer this quarter. Your cost came down there. I think you have $46, $47 a ton, which is notably lower than you had last year, have been kind of a little bit more in line with what this mine produced in the past. What sort of -- I mean, from what you can comment with this new San Rafael zone being mined, what sort of cost on a per ton basis do you think we should be looking at going forward for that mine?
I -- the -- that -- it's a hard one want to answer. What -- the mining cost in San Rafael, because of the width of it and the proximity of the surface are -- will be quite a bit lower than, say, the cost from the footwall zone, which is getting to be a very, very long ways from the base of the hoist or from the ramp to the surface. So that's why I'm kind of -- I kind of keep referring to this technical report because with -- we can look at San Rafael in isolation, and it tells us one thing. But when we're looking at where the larger potential there with the exploration that we're doing in the footwall zone, things are going to look different. And what we expect is that -- what we're seeing with the potential there is going to change our infrastructure there. It's -- with the potential to extend the mine life, then we can resolve some of these issues that we have with the very long distances that we're hauling ore now underground. So I think it -- the numbers you saw in this quarter are going to be, I think, indicative of what you can see -- we're going to see for the remainder of the year. But looking forward, it's -- we need to -- there's a lot of additional information that needs to be incorporated into this new future Cozamin.
We have a follow-up from Dalton Baretto.
We were talking about mining cost, and we talked about Pinto Valley. I'd like to talk about Cozamin as well, just kind of following up on Alex's question there. At Cozamin, it looks like the mining cost went down substantially this quarter relative to previous quarters. What's driving that?
Are you referring to the cost per ton? Or cost per pound for copper?
I'm looking at the cost per pound because the copper production doesn't really change in the past few quarters much, but [indiscernible]
Yes, I would assume it's the byproduct impact of the additional zinc and silver.
But that wouldn't hit the mining cost per pound, right? I mean, you typically average $0.85 a pound, and it's $0.78 this quarter.
Okay. Yes, okay. I see your point, yes. Well, I mean, part of it is the -- where we're capitalizing. Because San Rafael is a zone that's going to provide ore over a number of years, we're capitalizing that development, but it's providing ore. So -- and I think probably another thing that we're seeing is, over the last couple of years, we've had an operating -- operational or operating development deficit over a couple of years there, and that was one of the things that was impacting our production. So over the last couple of years, we've gotten that -- we've gotten back up to where we wanted to be on the development and the amount of ore, the amount of ore, amount of ore, ready-to-mine ore and stopes. So the -- so we've kind of backed off a bit on that operating development. So that's -- you're seeing that in the mining cost as well.
Okay. Great. And then maybe if I can just jump back to Pinto Valley. Stefan talked about the maintenance issues there. You said it's mostly asset management and not capital-driven. Can you be a little bit more specific? What specifically is involved in terms of managing the assets?
Well, asset management is, I guess, the term we use to describe how we manage our maintenance. So it's our maintenance management system, to be more blunt.
Right. So -- but does that mean you're going to carry more parts? Is there working capital right there? Is it a maintenance program?
No, I mean, look, I mean, there's 20 different components of a good maintenance management system. And it goes all in how you manage your PMs, how you're managing your parts inventory, how you're managing your on-site, off-site contractor support, component rebuilds, things like that, and how you manage your backlog. But -- and I'd say in one -- and I mentioned this with an earlier question, it's just the layout or the arrangement of that flow sheet, it requires fairly high level of discipline in conducting your PMs in the different parts of the plant in concert in order to maintain the -- rather than just looking at your availability in the mill, which can be very deceiving there. You have to kind of look at your availability in the mill and how it coincides with the availability in the crusher, in the primary crusher and the secondary and tertiary crusher. So once you get that out of sync, it's really hard to get back in front of it again. So the -- I don't know if -- I'm not sure if I'm answering your question. I was trying to give a color on some of the issues we're dealing with there. This is not the problem that requires...
That was what I was trying to understand, is kind of the scope of what needs to be done.
Yes.
And then maybe one last question. This one's for Darren. Darren, I thought I heard you say earlier that with the sale of Minto closing, you're going to redirect resources to other projects, including Pinto Valley and Santa Domingo. When you say resources, does that involve the cash as well? Or is that cash that's going to go to pay down debt?
Well, the cash initially will go to pay down the debt because it's a revolving facility. But we obviously -- I've talked in the past about negotiations surrounding Pinto Valley, and should those come together, we potentially have a much larger resource to deal with there, understand how a potential expansion at Pinto Valley could play a factor. Gregg talked about -- we're very encouraged about what we're seeing on the exploration front at Cozamin. That could involve more capital down the road if we foresee a larger scenario there. And then of course, as we get into a tighter copper market over the next few years, we feel pretty good that we've got a permitted -- a permittable permitted project in Chile that -- copper project that just seems to be getting better and better in this current environment in terms of lower OpEx and CapEx. So we feel pretty good about the lower risk projects we have in our portfolio that provide substantial growth in our copper base going forward. And with our balance sheet getting stronger and more cash coming on with Minto, we feel we're in pretty good shape with those assets going forward to develop them.
Okay. So it's not an immediate thing? It's depending on what develops?
Right. We feel good that things are going to develop, so we're happy to put that cash in the balance sheet. As Gregg mentioned, if there was any significant capital associated with this maintenance program, we will obviously be revising capital guidance. We have not done so. We -- all of the capital projects that we think we need to do, not only PV but at Cozamin, are factored into the current capital guidance.
Your next question is from Jacques Wortman from Eight Capital.
Just a quick question. You maybe answered this before, but I didn't catch it if you did. The strip ratio going forward for the balance of the year, it was elevated in Q1. Do you expect that to be the case in quarters Q2 through Q4? And what does 2019 look like right now?
Yes. This is Gregg. Yes, for the remainder of this year, it's certainly -- I think that's the number in. And if I -- I probably should tell you I'd get back to you on 2019. I'm pretty sure it's about the same level as 2018, but I'm not positive.
Your next question is from Oscar Cabrera from CIBC.
Pinto Valley has had a number of issues with throughput and maintenance. How are you envisioning solving the problem in terms of like a time line? And that's sort of like the first part of second question, which is, as you're looking to develop a bigger project, which is Santo Domingo, sources of funds and then the possibility of running a larger asset, like how are you thinking about staffing that project? And what's the time line on that as well?
Well, Oscar, right now, we're focused on Santo Domingo. We currently get no value for that project in our share price. So our focus for this year is just to establish a current value with the project based on current economics and the current environment in Chile. So that's first and foremost in -- with Santo Domingo. And the plan there is to have an updated report done by the end of this year. And then we'll understand what kind of partnerships or what kind of level of interest -- we're open whether our interest stays the same or comes lower to bring in a stronger partner if that's needed. Our focus is to get that project developed as quickly as possible, and we recognize where our balance sheet sits at this point in time in relation to the capital required. So we'll adjust that partnership or understand how to move forward. But our philosophy is not to bet the company on any one asset or project, and that stays the same with Santa Domingo. In terms of a larger operation, the feasibility study for Santo Domingo envisions the same amount of throughput as we have at Pinto Valley. So it's not a larger operation by any front. It's definitely building one, but it's not a larger mining operation than what we already have. And as Gregg mentioned, it would have like a 40-foot sag, whatever, it wouldn't have 6 ball mill lines and then the maintenance required that we have to do with an old plant like Pinto Valley. So it's much more challenging on the maintenance front at an older vintage plant than what you'd build new.
I mean, is it your view then if you're talking about -- because I mean, if I follow the train of the questions that you're getting and the answers that you're giving, like, I mean, we're not spending capital to fix a problem, right? It's -- what you're telling us is that it's just managing the asset. And so if that's the case, how long do you think it will take to get to where you need to be?
Well, you're right. You've hit it. That's a good description. It's not capital projects. It's managing the assets. It's not going to be a 1-week fix, but it should trend higher throughout the subsequent quarters starting from -- or right now. We're already on it. We're already working on it. We're seeing -- as Gregg mentioned, we're seeing positive results. Can we move the throughput up 4,000, 5,000 tons a day in a week? No. But it's going to trend -- it should trend up throughout the quarters as we complete that maintenance. So that's the plan. It should improve consistently from where we -- from the low point being Q1.
[Operator Instructions] We do have a follow-up from Pierre.
Darren, could you elaborate on your negotiations surrounding Pinto Valley of where things are at?
I can't because we're subject to confidentiality agreements. All I can say is we're actively engaged in a dialogue, and it's probably the most advanced it's ever been. So we feel good about it. And we're the only operating mine in the Valley so -- with the infrastructure there. So obviously, it makes a lot of sense for us to be the beneficiary of any resources that are there. So we -- that's about all I can say at this point. We are hoping to come to a conclusion sometime throughout this year, and we expect to do so. But that's about all the information I can give on it at this point in time.
Okay. So I mean, if you were to look at your options post the sale of Minto, is Santo Domingo more in focus relative to other opportunities?
I would say that internal M&A is much more focused than any external M&A. But that internal projects include the highest rate of return at any asset, whether it be getting additional resources at Pinto Valley and envisioning a substantial increase there or moving forward to Santo Domingo. It's based on a return basis, and it has to deliver the return necessary to drive shareholder value. So that's first and foremost, no matter what project we're working on. But we see a lot of high-value projects within our portfolio.
There are no more questions at this time. Please proceed, Mr. Pylot.
Okay. Well, thank you, everybody. Thanks for tuning in into the call. Thanks for all of your good questions. Hopefully, we were able to answer those to your satisfaction. And as always, if you need more information, please don't hesitate to contact us, and we'll be happy to give you more detail offline. So that concludes the call and the question period, and have a good day, everybody. Thank you.
Ladies and gentlemen, this concludes your conference call today. We thank you for participating and ask that you please disconnect your lines.