Morning. My name is Anis, and I'll be your Conference Operator today. At this time, I would like to welcome everyone to the Capstone Mining Q4 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star then number two. Thank you. Mr. Annett, you may begin your conference.
Thank you, and good morning, everyone. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2020 fourth quarter and year-end financial results is available on our website. If you are logged in to the webcast, we will be advancing slides. On the call are Darren Pylot, President and CEO, Raman Randhawa, Chief Financial Officer, Brad Mercer, Chief Operating Officer, and Mike Wickersham, the General Manager of our Pinto Valley Mine. 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.
Finally, I'll just note that all amounts we discuss today will be in US dollars unless otherwise specified. Now I'll turn the call over to Darren Pylot.
Thank you, Jerrold, and good morning, everybody. To start, I want to flag the photo on the first slide on page four of this presentation. That shows a blast at our Pinto Valley Mine using a third-party expert in blast fragmentation. The mine has been able to increase the percentage of half-inch fines in the run of mine from around 25%, which we were doing a year ago, to now over 40% today. This translates into lower costs, less maintenance, and downtime in our crushing circuit, and overall better mill performance. Turning now to slide five, it can go without saying how challenging 2020 was. For Capstone, I'm incredibly grateful of how our employees rose to the occasion and delivered safe production that exceeded our original 2020 guidance and beat on costs.
We accomplished this while advancing our growth plans, which now have positioned our company to benefit from the current high copper price environment. Q4 consolidated copper production came in at 44.4 million pounds at a $1.68 per pound C1 cash cost. Q4 production at Pinto Valley was 34.1 million pounds at a C1 cash cost of $2 per pound and benefited from strong mill performance. Throughput of 57,000 tons per day was over 10% higher than the 2019 average and was really the first quarter which had the full impact of our phase one optimization work completed earlier in the year. Recall that phase one really focused on the debottlenecking of the front end of our mill, and we're confident that the current run rate is sustainable.
Phase two optimization work this year will focus on higher copper recovery and increased capacity of our tailings thickeners. At Cozamin, another great quarter with 10.3 million pounds of copper production at first quartile C1 cost of $0.63 per pound. In December, the one-way ramp was completed and has since surpassed our expectations for haulage efficiencies. We expect to reach the target of 3,800 tons per day by April, as guided. Turning now to slide number six, we had a terrific year. Despite all the challenges that the pandemic imposed on everyone in 2020, we were able to achieve new safety records at our operations. We recently expanded Wendy King's Senior Vice President role to lead our ESG strategy. In Q3, we published an interim ESG sustainability report, and we will be releasing a full report for 2020 in June of this year.
In December, we announced a $150 million silver stream for 50% of Cozamin silver, which closed last week and gave Capstone a net cash position. Our balance sheet and expected cash flow from operations gives us an opportunity to accelerate organic growth projects at Cozamin, Pinto Valley, and Santo Domingo. It gives us the ability to negotiate from a position of strength when it comes to partnerships with Santo Domingo, as we look to get the best possible partnership deal for our shareholders. I'm very proud of how Capstone has embraced testing new technologies that have the potential for high impact in operational, environmental, and safety performance. Innovation will drive cost efficiencies and offers new growth opportunities across all of our operations.
At Pinto Valley, the Jetti catalytic leaching technology that we have successfully implemented and the Eriez HydroFloat coarse particle flotation that we pilot plant tested in December are two very good examples of the cutting-edge technologies that recover copper from waste streams. We expect the leach technology to enable the recovery of more than 300 million pounds of copper from waste tons over the next 18 years. Eriez HydroFloat has the potential to boost annual production by anywhere between 9 million pounds and 12 million pounds annually from what would normally have gone to the tailings. The photo on the right is a close-up of 300-micron coarse particles that were recovered during our pilot plant testing, and you can see how we have floated very fine-grain chalcopyrite, even though it is still attached to coarse particle gangue minerals.
This allows us to recover sulfides that have not fully liberated in the grinding process. Note the tiny specks of chalcopyrite on the coarse gangue mineral. This quite simply cannot be achieved in our conventional flotation circuit because the coarse particles of the attached gangue are too heavy. At Cozamin last month, we announced the new mine plan with paste backfill technology incorporating 50% of the tailings that will be mixed with cement and sent underground to form concentrate pillars, allowing for maximized copper extraction at this high-grade mine.
On the same theme of recovering metals from waste streams, at Santo Domingo, we announced a PEA for cobalt production that starts with recovering pyrite laden with cobalt from a tailing stream. The process we have chosen is a series of off-the-shelf technologies that provide an efficient pathway for nearly 80% of the cobalt contained in the ore body to be recovered.
We're excited about this cobalt project because once in production, Santo Domingo would be one of the world's largest and lowest cost battery-grade cobalt sulfate producers. With respect to the last bullet on the slide, we are in late-stage negotiations with Puerto Ventanas and hope to have an update on this very shortly. I'll now pass it over to Raman.
Thanks, Darren. We are now on slide seven, which highlights the financial transformation that occurred at Capstone during the year ended December 31st, 2020. The operating results of the fourth quarter are reflective of Capstone's strong earnings and cash flow potential in a rising copper market. We finished the year with Q4 adjusted EBITDA of $63.5 million and cash flow from operations of $67.4 million. Our net debt has decreased to $125 million or 0.88x as at year-end. Subsequent to year-end, with the closing of the Cozamin silver stream for $150 million, we are now in a net cash position of $25 million, and the chart on that bottom right would show a negative net debt to EBITDA ratio. That is obviously a big positive change over the past six to nine months.
Just to remind everyone, this wasn't just a result of higher copper or silver prices. Our balance sheet turnaround ultimately came from the exploration excellence at Cozamin that resulted in a competitive bid process for the silver stream and strong operational performance at both mines during 2020. In 2021, we expect to be in a debt-free position, and we've eliminated a historic interest charge of roughly $15 million per year or $0.08 per pound. Turning to page eight. Our balance sheet is well positioned to fund our growth at both Pinto Valley and Cozamin. We are excited about the remaining PV3 optimization projects, which include Eriez HydroFloat, subject to feasibility study and board approval by mid-year. This project's another great example of a high return capital investment, which also improving and supporting our ESG strategy with lower power and water consumption per ton of copper produced.
With respect to capital allocation, our strategy is to invest organically, providing double-digit returns. This includes Santo Domingo with an attractive IRR of up to 29%. We'll speak more on Santo Domingo on a later slide. The table on the bottom right shows what I'm most excited about, where we're expecting at least $1 billion of cumulative operating cash flow in a $4 copper environment over the next few years. Quick sensitivity to a $0.50 change in the copper price is around $67 million per operating cash flow, over the next three years. We are clearly excited to be delivering into growth at a time where copper prices are so robust. Commodity prices, including oil rising. Lately, some of you may ask us questions on cost inflation. Right now, we have not seen anything notable for key inputs at our sites.
We have set contracts for key inputs. The only thing we may see would be some increases based on raw materials index for some products or increases on fuel surcharge. Fortunately, last year, we hedged about 70% of our Pinto Valley diesel consumption for 2021 and 2022. At current spot pricing, we are going to save $4 million in fuel savings at Pinto Valley this year. In addition, given the low copper supply markets, we are actually receiving all-time low spot TC/RCs, currently between $20-$30 a ton as well. Now I'll hand it over to Brad Mercer.
Thank you, Raman. Good morning, everyone. Just remind you, we're now on slide nine. This slide speaks to being a good steward of natural resources, and we are investing in ways to maximize recovery of valuable green metals like copper and cobalt. Darren spoke earlier to many of these projects. We'll expand a little bit here. I'll add that with the expanded use of Jetti catalytic leaching, we can look at initiatives to enhance metallurgical and environmental performance as well. For instance, increased use of water from brownfield mining districts around us, surrounding PVM, could actually lower our freshwater needs. We're also introducing a new project called pyrite agglomeration, and that could potentially recover up to four million pounds of copper that normally would have gone to tailings.
This stream is pyrite rich, and when agglomerated with our run of mine dump leach, will provide a valuable source of free acid in the form of the pyrite breaking down. That will enhance the copper leaching. Diverting this mill stream away from our tailing storage also improves our long-term environmental performance, and that's another key benefit of the project. The PFS for the pyrite agglomeration project is under study this year, with a view to adoption in 2022. The capital for this is expected to be less than $10 million, and that meets our internal rate of return hurdle that Raman just mentioned.
Moving on to slide 10. It's a bit of a complicated illustration. It shows you the flow sheet of the mill before and after Eriez and pyrite agglomeration. Both projects are subject to PFS or feasibility level studies eventually, and could be brought online as early as mid-2022. The flow sheet on the left is our current conventional flotation circuit, and you can see 150 million pounds of copper enters the circuit, and we recover approximately 127 million pounds into concentrate. Basically, 85% recovery. This results in about 23 million pounds of copper going to tailings impoundment. If we add Eriez and pyrite agglomeration in operation today, we estimate that only 10 million pounds of copper will be going to tailings. This would translate to an increased overall recovery of 93%.
If you think about the incremental cost to recover an additional 13 million pounds, it is very low, as you can imagine, given the recovery happens at the end of the process. No additional mining, no additional crushing, and no additional grinding cost are required for this additional production. Our preliminary estimate for the capital on Eriez is expected to be in the $70 million range. At this level, would meet our rate of return on capital objectives. As I mentioned above, less than $10 million for pyrite agglomeration. Please move on to slide 11. 2020 was a pivotal year for Cozamin. As we have demonstrated, it is a truly tier 1 asset, now with more than a 10-year mine life ahead and still exploring. With higher production and first quartile cost, even with the silver stream that closed last week. This is still a flagship operation.
I think we should move on to slide 12. We believe in the next 10 years, we will have higher cumulative cash flow than the previous 14 years. We look to enhance this with Impact 23 growth projects aimed at extending the mine life and reducing cost. We expect that work will start now and take us the next two years, and will be captured in a technical report sometime in 2023. Ultimately, we believe that Cozamin will remain our crown jewel asset well into 2030s. Moving on to slide 13. We showed this figure last month when we announced the new technical report. I think it's worth showing again that we have set a new bar of higher throughput and higher grades.
As a test to see what mining rates Cozamin could deliver on the one-way ramp, we have on occasion this year with ramp-only production haulage of over 4,000 tons a day. If you couple that with our 2,000 tons a day of hoisting capacity, that tells me we will not have logistical issues in achieving 3,780 tons a day, the target we've set for 2021. In anticipation of being able to achieve higher mining rates and haulage rates, we have started to invest in our mill by reconfiguring the ends of each of our ball mills, and this alone is expected to add about 60% additional grinding capacity. Further minor investment in crushing and dewatering will also be performed over the year. That's it for me. Now back to Darren.
Thanks, Brad. Now on to slide 14. When I look at today's copper and iron price environment, if I assume that we stream the gold to help build it, so without the gold revenue, if Santo Domingo were producing today, the first year would be $1 billion in free cash flow on 100% basis at these current metal prices. The payback on initial capital is quick because of the very high grades we realized at the beginning of the mine plan. It works out to around 0.9% copper equivalent over the first five years, with over 1% average copper equivalent over the first two years. These are very high grades for an open-pit mine in Chile, at low altitude, near infrastructure, and also close to the port. The quick payback and low CapEx intensity are why we bought this asset almost 10 years ago.
We kept this project slowly moving forward through the low copper price cycle and preserved all the optionality that we have to this day. In other words, we are now able to negotiate partnerships from a position of strength. The time was spent well on detailed engineering and trade-off studies, permitting, and the cobalt PEA that once in production, would put Chile on the map as a major global producer of ethically sourced cobalt. Next slide, please. On slide 15, we demonstrate our pathway to construction for Santo Domingo. You may notice we have removed specific numbers and percentages compared to previous presentations. That is because today's copper price environment and debt-free balance sheet have given Capstone a stronger bargaining position than we had last year.
We are now evaluating two different scenarios, one with 50% of Santo Domingo and the other, which maintains our current 70% ownership position. As Raman noted earlier, at $4 copper, we are expecting $1 billion of after-tax cash flow from our current operations over the next three years. The higher percentage of 70% is something we're very comfortable with. The key in this is that we still have a turnkey fixed price proposal from POSCO and the port and rail deal we have been negotiating with Puerto Ventanas will also significantly de-risk this project by de-risking CapEx attributed to Capstone by up to $400 million reduction. Next slide, please. For 2021, we have the opportunity to be debt-free a lot earlier than we expected with the current copper prices, and this positions us incredibly well as we look to finance Santo Domingo.
By 2022, we see sustainable production of over 200 million pounds of copper per year. By adding Santo Domingo to production in 2024, we will realize transformational growth of 80%-110% copper production, depending on which ownership scenario that we go with. At Pinto Valley, as we noted earlier, our short-term focus is to increase copper recovery as this is the lowest cost path and highest return to increase production. We expect that these projects will be captured in an updated technical report to be delivered in the second half of this year. At Cozamin, the mine is ramping up as expected, and we remain actively drilling the Mala Noche Footwall West target. Development of the west cross cuts will start later this quarter, which will allow us for efficient underground drilling later in the year. Next year, excuse me.
An exploration update, including updates from our greenfield exploration opportunities, will be released before the end of Q1. Now for slide 18, which is the last slide of the presentation. 2022 and 2023 continue to be busy years for us. PV4 aims to show the ultimate potential of Pinto Valley as it brings forward 1 billion tons of resource at similar grades that what we're mining now, that sit outside of current reserves currently. To accomplish this, we believe an expanded leach strategy with higher mill feed grades is the right one for us. We think our 1970s mill, with the upgrades and modifications we are currently making, will operate like a new mill. There's no need to build a new one.
At Cozamin, by 2023, we will deliver the results from Impact 23, which will look to extend the mine life and overall performance well into 2030s, as Brad noted. In 2022, we expect to be building Santo Domingo and also deliver the cobalt feasibility study with permitting underway. Recall, in our cobalt PEA we announced in February of 2020, the cobalt operation started two years after the mill operation without losing out on any of the cobalt potential. By 2024, I can assure you the whole Capstone team is focused on delivering Santo Domingo for our shareholders. This would be transformational for our company, as even 50% would increase production by 80%, and C1 costs down to $1.20 per pound. At 70%, our production would more than double, where we are now with even lower costs.
To put this into perspective, the difference between owning 70% of Santo Domingo versus 50% is 65 million pounds of production at first quartile costs. That's about the same level of cash flow potential we're expecting from Cozamin in 2024. Thank you for joining us today. I founded this company more than 15 years ago, as most of you know, and have never been more excited about Capstone's future than I am right now. With that, we're ready to take questions from the floor.
Thank you. Ladies and gentlemen, we now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to withdraw your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please, before your first question. The first question comes from Dalton Baretto with Canaccord. Please go ahead.
Thanks. Good morning, Darren and team. Congrats on wrapping up an excellent year. I wanted to start out by asking about Pinto Valley. Mill's running really well now, and you're potentially going to get a 6%-8% recovery bump from this year's HydroFloat. I guess part one of my question is, how does this plus the current copper price factor into your thinking around PV4? Part B of that question is the BHP land next door still on the table, and how does that factor into your PV4 calculations? Thanks.
Thanks, Dalton. I'll get Brad to answer the first part of that question, and when Brad's finished, I'll answer the second piece.
With the PV4, first of all, I want to remind everybody, with PV3, we'll wrap that up in a study at the end of the year, and then a more fulsome study on PV4 coming in in 2022. Just remind everybody that we've got a billion tons of similar grade material as in the current 2039 life of mine plan. PV4 would extend the mine life well into the 50s, with similar copper production range of 150 million-170 million pounds a year. Jetti technology is expected to be very integral part of that and helping us determine what the optimal leach float cutoff is. We want to demonstrate that the economics will be a lot better to strip a lot of this material and leach it rather than float it.
We think our 25 million pound a year SXEW plant would likely need to be expanded to accommodate the increase in copper production. I don't think this would be a big CapEx item, but that's one we'd be looking at. Integral to this, and being able to announce this in a reserve, we have just embarked on a very large-scale column leach study to establish the optimal Jetti-assisted leach versus the mill flotation. We'll get the recovery curves on Jetti. Minimum, that's going to take nine months from now, if we started today. We need to get those cells loaded up, which we will be doing basically in the next month. Our mill may be very old, but we've spent a lot of money on it, as Darren said already, in terms of the crushing and grinding circuits. We've spent money in the pit on throughput.
We expect our mill to continue to perform like a new mill. We wouldn't be building a new mill. We'd just continue to bolster the technology we have. One thing I think you can say is certain here, Dalton, that PV will be changing dramatically over the near term, and as catalyst, you'll see the PV3 report this year and the PV4 report next year.
Thanks, Brad. The second half of your question, Dalton, as it pertains to the district consolidation. Obviously, it's a very big opportunity for us. We mentioned before, we're the only producing mine in a district that has a lot of copper resources around it. Would potentially be one of the largest copper mining operations in North America, when we put it together. The details, obviously, we're under CA, so we can't comment on details. What I can say is we're having much more frequent discussions right now than we've ever had. I can also say that as CEO of Capstone, my top two objectives this year are, one, to have this consolidation defined, and number two, to optimize and move forward on the construction and partnership at Santo Domingo.
It's very important for the company and very important for me as CEO to get this done as soon as we can.
Would you expand the mill then if you had access to that land?
Well, as Brad commented, we would incorporate the Jetti solution, understand what the cutoff grade would be, and then understand the best way to mine it. We're running different scenarios, but more details to come.
Okay, great. Maybe I can switch gears to Santo. Just in the current copper and iron ore pricing environment, are the bids you're seeing in the process now more for the whole asset, or is it still very much a JV model that's being looked at?
Well, as I said earlier, we've looked at anything from 0%-100% in terms of selling the asset. We believe owning a Tier 1 asset that's fully permitted in one of the best mining jurisdictions in the world at low altitude is something you don't want to get rid of, especially in this price environment. We think we have one of the only permittable projects to go forward, and that's why we want it. We understand that with high commodity prices also comes cost inflation. The sooner we can get moving on this project, the better we can to fight inflation, because we know it's going to come. It comes every cycle, and we know that from the past.
We believe this project has a lower risk because of where it's located and the amount of engineering that's been done over the 10-year period since we've owned it, and we would like to own as much of it as we can.
Okay, then as my last question, maybe just a follow-up to what you just said then. How cumbersome is the Korea Resources stake in this process? Are they letting you just run with it, or do you have to keep them in the loop and bring them along as you go?
Yeah. Korea Resources Corporation has been a great partner, and they're there side by side with everything that we're doing, fully on side and cooperating as one process.
Great. That's all for me, guys. Thank you.
Thank you.
Thank you. Your next question comes from Orest with Scotiabank. Orest, please go ahead.
Hi. Good morning. More questions on Santo Domingo from me. This is obviously a change, I think, in direction at Santo Domingo. Am I correct in understanding that you're now looking at the most likely scenario is you're going to own 50% or more of Santo Domingo? Does that mean you're now 100% the operator in terms of the likely direction of this?
Orest, it's Darren. Thanks for the question. I think what we're saying is we have more options now, more potential. We can look at different partners now. It doesn't mean that we don't need to be the operator, but we do have a turnkey proposal from POSCO, fixed contract on the mill and the mine. We could be the operator. We're set up to do that, or we would not be the operator if somebody had more experience, larger balance sheet, what have you. That's still completely fluid and flexible. With this dramatic increase in copper prices moving so quickly and our balance sheet, we can afford to look at different options and allow us to pick the highest return for our shareholders, I think, is the way I want to answer that.
Okay. Previously, when you did the Cozamin stream, you talked about that the two current producing assets were not going to be used to fund Santo Domingo. Is that still the case if you go to a higher ownership scenario?
Yeah, definitely, number one, those assets need to return the capital back into all these projects, these high return, lower CapEx projects that we've been speaking about, both at Pinto Valley with PV3 and PV4 and Impact 23 at Cozamin. Absolutely, that's the priority of the operation. That stands. Raman, I don't know if you want to add to that.
That comment was also in lieu of a $3 copper price environment. In $4 you got a little bit of surplus cash flow. Reinvestment of our cash from our operating assets back in our operating assets, and then we can project finance Santo Domingo at different levels in a higher price environment.
Okay. Just finally, what's your best sort of guidance you can give us on when we're going to get some clarity on the path forward here for Santo Domingo with respect to the partnership financing, all the structure here?
We've set an internal goal of hoping, having things wrapped up by the middle of this year so that we can move forward with whatever scenario, in the back half of the year.
Okay. Does that imply that you're well advanced in terms of the discussions with potential partners and figuring out the components here?
Yeah. We're advanced. We're in discussions with, I said, different options. We have been and continue to be. We've just opened up a bit more options for us going forward now in this environment.
Okay. Just finally, would you consider, if you decide to go ahead with Santo Domingo, would you consider hedging, putting copper hedges in place to try to protect some of the risk during the build period, on the existing assets?
I would expect if we, again, if we did project financing, non-recourse project financing at the asset level that in these copper price environments to protect that, as you mentioned, would not be unreasonable. We've seen First Quantum do it. We've seen others have to do it. Depending on our ownership, I would expect that to happen as well.
Okay. Thanks, Darren.
Thank you.
Thank you. We have a following question from Stefan with Cormark. Stefan, your line is now open.
Great. Yeah, thanks, guys. Just maybe just on the Santo Domingo as well, just given the anticipated construction startup timeline of the second half of this year. I know Santo Domingo is technically fully permitted. I know you've kept them in good standing over the years, but are there any underlying sort of just amendments or updates that are required that we should just have in the back of our head, or is everything fully up to date?
Yeah. Stefan, it's Darren here. No, everything is fully up to date. As we said before, we're not going to start spending serious money without the project and the financing defined. That won't happen. If it were to happen tomorrow, we would be able to put shovels in the ground tomorrow. It is fully ready to go and can be developed on a moment's notice, but we are not going to, obviously, make any serious capital decisions without the project being fully defined, optimized, and financed, the financing plan in place.
Okay. Great. Maybe just shifting gears to something completely different, just the Donovan 2 VMS prospect. Can you give us an update there? Is it still just planning to drill it at some point this year, or what are you thinking there now?
Brad will be happy to answer that question. I'll let him answer.
Sorry, Stefan, I'm laughing because, yeah, we should be drilling it tomorrow.
Oh, okay, great. Fantastic. We'll stay tuned. Thanks, guys.
Thank you.
Thank you. Finally, we have a question from Craig with TD. Craig, your line is now open.
Okay. Thanks for taking my question. You guys mentioned you're not seeing a lot of cost pressure in your existing operations, but you're a little bit concerned about getting started here on Santo Domingo to avoid the cost creep. Are you concerned we should give an update on the cost estimates? Do you feel like the feasibility study you guys put out a couple years is still current around the $1.5 billion? Obviously, we're seeing steel prices sky-rocket the past six months. Thoughts around concerns over cost escalation and potential updates there.
Yeah, Craig. Darren here again. I commented on it a little earlier that we have to assume there's going to be cost creep and inflation. As you mentioned, these input costs are going up. That's obviously great for copper, but the steel costs and what have you are going up. We do expect that to happen. We haven't seen it yet in our last checks, but we know going forward now it's going to be there. As I said earlier, the best thing we can do is optimize this project and get moving on it as sooner rather than later to be first movers and be in front of that inflation, so to speak, as much as we possibly can, knowing that there's going to be some there for sure.
Okay.
So are we, is there-
Anything else, Craig?
Anything else, Craig? We kind of lost connection, I think. Is there any other questions, or operator, are you there?
I'm good.
It appears. Craig, are you still there?
I am, yes. That's it for me, guys.
Okay. Thanks, Craig.
Thank you. It appears there are no further questions. You may proceed.
Okay, everybody. Thanks, operator. Thank you again for joining us, everybody. As I mentioned, I've never been this excited about Capstone's outlook. Stay tuned, and don't hesitate, as always, don't hesitate to contact us with any additional questions. Continue, obviously, to remain safe and healthy. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.