Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capstone Mining Q3 2020 Results Conference Call. Note that all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. Mr. Annett, you may now begin the conference.
Good morning. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2020 Third Quarter Financial Results is available on our website. If you are logged into the webcast, we will be advancing slides. On the call are Darren Pylot, President and CEO, Raman Randhawa, Chief Financial Officer, Brad Mercer, Senior Vice President, Exploration and Operations, and Mike Wickersham, General Manager of Pinto Valley Mine. Following our brief remarks, there 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 U.S. dollars unless otherwise specified.
Now I'll turn the call over to Darren Pylot.
Thanks, Jerrold. Good morning, everybody. To start, I just wanted to flag the front page of this presentation showing Abel Gonzalez, who is our general manager at Cozamin. His photo should be on the front of this page based on the record overall cost performance in the history of the mine’s operations. Great job at Cozamin. Moving to slide number four, I am very pleased with our Q3 results of 38.5 million pounds of copper at a C1 cost of $1.82 per pound. Well on our track to meet our annual guidance. At Pinto Valley, the results reflect a quarter focused on advancing phase I of our PV3 optimization with planned downtime in July to install the first of two secondary crushers, as well as install the first of two new ball mill shells.
Additionally, July was a month to catch up on maintenance that was delayed from the spring due to the COVID-19 restrictions that impacted contractor access to our site. C1 costs at Pinto Valley were $2.38 per pound and reflected the higher level of contractor activity we did have in July. Coming out of the upgrades, we saw very strong operating performance with September throughput at nearly 58,000 tons a day with 86.5% recovery. At Cozamin, as I mentioned, the mine had a stellar quarter with 10.6 million pounds of copper at a C1 cost of just $0.36 per pound. What I find impressive with these results is that it comes ahead of the mine expansion, which will take into consideration both increased grade and tonnage associated with the new mine plan starting next year, once our one-way ramp is completed in early December of this year.
On to slide number five. We're seeing some very encouraging trends with respect to safety performance at Capstone, and I attribute this to our Values in Action program that we enacted in 2018 that started a committed, positive, and open safety culture shared by all employees from the top down. We've been focused on strengthening our management, especially on key risk areas. This year, we hired a Director of Environment, Health, and Safety, as well as a Director of Technical Services who is focused around tailings and water at our sites. At both of our operations, a system of leading indicators has been implemented, enabling management to analyze data and look for risk mitigation steps to prevent safety or environmental incidents. We're also looking to technology to improve safety.
An example of this is at Pinto Valley, where we have been testing a fatigue monitoring system that enables us to monitor mine equipment operators for signs of fatigue. Also, Capstone will publish an annual sustainability report for 2020 next year, and in the meantime, we recently published an interim performance data report from 2018 that runs all the way through June 30th, 2020, and is now available on our website. Moving now to slide number six. This year has been an extremely productive year at Capstone, as you can see by the list of goals and objectives we have completed. One key theme here is that we are willing to try new technologies and enter into new partnerships. With this, I believe we have surfaced incredible value this year.
At Cozamin, we are on track to complete the one-way ramp in early December. We will release the pillar extraction PFS results in January. Next year at Pinto Valley, we will complete phase II of the PV3 optimization work. In a few minutes, Mike Wickersham will detail our current plans on the future for Pinto Valley. Our strategy has evolved from last year as we have kept an open mind to what innovation can do for us. I'm fascinated by the recent pace of technological gains from the mining industry. This could result in the 50-year-old Pinto Valley operation performing like a brand-new mine at some point in the future without spending a high level of CapEx. Our strategy now for the PV4 expansion is to look for opportunities to improve and expand our existing mill versus building a brand-new one. As for Santo Domingo, excuse me.
As for Santo Domingo, I believe the timing has never been better to secure the right strategic partner and to fully finance this project. We aim to announce our partner in the first half of 2021, with construction starting in the second half of 2021 as well. Now I'll pass it over to Raman.
Thanks, Darren. We are now on slide seven. The operating results were strong, with adjusted EBITDA of $51.6 million and cash flow from operations of $27.7 million. Our net debt now stands at $163 million, and our net debt to EBITDA ratio has decreased significantly from 2.54x- 1.62x , which is a big improvement over the past two quarters. I'd also like to point something else out on this slide that gets often overlooked. It's how efficient cash flow from operations builds equity for shareholders. Because of our peer-leading lowest G&A and interest per pound, specifically, we're at $0.09 per pound of G&A and $0.08 interest paid on debt. This means we have the ability to fund a robust exploration program and pay for optimization projects without hesitation. These two examples have delivered huge value for shareholders over the past year. Turning to slide eight.
We're certainly happy to see the current optimism for higher copper prices. Despite this, we will stay lean in our focus on paying down debt and increasing the value of our assets. We are focused on low capital, quick payback, high return capital investments, which we internally fund by cash flows. In addition, we are unlocking the steps required to financially de-risk the capital required to fund our targeted share of around 50% of Santo Domingo. The table on this slide highlights that we're expecting at least $100 million of EBITDA growth from 2021- 2023, assuming $3 copper. The sensitivity to a $0.25 change to the copper price is around $50 million of EBITDA per year on average, so we're very happy to be at the forefront of our growth at a time when copper prices are improving. I'll hand it over to Mike Wickersham.
Thank you, Raman. We're now on slide nine. On this slide you can see a photograph of Umut Erol. He's our metallurgical superintendent at Pinto Valley, and he is championing some coarse particle flotation pilot plant trial work that begins in November. On slide 10, you can see how our strategy is aiming to get the best of both worlds, of higher throughput and higher recovery. We know we can achieve this given that we've done this in the past, and most recently in the month of September, with nearly 58,000 tons per day through the mills at 86.4% recovery. A very good showing.
Over the next four years, we're going to see copper grades rise about 10% higher than we've observed this year, and the ore is expected to be softer and more favorable for higher milling rates with lower oxidation, which means we're setting up the mill for good performance, and that's should be enhanced by the optimization program that's well underway. Ultimately, we're targeting reliable and sustainable throughput of 60,000 tons- 63,000 tons per calendar day at a recovery of 85% to 90% in the float plant through the 2022- 2023 timeframe. To get there, we're going to have to complete phase I and phase II work that's detailed on the slide. Some newly approved projects now include $10 million in conveyor upgrades, mill auto controls, cyclone upgrades for the ball mills, and tailings thickener upgrades, all of this to be completed by third quarter 2021.
Also, we've hired a third-party consultant to review our plan for increasing tailings safety and capacity as we raise rates in the mill. Given the pilot plant trial work that's underway and work on tailings management, our PV3 optimization study will now be released in the first half of 2021. Earlier you heard Darren mention how innovation is leading to this strategy change for Pinto Valley. This has been true, as you may have heard so far, with our catalytic leaching technology that was pioneered and announced in July, and also a coarse particle flotation technology that we will begin pilot testing this next month of November. These, along with numerous other initiatives, are creating some real excitement about what we can do at Pinto Valley.
Now on slide 11, you can clearly see how we're working towards optimizing or debottlenecking right from the start through to the finish of the value chain. Every step that we take has to have high IRR, internal rate of return, and it has to fall in line with our strategy for improving environmental and safety performance as well. Slide 10 gives a more detailed review of this potential for coarse particle flotation technology that's provided by Eriez. It's called HydroFloat technology. The lab results on our flotation circuit samples from Pinto Valley show that near 50% reduction in lost copper is possible, which overall means we could increase 6% the total copper recovery in the float plant.
Success with this pilot plant will allow us to pursue our coarser grinding strategy, and by doing so, it enables higher throughput from the mills, lower power consumption per ton of ore processed, lower water consumption per ton, and it supports more stable tailings. Once the HydroFloat pilot plant test results have been received, we'll make a full financial analysis, and that has to factor in recovery improvements and other benefits, which we expect to look very attractive. In terms of CapEx for this HydroFloat project, an early estimate in the range of $50 million could be made based on the installation at Newcrest Cadia operation. Turning to slide 13. As we've shown, 2020 can be characterized as a year of innovation, and this will shape how Pinto Valley looks in the future.
We'll incorporate this into our optimization study for PV3 optimization, which will be delivered in the first half of 2021. Also, we'll have a technical report update for Pinto Valley in the second half of 2021 as we complete this optimization study. The PV4 expansion study, which is backed by 1 billion tons of resources, similar grade, is now expected for 2022. The reason for this is that it now involves column leach test work that has to be conducted to evaluate expanding our dump leach production, instead of a new or greatly expanded mill option. This is a reflection of the success of our Jetti Catalyst Project. We'll also run scenarios with higher mill cut-off grades to make sure we optimize our PV4 expansion opportunity. We've been very busy. We're very excited about the future of Pinto Valley.
With that, I'll hand it over to Brad Mercer.
Hello, everyone. Thank you, Mike. I'm on slide three now, the one with the smiling faces. That picture there from left to right is Abel, the GM of Cozamin, Darren Pylot, our President and CEO, and myself, Brad Mercer. That's a good photo because we're all very happy with the impressive quarter this quarter. Turning to slide 15. It shows that we had C1 cost at $0.36 a pound, and it's the lowest C1 cost on record. That was helped by strong production, higher tons, higher grade, lower operating cost per ton, and a very nice kick with high by-product silver prices. Now turning to slide 16. We want to emphasize that we are only 31 vertical meters away from completing the one-way ramp, and this is on schedule or slightly ahead of schedule and should now be completed in early December.
As we have said before, not only will this de-bottleneck the mine, it will lead to a safer mine with a simpler traffic pattern. Work continues apace on the PFS for pillar extraction, which will include an analysis of a paste backfill solution in combination with the dry stack filter tailings solution we are currently designing for Cozamin. It is expected for release in January. Other initiatives to optimize the mine are ongoing, like improving stope dilution and adding ore passes, or as we call them, truckless headings. There's a big opportunity to surface a lot of value at Cozamin by working on converting some of the nearly 300 million pounds of copper and 30 million ounces of silver in resource, not yet in reserve.
A study on this, to accelerate conversion rate, will be initiated in 2021. With respect to exploration, we are full steam ahead on our new 80-hole drill program, which is targeting the expansion of both vein 10 and vein 20 to the southeast. We will be in a position to start a 1,000 m exploration drift in early January to provide more platforms and easier access to target this area from underground. We are also stepping up our drilling to the southeast perimeter of the current reserve, and expect to add additional reserves to tidy up that area. The initial results of this effort will be included in an updated technical report in January. As we have done in the past, we'll provide exploration updates as assay results come in. With that, I'll pass it back to Darren to provide an update on Santo Domingo. Thank you.
Thanks, Mike and Brad. Now for everybody, we're on slide 18. As I said earlier, sentiment has greatly improved for copper, iron, and cobalt, and there is a dearth of permitted projects ready for construction. Santo Domingo, in the middle of one of the most prolific mining districts in the world, is a standout. The MoU with Puerto Ventanas for rail and port facilities involved a 90-day period to explore mutual synergies and regional benefits, and this is expected to be completed by the end of this year. On page 19, we show a pathway to fully finance this project that involves a gold stream, project financing, and a strategic partner.
We presented this slide back in September, but I wanted to, excuse me, reiterate it, that our strategy is to build Santo Domingo without drawing on funds from current operations and without diluting equity shareholders. Turning to slide 20. Capstone is about to enter the first year of high growth. By 2022, we will be a 200 million pound per year producer with C1 costs in the $1.50 range. By 2023, at $3 copper, our EBITDA is expected to be 170% higher than it is this year. Santo Domingo is really the wild card, which will be transformational for Capstone. As illustrated on the final slide, at 375 million pounds of production by 2024, this is over 150% higher than levels we're seeing this year and should translate into a significant re-rate in our valuation. With that, operator, we're ready to take questions from the audience.
Thank you, sir. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to withdraw your question, simply press star followed by two. If you're using your speakerphone, we do ask that you please lift the handset before pressing any keys. Please go ahead and press star one now if you do have a question. Your first question will be from Dalton Baretto at Canaccord. Please go ahead.
Thanks, guys. Good morning, Darren and team. Tough day to be reporting your results on. It sounds like your thinking's changed fairly dramatically on the Pinto Valley optimization efforts. Just a couple of questions from me on PV3 and then on PV4. First on this Eriez coarse ore technology. It sounds like it's got some pretty decent benefits, pretty good CapEx that attach. How long has Cadia Valley been using this for, and what kind of results have they seen? Part three of that question is, do you have to pay any royalties to Jetti like you do to Jetti?
Thanks for that, Dalton. I'll let Mike answer it because he's had the most direct experience with the team at Eriez. Go ahead, Mike.
Thank you, and thanks for your question, Dalton. Things did change just a little bit in our PV3 optimization, mainly because we decided we wanted to study this coarse particle flotation technology more carefully. We evaluated other options to present finer material to ball mill feed. We didn't like the economics on those, as well as we like what we see now in this ability to double down on our strategy to be a coarse float mill. That's really what's driven that. We want to make sure that we get those numbers right, and we get the technology right, and we keep the capital footprint low. With regard to Jetti, we do have a royalty payment with our partner at Jetti. We still are making copper at very low unit costs, and we're rapidly expanding how many pounds of cathode we make per year. It's doing very well.
My question was, Eriez, do you have to pay them a royalty if you deploy this coarse ore flotation technology?
Oh, I'm sorry. Dalton, I misheard you. At this point, we've completed lab-scale testing. We're going to get started on pilot-scale testing. We have no commercial agreement or negotiations right now in view with any kind of a royalty. We want to make sure that the technology works in our float plant, and we get the recovery and throughput gains we expect, and then we'll talk about commercial terms.
Okay, are you aware if Newcrest is paying a royalty at Cadia Valley? The only reason I ask is because it changes the cost dynamics. Okay?
Yeah, I don't know if a royalty was part of Cadia's deal. I don't know how to answer that for you.
Okay.
Dalton, I can answer. Dalton, I should say, this I believe is, I can't guarantee it, but I believe this is more like buying a piece of equipment than it is a technology. It's a newer piece of equipment that does different things, but we wouldn't expect to be paying royalties.
Perfect. Thanks, Darren. Yeah, that was the gist of my question. You're not licensing the technology.
Yeah.
You're buying equipment.
No, exactly.
Got it. Okay.
Yeah.
Okay. Maybe just switching gears to PV4. Again, completely different strategy there now. I understand you don't need to build a new mill, but if you're going to expand the leach and you're paying a royalty to Jetti and the all-in cost there is like $2 a pound, I'm having a hard time understanding where the economic trade-off is.
Well, that's just it. We've got to do the work. The success of Jetti has been building. As you know, the longer that you leach something, the more time you have, the more clear results you get. We want to do this column testing over the next 12-18 months to understand the leaching process better, and at the same time, understand what we can possibly raise our cutoff grades to the mill, and therefore, spend much less CapEx on equipment in the mill and understand the trade-offs, just as you said, right? We understand that there's a licensing cost with Jetti, and then there's obviously a CapEx cost to building bigger mills. That's exactly what we'll be doing, is trading off one for the other. We believe that building a smaller mill and leaching more will be more economic and better for the operations.
Okay, great. Then just one last one for me on Santo Domingo. I understand the 90-day period's still ongoing. Have you guys had any initial feedback?
Yes. We have a weekly meeting with them. We're working jointly to, one, consider what a final agreement would look like, as well the real 90 days is for them to do a market analysis on other potential customers on a multi-user port basis. They're working with other potential users, and we talk with them every week, and we have an extremely good relationship, and we're working together on finalizing it.
Thanks, guys. That's all from me.
Thank you. Next question will be from Orest Wowkodaw at Scotiabank. Please go ahead.
Hi, good morning. Just wanted to get a bit more color on the costs involved at Pinto Valley. Obviously, you're making a fair amount of investments and upgrades there. I noticed that you did up the CapEx guidance for this year. If I understood what was said earlier, that you are targeting to increase the throughput there to about 63,000 tons a day starting in 2022, these mill upgrades would be finished by, I think, the third quarter of 2021. How much additional capital, or I guess, how much total capital does Pinto Valley need for 2021 in order to achieve this target?
On average, Orest, we spend about $40 million, $50 million on sustaining capital, and then the additions to take us to about the next phases in the MD&A, we got another $10 million of growth capital for the cyclones and the auto control system to take us about to the 60s. The next step will be the 60,000 tons-63,000 tons, which is part of the PV3 optimization final study, which will come out early next year.
Can you give us a, should we anticipate your kind of consolidated CapEx to be at similar levels in 2021 with majority going into Pinto? Is that the right way to think about it?
Yeah, I would think about it that way. Cozamin's still got the dry stack tailings that we want to put in place as well. That'll be a bit of a capital in 2021 as well that we'll kick off.
Okay. Just separately, can you give us an update, where your head may be at with respect to a potential silver stream at Cozamin and whether that's something you're actively engaged in from a evaluation perspective?
Yeah. Orest, I would say that we're cognizant of elevated precious metal prices, both silver at Cozamin and gold at Santo Domingo. I would think it's fair to say that we're dealing with this from a position of strength. As you saw by the cost profile at Cozamin, there's no need to do a silver stream based on that, and as well as our balance sheet. If we can be opportunistic and, because it's a very coveted asset, if we can get something that we like, and it's accretive to shareholders, we would absolutely look at it. Yeah, we're taking a hard look right now.
Should we anticipate that you need to finish the updated 43-101 around the paste backfill before you'd be in a better position to perhaps move forward on something like that or not necessarily?
No, I would say not necessarily, because it's relative to the overall reserve. It's not a large number, and as well, it's pretty well defined that if that went in, you'd be able to recover pillars. It's not much of a risk on either side.
Okay. Thank you very much.
Thank you. Next question will be from Raphael de Souza at CIBC. Please go ahead.
Hi, good morning, and thank you for taking my questions. Just somewhat of a follow-up on the 2020 CapEx. I was just wondering, what initiatives have been brought back to the table with this update?
Hey, Ralph, it's Raman. We accelerated our capital spend by, we took it down from 90 to 60, and then back up to about 90. The major items are stripping. We were going to dial back a bit on stripping. The stripping will be $7 million higher, which puts us on plan to deliver that 10% higher grade next year into the 0.33% over the next four years. Haul trucks, we had purchased some haul trucks that we're going to pay for this year that we could have deferred. PCRs, which are component replacements and some tailings work. Also a new loader. Instead of running these high-cost shovels, we were able to bring in a loader that's more energy efficient, but also will defer some capital that would've been required on those shovels.
Those are the big items when you add that up, and then a little bit more spend in MSD.
Okay, thank you. Just on stripping. I noticed that at Pinto Valley stripping was a bit higher this quarter. Should we expect that to continue in the fourth quarter?
Yeah, I would say so. At probably the same rates you saw in the third quarter.
Okay, thank you. Last question for me. At Cozamin, as you continue to move away from the San Rafael zone, should we expect that grades will continue to go higher going forward, at least in the fourth quarter?
Yes. We're planning on phasing San Rafael production out in the first month of Q1 of 2021. You'll get a marked jump in the head grade because we won't be blending with the lower grade zinc material.
Okay. Yeah, that's all from me. Thank you.
Thank you. Your next question will be from Stefan Ioannou at Cormark. Please go ahead.
Great. Thanks very much, guys. I get that obviously the PV4 plan has sort of pivoted a little bit and it's still early days, but just wondering, obviously, if the mill's staying the same size and a lot more material will be going onto a heap leach pad, do you have any sense of how much it would impact your future tailings requirements in terms of, I know PV4 entailed a new site and all that sort of stuff. Is that still on the table? Just maybe give us an update on that aspect of it.
Yeah. Stefan, I would say that the mill is going to be bigger, not the same size. I would say, when we were envisioning a mill in excess of 100,000 tons a day, we think it can be smaller now. Absolutely, we will need to solve the tailings situation with land we either have on our site or permitted land. We need to evaluate that, but we would definitely need more space for tailings as part of a PV4.
Okay. Got it. Just maybe just a sort of a housekeeping question for Mike. He mentioned, I don't know if I got it, just the anticipated CapEx to put a HydroFloat in. Did he say $50 million, Mike, or?
Yeah, it was $50.
$50, okay. Thanks very much. That's great, guys. Thanks very much.
Thank you. Ladies and gentlemen, as a reminder, if you do have a question, please press star followed by one on your touchtone phone. Your next question will be from Craig Hutchison at TD Securities. Please go ahead.
Hi, guys. Most of my question's been answered, but just in terms of your discussions for Santo Domingo in terms of strategic partners, has there been a strong interest in the offtake for the magnetite ore?
Yeah, there's been strong interest, Craig, from kind of all of the metal streams that we produce. Copper is a high quality and very strong interest on an offtake financing or agreement for copper. The iron is a premium product, very good interest on purchasing the iron, on an offtake of that as well. Obviously, lots of interest around cobalt because it's associated in Chile, and at a lower risk than the D.R.C. Very strong interest for offtake for all of the metals that we'll produce there.
Is your intent still to be a majority owner, or would you be willing to go become a minority owner in the asset?
Yeah. Similar case, right? If we have a strong partner with a track record of building mines and can finance the project very quickly, we would absolutely have them be the operator. At the same time, with the copper price and cash flow we're generating from our existing operations, we could envision being a 50% partner and operator as well. Whatever's best for the lowest risk for our shareholders, best return for the project, and best execution of building a mine is the way we would go forward on that.
Okay, thanks. Just maybe a housekeeping question from me as well. Just in terms of taxes for sort of the balance of this year, are you guys in a fully cash taxable position at this point, or should we assume there is still some deferred tax credits you guys have to offset?
Depends on jurisdiction. In Mexico, we're fully taxable at the tax rate in the 30s, 35%, and then we pay withholding tax when we bring it up. At Pinto Valley, we have a lot of loss carry-forwards are up to about $100 million. We won't be paying taxes at Pinto Valley for a little while here in the next couple of years.
Okay, perfect. Thanks, guys.
Thank you. At this time, we have no further questions, so I would like to turn the call back over to Mr. Pylot.
Great. Thank you, operator, and thank you everybody for your questions and joining us today. Please continue to remain vigilant to stay safe and healthy as this COVID-19 continues to be a global concern. Please don't hesitate, as always, to contact us with any further questions or follow-up you may have after this call. Thank you very much.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we ask that you please disconnect your lines.