Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp Second Quarter Results twenty twenty Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, 07/30/2020. I would now like to turn the conference over to Gerald Henett, Vice President, Strategy and Capital Markets.
Please go ahead.
Thank you, and good morning. I'd like to welcome everybody on the call today. The news release announcing Capstone's twenty twenty second quarter financial results is available on our website. And if you're logged into the webcast, we will be advancing some slides. On the call are Darren Pilot, President and CEO Raman Randhawa, Chief Financial Officer Brad Mercer, Senior Vice President, Exploration and Operations Jason Howe, Senior Vice President, Corporate Development 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. And 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 Pilot.
Good morning, everybody, and thank you, Gerald. We're very pleased to share with you our strong second quarter results in this current environment of rising copper and silver prices. It seems every day that there's an article on the future for green metals as the world moves towards a low carbon footprint economy. And I'm excited that Capstone is positioned to be a responsible and growing producer of both copper and silver. Our growth progress has not been uninterrupted by COVID-nineteen restrictions.
In fact, over the last six months, it has strengthened our company in a very positive way as everyone had to pull together to safeguard the health of our employees and our business. I'm proud of what we've accomplished and the fact that we've stayed on track to deliver 20% production growth with 10% lower costs starting next year, which is a commitment we made to the market at the beginning of this year. For those of you who are not logged into the webcast, we're now on Slide four of the presentation. Overall for Q2, we produced 38,500,000 pounds of copper at C1 cash cost of 1.87 per pound. We've reinstated our original production and cost guidance for the year.
And as mentioned, COVID-nineteen has not to date significantly adversely impacted or affected our production and costs at either of our operations. Our year to date production results sit right in the middle of our original guidance, and therefore, we continue to expect to finish the year between 140,000,155 pounds of copper at C1 costs of between 1 point dollars 8 and $2 per pound. Moving on now to Slide number five. In early April, Cozamin ramped down production to comply with the Mexican government decree and has since safely ramped back up to full operations as of June 1. During the ramp down period, with 30% of our workforce, Cozamin turned in a solid quarter, allowing Capstone to hit its first half twenty twenty targets.
Importantly, Cozamin also supported the local community of Zacatecas by donating medical supplies and hospital beds to the state and government in a time of need. We improved our liquidity position from $112,000,000 at the March to just over $136,000,000 by the June. And Raman will provide the details on those actions we took during the quarter, which strengthened our balance sheet when he speaks. Next slide, number six. Q2 was also a very good quarter for Pinto Valley.
The operation continued to maximize mill throughput to around 54,000 tonnes per day. And additionally, we focused on flotation performance to identify bottlenecks when the operation is at a high throughput rate. Recovery averaged around 85% during the quarter versus 82.5% in Q1. Property cost per ton milled of $10.86 is trending lower with improved throughput and cost savings that we announced earlier in the year. Specifically, Q2 was is about 3% lower than the previous year's quarter in 2019 and six percent lower than the similar quarter in 2018.
So the trend is continuing lower there. The majority of Phase one work, including three secondary screens, each with 20% more capacity, a new secondary crusher with 50% more power and a new ball mill shell with more capacity has all been completed. And with this, we are now expecting reliable mill throughput of 57,000 tonnes per day. Phase two of the PB3 optimization project will identify additional opportunities to debottleneck throughput while optimizing flotation plant performance. The target here is to achieve up to 70,000 kilotonnes daily mill rate with 85% copper recovery or better.
Recall, we did achieve these levels of performance in December, so we feel it can be optimized this rate can be optimized as a daily rate subsequent to that PV3 those PV3 improvements. This study is scheduled for release sometime in the last quarter of this year. So with that, I'll hand it over to Mike to share with you a more detailed update on Pinto Valley.
Thank you, Darren. It certainly has been a busy month for the processing plant and our Phase one work, that has been underway will continue into quarter four with six new tertiary crusher screens to be installed. Another secondary crusher will be installed as well. And then the second ball mill shell is due for replacement in first quarter of next year. And if you move to Slide seven, you'll see there's some photos of these Phase one installations, which are being completed or have been completed in second quarter, and I'm really pleased to see this progress.
It's continued despite the global pandemic and the volatile commodity prices because Pinto Valley is committed to making these targeted investments today to prepare Pinnel Valley assets for improved reliability, higher capacity and lower unit costs so that we can always deliver solid cash flow up in the coming years. In addition to the work in processing operations, we've been preparing for increased production in the mine as well by expanding haulage capacity, adding four two forty ton class trucks, an additional dozer and an ultra class loader to our fleets in the mine. Now moving to Slide 8. Earlier this week, we announced a plan to increase cathode production at Pinto Valley following a successful commercial demonstration phase with Jetty Resources that allows us to recover more copper from our high grade wastes. The operation will be taking advantage of historic waste dumps and new material, adding 300,000,000 to three fifty million pounds of low cost cathode over the next two decades.
This represents an opportunity to further reduce unit cost at Pinto Valley. It creates, and sustains new jobs, in Gila County and delivers economic benefits in a socially and environmentally responsible manner that comes with this SXEW cathode copper production. As you can see in the estimated production profile graph, cathode can represent 10% to 12% on average of Pinto Valley's total copper production, which is a nice boost considering the copper is recovered from waste that is currently outside of our technical report. We believe that this enhanced leaching technology may create more upside with options to review cutoff grades that raise copper production for both the mill and cathode operations as well. After mining of our PV3 pit shell reserves is complete, remember there is still another billion tons of resource at 0.3% copper and this new leaching technology may now form a component of our PB4 pit shell study that's due to be released next year.
Moving to slide nine. So Pinto Valley is a 120,000 ton per day mining operation with a 60,000 ton per day mill and has a 25,000,000 pound per year SXEW plant associated with it. It will be well over a billion dollars to replace an operation like this. We have a twenty year mine life ahead of us in the PV3 pit shell with 1,000,000,000 tons of resources at similar grade that remain behind that. Pinto Valley will be around for generations to come, and this slide shows how we intend to surface value for all stakeholders by delivering a sustainable and competitive copper business.
So I'll now hand the call over to Brad, who will share some exciting progress about Cozamin.
Thank you, Mike. We're now on Slide 10. In June, we announced an updated mineral resource for Cozamin with total measured and indicated tonnage increasing by 66%. This is incredible resource growth achieved since 2018 with an exploration budget of only $10,000,000 We are now updating the mineral reserves and the technical report, the results of which will be released within approximately one month. Moving on to Slide 11, you will see Cozamin's mill performance from mid February to June.
And we are showing this slide because we want to highlight the excellent metallurgy we expect to get when Cozamin moves from a blended ore source to copper, silver ore feed only. And this is what we will see starting in 2021 onward in the new reserve that you'll see in the technical report when it comes out. Please note the orange box. For two separate mill campaigns with copper silver ore only at three thousand eight hundred and four thousand one hundred tonnes per day, respectively, we realized 96% copper and 85% silver recoveries. These are stellar results for any mine.
And I don't know of any operation that, I'm sure there may exist, but I don't know of any operation that can achieve silver recoveries and flotation like that. Slide 12. Twice in my, tenure at KapStone, Cozamin looked like a sunset operation, but, we ranked our targets and broke down the technical hurdles to test them. And in twenty sixteen, twenty seventeen, the hurdle was limited underground workings to drill from and to a large extent, limited access from surface because of the infrastructure, our tailings pond. But we solved both issues through either drifting in the mine and permitting on the surface, respectively.
So please note the jump in resources from 2017 to 2018 on the graph. Then in early twenty nineteen, we started to believe the Malanoche Football Zone had cut off of dip. But trusting in our understanding of this mineralized system and our exploration model, we stepped out and drilled four holes 200 meters above what we thought was a barren zone, and the zone returned again and blossomed out that far exceeded even our expectations. So basically, that will be the basis of the new reserve going forward. Note, the next step up in resources from that work in 2019 to 2020.
And that was achieved through, I think, a breakthrough in understanding the geology and the exploration model. Now in 2020, with an even better understanding of our model, we still see targets, both up and down dip, and we now believe, more importantly, a long strike to the Southeast. I will come back to this in a moment. We also see some hanging wall veins, we thought had limited potential that are now opening up, and they will need to be tested in the future again as well. All of this, and we still haven't done much to test the multitude of other structures on the property that you can easily trace by connecting the dots from one old historical working to another going back centuries.
We'll move on to Slide 13. For those of you who have attended VERIFI, you will recognize this. It is a two d representation of the main targets that I mentioned earlier. In the near term, we are back, drilling to trim up the edges of the current resource and filling in gaps we left when we paused for the COVID ramp down. So those are the arrows, the thick arrows you see on the diagram.
But the target that really excites me is the one along strike. Note the oval in the lower right hand corner. Our model of the system, as we understand it today, is a series of vertically stacked high grade lenses within discrete blocks of geology. So when you step into a new geological domain, you have to establish if you need to look up or down for the copper zone. So southeast of the current resource, we are currently testing a new domain where we know the system is present at a high level in very limited drilling, but it's zinc dominated.
So we are looking deeper for the magic elevation where we expected to see the transition from relatively low grade zinc silver ore to, very high grade copper mineralization, the same mineralization we're currently mining. I will now turn the call back over to Raman to review the financial details.
Thanks, Brad. I'm really excited about both Pinto Valley and Cozman's future cash flow potential through our organic growth initiatives, especially in a rising copper price environment. As Gerard mentioned, moving on to Slide 14 of the presentation. As Gerard mentioned, in Q2, we produced 38,500,000 pounds of copper, which is GBP3 million higher than Q1 despite COVID-nineteen production restrictions at Cozamin. Our C1 cash cost of GBP1.87 million were 10% lower than Q1 as a result of the higher production.
Moving on to net income. Net income of CAD4.3 million or CAD0.01 a share benefited from a non cash provisional pricing adjustment of CAD13.6 million. Please keep in mind our reported adjusted EBITDA approximately $13,000,000 excludes the favorable provisional pricing adjustment of 13,600,000.0 mentioned to align with our bank covenant calculation. Operating cash flow of $45,000,000 or zero one one dollars per share was positively impacted by higher production rates and receipt of $27,000,000 in customer advances on future offtake to enhance our liquidity and to lower our net debt to EBITDA ratio. These offtake advances are not fixed with Q2 copper price, rather they're tied to future delivery of concentrate volumes.
Thus, we have full exposure to the higher spot copper prices. We expect to deliver most of the concentrate associated with these offtake advances in Q3, with the balance in Q4. As a result, the positive $27,000,000 working capital adjustment in Q2 will have a reversing impact on our operating cash flow of approximately $22,000,000 in Q3 and $5,000,000 in Q4. During Q2, we undertook a series of management actions to further strengthen our liquidity and manage compliance with banking covenants, including the previously noted off take advances. In addition, we have hedged opportunistic foreign exchange rates, interest rate swaps and a fixed fuel price contract.
As of June 30, we have a liquidity position of $136,000,000 with $86,000,000 in cash lowered our net debt from CAD188 million to CAD164 million and reduced our net debt to EBITDA ratio to 2.54. As a result, we have the balance sheet to fund our capital investments for the 2021 production growth profile. Now I'll turn it over to Jason to update on Santo Domingo. Thanks, Raman. As you
can see on Slide 15, Santo Domingo is in the middle of a growing mining district in Region 3 Chile. The project benefits from being at low altitude, near infrastructure and close to the coast. Santo Domingo is fully permitted and in Q2 we started a limited series of early works in order to preserve the validity of our environmental impact assessment. This work is included in our 2020 budget and is scheduled for completion in Q4. Activity and interest in the project via the strategic sales process increased in Q2.
We have received substantial interest in sharing or mutually developing off-site infrastructure valued at approximately $500,000,000 The Santo Domingo Port would be one of the only ports in the area that will be able to handle Capesize vessels, which will provide optionality in the region. This arrangement would substantially reduce the upfront project capital costs and operational risks and increased project economics. Ongoing discussions and negotiations are progressing and we'll provide an update when we can. We also released a PEA with respect to cobalt production earlier this year with an opportunity to build a low cost vertically integrated cobalt business in Chile. Please refer to our February 19 news release for full details.
With that, I'll pass it back to Darren to talk about our upcoming catalysts for the second half of the year.
Thanks, Jason. For everybody, now we're on Slide number 16. Looking ahead, both Pinto Valley and Cozamin continue to be on track to have banner years in 2021. Our growth plans will collectively provide Capstone with a 20% production growth and 10% lower costs, and they're coming to fruition during a time of rising copper prices. For the second half of this year, as I mentioned earlier, we completed a series of upgrades and installments for Phase one of our PV3 optimization.
The balance of the Phase one will be completed, as Mike talked about, towards the end of the quarter and into Q1 of next year when that second ball mill shell will be delivered and installed. Phase two of that PV3 optimization study will continue throughout this quarter, and we expect to release the results of the report in by at least Q4 of this year. Recall, Phase two is to maximize both copper recovery and identify downstream bottlenecks. Work on the PV4 expansion study also continues, and that report is now expected due to COVID towards the end of this year or the first quarter of next year. At Cozamin, we will be releasing the updated reserves, as Brad mentioned, and mine plan very shortly this quarter.
And we're very excited as you can hear Brad talk about, we're very excited about the step out drill targets and new exploration targets and look forward to completing the one way ramp on schedule in December. We continue to engage in discussion for Santo Domingo's strategic process and are very encouraged by the strong price environment for copper, gold and iron ore. And as Jason mentioned, we'll update you guys on the market on the strategic process as soon as we have some significant news there. Next slide. So 2021 is now less than six months away and it's obviously going to be a transformational year for Capstone given the big increase in cash flow and growth that we expect.
So in closing, as I look further ahead into 2021 and beyond, between all of Capstone's quality assets, we provide significant exposure to green metals like copper, silver and cobalt, all with incredible demand potential. With that, operator, we're now ready to take questions.
Thank you. Your first question comes from the line of Orest Wowkodaw with Scotiabank. Please go ahead.
Hi, good morning. I'm actually still looking at Slide eight. And I had a question about the Pinto Valley production profile there because it caught my attention, not with respect to the cathode, but is this an update to the concentrate production schedule as well in terms of life of mine?
Maybe Mike, do you want to take that one?
Yes, absolutely. What we've really tried to highlight here the contribution that comes from copper in cathode. And also it's important to note that we are in this year at a pretty low ore grade, at about 0.306 I think is where we're budgeted for. But the next several years on the five year plan, we're at 0.33, so you're going to see more copper come out from concentrate. And this graph really illustrates just how solidly this new cathode opportunity contributes in comparison with that production from the mill.
But is this basically a reset of the old sulfide mine plan with respect to the grade profile? And what throughput does this assume? Is this at the 56, 57 tonnes per day life of mine?
It's currently at the 56,000 or 57,000 tonne per day range. We have not yet finished our PV3 Phase two optimization study. That's the one that will lock down how fast and how high we can get our mill rates up above that 60,000 ton per day rate.
Okay. So the PV3 study, in theory, would actually increase this profile with higher
Yes, exactly. There's significant upside in that study still.
Okay. So is this more of a transition type of life of mine production schedule then?
Yes, it is. And I think this is the reason why you see we're going to update our forty three-one hundred one tech report as soon as we completed this PD3 Phase II optimization study. Once that's done, we'll have a much clearer understanding of what the future looks like.
Orest, Darren here. Just a follow-up. Yes, know that the technical report you see the analysts have is quite out of date relative to where we are now with the improvements to the mine plan and the plant throughput optimization. So we're going to come out with a new technical report next year. And as Mike mentioned, this is really a transition view on production until we get there.
Okay. Thanks, Darren. And
your next question comes from the line of Dalton Berrito with Canaccord. Please go ahead.
Great, thanks very much guys.
I just kind want to follow-up on what Orest was talking about there. So clearly I mean there's upside in this point by you showing on Figure eight. And there's just so much going on at Pinto Valley. You've got the Leeds Project, you've got PV3 Phase I, Phase II, PV4. So I just want to be very clear in terms of what's going to get included, where and what the baseline is.
So the PV3 optimization study, that's going to include both Phase I and Phase II, correct? And just give us a scope in terms of what's involved in Phase two in terms of the projects, the CapEx, the timing, that sort of thing?
Darrin, if you're okay, I'll take that one as well. So what we see is PV3 Phase II, the study that's due out in fourth quarter, will help us understand the downstream bottlenecks that are required for us to get to that on a daily basis, 70,000 ton per day run rates that we enjoyed in December, and deliver an average performance across months or quarters that exceed 60,000. So we're looking at debottlenecking in tailings operations, making sure we have filter plant capacity, making sure we have the mine capacity, all those kinds of things. So that is not yet ready. We have an idea of what we think the CapEx may be, but we're not ready to release that until the study is complete.
Okay. But the PV3 study, once it is complete, will be along these lines with PV four showing the upside, or is this is it all going be incremental to this?
So PV three phase two is incremental. Go ahead.
No, that's fine. Yeah, Dalton. PV3 phase two is incremental, and it's a series of, like we said, smaller CapEx, short term payback relatively to the PV4 is kind of uncovering the total potential of the operation at significantly higher throughput rates than what we're talking about in PV3. So that's the difference between the PV3 studies is more optimizing what we have with low CapEx projects and quick paybacks. And PB4 is what is the maximum potential of the operation.
Okay, great. And then maybe if
I can just ask a couple more. On Cozamin, I know next year the strategy is going be just focusing on the copper silver zones. But just given what's happened with the silver price so far and copper has bounced back too, Is it your plan to start that sort of immediately and just start mining the copper silver zones this year? Is that a possibility?
Darren, if you don't mind, I'll take that one. We're mining the copper silver zone now. But we also because we have the mill capacity, we we also, fill the mill up when when we can with, lower grade, lower margin, zinc, and lower grade silver ore. As soon as we it's not about the mining, it's about the the hauling. So we need that ramp to open up, and that's on schedule to open, in in December.
As soon as that ramp opens up, we can boost production by about 30, 30% tonnage, and, and we're waiting to the races there. So, yeah, we are not gonna wait for 2021. If we can open the ramp early, we will start immediately boosting production. You know? And and I think you might see a ramp up over a few weeks, but not much more than that.
We have a significant inventory of developed access into the ore body, more than we've ever had, about a year. So, we've already got that lined up, and we're taking steps to, to, add more add more equipment in in into drill and blast. We don't see, we don't see the bottleneck being the mine at all, and I think we're fully on schedule.
Okay. Great. And maybe just one last one
for
Darren. Hopefully, we've skated through the worst of the COVID impacts on the copper price and silver skyrocketing now. Your share price has done really well. How are you thinking now strategically about the business?
Well, in terms of silver, yes, and gold for that matter, we've got, as you mentioned, to the resource that we've put out at Cozum and Dalton, significantly more silver than we've had in the past. And we're coming out with that new reserve and mine plan, as Brad mentioned, within the next month. So that's going to give us a good view and the market a good view of the new mine plan at Cozamin. We do have, as Brad mentioned in his presentation and if anybody has attended VERIFI, there are some very substantial new targets that we need to test immediately to understand the potential upside of copper and silver in targets we haven't tested. So we have drills on some of those targets now, and we'll report those as we get.
But we want to get a good view of the deposit before we understand what we want to do with our silver. But we do recognize the prices. We talk about it a lot, and we will be making some decisions around that. And as well, the gold at Santo Domingo. We've got a substantial amount of gold that doesn't provide a lot of, when you look at it against the copper and the iron, it's not a lot of revenue.
So we could use that as a financing mechanism. There's like 300,000 ounces of gold there, so to potentially streamed as well.
That's great. Thank you, guys.
And your next question comes from the line of Stephen. Please go ahead.
I think it's me, Stefan Ioannou. Can you guys hear me?
Yes, go ahead, Stefan.
Okay, okay. Great. Thanks. Yes, sorry, not to beat a dead horse here, but just on the study timing for Pinto Valley. So just so I'm super clear, later this year, we'll see the PV3 optimization study.
And then sometime early next year we'll actually see a formal forty three-one hundred one updated mine plan which will be the PV3 optimization and the cathode production stuff. And then at some other point beyond that we'll then see an additional PV4 expansion evaluation of some sort?
Yes, you might have that mixed up. You might get the technical report. You might get PV4 before the technical report. But yes, that's essentially what's going to happen.
Okay. Okay, great. And just thinking ahead to PV4, is there any work going on in the background just thinking about sort of some of the bigger infrastructure issues like tailings and or water and stuff like that? Is that work going on now? Or can you give us any clarity on sort of
Your thoughts are on
Stephan, that's essentially the difference between the two, right? The PV3 is using existing infrastructure, existing tailings and maximizing, optimizing that with lower CapEx projects to debottleneck downstream as Mike mentioned. So we've got the crushing grinding now figured out it's okay, how does that affect flotation and tailings and what have you existing tailings, right? And then unconstraining everything by new tailings, much larger mill, the whole thing unconstrained and using all that 1,000,000,000 tonnes of resources that's not currently in the mine plan and giving us in the market a view of what that kind of what that would look like as a PV4 study.
Yes, definitely. So I just I guess maybe Yes, maybe I guess maybe just asked a different way then. So obviously, using the resource to drive the PV4 plan. But then when we think about that, should we think about sort of the tailings location
as sort of
like one of the critical paths to make that happen?
Absolutely. We have a new location potentially on or not on our property and how that would impact it going forward in terms of permitting and all that stuff is being looked at. And yes, you should look at it that way.
Okay. Okay, great. Thanks very much guys.
And your next question comes from the line of Oscar Cabrera. Please go ahead.
Thank you, operator, and good morning, everyone. Just a clarification on your holding sustaining costs. If I look at the presentation from the XEW increase, you quote 140 to 150. And then in in today's presentation, you have $2 a pound. So, you know, is is the difference between the two the the royalty that you have to pay your partner, or is there some something else in there?
Oscar, it includes some capital as well required to build the infrastructure or upgrade the infrastructure. So it's got sustained capital.
And it does include the partner payment that we're not under CA, allowed we're to disclose the numbers and how it works, but it does include that as well, Oscar.
Okay. No, that's thank you. And then the other thing too is the what is the increasing capacity utilization you can have with this new technology? Would you be able to use the full £25,000,000? Are you still testing it?
Is it scalable?
I think Gerald is probably the best one to answer that one. It's his it's pet project. Okay.
Well, I didn't quite hear the question. Could you repeat that?
Yeah. Sure. So what capacity utilization are you planning to have with the, you know, with the chart that you show here, an increase in SX EW production? Are you still in testing mode, or is it scalable?
Well, the the the salt the electrowinning plant can get 25,000,000 pounds, and we're currently only using 20% of it. So this is very scalable. If we can get the leaching rates up to the point where we can push the electrowinning plant, then I think it's gonna take seven or eight years before we have to worry about the full capacity of 25,000,000 at this point. So we're we're scaling up from 5,000,000 to 25,000,000 over the over the next, seven or eight years.
Okay. Okay. That helps. And then, you know, exciting opportunities in both Pinto Valley and Colsonman. There is a during your opening remarks and during your presentation you talk about the potential for partnerships in Santo Domingo.
You had sort of like touched on those in previous calls. Just wondering if you have any updates with regards to that and how that can accrue value to your shareholders.
Okay. And your next question comes from the line of Craig Hutchinson with TD Bank. Please go ahead.
Hi, guys. Can you hear me?
Hello?
Hi. This is Brad.
Hear you. I can hear you.
Yeah. Okay. Sorry. Just a question on the recoveries at Cozamin. The really good
Operator, I can't hear him.
He just hopped off.
Yes. He dropped off. So we do not have any further question at this time. I will turn the call back over to the presenters for closing remarks.
I think there's a technical issue that just, all of
a sudden popped up, but
I'll just take the opportunity to thank everybody on this, on this call, for their time. And we're very excited about what lies ahead here for Capstone Mining. And, if you have any questions, feel free to reach out to any one of us. And, we hope everybody stays healthy here and have enjoy the summer.
This concludes today's conference call. You may now disconnect.