Good morning, ladies and gentlemen, and welcome to the Capstone Mining Corp. First Quarter Results 2020 Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question -and- answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, April 29th, 2020. I would now like to turn the conference over to Jerrold Annett, Vice President, Strategy and Capital Markets. Please go ahead.
Thank you and good morning. I'd like to welcome everyone on the call today. The news release announcing Capstone's 2020 first quarter financial results is available on our website, and if you are logged into the webcast, we will be advancing slides which are also available on our website. On the call are Darren Pylot, President, 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.
Thank you, Jerrold, and good morning, everyone. For those of you not logged into the webcast, we're on Slide four of the presentation now. Overall, for the first quarter, we produced 35.5 million lbs of copper at a C1 cash cost of $2.05 per pound. Consolidated production came in at the lower end of our 2020 guidance we provided in January of 140 million lbs-155 million lbs, and costs were slightly higher than our $1.85-$2 per pound guidance. Pinto Valley production and costs are expected to greatly improve moving forward. Given the mine plan, we see grades and recoveries increase, and we have recently locked in a materially lower diesel price. We'll expand on this later in the call, and I'll provide you with an overview of our business activity for the quarter. Moving on now to Slide number five.
I'm really proud of Capstone's response to the COVID-19 pandemic. We acted quickly and effectively and I feel this experience has strengthened the company in a very positive way. From a business health perspective, the quick drop in copper price in Q1 is a good reminder to the importance of maintaining a low-cost structure. Since late 2018, Capstone has been proactively cutting costs. As a result, we entered 2020 in a very strong financial position. Last month, we announced that we reduced $32 million from discretionary capital and exploration expenditures without delaying the 2021 growth targets that we have set for ourselves. It is important to note that both Pinto Valley and Cozamin are on track to have banner years in 2021, collectively giving Capstone a 20% production growth and 10% decline in costs.
On April 7th, we commenced the safe ramp down of operations at Cozamin to comply with a Mexican government decree, which was recently then extended to May 30th. The decree allows for normal operations to resume on May 18th in municipalities which present low transmission risk of COVID-19. Currently, Zacatecas has one of the lowest number of cases in Mexico. We are taking steps now to prepare for a ramp-up to full production by May 18th. Slide six shows a quick summary of the actions we have taken due to the recent abrupt drop in copper prices. Lower prices equate to a drop in expected annual revenues of approximately $50 million. How did we respond to this?
In addition to the $32 million cuts in discretionary capital and exploration expenditures, we are locking in spot diesel prices at approximately 45% lower than our budget, providing $8 million of savings. Additionally, we hedged 50% of our Mexican peso exposure and took advantage of attractive interest rate swaps and cut contractors at site. These efforts have translated to an additional $22 million of operating cost saving for the balance of this year. Overall, these cost reductions have nullified the impact of lower copper prices. Raman will have more on this later in the call. Now for a site-by-site update, moving to Slide seven for Cozamin. We've released high-grade drill results from Cozamin's Infill and Expansion Program last week, and also in January, that were amongst the best we've ever seen at the mine.
Intersection of 3%, 4%, and even over 7% copper with 130 g per ton silver over a wide intersection are truly exciting. I personally can't wait to see what all this means for our mine plan in the coming years, as there's potential upside to our grade profile. The program is now 85% complete and three months ahead of schedule with the updated reserves and resources estimate on track to be released late this year. If you've missed the 3D VRIFY webcast last Thursday, hosted by Brad Mercer, our Senior Vice President of Exploration, talking about the significance of these drill results and the upside potential, then please go to our website under Events and Webcasts to watch a replay. I'm pleased to say that Cozamin's one-way ramp and our 50% growth in production is still on track for completion by the end of this year.
So far in 2020, we have completed the raise bore 52 days ahead of schedule. We've upgraded the underground electrical substation and added an additional underground maintenance shop, which increases maintenance capacity by 50%. To Pinto Valley on Slide number eight. In Q1, Pinto Valley continued to test operational throughput limits, whereby achieving 28 days of greater than 60,000 tons per day for an average of 55,000 tons per day for the quarter. This is approximately 5% higher than the three-year average from 2017 to 2019, and is just under our target for 2021 of 56,000 - 57,000 tons per day. Given these results, we feel very confident that we're on track to achieve our throughput growth targets given this performance. The first of two secondary crushers and three screen decks are on-site and scheduled to be installed in July. Moving now on to Slide number nine.
In February, we released the results of an updated technical report for Santo Domingo, which outlined the opportunity to build a low-cost, vertically integrated cobalt business, in addition to our base case copper iron gold project. As you can see on the slide, both scenarios are compelling, helped by a high grade of over 0.8% copper equivalent during those first five years of mine life. Having the cobalt opportunity identified also opens up new doors to our strategic process, as we are seeing strong investment interest for ethically sourced cobalt projects in mining-friendly jurisdictions. I'll now turn the call over to Raman to give you a brief update of our financial results.
Thanks, Darren. Moving on to Slide 10 of the presentation. In Q1, we produced 35.5 million lbs of copper, which was at the low end of our original 2020 full-year guidance of 140 million lbs-155 million lbs due to lower grades at Pinto Valley. In addition, copper sales of 30.4 million lbs were lower due to timing of shipments at Pinto Valley. As a result, our operating cash flow was impacted by approximately $10 million or $0.02-$0.03 per share due to one less shipment at Pinto Valley and the buildup of concentrate inventory during the quarter. Moving over to our adjusted EBITDA figure of $11.1 million includes a positive adjustment for unrealized provisional pricing of $9.8 million to align with our covenant calculations moving forward.
Turning to cost, as a company, we have taken further actions to reduce our operating cost by $22 million for the remainder of the year. The list of operating cost reductions include the following: $8 million on fixing a low-price fuel contract with a supplier, $4 million on hedging Mexican foreign exchange, $3 million on contractor reductions, $2 million on renegotiated ocean freight costs, and $1 million on interest rate swaps. With respect to cost, the chart on the right shows how our consolidated C1 costs are expected to drop $0.25 per pound to below $1.80 per pound moving forward this year.
Pinto Valley C1 costs are expected to drop below $2 per pound as the mine plan sequences back into 0.31% copper grade and associated higher recoveries, which translate to a $0.20 per pound reduction in cost, while the lower input costs noted previously total over $0.25 per pound for Pinto Valley. This brings me to our next Slide 11. As I mentioned, we have a number of operating cost items that are tracking well below our 2020 budget levels. Given the market volatility, we took the opportunity to lock in record low input costs such as diesel, foreign exchange, and interest rates. The diesel contract is the most impactful move in my opinion, as it represents around 10% of our operating cost at Pinto Valley.
Our budgeted price per gallon was $2.35 a gallon. Currently we're locking in a price approximately of $1.35 per gallon, which delivers $8 million of savings for the balance of the year. The chart on the bottom right shows how the actions we have taken with respect to our operating and capital plans to drop our AISC, or all-in sustaining cost, to average below $2.20 a pound for the balance of the year. This is a significant reduction from the start of the year by $0.30-$0.40 per pound. Turning to the balance sheet, Capstone started from a strong financial position with a low net debt-to-EBITDA ratio prior to COVID-19. We have taken actions of $54 million on capital and operating costs to generate cash flow before growth capital amidst a lower copper price environment. We do not have any liquidity concerns at this time.
As of March 31st, we had $112 million of available liquidity. In April, we drew additional $30 million from the revolver as a precautionary measure for working capital purposes. As a result of lower copper prices, our EBITDA is impacted, thus resulting in our increase in our net debt-to-EBITDA to 2.61. If copper prices were to average $2.25 per pound, we would be required to seek covenant relief. As a proactive measure, we have commenced discussions with our lead banks on seeking covenant relief for 2020. Early indications are that the banks are supportive during this period of volatility. With that, I'll pass it back to Darren.
Thank you, Raman. We're now on Slide number 12. Looking ahead to a big year for Capstone in 2021. Our growth to 180 million lbs of copper at C1 cost per pound of $1.70, next year is on track. This 20% increase to production and 10% decline in cost should translate into 100% EBITDA growth for the company, assuming a $2.50 per pound copper price. Excuse me. Turning now to Slide 13. We are ahead at Cozamin with the raise bore development and are 85% complete and three months ahead in our drilling program. We will use this completed drilling to date to update the reserves and resources with a target of doubling mine life, which is expected in Q4 of this year. Drilling will resume when the government decree is lifted and the deposit is still open.
For the second half of 2020, phase 1 of our PV3 optimization will see the installation of the first of two secondary crushers and screen decks installed in July. Phase 2 of the optimization work will continue over the balance of this year, and recall, this initiative will evaluate a number of debottlenecking steps aimed for low CapEx and quick payback in the operation. Preliminary work on PV4 expansion continues, albeit at a slower rate, given the COVID-19 restrictions. The report is now expected in the first half of next year. At Cozamin, we're expecting post-expansion production increase into between 50 million lbs and 55 million lbs of copper and 1.5 million ounces of silver by next year, with the completion of the one-way ramp still on track for the end of this year. We had some good momentum for Santo Domingo strategic process.
However, with the international travel restrictions due to COVID-19, the process has been put on hold and expected to resume as soon as travel restarts. Next slide. In conclusion, we are well positioned to weather the short-term impact of COVID-19. We have preserved multiple levers to improve our liquidity if necessary. As quick action to lock in attractive input costs, including a 12-month contract for low diesel prices, has pushed down our cost structure so that we can generate cash flow. Importantly, our 2021 growth plans are still on track despite the challenge posed by the pandemic this year. We look forward to safely ramping up Cozamin to full production on May 18th, and we'll remain vigilant with our strict hygienic protocols. We will continue to assess the quickly evolving COVID situation and reinstate revised guidance when the time is right. With that, we're now ready to take questions.
Ladies and gentlemen, at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Orest Wowkodaw with Scotiabank. Your line is open.
Hi, good morning. How quickly do you think we're going to see the lower costs roll through Pinto Valley, specifically around the fuel? Is that something that starts right away, or is that a delayed effect? Second question was around the covenants. Can you please remind us what the covenants are and at current copper pricing, when do you think you would technically trip them? Thank you.
Thanks, Orest. I'll pass it over to Raman since he was overseeing locking in that diesel contract and as well obviously has the covenants on hand. I'll give that question to Raman.
Hey, Orest. On the fuel side, as you know, the oil markets are very volatile. Last week, spot prices, basically the prices we're talking about are the prices we're paying. That you effectively see those oil savings right in the second quarter. In terms of the covenants, our covenants are 3 - 1 on a secured leverage ratio, and then total leverage ratio can be 4, but the key one is 3 - 1. It all depends on copper price. You talked about $2.25. Today, we're sitting at $2.35. That likely has impact on our covenants breaching at $3, about $2.45, we're okay for a quarter or so. I think we're proactively talking to the banks ahead of this, not banking on copper price. That's the strategy there.
Sorry, are you suggesting that you could trip it as early as the second quarter? Do I understand that right?
Yeah. Right now, if you look at our net debt-to-EBITDA, it's 2.61. Depending on copper price, I think, at $2.35, it could trip.
Okay. Are there any other sources of liquidity at your disposal besides, I guess the remaining $50 million on the credit facility?
Darren, do you want to take that one?
Yeah. Orest, the other levers we have, obviously, and we've stated this, is we have a silver stream available to us at Cozamin that's currently untapped. We do have a silver stream available to us, and as well, our largest shareholders are very supportive as well. Immediate liquidity on the balance sheet is what we have on the revolving facility.
Okay. Thank you very much.
Your next question comes from the line of Stefan Ioannou with Cormark. Your line is open.
Yeah, thanks. I think Orest got my main question on the covenants, but just curious with the delayed shipment or the final shipment that missed out of Pinto Valley for the quarter, was that just a general standard timing issue, or could we read between the lines that with COVID and everything else, you're seeing delays in generally getting concentrate out of the mine?
No, that was just a standard issue, standard shipping logistics. We're seeing no issues with trucking, no issues with logistics to get to the port, and all of our sales right now go offshore, and they are absolutely screaming for the product in Asia. No issues at all getting the concentrate off to our buyers. Just one other comment on the covenant. I want to stress that we don't see any issues with temporary covenant relief based on the fact that our production at Cozamin doubles next year and the grade profile of Pinto Valley increases as well. Even at current copper prices, beyond the next two quarters, things change considerably. I want to be really clear that the banks really don't have any issues with looking at our covenants and potentially giving us brief relief based on the next quarter or two.
Okay. Great. Thanks very much.
Ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Daniel McConvey with Rossport Investments. Your line is open.
Hello. Good morning, everyone. Hi. A couple of questions, maybe one for Mike. Just in Pinto Valley, you have fuel cost reductions and some other costs there. It's not a new operation. Just the sustainability of keeping those costs down this year and, say, next year, how do you feel about that, and is there any kind of things that are going to come back and cause some offsets in 2021?
Yeah. Thanks for that question. What I'll tell you is last year, we saved about $15 million compared to budget. We intend to build on that performance. What I see right now is we're taking advantage of these lower prices for diesel. We have a good project, lower prices for grinding media. We're also reducing pH and trying to attempt to increase our mass pull in the flotation plant, and that helps us save money on lime. I think the only thing that's not sustainable in this is when diesel prices rebound, as they will someday, we'll see diesel prices go back up.
What's going to structurally reset our operating costs in processing is this investment in new crushers and new screens that have higher reliability and consume less maintenance labor and maintenance downtime because we're not maintaining, as you described, those older pieces of equipment. I don't see that we're going to see a sharp uptick back up in our unit cost, with the exception of just taking advantage of these commodity prices that are low for something like diesel.
Okay, thanks. Second question, just with COVID. I'm going to start with you, Mike, just at your operation and then at Cozamin. If you have to social distance, if the outbreak does come, how difficult would it be to keep your operations going, just keeping everyone apart, so to speak? Pinto Valley, I think there's a lot of space there, less so at Cozamin. Have you thought through just how you would structure things differently if you had to live with COVID for a year or so?
Yeah. Darren, are you okay with me taking this for Pinto first?
Yeah. Go ahead on Pinto, Mike.
Sure. What I would say is we are all learning a terrific amount as we work through this COVID-19 pandemic. Social distancing will have to become part of what we do as standard procedure. It's affected how we train haul truck operators, for example. You don't want to have two people in the cab for 12 hours a day in close proximity with one another. We're going to something innovative like using small amounts of targeted training to teach people how to functionally operate the machine, and then we do videotaping to watch their skills and give them feedback that way without having to have someone in the cab. There will still be some people who probably work from a remote setting rather than work in the office.
For those who are in the office, we'll be doing all the things that I think all of us are doing around separating office spaces a little further apart. If we need automatic doors or, better yet, copper-covered handles on doors, which are toxic to microbes and viruses. We'll be doing many of the things we're doing today long term. One of the things I think that we will be doing in the operation is we'll be seeing the use of masks much more frequently when we are in close proximity with one another and we can't avoid that close contact. We're changing structurally, in some ways permanently.
Once again, ladies and gentlemen. Go ahead.
Excuse me, Brad, maybe give a couple of quick comments on how we're dealing with the COVID and the precautions we're taking at Cozamin.
Thank you, Darren. Yeah, we have all the same precautions in place that Mike just mentioned for Pinto Valley. I would like to add that the underground mine, and Daniel, I think you've been there. It's a big mine. The work areas are stretched out. We don't have people working elbow to elbow. Matter of fact, if you had to tour there, you'd rarely see people. They're spread out all over the place.
Transportation into the mine, we have buses that have somebody sitting in every second row to keep them apart. I think the biggest thing going forward, we would have to continue to enforce our strict lunchroom policy, because that's where people really meet, to restrict the number of people in the lunchroom. In the admin areas, we would probably do a rotation of X number of people in the office one week and X number of people in the next week, so working from home. All in all, there's not a lot of elbow-to-elbow people working in Cozamin. We just got to make sure to work out the bottlenecks and where people would attempt to socialize.
Once again, ladies and gentlemen, to ask a question, that's star one on your telephone keypad. Your next question comes from the line of Oscar Cabrera with CIBC. Your line is open.
Thank you, operator. Good morning, everyone. First of all, hope everyone and their families are doing well and stay healthy. Darren, with respect to Pinto Valley, could you guys just possibly comment on the grade profile that you see for the balance of the year? Assuming the C1 cash cost drop, presumably, it has to do a lot more with production on a per pound basis versus cost. Could you at least give us an idea what that profile looks like in going into 2021, please?
Sure. I'll pass it over to Mike. Just quickly, I'll just say if the average grade is, I think it's just over 0.3 for the year, and we were under that for the first quarter, it's going to have to average for the next three quarters above that to get back to the average. That's the overall macro view of the grade profile. It gets better than the first quarter for the next three to get to the average, and we're not changing our grade from what we've forecasted. Mike, if you want to add to that on anything and on the cost side, please go ahead.
Sure. Thanks, Darren. Thanks, Oscar, for the question. Yeah, that's right. We'll be back on target for ore grade by the end of the year, and I don't see any problems with that at all. We did some resequencing in our Castle Dome section of the pit in the first quarter. It won't affect the overall plan for the year. What I will say, too, Oscar, is last year, we were 12% above budget for total waste moved.
We moved about a month and a half's equivalent of extra material, in terms of waste, out of the mine. That kind of productivity gain gave us some extra options and flexibility across the year 2020. 2020 is our low-grade year. This is going to be a real test for us, especially with COVID. What we get out of this is we get better grades in the rest of the five-year plan, and we will have taken the time to upgrade the processing equipment components that we talked about, crushers and screens. 2021 is going to be a good year, and we'll finish 2020 on budget for grade.
Mike, if I may, you talked about the different adjustments that you're doing to your mill. How do you expect that to affect recovery? In other words, how should we think about recoveries for the balance of the year?
What I'm seeing is there is some oxide copper in sections of the pit wall that were first exposed a decade or more ago. There is some impact on that in recovery. Our biggest opportunity is to mass pull harder the concentrate that is produced in the rougher cells, and we've got to debottleneck some pumps and some pipes to do that. That's what we're focused on for the next big gain in recovery. I don't think recovery is going to be a problem across the rest of the year as we implement that plan.
Great. Thanks, Mike, for that. Lastly, out of the $32 million in capital deferrals, can you tell us how should we think about when would this be back? Is it 2021? Is there something in that deferral that could be completely eliminated?
Mike, did you want to comment on that?
Yeah. Absolutely. We absolutely have eliminated some capital in some cases, and we've trimmed scope wherever we can. We're pretty aggressive in making sure we get the minimum scope necessary to acquire the objective and then really try to scrutinize those costs so that we're as efficient as we possibly can be. Many of the capital items have been pushed.
For example, one ball mill that we intended to replace this year is pushed to next year, so that cost won't change. One of our crushers, the third that we intended to install this year, now is going to be pushed out a little bit as well. We'll continue to really test our CapEx plan and try to eliminate anything that we possibly can. Again, I think we're going to see a very, very good year in 2021 with the investments realizing better production, better throughput, better recovery in the course of 2020, so we're positioned for 2021.
Thank you, everyone, and best of luck.
There are no further questions at this time. Darren Pylot, I turn the call back over to you.
Okay. Well, thank you, everybody, for joining us on the call today. As Oscar reiterated, please be safe with yourselves and your families. Thank you for joining us today. Don't hesitate, as always, to contact us for any further questions you may have. Have a good day, everybody. Thank you.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.