Major League Acquisition Puts Canadian Junior on the Big Stage

Located in Arizona's Globe-Miami district, the newly acquired Pinto Valley assets should increase Capstone's copper production by 150% in 2014. Transporting ore between mine sites and the 50,800 tonnes per day mill shouldn't be a problem either, because Capstone picked up the San Manuel Arizona Railroad from BHP Billiton as part of the deal. Now having three producing copper mines, two development stage projects, and 29 miles of mainline railroad track connecting San Manuel and Hayden (Arizona), Capstone Mining (NASDAQOTH: CSFFF  ) deserves the attention of investors.

Major league acquisition
Capstone and BHP Billiton (NYSE: BHP  ) finalized the Pinto Valley deal on October 11 for $650 million. The purchase should add 130 to 150 million pounds of copper atop Capstone's existing 80 million pound production base. At the Scotia mining conference, 'management said more than 90% of BHP's employees will continue working at Pinto Valley. In addition, BHP invested more than $190 million into the facilities and upgrading the railroad track before handing over the keys to Capstone. Continuing under BHP's current five year mine plan, Capstone's contained metal at Pinto Valley is 714 million pounds at 0.35% copper. It's hopeful that future drilling will extend the mine's life more than a decade.

Major league shareholder and partner
Via Korea Resources Corporation (KORES), the Korean government is Capstone's largest shareholder, owning 11%. More than just passive holders, KORES is 30% partner in Capstone's Santo Domingo project (Region III Chile). Relatively close to existing infrastructure, Santo Domingo is situated seven kilometers from a town, power line, and substation. While Capstone and KORES are eager to move the project toward a construction decision, the two are under no pressure to build. An updated feasibility study is expected on Santo Domingo any day now.

Looking backward
Last year Capstone's 29,500 meter drill program at Minto (Yukon, Canada) helped add 101 million pounds of copper to the indicated category. Of interesting geologic note, Capstone added 2.2 million tonnes of 2.14% copper resource at Fireweed, an extension of the Minto East deposit. Year to date, 23 million pounds of copper have been produced at Minto with a cash cost of $2.38. Minto is Capstone's highest cost operation. Minto's current resource base is 3.5 kilometers in strike length; Capstone has lots of room for exploration and infill drilling looking ahead to 2014 and beyond.

The analyst that cried copper glut
If future drilling and exploration don't go well, Capstone's current resource numbers on Minto and Cozamin should keep them mining for another nine years (five at Pinto Valley). Some analysts called for an oversupplied copper market in 2006, 2009, and 2013 (now they're predicting 2016). According to Capstone, none of these have materialized. Should copper prices hold steady or rise from here, Capstone will be one Canadian junior getting called up to play on the big stage with the seniors.

Looking forward
Capstone's projected five-year production profile:

Source: Capstone

From Capstone's projections, you can start making your own conclusions about what cash flows might look like under various copper price scenarios. Also impacting future cash flows, Silver Wheaton (NYSE: SLW  ) , one of the world's leading precious metal royalty and streaming companies currently owns the silver production from Cozamin (Zacatecas, Mexico). It's a ways out, but the stream will be terminating on April 2017. From there Capstone will collect the 1.5 million ounces that Silver Wheaton is currently receiving. Cash costs for copper production at Cozamin are expected to be in the $1.10 to $1.20 range for 2013; they could fall further when the silver credits kick in.

BHP Billiton and other senior miners like it are expected to sell or spin off more assets in 2014. Trying to firm up the balance sheets, seniors will be looking toward juniors like Capstone, and streamers like Silver Wheaton as potential buyers for properties and production assets. However, with investment capital quite scarce within the metals and mining sector, deals above $1 billion will likely be few and far between. With that said, any spike upwards in metals prices could create some urgency for buyers that are on the fence.

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