Capstone Copper Corp.

Good morning, ladies and gentlemen, and welcome to Capstone Copper Q3 2023 results conference call. At this time, all lines are in 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 today on Friday, 3rd of November, 2023. I would now like to turn over the conference to Gerald Annet. Please go ahead.

Good morning. I'd like to welcome everyone to Capstone Copper's Q3 2023 conference call. Please note that the news release and regulatory filings announcing Capstone Copper's 2023 third quarter financial and operational results are available on our website and on CDAR. If you are logged into the webcast, we will advance the slides of today's presentation, which are also available in the Investors section of our website. I'm joined today by our CEO, John McKenzie, our President and COO, Kashil Maher, our Chief Financial Officer, Raman Randhawa, and our Senior Vice President, Risk, ESG, and General Counsel, Wendy King. Following our brief remarks, there will be an opportunity for questions. Please note that comments made on the call today will contain forward-looking information within the meaning of applicable securities laws. 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 the risks and uncertainties pertaining to our business, please see Capstone's most recent filings, which are available on our website and on CDAR. And finally, I'll just note that all amounts we will discuss today are in U.S. dollars unless otherwise specified. Now, I'll turn the call over to John McKenzie.

Thanks, Gerald, and good morning, everyone. We're pleased to present our third quarter 2023 results and achievements, starting with slide five. I was in Chile last week, and I was thrilled to see how close we now are to finishing construction at our Monteverde development project. This project is the culmination of many years of dedicated effort by our team from the permitting and engineering to the mine build, and now we're approaching commissioning and first production. MVDP is transformational for capstone copper and will drive a step change improvement in our consolidated unit costs and a pathway to record operating cash flow generation. During the quarter, we progressed the project in line with our schedule, As at September 30th, we'd stockpiled approximately 5 million tons of sulphide ore, which positions us extremely well for the project ramp-up. We also commenced commissioning of the primary crusher and performed the first rotations of the sag and wall mills. Meanwhile, at our tailing storage facility, mass excavation was completed and both the starter wall and the cut-off trench are nearing completion. The project remains on time. with construction completion to occur by year-end. After that, we expect a six-month commissioning and ramp-up to the MVDP's nameplate capacity of 32,000 tons of oil per day. As we approach completion, we've updated our total capital cost estimate for the project to $870 million. This reflects an increase of 5% from our initial estimate in March 2022 of $825 million, and is largely driven by three factors. Firstly, inflationary impacts, mostly related to higher diesel prices on pre-stripping and tailings earthworks, corresponded to $20 million of the increase. Secondly, we've made several project improvements, including the purchase of additional retainers for best practice in concentrate transport and storage, a water reservoir, as well as additional camp and warehouse infrastructure. These project improvements contributed to another $20 million of the increase. The balance corresponds to additional forecast ramp-up and commissioning costs. We have provided a link with our news release and presentation materials to a video update of the project from early October. We're excited to be in the final stages of construction. Turning to slide six. We produced 40.3 thousand tons of copper. at consolidated C1 cash costs of $2.88 per pound in Q3. Production and costs were impacted by eight days of unplanned downtime in the crushing circuits at our Pinza Valley operation in Arizona, along with our continued debottlenecking efforts at Montes Blancos in Chile. Kozerman delivered another solid quarter, as the mine has now ramped up to full production levels using the new cut-and-fill mining method. production slightly improved on Q2, and we believe we are well positioned heading into Q4. Turning to slide seven, we are reiterating our consolidated guidance. Specifically, we continue to forecast second half production of 83 to 93,000 tons of copper. In terms of our C1 cash costs, we've noted that they are trending towards the upper end of our second half guidance range, of $2.55 to $2.75 per payable pound of copper produced. We've also reiterated our consolidated capital expenditure guidance for 2023, although we've reclassified certain expenditures by operation as displayed on the slide. I believe that we are well set up to have our strongest quarter of the year in Q4. Now I'll pass over to Raman for our financial results.

Thank you, John. We are now on slide eight. In Q3, we recorded copper production of 40.3 thousand tons and copper sales of 38.7 thousand tons. LME copper prices during the quarter averaged 379 per pound, down 1% compared to 384 per pound in Q2 2023. Our realized copper price of 377 per pound was largely in line with LME average price. As a result, we recognized revenues in the quarter of $322 million. Realized copper prices, including the impact of copper hedges, result in a copper price of $3.69 per pound. The difference between the LME and our realized price translates into approximately $6 million impact after tax or $0.01 per share to our adjusted EPS. We reported consolidated C1 cash costs of $2.88 per pound in Q3, which are impacted by lower production levels and additional maintenance expenses. As we noted in the prior quarter, our higher C1 cash costs continue to be heavily influenced by the production denominator. We expect the increase in our production in Q4 to drive a notable decrease in our C1 cash cost. Adjusted EBITDA in Q3 of $62.8 million improved from Q2, but was impacted by the unplanned downtime at Pinto Valley and our de-bottlenecking efforts at Mentos Blankos. Adjusted net loss attributable to shareholders of $15.8 million excluded a one-time deferred income tax expense of $24.3 million relating to the Chilean mining tax reform, which includes a modest increase in taxes effective January 1, 2024. I believe that the uncertainty of the new taxation regime in Chile has been resolved, and any impact to us is somewhat mitigated by our ongoing level of reinvestment in the country. Moving on to slide nine. On the left-hand side, we summarize our available liquidity, which as at September 30th was approximately $425 million, including $130 million of cash in short-term investments and $295 million of undrawn amounts on our $700 million corporate revolving credit facility. During Q3, we increased the size of our revolving credit facility by $100 million and we extended the maturity by one year to September 2027. We end in Q3 with a consolidated net debt balance of $855 million and a tributable net debt balance of $705 million. Our balance sheet is in good shape. With mantle parties spent to September 30th of $763 million, the remaining balance is approximately $107 million. We expect roughly $50 million to be incurred in Q4 2023 and the remaining balance of $57 million in 2024. The chart on the right-hand side of the page illustrates our EBITDA sensitivity at various copper prices. In the first two bars, you can see that we expect significant near-term EBITDA growth with Mantoverde sulfides at full run rate production. With MBDP at full capacity, we expect to generate approximately $1 billion of annual EBITDA, assuming a $4 copper price. The EBITDA generation associated with Mantoverde will enable us to focus on generating free cash flow to de-lever our balance sheets and be below one times net leverage at copper prices between $3.75 and $4 per pound, which provides additional liquidity to advance our future growth pipeline in terms of incremental brownfield expansions or Santo Domingo, depending on market conditions. Turning to slide 10, we outline our copper hedging program, which provides downside protection for our balance sheet through the MBDP construction and ramp-up period. In late July, we opportunistically entering into additional 20,000 tons of copper hedges for H1 2024 at an average floor price of 374 per pound. Overall, our hedge book, excluding QP hedges, includes 54,000 tons of copper over the next three quarters with a weighted average protected floor copper price of 354 per pound. Meanwhile, we have 21,000 tons of collars in our portfolio with a weighted average ceiling price of 427 per pound. Following the ramp-up of the Manto Verde development project, we have no further copper hedges in place, and we will have full exposure to the copper price. Now, I'll hand it over to Cascio for the operations review.

Thanks, Raman. Pinto Valley produced 13.7 thousand tennies of copper at a C1 cash cost of $2.83 per payable pound during Q3. Operations were impacted by unplanned downtime in the secondary crushing circuit, resulting in approximately eight lost days of production. As we discussed last quarter, we are placing an emphasis on operational discipline and key performance indicators in order to improve online time and reliability. We are prioritizing asset integrity assessments based on downtime. and we are implementing condition monitoring to improve our performance. Pinto Valley performed well in October and is set up to have its best quarter of the year in Q4, driven by higher grades and more consistent throughput. We continue to engage with our neighbors in the Pinto Valley District during the quarter as we explore value creation opportunities. Moving to slide 12. Hozaman Mine delivered a solid Q3 producing 5,900 tonnes of copper at a C1 cash cost of $1.85 per payable pound. The mine demonstrated another quarter of nameplate mining rates after transitioning to the new cut and fill mining method earlier this year. Cash costs in the quarter were impacted by crusher availability and unfavourable foreign exchange rates. Our Mantos Blancos asset is highlighted on slide 13. Total sulfide and cathode production yielded 12.1 thousand tonnies of copper at a blended C1 cash cost of $2.82 per payable pound. Sulfide operations this year have not performed consistently at nameplate levels, while the major components, including the crushing, grinding, and flotation circuits, remain more than capable of throughput rates in excess of 20,000 tons per day, Linkages between these systems, including pumps and pipes, have exhibited bottlenecks. We are executing on our updated plan to address plant stability that includes improved maintenance and optimization of the concentrator and tailing system. The plan incorporates feedback from our new SVP, head of Chile, Jim Whitaker, and our new general manager, Jaime Rivera. We have also incorporated the learnings to date from operating the plant since the expansion was completed. We worked through several areas during the quarter and we have addressed several of the bottlenecks in the crushing and grinding area of the mine. To facilitate a sustainable 20,000 tonnes per day throughput rate, we have identified additional tailings, handling and pumping infrastructure that we expect to receive and install in early 2024. after which we expect to be operating at nameplate throughput rates. We are confident that we have both the team in place and the asset that will support full run rates. Our efforts are focused on achieving this, and after that, we will recommence our studies related to Mentos Blancos Phase 2, as we believe the ore body can support a larger operation. Now on to Mento Verde on slide 14. Q3 2023 oxide production was 8,600 tons of copper in cathode at a C1 cash cost of $3.74 per payable pound. Oxide production and costs in the quarter were impacted by a temporary sulfuric acid supply shortfall, which has since been rectified. Most important, significant progress was achieved at the MVDP during Q3. Progress now stands at 93%, with $763 million spent as of September 30th. As previously mentioned by John, we have increased our total capital estimate for the project by 5% from the original 2022 estimate. However, we remain on track for the project completion by the year end, followed by a ramp up in 2024. The Mantle Verde development project will produce approximately 120,000 tons of combined cathode and copper and concentrate with over 30,000 ounces of gold per year. Slides 15 through 18 show construction progress at several key areas of the MVDP. Slide 15 shows the primary crusher in the background with the covered course or stockpile in the foreground. During the third quarter, we commenced commissioning tests of the primary crusher. Slide 16 shows a close-up of the processing flow sheet from a bird's eye view. The ball and sag mills can be seen on the right. During the quarter, we installed the lubrication and cooling systems, completed initial testing of these components, and performed the first rotation of these mills. On slide 17, we highlight the tailing storage facility. Mass excavation is complete and the starter wall and cutoff trench are nearing completion. We are also in the final stages of liner installation. And lastly, on slide 18, you'll find the desalination plant. It has now been expanded to support the MVDP and we are currently ramping up flow rates to that capacity. I'm excited to complete construction of the MVDP by year end and transition into the ramp up stage for the project. Now over to Wendy King for the sustainability review.

Thank you, Cashel. We're now on slide 19 with a review of our sustainability highlights for Q3. As previously disclosed, we are thrilled that both Manto Verde and Manto Blanco were awarded the Copper Mark. Responsible operating practices are a vital component of our commitment to the environment, our employees, local communities, and governments. and must remain front of mind in everything we do. The Coppermark is a powerful advocate for transparency and accountability and reinforces our values on responsible, sustainable production. We take pride in the achievements of our Chilean operations and we are actively striving to replicate this success at Pinto Valley and Cozumel. Also in Chile, we were recently recognized by Corpora Atacama, for achievements and advances in sustainability, for our contributions to sustainable development in the region. The award was presented to John McKenzie by the Chilean Minister of Mines and is another testament to the great work being done by our teams at Manto Verde and Manto Blanco. At Cozumel during the quarter, we enhanced our biodiversity monitoring with camera traps. which automatically capture photos driven by a change in the activity in its vicinity. Five of these cameras have been deployed throughout the site and will result in a significant difference in our ability to monitor local species. At Pinto Valley, we incorporated additional air quality monitoring stations to help us improve our understanding of localized air quality differences. so we can continue to safeguard the health of workers and our communities. During the quarter, we continued supporting local community initiatives, emphasizing community safety, education, local school fundraising, technical training, and community celebrations. Pinto Valley hosted a local community event that raised more than $50,000 for three area schools. Cozumel hosted a day-long community safety fair for families teaching safety skills in a fun and interactive way. In Chile, about 90 local community members graduated from Mantua Verde's Learning for Development program, earning certificates to increase their employability in the areas of food handling, security, forklift crane operations, warehousing, and mine equipment maintenance. This supports our strategy to develop technical skills in local communities. In Chile, we have continued our initiatives of joining together with some of our partners to invest in community projects to have a more significant impact on the community programs. We are also working to develop these initiatives in the other jurisdictions in which we operate. Lastly, we anticipate releasing our first combined sustainability report for capstone copper, Growing Responsibly. This will be released in the coming weeks. We're very proud of this report, which provides enhanced information on our global policies related to sustainability, and includes emissions data reported per unit of ore processed and unit of copper produced to give a clear and transparent picture of our emissions to allow stakeholders to follow our progress. Towards our diversity and inclusion objectives, we also highlight in the report the promotion of several women in key management roles in Chile and Pinto Valley. Women in leadership roles are a crucial driver for attracting and retaining more women to mining and our operations. And with that, I'd like to pass it back to John.

Thanks, Wendy. Turning to slide 20, we've outlined our sector-leading growth plans and some of the additional upside within our portfolio. As can be seen, we expect MVDP at its run rate production level to bring us to a consolidated annual level of around 260,000 tons of copper at significantly lower costs. From there, we have a pathway to over 380,000 tons of copper production with the fully permitted Santo Domingo project. We have high returning brownfield expansions at both Monteverde and Montes Blancos with low capital intensity that are not pictured on the slide. And then further upside exists with oxides at Santo Domingo utilizing our SXEW plants at Monteverde, Monteverde phase two, growth in our Pinto Valley district, and cobalt optionality in our MVSD district. On slide 21, we show more detail around what is driving the significant near-term cost reduction at MVDP. As can be seen in the graph on the left, 70% of our copper production today is from sulfides, with the remaining 30% from higher cost oxides. The oxide production has both lower grades and lower recoveries, as the highest grade oxides have previously been mined and processed at Monteverde and Montes Blancos. With MVDP at full run rate, our copper production will be split roughly 85% sulfides and 15% oxides. In the graph in the middle, you can see the impact this has on our weighted average grades and recoveries. From a blended grade process of 0.35% copper this year, we'll move to a blended copper grade of just over 0.6% with MVP up and running. Similarly, average recoveries will improve from 80% to closer to 90% across our portfolio. And in the chart on the right, this shows the overall effect. A significant increase in copper production and a significant reduction in our unit costs, leading to an overall increase in margin. On slide 22, we highlight the timelines for those catalysts and studies we have over the next year that support our growth plans, with further upside beyond this across our portfolio. We've continued to build a highly talented technical team and are working with strong engineering firms to execute on these studies. We now expect to deliver the updated Santo Domingo feasibility study in the first half of 2024. As we have advanced the study, we are of the view that this does not yet reflect the optimal project configuration and design, particularly as we take into account the synergies with Montevade and the flowsheet improvements that we have identified. As such, we have decided to commit additional time to ensuring that the project is designed and configured in a way that maximizes the value created for capstone copper. prior to advancing to the phase of detailed engineering. We believe that this approach is in line with best practice in large project development. In conclusion, we reiterate that we are in the midst of a transformational period for Capstone. I am very excited that we are on track for project completion at MVDP by year end that will lead to a step change to 260,000 tons of copper per year at significantly lower costs. This will expand margins and drive record operating cash flow generation for the company.

With that, we're now ready to take questions.

Thank you, ladies and gentlemen. We will now conduct the question and answer session. If you have a question, please press star 1 on your touchpad. If you wish to cancel the request, please press star, then the number 2. Please ensure to lift your handset if you're using a speakerphone before pressing any keys. Your first question comes from Boris Wauketa from Scotiabank. Your line is now open.

Boris Wauketa Oh, hi. Good morning. A question about the Manto Verde. CapEx increased to $870 million, I guess, plus 5%. Can you give us some better color on what's driving that increase? And also, maybe more importantly, what confidence do you have that this is the last increase and the 870 is going to be a final number? We've just seen another project in the ramp-up phase announce a further capex overrun. So I guess trying to get a bit more color on why or if you think the 870 will be the final number.

Yeah. Thanks, Orest. So in terms of the increase in costs from 825 up to 870, it's basically split into two components of $20 million each. The first is really around certain inflationary impacts. We've already received three of the big electric shovels at Monteverde. The fourth shovel has actually been delivered and is currently being assembled. However, that was subject to an escalation clause and with sort of higher inflation rates, that's sort of an additional number that wasn't taken into account in that 825. And then I think also, you know, whilst we have a fixed price contract with Osenco, the tailings facility was on a unit rates basis. So I think particularly the impact of higher diesel prices impacted all of the earth moving we needed for developing the trench and the starter wall at the tailings facility. And then also some of the pre-stripping work was sort of similarly impacted by slightly higher diesel prices. The other $20 million came from areas that we identified would actually just improve and enhance the project. So we're going to be transporting all of our concentrate to port using a relatively new technology called retainers. These are essentially containers, but ones which are filled at the site, are then fully sealed, can be transported to the port. They actually act as the storage at the port and are then tipped directly into the vessel. So it is what we would regard as sort of leading practice in terms of kind of transport and storage of concentrate. And when we kind of looked at, we had already ordered these retainers. We already sort of own what we initially regarded as sufficient retainers, but we decided to to order more just to take into account sort of any potential fluctuations in, you know, you get things like swells at the ports which can delay shipments and we just wanted to make sure that we had adequate capacity in place. We also took the decision to put in a water reservoir and that was really just based on we know that we have sort of more than sufficient water for the MVDP. However, during the ramp up, you always have a water balance and some of that water comes out of the tailings facility and sort of recovery from tailings. But that takes some time before that is actually available to you. So we just felt that to sort of mitigate any water issues, we would build an additional water reservoir for the project. And then we've added just a little bit of extra camp space and additional warehouse space just to, I think, sort of better service the business going forward. We have been internalizing quite a few of our functions from external contractors to things like maintenance to doing it ourselves. And so we took the decision to put in some extra facilities. So that's the background to the increase. We've got a pretty clear line of sight to the end of construction. We're really in the stage of final piping. It's now cabling and instrumentation. Everything that the project requires is already on site. It's really down to just completing these last stages of work. So we feel pretty comfortable in terms of the capital number that we've put out there. You know, we don't see any reason to expect any difficulties during the ramp up of the project. Clearly, you know, if one does have any issues that can cause an impact on sort of additional capex required, but we certainly don't anticipate that at this stage. I think one of the ways we mitigated that risk was the key reason we appointed Orsenco to be our EPC contractor on this contract was they've built four of these almost identical concentrators before, three of which have been in South America. They've built these before. In our case, they will be ramping it up as they've done with each of those other concentrators that they have built. And so I think we derive quite a lot of confidence from that experience that they have. And we've also, on our side, been spending pretty much a large part of the last year working on operational readiness. Our own operating team is in place. I think we've got top-notch people that we've been able to recruit at sort of at every level. And so I think all of that gives us a high level of confidence in having a successful ramp-up of the project. We've budgeted for a six-month ramp-up period. We clearly hope to do a little bit better than that, but our current assumption is six months. And that's very much in line with Orsenko's previous performance in ramping up very similar concentrators to this one. I think the other thing that gives us the confidence is the mine is ready. In fact, it's more than ready. We've now stockpiled 5 million tons of sulfide ore sitting in front of the crushers. From a mining point of view, we've actually exposed around a year's worth of sulfide ore. The mine is basically just waiting now for the plant to be ready to take the ore.

Thanks, John. Just a quick follow-up question for Raman. With the ramp up, call it in Q1, Q2 next year, is your expectation that all of the costs involved with ramping will be expensed? Or could we see kind of a capitalization of costs like we've seen with, call it with QB2? Just wondering how to think about modeling Q1, Q2.

Yeah, we're looking at what tech's doing over there, so we'll analyze that a bit further. But really, the IFRS standard is once you hit production, you start expensing those costs. So until you get the concentrate on your books, but once it's on your books and you've produced it, you expense. So there will be a certain period of time we can capitalize and ramp up commissioning costs, which is included in this 870. But beyond that, we expect to expense it.

Your next question comes from Ralph from Eight Capital.

Your line is now open.

Thanks, operator. Good morning, everyone. John and Kasia, when you talk about the Pinto Valley Asset Integrity Program, right, and you brought up these KPIs, I'm just wondering, is there sort of strategic management of the grade and the mine plan being looked at? Or is this mostly focused on costs and continuous improvement? Or is there any impact on the mine plan itself, including stripping? And with that, are we potentially looking at some cost improvements going forward?

Thanks, Ralph. Look, it's not the mining. It's not the mine that's performing as it should. the grades are coming out and our reconciliation as they should. I'll just start by saying, you know, we've been really pleased with our efforts to date and what we've achieved in October. So we're off to a good start here for our catch up in Q4. So we've got our right foot forward. And that gives us some assurances that some of the initiatives that we've undertaken in our asset integrity and maintenance programs are starting to pay off. So one of the things we did was a structural design change. We're going to implement a maintenance program and a maintenance manager. It's a different setup than what we had at Pinto Valley before where maintenance was in the domain of either the mine manager or the plant manager. And so what we're doing is we're elevating the expectation out of our maintenance department and improving those processes. And we actually appointed in the last quarter, a VP of mine and maintenance who's excels in that area, Hayden Halstead. And then he has a fixed plant individual, a director of asset integrity, Rob Taylor. So they've been instrumental in helping us improve our uptime and reduce our downtime on our critical components which usually are revolving around the crusher infrastructure and conveyance infrastructure that feed our mills. So we've seen already improvements there and specifically those are the areas that are changing their performance and those are the areas that were creating the bottlenecks of our production in Q3 and a little in Q2. So I'm happy to say that we're seeing it better. And it also helps that our schedule, our budget, our plan for the end of the year was a little higher grade. It's actually the highest grade in the sequence where we're coming into in Pinto Valley, and we're seeing that come forward too.

Okay. Yeah. Good to hear. Thanks for that. And at Montos Blancos, it sounds like, Cashel, that 20,000 tons a day is something like an end of Q1 24 target as sort of a, you know, sort of a rational expectations, maybe some spillover into sort of Q2 of 2024. And just wondering if that's something that we should be going by. And do you think there's potential for some spillover CapEx into 2024 just to be able to, you know, iron out getting up to full capacity?

Yeah, we're working through the plan there. So there is, there's going to be in the order of $20 million more required to bring the plant to the state that's required. You know, I think we've described it before, the major components are there. They have the capacity. It's some of the piping, cabling, and instrumentation. that we're upgrading to be able to do it. And one of the things that we've zeroed in on and focused is actually the back end of the plant, the dewatering and tailings infrastructure. While it looked like on paper it was capable of doing the design of 20,000 tons, we're going to have to upgrade that area. That is the area where there are some longer lead items. That will take us to the time period you mentioned near the end of Q1, start of Q2 to be able to get this plant consistently and sustainably to 20,000 tons. Like we've achieved over 20,000 tons sporadically, but what we want is consistent production out of it. And that's the area we're focusing on is the back end of the plant and some upgrades to some instrumentation and piping. in some other areas, but it's going to take another, you know, from where we're sitting today, that amount of time to be able to put these in. Again, we have a new general manager for Chile, for, sorry, Mentos Blancos, and we have replaced some of the team. And these are really strong individuals with a lot of experience in this type of work. So we're very confident in the plans now going forward. They're very detailed out. We're no longer de-bottlenecking one issue at a time, and we're tackling the remaining issues at hand. And that is the timeframe we will require to be able to install and procure what we need.

That's a very helpful call there, Cashel. Thank you.

Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by the number one.

There are no further questions at this time.

John, please proceed with your closing remarks.

All right. We look forward to updating you again in February with our Q4 results. And until then, keep well and feel free to reach out to Gerald or Daniel if you have any further questions. Thank you for your continued support and have a good day.

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