Capstone Copper At Inflection Point

This story features CAPSTONE COPPER CORP., and other companies. For more info SHARE ANALYSIS: CSC

In a world yearning for more copper, Capstone Copper’s resource base and ramped up operations offer a path to share price re-rating, analysts believe.

-Capstone Copper offers strong production growth
-September quarter provided a few problems
-The company is at an inflection point, analysts suggest
-Buy ratings all round

By Greg Peel

Capstone Copper ((CSC)) is a Canadian-based, multi-asset, high growth copper producer, listed on the Toronto Stock Exchange and as of this year, dual-listed on the ASX.

Capstone has two operational mines in Chile, one in the US and one in Mexico, and a fully permitted development project in Chile.

Mantoverde (70%-owned) in Chile is expected to produce 36-40kt of copper cathode and 25-35kt of copper from sulphide ore in 2024.  

Mantos Blancos (100%) in Chile is expected to produce 6-8kt of copper cathode and 43-49kt of copper from sulphide ore in 2024.

Pinto Valley (100%) in Arizona is expected to produce 58-64kt of copper in 2024, and also produces molybdenum.

Cozamin (100%) in Mexico is expected to produce 22-24kt of copper in 2024.

Santo Domingo is a fully permitted open-pit project in Chile that has the potential to produce 200kt of copper per year once it is integrated with the nearby Mantoverde project. It also has significant cobalt deposits, along with iron ore and gold.

Mantoverde is the most significant of these assets, Ord Minnett notes, and accounts for some 49% of the broker’s 2025 operating earnings forecast followed by Mantos Blancos and Pinto Valley at 20% each and Cozamin at 11%.

Capstone is currently around the 30th largest copper producer in the world. Wilsons sees potential to vault up towards the top 15 over the next five years, assuming management can execute on growth.

A key pillar of the investment case for Capstone is its multiple growth options. Ord Minnett forecasts the company can lift annual production to almost 400kt by 2029 from expected 2024 production of around 190kt in an industry in which the opportunities to increase output are hard to come by.

Analysts have long warned new prospective supply of copper globally falls well short of the expected increase in demand as the world electrifies. No surprise, hence, large mining conglomerates such as BHP Group ((BHP)) have been chasing opportunities in copper as a “future-facing” commodity.

No Stroll in the Park

Wilsons highlights execution on growth and Capstone’s September quarter performance reminded that mining operations are inevitably burdened by setbacks.

Group production of 47.5kt was line with forecasts but cash costs of US$2.83/lb were 5% above consensus of US$2.69/lb. Mantoverde was the key outperforming asset versus expectation, while Mantos Blancos and Pinto Valley detracted from the results, Macquarie notes, due to mill downtime both planned and unplanned.

Revenue was -3% below consensus and earnings -14% below. While copper production was in line, revenue was affected by lower payable production (stockpiles at Mantoverde), while earnings were reduced due to higher costs.

The physical output was largely as Moelis expected, with continued growth in the coming periods anticipated as capital works/process improvements at Mantos Blancos come on line and Mantoverde continues to hit its straps.

There was no material change to the balance sheet (gearing) although the company is right at the nexus, Moelis suggests, whereby capital spend has concluded but the resulting production uplift has not yet had the opportunity to generate a meaningful cash margin as payback.

Moelis includes the capital commitment to Mantoverde Optimised in its base case, but otherwise expects a drop-off in capital spend which should see the balance sheet rapidly deleverage, particularly at current copper prices.

Capstone indicated it is trending to the lower end of 2024 guidance of 190-220kt (consensus suggests a slight miss of the lower end) but raised its cash cost guidance to US$2.60-2.80/lb from US$2.30-2.50/lb due to a slightly slower-than-expected ramp-up at Mantoverde and higher costs at Mantos Blancos due to longer equipment procurement and additional maintenance.

In its first quarter of production, Mantoverde sulphides milled 1.7mt at 0.71% Cu with recoveries of 68.2% which resulted in production of 8.1kt at a cash cost of US$2.52/lb. Macquarie believes the operation should see material improvement in the December quarter in all aspects including mill availability, mill throughput, and improved recoveries.

Inflection Point

Capstone’s September quarter was affected by mill outages at both Pinto Valley and Mantos Blancos, but the Mantoverde ramp-up was a key positive. Macquarie suggests this indicates Capstone is at an inflection point with the Mantoverde ramp-up almost de-risked and recovery improvements one of the last key milestones.

Following the September quarter report, Macquarie retained its Outperform rating and $12.80 target.

Moelis also retained a positive view with the cashflow inflection post construction now imminent. While the company has in Moelis’ view enormous organic optionality within the portfolio, until a firm commitment is made to progress with Santo Domingo (potentially next year), excess operating cashflow is going to manifest on the balance sheet as cash or a reduction in debt.

Even when a final investment decision on that project is made, it is likely to be well funded through a project facility as well as proceeds from the likely sell-down of a significant stake in the project. The company is considered uniquely positioned as one of very few largescale, pure-play, growth-oriented copper stocks. Given the current market sentiment towards the metal, Moelis expects to see continued trading interest.

Moelis maintained its Buy rating and $14.00 target.

Ord Minnett initiated coverage of Capstone last week with a Buy recommendation and a target price of $13.00, based on the company’s strong production growth prospects from its already operating mines and future developments, its relatively high exposure to the copper price, on which Ord Minnett has a positive view, and an attractive entry point at present valuation levels.

Ord Minnett’s latest commodity price review incorporates a long-term copper price of US$5.00/lb, up from circa US$4.00/lb currently.

In addition to its flagship growth projects at Mantoverde and Santo Domingo, which are relatively well understood by those familiar with the story, Wilsons believes there exists material “latent” or “hidden” potential optionality within the Capstone portfolio. This broker’s modelling of these potential opportunities suggests there could be in excess of $2.00-3.00 per share of incremental value on top of its base case valuation.

Stepping back, Wilsons acknowledges it is somewhat speculative to attempt to be too granular around some of these future opportunities, but flags that a key strategic advantage for Capstone is its significant resource base (some 14mt of contained copper). In Wilsons’ view, having the resource base already in place provides unspecified optionality for the company over the longer term.

Wilsons does also acknowledge Capstone’s operations are not without risks.

In addition to the generic risks of commodity movement, cost inflation, geopolitics. and project delivery, Wilsons flags a key specific risk for Capstone presented by some of its older assets. At present, the bulk of production comes from relatively old operations, which presents some risk on the reliability front.

There are nevertheless substantial sections of the varying assets which are considerably more modern, Wilsons notes; Mantoverde’s concentrator is brand new, for example, but the company has suffered some modest challenges in ramping up output from these newer facilities in more recent times. As a result, the company has tended to disappoint versus guidance in recent years.

Accordingly, Wilsons’ current cost and volume forecasts sit below consensus expectations. While the broker believes delivery may be slightly below current market expectations, Wilsons still believes overall earnings growth will underpin a positive share price performance.

Wilsons has this week initiated coverage of Capstone with an Overweight rating and $14.50 target.

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