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TABLE OF CONTENTS Apr 21 - 27, 2014 Volume 100 Number 10 - 0 comments

Capstone 'gets it right,' analysts say

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By: Trish Saywell

Mid-tier copper producer Capstone Mining (TSX: CS; US-OTC: CSFFF) impressed analysts after posting record production results for the first quarter of the year.

The Vancouver-based company’s three producing copper mines churned out 27,600 tonnes of copper (in concentrate and cathode), along with zinc, molybdenum, lead, silver and gold by-products.

“It’s refreshing to read of a copper producer that has got it right,” Raymond Goldie and Nik Rasskazovskiy of Salman Partners commented in a note to clients.

Breaking down the numbers, Capstone’s Pinto Valley copper–moly mine in Arizona — which it bought from BHP Billiton (NYSE: BHP) in October 2013 for US$650 million — produced 16,700 tonnes of copper-in-concentrate and 600 tonnes of copper cathode. The company’s Cozamin copper–silver–zinc–lead mine in Zacatecas, Mexico, produced 5,100 tonnes of copper-in-concentrate, and its Minto copper–gold–silver mine in Canada’s Yukon turned out 5,200 tonnes of copper-in-concentrate.

Capstone forecasts yearly production will reach 102,000 tonnes of copper-in-concentrate at C1 cash costs of US$1.90 to US$2 per lb. payable copper, net of by-product credits.

Cash costs for the first quarter will be reported in May when Capstone releases its quarterly financial results, but Peter Campbell, an analyst at Jennings Capital in Toronto, anticipates they will come in at US$1.79 per lb.

“We continue to view Capstone as one of the best copper growth stories in the mid-tier producer space,” Campbell wrote in a research note after the results.

According to Campbell, a recent site visit to Pinto Valley attracted 37 visitors: 20 of them sell-side analysts, and the rest buy-side clients.

In March Capstone more than doubled Pinto Valley’s mine life, showing that the mine can operate for at least eight more years and produce a billion more pounds of copper than projected.

When it bought the mine, reserves were only enough to sustain five more years of mining. According to Capstone’s recently completed prefeasibility study, however, the mine life would extend to 2026 rather than 2018, and produce 119.5 million lb. copper, 1.4 million lb. moly and 235,000 oz. silver-in-concentrate a year, and another 6.3 million annual lb. copper cathode.

Aleksandra Bukacheva of BMO Capital Markets, who attended the recent site visit to Pinto Valley, said in a research note that challenges to the production expansion include permitting “sufficient waste and tailings capacity and meeting additional water requirements.”

But she says Pinto Valley makes Capstone a potential takeover target. “Ownership of a producing copper asset in a low political-risk environment — with 50-plus KTPA in annual production, reasonable cash-cost profile [of US$2 per lb., third quartile] and improved visibility for long mine-life potential — places Capstone in the ‘sweet spot’ of the mergers-and-acquisitions landscape, in our view.”

Tom Meyer, an executive director of institutional equity research and a base metals and minerals analyst at CIBC World Markets, describes Capstone’s Pinto Valley acquisition as “transformational” and says it “further diversifies the production base and . . . strengthens the company’s ability to execute on its future growth plans.”

Catalysts for the company include an updated reserve estimate for Cozamin, which Meyer expects before the end of 2014. The analyst also points out that the Cozamin silver-stream sale expires in April 2017. As for the company’s 70%-owned Santo Domingo copper–iron–gold project in Chile, Capstone submitted an environmental impact assessment in October 2013, and Meyer expects the process could take 15 to 18 months. Capstone’s partner on the project is Korea Resources Corp., which owns the other 30%.

Capstone is also developing its 100%-owned Kutcho copper–zinc–gold–silver project in B.C., and holds exploration properties in Chile and Mexico.

Over the last year Capstone has traded in a range of $1.68 to $3.35 per share, and closed at $2.98 per share. At press time the company traded at $2.93 per share.

CIBC’s Meyer has raised his target price to $4.50 per share from $4 per share after the production results were released before markets opened, and describes the company as his top pick in the mid-tier space.

“The entrepreneurial management team has built this company from the ground up,” he writes. “The focus has been on cash flow and ensuring a positive return on investment. We expect more of the same from this group going forward.”

Jennings Capital has a $3.85-per-share price target. Dundee Capital Markets has a $4.40-per-share target; Laurentian Bank Securities, $3.70 per share; and BMO Capital Markets, $3.50 per share.

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