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TABLE OF CONTENTS Mar 3 - 9, 2014 Volume 100 Number 3 - 0 comments

Capstone misses but analysts remain upbeat

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By: Anthony Vaccaro

Capstone Mining (TSX: CS; US-OTC: CSFFF) may have missed on earnings, but its operations are performing well, and it expects good things to come from its recently acquired Pinto Valley copper–moly mine in Arizona.

Speaking on a conference call, James Slattery, Capstone’s chief financial officer, pointed to a factor outside of the company’s control — a decrease in realized copper prices — as having the biggest impact on earnings.

The result was a worse-than-expected fourth-quarter adjusted earnings per share of US2¢, versus the consensus forecast of US7¢.

Sales volumes were also lower than expected at 44 million lb., despite the company’s 55 million lb. payable production. The gap between production and sales was chalked up to difficulties getting the material out of its Minto mine in the Yukon due to the Yukon River’s freeze-and-thaw cycles.

So while Jennings Capital’s analyst Peter Campbell expected multiple shipments from Minto, Capstone only completed one.

Those lower sales volumes had revenue coming in at US$137 million versus Jennings Capital’s estimate of $176 million, but Campbell remained bullish on the company’s prospects going forward.

“Capstone’s management team continues to execute at all operations,” he said in a research note. “The company remains well positioned to benefit in an increasing copper-price environment, and we believe investors ought to look forward to significant cash flow from Pinto Valley in 2014, once operations and costs stabilize.”

Also supporting his optimism is the fact that the build-up inventory at Minto and at its Mexican mine, Cozamin, where rising inventories were caused by higher-than-expected production rates, will reach the bottom line this quarter and boost its next earnings figures as a consequence.

Despite the lower production totals, Capstone beat on cash costs of US$1.78 per lb. against a CIBC estimate of US$1.90 per lb.

CIBC analyst Tom Meyer, who has the stock rated as “sector outperform” with a $4 price target, attributed the earnings’ lacklustre appearance to Capstone’s recent acquisition.

“There was a bit of noise in the numbers due to the inaugural quarter of including Pinto Valley in the accounts and weak sales volumes,” Meyer wrote in a research note.

That also meant it was the first time investors could delve into the balance sheet with Pinto Valley on the books. Capstone shows US$104 million in cash,. While impressive, that has to be weighed against the US$242 million of long-term debt, which was used to partly finance the Pinto Valley acquisition.

“Despite this net-debt position, we note that Cozamin, Minto and Pinto Valley drive US$150 million of cumulative after-tax free-cash-flow generation over the next three years in our model,” Haywood Securities analyst Stefan Ioannou wrote in his report. “Hence, Capstone remains well positioned to internally fund most of its share of timely development costs at its Santo Domingo project in Chile and to pursue other growth initiatives.”

Speaking on a conference call, Capstone’s CEO Darren Pylot said he is often asked by investors about surprises associated with Pinto, which was acquired last October, although most of the surprises have been positive, as both the workforce and the condition of the equipment have been better than expected.

The company is in the midst of a preliminary feasibility study that will convert Pinto’s resources into reserves, while considering extending operations. The study is due out later this quarter.

CIBC’s Meyer said it could be positive for shares.

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The view from the pit at Capstone Mining's Pinto Valley copper-molybdenum mine in Arizona. Credit: Capstone Mining
The view from the pit at Capstone Mining's Pinto Valley...

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