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TABLE OF CONTENTS Dec 2 - 8, 2013 Volume 99 Number 42 - 0 comments

Capstone misses but still impresses with production profile

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Capstone Mining (TSX: CS; US-OTC: CSFFF) has proven that a slump in commodity prices hasn’t curbed its appetite for growth. With its recent acquisition of BHP Billiton’s (NYSE: BHP) Pinto Valley copper mine in Arizona on the books, the company reported third-quarter results that may have missed analysts’ expectations, but still showed plenty of upside.

Rather than generating the expected 2¢-per-share profit, Capstone reported a cent loss per share. Thankfully for shareholders, the miss had more to do with  booking greater exploration expenses and “below-the-line” items on the income statement, connected to the Pinto Valley acquisition.

When such one-time items are stripped out, adjusted earnings before interest, tax, depreciation and amortization (EBITDA) beat expectations at US$30 million, compared to a forecast of US$26 million.

The number was based on sound operations, as copper production for the quarter came in at 19 million lb., or 56.9 million lb. year-to-date, at an average cash cost of US$1.57 per lb.

Solid production numbers were generated by the company’s Minto mine in the Yukon and its Cozamin mine in Mexico. Capstone expects the two mines to produce 85 million lb. copper for the year, at a cost of between US$1.65 and $1.75 per lb.

But Minto and Cozamin are only part of the Capstone story. While other miners are sitting on their remaining capital, Capstone is heavy on capital expenditures. The company spent US$38 million on capex in the third quarter and has spent US$94.7 million year to date. Most of the capital has gone into deferred stripping and underground development at Minto, and towards developing its Santo Domingo and Cozamin projects.

The company’s US$650-million acquisition of Pinto Valley closed on Oct. 11, and results from the mine will be included in the company’s financials from that date forward. The acquisition was financed mainly from Capstone’s US$457-million cash balance, as well as with debt.

The next quarter will give a better sense of the investment, as Capstone expects to produce between 22 million and 27 million lb. copper. Construction for its Santo Domingo project in Chile is expected to get underway in 2015, but Capstone won’t speculate on when it can secure power for the project.

Haywood Securities analyst Stefan Ioannou has Capstone rated as a “buy,” and sees good things in the company’s future.

“We look to the fourth quarter as a pivotal time for Capstone,” Ioannou writes in his research note. “Now that the acquisition of BHP’s Pinto Valley copper mine in Arizona is complete, and the company gets comfortable with the project’s day-to-day operations.”

Because of the Pinto Valley deal, Capstone expects copper production to climb next year to a hefty 235 million lb. That boost to production, Ioannou writes, will help bridge the production–growth profile gap between its existing mines, and future production from Santo Domingo.

Canaccord Genuity mining analyst Gary Lampard isn’t so bullish. Lampard downgraded his recommendation on Capstone due to its share price’s recent run-up (its shares went from $1.70 in June to as high as $2.91 in October). He also trimmed his target price, as he believes declining copper grades at its existing mines and capex at Santo Domingo will cut into EBITDA over the next three years.

BMO Capital Markets analyst Aleksandra Bukacheva falls into the bull camp, as she has Capstone rated as “outperform,” with $3.50 price target. At press time Capstone shares were trading for $2.65.

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