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Capstone Copper Corp. — Management Reports 2023
Feb 3, 2023
48344_rns_2023-02-03_eda8baaf-7f85-42b1-996c-7c4cb0f76691.pdf
Management Reports
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF CAPSTONE MINING CORP. FOR THE YEAR ENDED DECEMBER 31, 2021
Capstone Mining Corp. (“Capstone” or the “Company”) has prepared the following management’s discussion and analysis (the “MD&A”) as of February 15, 2022 and it should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2021. All financial information has been prepared in accordance with International Financial Reporting Standards (“IFRS” or “GAAP”) and all dollar amounts presented are United States (“US”) dollars unless otherwise stated. “C$” refers to Canadian dollars.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
This document may contain “forward-looking information” within the meaning of Canadian securities legislation and “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”). These forward-looking statements are made as of the date of this document and the Company does not intend, and does not assume any obligation, to update these forwardlooking statements, except as required under applicable securities legislation.
Forward-looking statements relate to future events or future performance and reflect our expectations or beliefs regarding future events and the impacts of the ongoing and evolving COVID-19 pandemic. Forward-looking statements include, but are not limited to, statements with respect to the estimation of Mineral Resources and Mineral Reserves, the success of the underground paste backfill and tailings filtration projects at Cozamin, the timing and cost of the construction of the paste backfill and dry stack tailings plant at Cozamin, the timing and results of the PV4 study, timing and success of the Jetti Technology, the successful execution of a port services agreement with Puerto Abierto S.A. and/or rail agreement with Sigdo Kopper’s rail business, the expected reduction in capital requirements for the Santo Domingo project, the timing and success of the Cobalt Study for Santo Domingo, the success of the PV3 Optimization project, the realization of Mineral Reserve estimates, the timing and amount of estimated future production, the costs of production and capital expenditures and reclamation, the budgets for exploration at Cozamin, Santo Domingo, Pinto Valley and other exploration projects, the timing and success of the Copper Cities Project, the success of our mining operations, the continuing success of mineral exploration, the estimations for potential quantities and grade of inferred resources and exploration targets, our ability to fund future exploration activities, our ability to finance the Santo Domingo project, environmental risks, unanticipated reclamation expenses and title disputes, the consummation and timing of the transaction with Mantos Copper (Bermuda) Limited ("Mantos") (the "Transaction”) and, if consummated, the success of the synergies and catalysts related to the Transaction for the combined entity, Capstone Copper Corp., and the anticipated future production, costs of production, capital expenditures and reclamation of Mantos Copper operations and development projects. The potential effects of the COVID-19 pandemic on our business and operations are unknown at this time, including Capstone’s ability to manage challenges and restrictions arising from COVID-19 in the communities in which Capstone operates and our ability to continue to safely operate and to safely return our business to normal operations. The impact of COVID-19 to Capstone is dependent on a number of factors outside of our control and knowledge, including the effectiveness of the measures taken by public health and governmental authorities to combat the spread of the disease, global economic uncertainties and outlook due to the disease, supply chain delays resulting in lack of availability of supplies, goods and equipment, and evolving restrictions relating to mining activities and to travel in certain jurisdictions in which we operate.
In certain cases, forward-looking statements can be identified by the use of words such as “anticipates”, “approximately”, “believes”, “budget”, “estimates”, expects”, “forecasts”, “guidance”, intends”, “plans”, “scheduled”, “target”, or variations of such words and phrases, or statements that certain actions, events or results “be achieved”, “could”, “may”, “might”, “occur”, “should”, “will be taken” or “would” or the negative of these terms or comparable terminology. In this document certain forward-looking statements are identified by words including “anticipated”, “expected”, “guidance” and “plan”. By their very nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, amongst others, risks related to inherent hazards associated with mining operations and closure of mining projects, future prices of copper and other metals,
compliance with financial covenants, surety bonding, our ability to raise capital, Capstone’s ability to acquire properties for growth, counterparty risks associated with sales of our metals, use of financial derivative instruments and associated counterparty risks, foreign currency exchange rate fluctuations, market access restrictions or tariffs, changes in general economic conditions, availability and quality of water, accuracy of Mineral Resource and Mineral Reserve estimates, operating in foreign jurisdictions with risk of changes to governmental regulation, compliance with governmental regulations, compliance with environmental laws and regulations, reliance on approvals, licences and permits from governmental authorities and potential legal challenges to permit applications, contractual risks including but not limited to, our ability to meet the completion test requirements under the Cozamin Silver Stream Agreement with Wheaton Precious Metals Corp. ("Wheaton"), our ability to meet certain closing conditions under the Santo Domingo Gold Stream Agreement with Wheaton, acting as Indemnitor for Minto Metals Corp.’s surety bond obligations post divestiture, impact of climate change and changes to climatic conditions at our Pinto Valley and Cozamin operations and Santo Domingo project, changes in regulatory requirements and policy related to climate change and greenhouse gas ("GHG") emissions, land reclamation and mine closure obligations, aboriginal title claims and rights to consultation and accommodation, risks relating to widespread epidemics or pandemic outbreak including the COVID-19 pandemic; the impact of COVID-19 on our workforce, risks related to construction activities at our operations and development projects, suppliers and other essential resources and what effect those impacts, if they occur, would have on our business, including our ability to access goods and supplies, the ability to transport our products and impacts on employee productivity, the risks in connection with the operations, cash flow and results of Capstone relating to the unknown duration and impact of the COVID-19 pandemic, uncertainties and risks related to the potential development of the Santo Domingo project, increased operating and capital costs, increased cost of reclamation, challenges to title to our mineral properties, increased taxes in jurisdictions the Company operates or is subject to tax, changes in tax regimes we are subject to and any changes in law or interpretation of law may be difficult to react to in an efficient manner, maintaining ongoing social licence to operate, seismicity and its effects on our operations and communities in which we operate, dependence on key management personnel, potential conflicts of interest involving our directors and officers, corruption and bribery, limitations inherent in our insurance coverage, labour relations, increasing energy prices, competition in the mining industry including but not limited to competition for skilled labour, risks associated with joint venture partners, our ability to integrate new acquisitions and new technology into our operations, cybersecurity threats, legal proceedings, risks related to the consummation of the Transaction, including failure to receive shareholder and other necessary consents and approvals for the Transaction, the volatility of the price of the Common Shares, the uncertainty of maintaining a liquid trading market for the Common Shares, risks related to dilution to existing shareholders if stock options or other convertible securities are exercised, the history of Capstone with respect to not paying dividends and anticipation of not paying dividends in the foreseeable future and sales of Common Shares by existing shareholders can reduce trading prices, and other risks of the mining industry as well as those factors detailed from time to time in the Company’s interim and annual financial statements and MD&A of those statements and Annual Information Form, all of which are filed and available for review under the Company’s profile on SEDAR at www.sedar.com. Although the Company has attempted to identify important factors that could cause our actual results, performance or achievements to differ materially from those described in our forward-looking statements, there may be other factors that cause our results, performance or achievements not to be as anticipated, estimated or intended. There can be no assurance that our forward-looking statements will prove to be accurate, as our actual results, performance or achievements could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on our forward-looking statements.
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Table of Contents
Nature of Business ............................................................................................................................................................. 4 Q4 2021 Highlights and Significant Items....................................................................................................................... 5 Operational Overview ........................................................................................................................................................ 9 Financial Overview ............................................................................................................................................................. 11 Selected Quarterly Financial Information........................................................................................................................ 12 Consolidated Results ......................................................................................................................................................... 13 Operational Results............................................................................................................................................................ 18 Outlook – 2022 Guidance.................................................................................................................................................. 24 Liquidity and Financial Position Review.......................................................................................................................... 25 Commitments ...................................................................................................................................................................... 28 Risks and Uncertainties..................................................................................................................................................... 28 Transactions with Related Parties.................................................................................................................................... 35 Off Balance Sheet Arrangements..................................................................................................................................... 35 Accounting Changes .......................................................................................................................................................... 35 Alternative Performance Measures ................................................................................................................................. 35 Additional Information and Reconciliations .................................................................................................................... 44 Outstanding Share Data and Dilution Calculation......................................................................................................... 46 Management’s Report on Internal Controls.................................................................................................................... 46 Other Information................................................................................................................................................................ 46 National Instrument 43-101 Compliance ........................................................................................................................ 47
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Nature of Business
Capstone Mining Corp. (“Capstone” or the “Company”), a Canadian mining company publicly listed on the Toronto Stock Exchange ("TSX"), is engaged in the production of and exploration for base metals in the United States (“US”), Mexico, and Chile, with a focus on copper. Pinto Valley Mining Corp. ("Pinto Valley"), a wholly owned US subsidiary, owns and operates the copper Pinto Valley Mine located in Arizona, US. Capstone Gold, S.A. de C.V. ("Capstone Gold"), a wholly owned Mexican subsidiary, owns and operates the polymetallic Cozamin Mine located in Zacatecas, Mexico, and has a portfolio of exploration properties in Mexico. Capstone Mining Chile SpA, a wholly owned Chilean subsidiary, is performing exploration for base metal deposits in Chile.
On March 24, 2021, Capstone consolidated a 100% ownership interest in 0908113 B.C. Ltd. (“Acquisition Co.”) by purchasing the remaining 30% ownership interest from Korea Resources Corporation (“KORES”), resulting in the elimination of the non-controlling interest (“NCI”) in Acquisition Co. Minera Santo Domingo SCM, a wholly owned Chilean subsidiary of Acquisition Co, holds the Santo Domingo copper-iron project in Chile.
In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The Company continues to evaluate the potential impacts arising from COVID-19 on all aspects of its business. For the year ended December 31, 2021, there were no significant financial impacts on the Company.
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2021 Annual and Q4 2021 Highlights and Significant Items
2021 Copper Production and C1 Cash Costs[1 ] Guidance
Capstone achieved both production and cost guidance in 2021 ; finishing the year at 187.1 million pounds of copper production, at the upper end of the 175 - 190 million pounds guidance range, and at consolidated C1 cash costs[1] of $1.81 per payable pound of copper, which was at the mid-point of the guidance range of $1.75 to $1.90 per pound.
2021 Annual and Q4 2021 Financial and Operational Highlights
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Record net income of $252.9 million, or $0.56 per share for 2021 and net income of $41.4 million, or $0.10 per share for Q4 2021. Adjusted net income[1] of $241.6 million or $0.60 per share for 2021, and $73.2 million or $0.18 per share for Q4 2021, main reconciling item for Q4 2021 was share based compensation expense.
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Record Adjusted EBITDA[1] of $432.2 million for 2021 and $113.3 million for Q4 2021. The increase in adjusted EBITDA[1] is reflective of Capstone’s 19% growth in production and strong operational performance and financial leverage in a robust copper price environment.
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Record Operating cash flow before changes in working capital[1] of $556.3 million in 2021 and $104.9 million in Q4 2021 driven by strong revenue in a plus $4.00 price copper environment. Included in 2021 Operating cash flow is the receipt of the $150.0 million upfront payment for the Cozamin Silver Stream and $30.0 million upfront payment for the Santo Domingo Gold Stream Agreement.
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Cash and short-term investments grew by $56.2 million during the three months ending December 31, 2021 ("Q4 2021") and by $389.3 million during 2021 to $264.4 million . The Company's total available liquidity[1] was $489.4 million with nil long-term debt. The balance sheet was further enhanced by continued strong operating cash flow generation during Q4 2021.
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Consolidated copper production of 51.6 million pounds at C1 cash costs[1] of $1.72 per payable pound of copper produced for Q4 2021. Full year guidance achieved with consolidated copper production for 2021 of 187.1 million pounds at C1 cash costs[1] of $1.81 per payable pound of copper produced.
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Cozamin Mine achieved another record quarterly copper production of 14.5 million pounds at $0.99 per payable pound of copper produced for Q4 2021. Q4 2021 production was 41% higher than in Q4 2020 following commissioning of the Calicanto one-way haul ramp in Q1 2021.
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Pinto Valley Mine produced 37.1 million pounds at $2.00 per payable pound of copper for Q4 2021. The mine's processing plant achieved rates of approximately 58,500 tpd in the fourth quarter following completion of Phase 2 of PV3 Optimization.
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Capstone announced the Transaction to combine with Mantos to create Capstone Copper Corp. The Transaction, if consummated, will establish Capstone Copper Corp. as a premier copper producer with a diversified portfolio of high-quality, long-life operating assets focused in the Americas with an extensive pipeline of near-term fully-permitted organic growth opportunities. Completion of the Transaction is expected in March or April 2022.
Mantos Transaction
On November 30, 2021, the Company announced it had entered into a definitive agreement (the "Agreement") with Mantos to combine, pursuant to a plan of arrangement. Mantos is a copper-producing company that, through its subsidiaries, is engaged in the exploration, development, extraction, and processing of sulphide and oxide ores, and the production and sale of London Market Exchange Grade “A” copper cathodes and clean copper concentrates, with gold and silver by-products from its mining assets. Mantos Copper currently operates the open pit copper mines and processing plants of Mantos Blancos, located forty-five kilometres northeast of Antofagasta, and Mantoverde, located fifty kilometres southeast of Chanaral, in the region of Atacama.
The Transaction will require the approval of at least 66 2/3% of the votes cast by the shareholders of Capstone voting at a special meeting of shareholders to be held on February 28th, 2022. Officers and directors of Capstone, along with Capstone’s largest shareholder, have entered into support and voting agreements, agreeing to vote their shares in favour of the Transaction (representing approximately 26.5% of the issued and outstanding common shares of Capstone). The management information circular dated January 27th, 2022 has been posted to the Company’s website and filed on its profile on SEDAR.
Upon completion of the Transaction, the combined company is expected to be renamed Capstone Copper Corp. ("Capstone Copper"). Capstone Copper will remain headquartered in Vancouver, B.C. and has received
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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conditional approval to be listed on the TSX. Pursuant to the Agreement, each Capstone shareholder will receive 1 newly issued Capstone Copper share per Capstone share (the "Exchange Ratio") and the existing Mantos shareholders will continue to hold Capstone Copper shares. Upon completion of the Transaction, former Capstone and Mantos shareholders will collectively own approximately 60.75% and 39.25% of Capstone Copper, respectively, on a fully-diluted basis. The Transaction is subject to certain regulatory approvals, consents from certain third parties and other customary closing conditions for a transaction of this nature, including approvals by the security holders, the TSX and the Supreme Court of British Columbia. The Agreement includes a nonsolicitation provision, a right to match a superior proposal and a C$75 million termination fee payable in certain circumstances. Completion of the Transaction is expected in March or April 2022.
Subject to shareholder approval and the satisfaction of all other conditions, the Transaction is anticipated to close in March or April 2022.
PV3 Optimization Completed
PV3 Optimization work was completed in Q3 2021. The $31 million two year program involved investments in the fine crushing plant, two new ball mill shells, tailings thickeners, and tailings pumping upgrades. The optimization work has enabled the reliability of higher throughput rates at Pinto Valley from 51,000 tonnes per day ("tpd") average in 2019 to over 58,000 tpd average in Q4 2021.
PV4 Study
During 2021, study work progressed on the pre-feasibility study ("PFS") for PV4 which aims to maximize the conversion of approximately one billion tonnes of mineral resources to mineral reserves, significantly extending Pinto Valley’s mine life and increasing the mine’s copper production profile. The application of the following new technologies and innovation is being considered:
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Expansion of the use of Jetti Catalytic Leach Technology which has the potential to increase mill cut-offgrades and increase tonnage available for leaching. Column leach testing is ongoing through H1 2022 and results will be included in the PV4 Study.
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Pyrite Agglomeration, with strong positive environmental, social and governance ("ESG") implications as it would divert acid-generating minerals including pyrite and chalcopyrite from tailings to the dump leach operation. Additional copper recovery and lower costs via self–generation of free acid would also be key economic drivers for this project. The project’s initiation would be targeted for H2 2022 subject to board approval. Based on preliminary study results, the project is expected to require a low capex with a short payback period.
Higher mill throughput will be considered targeting up to 65,000 to 70,000 tpd. Key areas of investment include upgrades to ball mill motors, grinding circuit cyclones, and to the rougher flotation circuit and evaluation of coarse particle flotation. A low capital strategy is currently under review to improve coarse particle recovery with some modest investment in the current conventional flotation circuit. An expanded dump leach strategy would translate to higher grades sent to the mill for processing and increased copper cathode production by expanding dump leach tonnage.
Capstone Advances Santo Domingo Project
Following consolidation of Capstone’s 100% ownership of the Santo Domingo Project ("Santo Domingo" or “the Project") in Region III, Chile during Q1 2021, the Company continued to advance the project on several fronts:
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With respect to the reduced initial capital estimate, the Company and its port partner, Puerto Abierto, S.A., a subsidiary of Puerto Ventanas, S.A., are executing on early works in the framework agreement. In addition, the Company is advancing the analysis of the pipeline versus rail capital trade-off in which the proposals replace the pipeline capital to become a rail customer. This work is now being done in conjunction with the Mantoverde synergies analysis discussed below.
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With respect to the proposed Transaction, scoping level work is being performed by the Santo Domingo and Mantos teams starting in late Q4 2021 to identify and refine potential synergies between the Santo Domingo Project with the Mantoverde mine (owned 70% by Mantos). Santo Domingo is situated ~35 kilometres northeast of the Mantoverde mine. Significant potential opportunities exist for:
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Infrastructure sharing (including power, water, pipelines, port),
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Transportation synergies for concentrates,
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Potential enabling of product lines (additional iron and cobalt production from Mantoverde, processing oxide ore from Santo Domingo),
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Potential integrated operating approach, and
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Construction synergies (including project teams and camp).
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With respect to potential increases in the Chilean mining royalty tax, Santo Domingo is expected to be protected given the Company has secured and retains a foreign investment agreement with the state of Chile, which fell under the provisions of DL600. One of the benefits to the Company of this foreign investment agreement is a tax invariability assurance for a period of 15 years post commercial production.
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Cobalt Feasibility Update: The drilling program from Q3 and Q4 of 2021 generated sufficient sample mass for 2022 pilot scale testing of the cobalt recovery process. The first of a total of two stages of the cobalt feasibility engineering work, covering pre-feasibility level activities, started in September 2021 and is expected to be complete in March 2022. The proposed cobalt recovery process takes advantage of a tailings side-stream containing pyrite laden with ~0.6% cobalt, which will be recovered through a conventional flowsheet. The concentrate will be sent to pyrite roasting and solvent extraction followed by crystallization to produce battery grade cobalt sulphate heptahydrate. At an expected 10.4 million pounds of cobalt production per year, this will be one of the largest and lowest cost cobalt producers in the world at C1 cash costs[1] after credits of minus $4 per pound. Additional benefits of this project include the production of by-product sulphuric acid from the pyrite roasting process, which can be used for heap or dump leaching to produce low-cost copper cathodes at Santo Domingo, Mantoverde, and elsewhere in the district.
Corporate Exploration Update
Cozamin exploration: The focus during Q4 2021 was on testing the Mala Noche Footwall Zone and Mala Noche Main Vein West Target with three surface rigs, along with the in-parallel development of the west exploration drift and crosscuts which will allow more efficient testing of the target from underground once completed in early 2022. One additional surface rig tested other brownfield targets on the property.
Copper Cities, Arizona : On January 20, 2022, Capstone announced that it had entered into an 18-month access agreement with BHP Copper Inc. ("BHP") to conduct drill and metallurgical test-work at BHP's Copper Cities project ("Copper Cities"), located ~10 km east of the Pinto Valley Mine. In 2022, Capstone plans to spend $6.7 million in a two-phase drill program aimed at twinning historical drill holes, and to select a portion of these for metallurgical testing.
Planalto, Brazil: Step-out drilling at the Planalto Iron Ore-Copper-Gold prospect in Brazil, under Earn In agreement with Lara Exploration Ltd., commenced in Q4 2021 and will continue into 2022. Lara is conducting the work and will report results when appropriate.
2022 Capstone Copper Catalysts
The following chart demonstrates key catalysts this year and assumes the completion of the Transaction by the end of Q1 2022. Of note, Capstone Copper's ESG Vision and Objectives will be rolled out in Q2 2022. The Mantoverde-Santo Domingo synergies study and integration plan is expected in September and will be followed by a site visit and investor day for institutional investors and analysts. At Pinto Valley, the PV4 prefeasibility study is expected to be released by year end and, at Santo Domingo, the updated feasibility and mine plan including the cobalt feasibility study is also expected to be released in Q4 2022. At Cozamin, the paste backfill and dry stack tailings plant is expected to be commissioning by the end of 2022.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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2022 Production and cost guidance: Continued strong production growth, cost control measures limit increase to C1 cash costs.
In 2022, Capstone Mining expects to produce between 82,000 and 90,000 tonnes of copper at C1 cash costs[1] of between $1.85 and $2.00 per pound payable copper produced from the Pinto Valley and Cozamin mines.
Our cost control strategy included the following actions. During 2020, financial hedges were executed on foreign exchange rates to protect approximately half of the Company’s Mexican Peso exposure from August 2020 through December 2021. The realized gain on the Mexican Peso zero cost collars was $2.6 million for the twelve months ended December 31, 2021. In November 2021, additional financial hedges were executed for approximate 75% of the Mexican Peso and Chilean Peso operating and capital cost exposure at the Cozamin mine and at Santo Domingo, respectively. The Mexican Peso collars have a floor of 20 and a cap of 24.75 Mexican Pesos to the US dollar, and the Chilean Peso collars have a floor of 750 and a cap of 931 and 939 Chilean Pesos to the US dollar. From time to time, the Company enters into foreign exchange hedging arrangements to mitigate the risk of exposure to fluctuating foreign currency exchange rates.
Pinto Valley entered into fixed-price diesel contracts with a supplier for its expected 2021 and 2022 diesel consumption at $1.76/gallon and $2.13/gallon, respectively. The contracted diesel prices have resulted in cost savings of $3.0 million and $6.3 million during the three months and year ended December 31, 2021, respectively. At current prices these contracts are expected to yield additional savings of approximately $4.5 million during 2022.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Operational Overview
| Q4 2021 Q4 2020 2021 2020 |
Q4 2021 Q4 2020 2021 2020 |
|---|---|
| Copperproduction(millionpounds) | |
| Pinto Valley 37.1 34.1 133.3 119.0 Cozamin 14.5 10.3 53.8 37.9 |
|
| Total 51.6 44.4 187.1 156.9 |
|
| Copper sales | |
| Copper sold (million pounds) 46.8 39.3 178.7 147.4 Realized copperprice($/pound) 4.61 3.64 4.42 2.99 |
|
| C1 cash costs 1 |
($/pound) produced |
| Pinto Valley 2.00 2.00 2.16 2.21 Cozamin 0.99 0.63 0.96 0.69 |
|
| Consolidated 1.72 1.68 1.81 1.84 |
Consolidated
Q4 2021 production was 16% higher than Q4 2020 mainly as a result of higher mine grades at both mines plus record copper production at Cozamin driven by the mine expansion related to the completion of the new one-way haul ramp at the end of 2020.
2021 consolidated production of 187.1 million pounds of copper is at the upper end of the full year guidance of 175 to 190 million pounds of copper. The production results reflect a 19% increase compared to prior year, benefiting from Cozamin achieving the higher mill rates (3,800 tpd) and benefits of the PV3 Optimization projects at Pinto Valley. The increase in production was the main driver for the $0.03 per payable pound decrease in C1 cash costs[1] in 2021 compared to 2020, offset by $0.09/lb related to the Cozamin silver stream, thus overall prestream the C1 cash costs[1] were $0.12/lb lower than 2020. 2021 YTD C1 cash costs[1 ] are within annual guidance of $1.75 to $1.90 per payable pound.
Pinto Valley Mine
Q4 2021 production was higher than the same period last year primarily on higher grades for Q4 2021 (0.37% versus 0.31% in Q4 2020) as a result of mine sequencing and an increase in cut off grade to the mill, sending the lower grade ore to leach, partially offset by lower recoveries in Q4 2021 compared to Q4 2020.
2021 production increased by 12% compared to the same period last year due to higher head grades for 2021 (0.35% versus 0.30% in 2020) and improved flotation plant recovery performance (85.7% versus 85.0% in 2020).
C1 cash costs[1] of $2.00 per payable pound in Q4 2021 were consistent with the same period last year. Lower capitalized stripping costs of $0.12 per pound during the quarter ($0.2 million versus $4.1 million in Q4 2020) were fully offset by higher Q4 2021 production compared to Q4 2020.
A decrease in 2021 C1 cash cost[1] by $0.05 per payable pound was primarily attributed to higher production compared to the same period last year.
Cozamin Mine
Production in Q4 2021 was 41% higher than the same period last year and set another record production quarter for Cozamin. Higher copper production was primarily due to the successful utilization of the Calicanto one-way haul ramp which increased mill rates from 3,086 tpd in Q4 2020 to 3,863 tpd in Q4 2021. In addition, with the optimized technical report mine plan, the mine is delivering significantly higher mine grades (1.92% in Q4 2021 versus 1.72% in Q4 2020) from the copper rich San Jose and Calicanto zones.
2021 production increased by 42% compared to the same period last year mainly due to higher mill throughput (3,724 tpd versus 2,949 tpd in 2020 YTD) and head grades (1.86% versus 1.67% in 2020).
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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C1 cash costs[1] in Q4 2021 were higher than the same period last year due to $0.29 per payable pound impact of the Cozamin silver stream with Wheaton for 50% of the silver sales and higher production costs attributed to higher operating development metres executed.
C1 cash costs[1] in 2021 were higher than the same period last year due to $0.30 per payable pound impact of the Cozamin silver stream with Wheaton for 50% of the silver sales. The cost per payable pound impact of the Cozamin silver stream was partially offset by higher production.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Financial Overview
| ($ millions, except per share | ||||||
|---|---|---|---|---|---|---|
| data) | Q4 2021 | Q4 2020 | 2021 | 2020 | 2019 | |
| Revenue | 215.9 | 148.1 | 794.8 | 453.8 | 418.7 |
|
| Net income (loss) | 41.4 | 27.6 | 252.9 | 12.4 | (16.2) |
|
| Net income (loss) attributable | ||||||
| to shareholders | 41.4 | 27.6 | 226.8 | 12.6 | (16.0) |
|
| Net income (loss) attributable to | ||||||
| shareholders per common | ||||||
| share - basic ($) | 0.10 | 0.07 | 0.56 | 0.03 | (0.04) |
|
| Net income (loss) attributable to | ||||||
| shareholders per common | ||||||
| share - diluted ($) | 0.10 | 0.07 | 0.55 | 0.03 | (0.04) |
|
| Adjusted net income (loss)1 | 73.2 | 35.6 | 241.6 | 26.4 | (6.0) |
|
| Adjusted net income (loss) | ||||||
| attributable to shareholders1 | 73.2 | 35.6 | 242.1 | 26.4 | (6.0) |
|
| Adjusted net income (loss) | ||||||
| attributable to shareholders per | ||||||
| common share - basic | 0.18 | 0.09 | 0.60 | 0.07 | (0.01) |
|
| Adjusted net income (loss) | ||||||
| attributable to shareholders per | ||||||
| common share - diluted | 0.18 | 0.09 | 0.58 | 0.07 | (0.01) |
|
| Adjusted EBITDA1 | 113.3 | 63.5 | 432.2 | 139.2 | 96.4 |
|
| Cash flow from operating | ||||||
| activities2 | 94.5 | 67.4 | 553.3 | 147.2 | 92.9 |
|
| Cash flow from operating | ||||||
| activities per common share1 - | ||||||
| basic ($) | 0.23 | 0.17 | 1.36 | 0.37 | 0.24 |
|
| Operating cash flow before | ||||||
| changes in working capital1,2 | 104.9 | 65.3 | 556.3 | 131.2 | 79.8 |
|
| Operating cash flow before | ||||||
| changes in working capital per | ||||||
| common share1 – basic($) | 0.26 | 0.16 | 1.37 | 0.33 | 0.20 |
2 2021 includes $180.0 million silver and gold stream proceeds
| ($ millions) | December 31, 2021 | December 31, 2020 | December 31, 2019 |
|---|---|---|---|
| Total assets | 1,728.0 | 1,391.6 | 1,331.4 |
| Long term debt (excluding financing fees) | — | 184.9 | 209.9 |
| Total non-current financial liabilities | 38.4 | 183.6 | 207.1 |
| Total non-current liabilities | 481.3 | 408.5 | 404.6 |
| Cash and cash equivalents and short-term | |||
| investments | 264.4 | 60.0 | 44.4 |
| Net cash/(debt)1 | 264.4 | (124.9) | (165.5) |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Selected Quarterly Financial Information
| ($ millions, exceptper share data) | Q4 2021(i) | Q3 2021 | Q2 2021(ii) | Q1 2021(iii) | Q4 2020(iv) | Q3 2020 | Q2 2020(v) | Q1 2020(vi) |
|---|---|---|---|---|---|---|---|---|
| Revenue | 215.9 | 165.4 | 209.4 |
204.1 |
148.1 |
130.5 |
104.7 |
70.4 |
| Earnings (loss) from mining operations | 102.5 | 62.8 | 102.8 |
92.5 |
57.2 |
28.6 |
16.3 |
(20.0) |
| Net income (loss) from continuing | ||||||||
| operations attributable to | ||||||||
| shareholders | 41.4 | 35.0 | 49.4 |
101.0 |
27.6 |
2.4 |
4.3 |
(21.7) |
| Net income (loss) from continuing | ||||||||
| operations attributable to | ||||||||
| shareholders per share - basic | 0.10 | 0.09 | 0.12 |
0.25 |
0.07 |
0.01 |
0.01 |
(0.06) |
| Net income (loss) from continuing | ||||||||
| operations attributable to | ||||||||
| shareholders per share - diluted | 0.10 | 0.08 | 0.12 |
0.24 |
0.07 |
0.01 |
0.01 |
(0.06) |
| Net income (loss) attributable to | ||||||||
| shareholders | 41.4 | 35.0 | 49.4 |
101.0 |
27.6 |
2.4 |
4.3 |
(21.7) |
| Net income (loss) per share | ||||||||
| attributable to shareholders - basic | 0.10 | 0.09 | 0.12 |
0.25 |
0.07 |
0.01 |
0.01 |
(0.06) |
| Net income (loss) per share | ||||||||
| attributable to shareholders - diluted | 0.10 | 0.08 | 0.12 |
0.24 |
0.07 |
0.01 |
0.01 |
(0.06) |
| Operating cash flow before changes in | ||||||||
| non-cash working capital1 | 104.9 | 67.1 | 140.4 |
244.5 |
65.3 |
44.9 |
24.0 |
(3.5) |
| Capital expenditures (including | ||||||||
| capitalized stripping) | 42.2 | 36.0 | 50.4 |
28.4 |
31.2 |
32.2 |
19.3 |
20.6 |
(i) Net income in Q4 2021 includes $27 million of share unit expense.
(ii) Net income in Q2 2021 includes $19 million of share unit expense.
(iii) Net income in Q1 2021 includes $92 million of impairment reversal on mineral properties as well as $27 million of share unit expense.
(iv) Net income in Q4 2020 includes $16 million of share unit expense.
(v) Earnings from mining operations and Net income in Q2 2020 includes $14 million of positive non-cash provisional pricing adjustments and $8 million in reversals of inventory write-downs.
(vi) Earnings (loss) from mining operations and Net income (loss) in Q1 2020 includes $10 million of negative non-cash provisional pricing adjustments and $7 million of inventory write-downs.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 12
Consolidated Results
Consolidated Net Income Analysis
Net Income for the Three Months Ended December 31, 2021 and 2020
The Company recorded net income of $41.4 million for the three months ended December 31, 2021 compared with net income of $27.6 million in Q4 2020. The major differences are outlined below:
==> picture [502 x 285] intentionally omitted <==
----- Start of picture text -----
$100.0 $67.8
$90.0
$80.0
$70.0 $(18.0)
$(4.4)
$(3.1)
$60.0
$50.0 $(10.7) $(6.4) $41.4
$40.0
$27.6 $(11.4)
$30.0
$20.0
$10.0
$0.0
Net Income Q4 2020 Revenue Production costsDepletion and amortization Share-based compensationG&A Other TaxesNet Income Q4 2021
$M
----- End of picture text -----
The difference quarter-over-quarter was driven by:
-
Revenue: $67.8 million or 46% increase driven by higher realized copper prices (Q4 2021 - $4.61 per pound, Q4 2020 - $3.64 per pound) and higher copper volumes sold (Q4 2021 – 46.8 million pounds, Q4 2020 – 39.3 million pounds).
-
Production costs: $18.0 million increase:
-
Pinto Valley recorded $13.5 million higher production costs in Q4 2021 compared to Q4 2020 as a result of higher copper volumes sold (Q4 2021 – 33.0 million pounds, Q4 2020 – 29.7 million pounds).
-
Cozamin recorded $3.8 million higher production costs in Q4 2021 compared to Q4 2020 as a result of higher copper volumes sold (Q4 2021 – 13.9 million pounds, Q4 2020 – 10.0 million pounds).
-
Depletion and amortization: $4.4 million increase primarily due to the increase in copper volumes sold.
-
Share-based compensation expense: $10.7 million increase as a result of mark to market adjustments on share unit liabilities to reflect the increase in the share price during Q4 2021 (increase from C$4.93 per share at September 30, 2021 to C$5.58 per share at December 31, 2021).
-
Income taxes: $11.4 million increase due to higher operating margins during Q4 2021 compared to Q4 2020.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 13
Net Income for the Years Ended December 31, 2021 and 2020
The Company recorded net income of $252.9 million for the year ended December 31, 2021 compared with net income of $12.4 million in 2020. The major differences are outlined below:
==> picture [502 x 285] intentionally omitted <==
----- Start of picture text -----
$400.0 $92.4
$341.0
$350.0
$300.0 $(47.0) $(9.8)
$(52.3) $252.9
$250.0 $(10.4) $(5.9)
$(67.5)
$200.0
$150.0
$100.0
$50.0
$12.4
$—
Net Income 2020 RevenueProduction costsDepletion and amortization G&AImpairment reversalShare-based compensation Other TaxesNet Income 2021
$M
----- End of picture text -----
The difference year-over-year was driven by:
-
Revenue: $341.0 million or 75% increase driven by higher realized copper prices (2021 - $4.42 per pound, 2020 - $2.99 per pound) and higher copper volumes sold (2021 – 178.7 million pounds, 2020 – 147.4 million pounds) on higher production (2021 – 187.1 million pounds, 2020 – 156.9 million pounds). The higher production was underpinned by the capital investments in PV3 Optimization and Cozamin expansion.
-
Production costs: $52.3 million increase:
-
Pinto Valley recorded $33.9 million higher production costs in 2021 compared to 2020 as a result of higher copper volumes sold (2021 – 128.0 million pounds, 2020 – 110.9 million pounds).
-
Cozamin recorded $14.6 million higher production costs in 2021 compared to 2020 as a result of higher copper volumes sold (2021 – 50.7 million pounds, 2020 – 36.5 million pounds).
-
Depletion and amortization: $10.4 million increase primarily due to the increase in copper volumes sold.
-
General and administration: $5.9 million increase primarily due to increases in performance related bonus accruals, salary expenses due to higher headcount, consultant expenses, and ESG reporting.
-
Impairment reversal of $92.4 million on mineral properties related to Santo Domingo recorded during Q1 2021.
-
Share-based compensation: $47.0 million increase as a result of mark to market adjustments on share unit liabilities to reflect the increase in the share price during 2021 (increase from C$2.38 per share at December 31, 2020 to C$5.58 per share at December 31, 2021) compared to a lower mark to market adjustment recorded in 2020 (C$0.76 per share at December 31, 2019 versus C$2.38 per share at December 31, 2020).
-
Net other expenses: $9.8 million increase due to an increase in non-cash interest accretion of $8.4 million driven by the Cozamin Silver Stream and non-cash interest accretion of $3.0 million on the payable to KORES, and partially offset by lower interest on long term debt as a result of full repayment on the Corporate Revolving Credit facility (“RCF”) in Q1 2021.
-
Income taxes: $67.5 million change due to higher operating margins during 2021 compared to 2020.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 14
Revenue
Revenue increased quarter-on-quarter ($215.9 million versus $148.1 million in Q4 2020) primarily due to a higher realized copper price ($4.61 per pound versus $3.64 per pound in Q4 2020) on 7.5 million pounds higher copper volumes sold (46.8 million pounds versus 39.3 million pounds in Q4 2020).
YTD revenue increased year-on-year ($794.8 million versus $453.8 million in 2020) primarily due to a higher realized copper price ($4.42 per pound versus $2.99 per pound in 2020) on 31.3 million pounds higher copper volumes sold (178.7 million pounds versus 147.4 million pounds in 2020). Additionally, silver revenue increased at Cozamin due to increased silver prices (average market prices $25/oz versus $21/oz in 2020) and higher ounces sold (1,696k oz versus 1,396k oz in 2020). There is minimal impact to 2021 silver revenue from the Cozamin Silver Stream as the non-cash amortization of deferred revenue to silver revenue and the 10% spot price paid by Wheaton largely offset the 50% of the silver sales delivered to Wheaton.
Realized Copper Prices
| ($/pound) | 2021 | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | ||
| Pinto Valley | 4.15 | 4.85 |
4.10 | 4.66 |
2.25 |
2.76 |
3.15 | 3.67 |
|
| Cozamin | 4.02 | 4.62 |
4.24 | 4.48 |
2.40 |
2.60 |
3.07 | 3.54 |
|
| Consolidated | 4.12 | 4.78 |
4.15 | 4.61 |
2.29 |
2.72 |
3.13 | 3.64 |
|
| LME Average | 3.86 | 4.40 |
4.25 | 4.40 |
2.56 |
2.43 |
2.96 | 3.25 |
|
| LME Close | 4.01 | 4.26 |
4.10 | 4.40 |
2.18 |
2.73 |
3.00 | 3.51 |
|
| Revenue by Mine | |||||||||
| ($ millions) | Q4 20212 | Q4 20202 | 20212 | 20202 | |||||
| Pinto Valley | 148.1 | 68.6 % | 105.3 | 71.1 % | 546.8 | 68.8 % | 321.3 | 70.8 % | |
| Cozamin | 67.8 | 31.4 % | 42.8 | 28.9 % | 248.0 | 31.2 % | 132.5 | 29.2 % | |
| Total revenue | 215.9 | 100.0 % | 148.1 | 100.0 % | 794.8 | 100.0 % | 453.8 | 100.0 % |
2 The current and subsequent periods may include final settlement quantity and/or price adjustments from prior shipments.
Provisionally Priced Copper
Gross revenue for the year ended December 31, 2021 includes 62.5 million pounds of copper sold subject to final settlement. Of this, the prices for 29.3 million pounds are final at a weighted average price of $4.39 per pound. The remaining 33.2 million pounds are subject to price change upon final settlement at the end of the applicable quotational period, as follows:
| Quotational Period | (Millions of Pounds of Copper) ($/pound) |
|---|---|
| Pinto Valley Cozamin Total Provisional Price |
|
| Feb-22 Mar-22 Apr-22 Not yet declared by customer |
10.1 — 10.1 4.41 5.4 — 5.4 4.41 9.9 4.9 14.8 4.41 2.9 — 2.9 4.41 |
| Total | 28.3 4.9 33.2 4.41 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 15
Reconciliation of Realized Copper Price
| Reconciliation of Realized Copper Price | |
|---|---|
| ($ millions,except as noted) | Q4 2021 Q4 2020 2021 2020 |
| Gross copper revenue | |
| Gross copper revenue on new shipments Gross copper revenue on prior shipments Provisional pricing changes to copper revenue Gross copper revenue |
207.3 132.3 762.1 426.0 2.5 5.6 31.5 12.4 |
| 6.1 5.2 (4.6) 2.4 |
|
| 215.9 143.1 789.0 440.8 |
|
| Gross copper revenue on new shipments ($/pound) Gross copper revenue on prior shipments ($/pound) |
4.43 3.36 4.27 2.89 |
| 0.05 0.15 0.18 0.08 |
|
| Provisional pricing changes to copper revenue ($/pound) Realized copper price ($/pound) |
0.13 0.13 (0.03) 0.02 |
| 4.61 3.64 4.42 2.99 |
|
| Gross copper revenue - reconciliation to financials |
|
| Gross copper revenue Revenue from other metals Treatment and selling Revenue per financials |
215.9 143.1 789.0 440.8 11.6 15.0 49.6 53.1 |
| (11.6) (10.0) (43.8) (40.1) |
|
| 215.9 148.1 794.8 453.8 |
|
| Payable copper sold (000s pounds) LME average copperprice($) |
46,835 39,334 178,718 147,437 4.40 3.25 4.23 2.80 |
The realized copper price in Q4 2021 of $4.61 per pound was higher than the LME average of $4.40 per pound due to 27.9 million pounds of copper priced at an average of $4.05 per pound at September 30, 2021 which final settled or second provisionally invoiced at higher average prices during Q4 2021.
The realized copper price in 2021 of $4.42 per pound was higher than the LME average of $4.23 per pound due to prior period shipments which final settled or second provisionally invoiced at higher average prices during 2021.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 16
Consolidated Cash Flow Analysis
| Consolidated Cash Flow Analysis | |||||
|---|---|---|---|---|---|
| ($ millions) | Q4 2021 | Q4 2020 | 2021 | 2020 | |
| Operating cash flow before changes in working | |||||
| capital1,2,3 | 104.9 | 65.3 | 556.3 | 130.3 | |
| Changes in non-cash working capital | (4.8) | 2.4 | 21.8 | 11.6 | |
| Other non-cash changes3 | **(5.6) ** | (0.3) | **(24.8) ** | 5.3 | |
| Total cash flow from operating activities | 94.5 | 67.4 | 553.3 | 147.2 | |
| Total cash flow used in investing activities | (37.5) | (29.5) | (143.7) | (96.4) | |
| Total cash flow used in financing activities | (1.1) | (35.6) | (204.3) | (34.1) | |
| Effect of foreign exchange rates on cash and | |||||
| cash equivalents | 0.1 | 0.8 | 0.2 | — | |
| Net change in cash and cash equivalents | 56.0 | 3.1 | 205.5 | 16.7 | |
| Openingcash and cash equivalents | 206.1 | 53.5 | 56.6 | 39.9 | |
| Closing cash and cash equivalents | 262.1 | 56.6 | 262.1 | 56.6 |
2 2021 includes $180.0 million silver and gold stream proceeds
3 Certain of prior period comparative figures have been reclassified to conform with the current year's presentation
Changes in Cash Flows for the Three Months Ended December 31, 2021 and 2020
The net change in cash was $56.0 million in Q4 2021 compared to $3.1 million in Q4 2020. The change was primarily due to:
-
Cash flow from operating activities before changes in working capital[1] was higher by $39.6 million. Revenue less production costs were significantly higher in Q4 2021 versus Q4 2020 (Q4 2021 revenue of $215.9 million less production costs of $86.6 million compared to Q4 2020 revenue of $148.1 million less production costs of $69.2 million). The increase in revenue is due to higher realized copper prices and higher copper volumes sold (Q4 2021 – 46.8 million pounds, Q4 2020 – 39.3 million pounds).
-
Changes in non-cash working capital in Q4 2021 was $(7.2) million lower compared to the same period last year primarily due to an increase in accounts receivable and decrease in accounts payable and accrued liabilities resulting from timing of payments made to vendors, partially offset by a decrease in other short-term assets mainly related to $10 million received related to the sale of Minto and prepaids.
-
Cash flows used in investing activities were $8.0 million higher in Q4 2021 mainly due to a ramp up in capital spend on Cozamin projects in Q4 2021.
-
Cash flows used in financing activities were $34.5 million lower in Q4 2021 primarily due to $35.0 million repayment on the RCF in Q4 2020.
Changes in Cash Flows for the Years Ended December 31, 2021 and 2020
The net change in cash was $205.5 million in 2021 compared to $16.7 million in 2020. The change was primarily due to:
-
Cash flow from operating activities before changes in working capital[1] was higher by $426.0 million due to strong operational performance plus $180.0 million proceeds received in 2021 under Silver and Gold Stream Agreements. Revenue less production costs were significantly higher in 2021 versus 2020 (2021 revenue of $794.8 million less production costs of $334.5 million compared to 2020 revenue of $453.8 million less production costs of $285.8 million). The increase in revenue is due to higher realized copper prices and significantly higher copper production and sales.
-
Changes in non-cash working capital was higher by $10.2 million primarily due to a decrease in other shortterm assets, partially offset by an increase in accounts receivable and decrease in accounts payable and accrued liabilities.
-
Cash flows used in investing activities were $47.3 million higher in 2021 mainly due to increased growth projects including PV3 Optimization and Cozamin's filtered (dry stack) tailings and pastefill facility totalled $31.6 million in 2021 versus $23.9 million in 2020. Santo Domingo project spend increased by $21.0 million year over year.
-
Cash flows used in financing activities were $170.2 million higher in 2021 primarily due to $184.9 million of net repayments on the RCF in 2021 and the first tranche payment of KORES’ 30% ownership interest in Santo Domingo of $17.1 million (net of taxes) paid compared to a $25.0 million net draw on the RCF in 2020.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 17
Operational Results Pinto Valley Mine – Miami, Arizona Operating Statistics
| Operational Results Pinto Valley Mine – Miami, Arizona Operating Statistics |
Operational Results Pinto Valley Mine – Miami, Arizona Operating Statistics |
|---|---|
| 2021 2020 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total |
|
| Production(contained metal and cathode)2 Copper in Concentrate (000s pounds) 35,248 28,438 29,083 35,706 128,475 Cathode(000spounds) 1,162 1,096 1,187 1,371 4,816 |
25,721 29,058 26,485 32,710 113,974 1,067 1,114 1,436 1,377 4,994 |
| Total Copper (000s pounds) 36,410 29,534 30,270 37,077 133,291 Mining Waste (000s tonnes) 7,169 7,144 6,115 5,411 25,839 Ore(000s tonnes) 5,569 4,393 5,545 6,560 22,067 |
26,788 30,172 27,921 34,087 118,968 5,588 5,677 8,025 8,002 27,292 5,399 4,992 4,461 5,030 19,882 |
| Total (000s tonnes) 12,738 11,537 11,660 11,971 47,906 Strip Ratio (Waste:Ore) 1.29 1.63 1.10 0.82 1.17 Milling Milled (000s tonnes) 5,229 4,474 4,517 5,380 19,601 Tonnes per day 58,095 49,170 49,100 58,481 53,700 Copper grade (%)3 0.36 0.33 0.33 0.37 0.35 Recoveries Copper (%)3 85.6 88.6 88.0 81.8 85.7 Concentrate Production Copper (dmt) 63,587 49,823 50,271 64,661 228,342 Copper (%) 25.1 25.1 26.2 25.1 25.5 Property costs1($/t milled) 10.92 13.23 13.76 11.14 12.16 Payable copper produced (000s pounds) 35,177 28,539 29,252 35,826 128,794 Copper C1 cash cost1($/pound payable copper produced) 1.94 2.33 2.44 2.00 2.16 Adjusted EBITDA1($ millions) 88.3 82.5 35.9 74.3 281.0 |
10,987 10,669 12,486 13,032 47,174 1.04 1.14 1.80 1.59 1.37 4,996 4,902 4,517 5,259 19,674 54,899 53,864 49,104 57,168 53,755 0.28 0.32 0.31 0.33 0.31 82.4 85.0 86.3 86.0 85.0 46,613 53,793 49,005 62,020 211,431 25.0 24.5 24.5 25.1 25.1 10.87 10.86 13.08 10.56 11.29 25,888 29,155 26,994 32,942 114,979 2.41 2.12 2.38 2.00 2.21 2.9 4.1 30.5 45.0 82.5 |
2 Adjustments based on final settlements will be made in future quarters
3 Grade and recoveries were estimated based on concentrate production and may be impacted by settlements from prior production periods.
Operational and C1 Cash Costs[1] Update
Copper production of 37.1 million pounds in Q4 2021 was higher than Q4 2020 mainly due to higher grades (Q4 2021 – 0.37% versus Q4 2020 - 0.33%) and achieving a milling rate of 58,481 tpd in Q4 2021 post the completion of PV3 Optimization work in the prior quarter. Recoveries were lower in Q4 2021 compared with the same period last year (81.8% versus 86.0% in Q4 2020) due to more tonnes milled which produced larger grind size to the Flotation Plant and higher acid-soluble copper content in the ore, which is not expected to reoccur going forward.
2021 production was 12% higher than the same period last year primarily attributed to higher grades (2021 – 0.35% versus 2020 – 0.31%) and higher recoveries due to improvements on floatation circuit tied to metallurgical practices and finer blasted ore.
C1 cash costs[1] of $2.00 per payable pound in Q4 2021 were in line with Q4 2020. Lower capitalized stripping costs of $0.12 per pound compared to the same period last year ($0.2 million versus $4.1 million in Q4 2020) were offset by higher Q4 2021 production compared to Q4 2020.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 18
2021 C1 cash costs[1] of $2.16 per payable pound were $0.05 per payable pound lower compared to the same period last year of $2.21 per payable pound primarily due to higher copper production.
Investing Activities
Sustaining capital[1] in Q4 2021 of $11.9 million was spent primarily on mining equipment component replacements, mill infrastructure and water and tailings projects. Expansionary capital[1] in Q4 2021 of $5.1 million primarily related to the booster station upgrade for the Solvent Extraction/Electrowinning ("SX/EW") plant, remaining PV3 Optimization Phase 2 projects and PV4 studies. Deferred stripping decreased in Q4 2021 relative to Q4 2020 as a function of the mine sequence and strip ratio.
| ($ millions) | Q4 2021 | Q4 2020 | 2021 | 2020 | ||
|---|---|---|---|---|---|---|
| Deferred stripping - cash | 0.2 | 4.1 | 8.9 | 10.3 | ||
| Deferred stripping- non cash | — | 1.3 | 3.0 | 2.8 | ||
| Deferred stripping (per financials) | 0.2 | 5.4 | 11.9 | 13.1 | ||
| Sustaining capital1 | 11.9 | 10.2 | 43.8 | 29.5 | ||
| Expansionary capital1 | 5.1 | 5.4 | 18.5 | 17.4 | ||
| Right of use assets - non cash | — | — | 8.7 | 6.2 | ||
| Pinto Valley segment mineral property, plant and | ||||||
| equipment("MPPE")additions(per financials) | 17.2 | 21.0 | 82.9 | 66.2 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 19
Cozamin Mine – Zacatecas, Mexico Operating Statistics
| Cozamin Mine – Zacatecas, Mexico Operating Statistics |
Cozamin Mine – Zacatecas, Mexico Operating Statistics |
|---|---|
| 2021 2020 Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total |
|
| Production(contained metal)2 Copper (000s pounds) 11,389 13,778 14,153 14,510 53,830 Zinc (000s pounds) 2,715 1,885 710 928 6,238 Silver (000s pounds) 343 364 398 426 1,531 Mining Ore (000s tonnes) 328 332 345 353 1,358 Milling Milled (000s tonnes) 301 348 355 355 1,359 Tonnes per day 3,345 3,828 3,854 3,863 3,724 Copper grade (%)3 1.79 1.86 1.87 1.92 1.86 Zinc grade (%)3 0.84 0.53 0.45 0.48 0.56 Silver grade (g/t)3 43.8 39.6 41.8 45.1 42.5 Recoveries3 Copper (%) 96.0 96.3 96.7 96.6 96.4 Zinc (%) 48.6 46.7 20.3 24.7 37.0 Silver (%) 80.9 82.1 83.6 82.7 82.4 Concentrate Production Copper (dmt) 19,897 23,583 23,792 24,379 91,651 Copper (%) 26.0 26.5 27.0 27.0 26.6 Silver (g/t) 505 476 520 541 511 Zinc (dmt) 2,542 1,777 726 896 5,941 Zinc (%) 48.8 48.1 44.4 47.0 47.8 Property costs1($/t milled) 46.27 41.65 44.10 43.79 43.87 Payable copper produced (000s pounds) 10,928 13,232 13,601 13,945 51,706 Copper C1 cash cost1($/pound payable copper produced) 0.91 1.00 0.93 0.99 0.96 Adjusted EBITDA1($ millions) 34.7 50.0 41.2 45.8 171.7 |
8,699 8,349 10,595 10,283 37,926 4,464 2,213 4,305 3,605 14,587 298 248 336 322 1,204 278 235 283 287 1,083 276 235 284 284 1,079 3,032 2,583 3,090 3,086 2,949 1.51 1.68 1.77 1.72 1.67 1.04 0.71 1.03 0.88 0.92 42.0 39.9 46.5 44.2 43.3 94.5 95.8 95.6 95.6 95.4 70.8 60.1 66.5 65.3 66.4 78.7 84.1 78.9 79.7 80.1 14,229 13,762 17,495 17,219 62,705 27.7 27.5 27.5 27.1 27.4 555 549 567 540 553 4,168 2,081 3,953 3,346 13,548 48.6 48.3 49.4 48.9 48.8 45.17 43.38 37.74 46.87 42.72 8,368 8,029 10,189 9,884 36,470 0.95 0.98 0.36 0.63 0.69 11.7 11.7 25.5 25.9 74.8 |
2 Adjustments based on final settlements will be made in the future quarters.
3 Grade and recoveries were estimated based on concentrate production and may be impacted by settlements from prior production periods.
Operational and C1 Cash Costs[1] Update
Copper production was 41% higher in Q4 2021 than in Q4 2020 as a result of mine expansion with the completion of the one-way haul ramp to increase mining rates, utilize excess mill capacity and achieve throughput of 3,863 tpd, and higher grades (1.92% versus 1.72%). Mining activity increased in the high-grade copper areas, San Jose and Calicanto zones. Q4 2021 was a record copper production quarter, beating the previous record set in Q3 2021.
2021 production was 42% higher than the same period last year primarily attributed to the mine expansion to higher mining rates and higher grades (2021 – 1.86% versus 2020 – 1.67%) and improved recoveries (2021 – 96.4% versus 2020 95.4%). Moreover, 2020 YTD production was slightly impacted by temporary restrictions as result of the COVID-19 government mandated decree.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 20
Q4 2021 C1 cash costs[1] was higher than the same period last year due to Q4 2021 including a $0.29 per payable pound impact of the 50% Silver Stream Agreement and higher production cost attributed to higher contactors' costs for higher operating development metres executed.
2021 C1 cash costs[1] was higher than the same period last year due to 2021 including a $0.30 per payable pound impact of the 50% Silver Stream Agreement. The Silver Stream Agreement impact on 2021 C1 cash costs[1] was partially offset by significantly higher copper production.
Investing Activities
Sustaining capital[1] and expansionary capital[1] spending at Cozamin totalled $13.9 million for Q4 2021. Sustaining capital[1] was related to mine development and mine equipment. Capital spending included $5.4 million of expansionary capital[1] on the filtered (dry stack) tailings and pastefill facility.
Capitalized exploration expenditures totalled $1.5 million for Q4 2021. This was spent primarily on Mineral Resource drilling of the Mala Noche Vein and Mala Noche Footwall Zone, associated with stepping out from regions of Inferred Mineral Resource category of the Mineral Resource estimate with three surface rigs.
| ($ millions) | Q4 2021 | Q4 2020 | 2021 | 2020 | ||
|---|---|---|---|---|---|---|
| Sustaining capital1 | 8.5 | 6.8 | 25.3 | 21.3 | ||
| Expansionary capital1 | 5.4 | 0.1 | 13.1 | 1.3 | ||
| Brownfield exploration | 1.5 | 1.1 | 5.3 | 5.2 | ||
| Cozamin segment MPPE additions (per | ||||||
| financials) | 15.4 | 8.0 | 43.7 | 27.8 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 21
Santo Domingo Project – Chile (Copper and Iron)
Investing Activities
The 2020 Technical Report includes a mine life of 18 years, production of ~260 million pounds of copper per year for the first five years plus 3.3 million tonnes of iron with an after-tax net present value ("NPV") (8% discount rate) of approximately $1 billion at $3 copper and an iron price of $80 per tonne (65%, Chile) and Chilean peso foreign exchange (“FX”) rate of 600.
During Q1 2021, Capstone entered into a Share Purchase Agreement (“SPA”) with Korea Chile Mining Corporation, a wholly owned subsidiary of KORES to purchase KORES’ 30% ownership interest in Santo Domingo for $120 million in three cash payments over the next four years. The SPA resulted in the consolidation of 100% ownership in Santo Domingo which provides greater flexibility to Capstone’s strategic process and unencumbers the future placement of the concentrate off-take.
Following consolidation of Capstone’s 100% ownership of the Santo Domingo Project ("Santo Domingo" or “the Project") in Region III, Chile during Q1 2021, the Company continued to advance the Project on several fronts:
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With respect to the reduced initial capital estimate, the Company and its port partner, Puerto Abierto, S.A., a subsidiary of Puerto Ventanas, are executing on early works in the framework agreement. In addition, the Company is advancing the analysis of the pipeline versus rail capital trade-off in which the proposals replace the pipeline capital to become a rail customer. This work is now being done in conjunction with the Mantoverde synergies analysis discussed below.
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With respect to the proposed Transaction with Mantos Copper, scoping level work was performed by the Santo Domingo and Mantos Copper teams starting in late Q4 2021 to identify and refine potential synergies between the Project and the Mantoverde mine (owned 70% by Mantos Copper). Santo Domingo is situated ~35 kilometres northeast of the Mantoverde mine. Significant potential opportunities exist for:
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Infrastructure sharing (including power, water, pipelines, port),
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Transportation synergies for concentrate shipment,
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Potential enabling of product lines (additional iron or cobalt production from Mantoverde, processing oxide ore from Santo Domingo),
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Potential integrated operating approach, and
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Construction synergies (including project teams and camp).
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With respect to potential increases in the Chilean mining royalty tax, Santo Domingo is expected to be protected given the Company retains a foreign investment agreement with the state of Chile, which fell under the provisions of DL600. One of the benefits to the Company of this foreign investment agreement is a tax invariability assurance for a period of 15 years post commercial production.
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Cobalt Feasibility Update: The drilling campaign from Q3 and Q4 of 2021 generated sufficient sample mass for 2022 pilot scale testing of the cobalt recovery process. The first of a total of two stages of the cobalt feasibility engineering work, covering prefeasibility-level activities, started in September and is expected to finalize in March 2022. The scope of work includes parallel execution of different trade-off studies focused on various concentrate oxidation technologies and different options for detailed production scheduling from a geological and mine planning perspective. The engineering work also addresses all relevant ESG aspects early on to assure smooth integration of the selected process route into the more developed copper and iron plant at Minera Santo Domingo. All work is progressing with support of several global and highly qualified consultant and technology providers so that delivery of the overall cobalt feasibility project can stay on track for release in Q4 2022.
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The proposed cobalt recovery process takes advantage of a tailings side-stream containing pyrite laden with ~0.6% cobalt, which will be recovered through conventional processes. The concentrate will be sent to pyrite roasting and solvent extraction followed by crystallization to produce battery grade cobalt sulphate heptahydrate. At an expected 10.4 million pounds of cobalt production per year, this will be one of the largest and lowest cost cobalt producers in the world at C1 cash costs1 after credits of minus $4 per pound. Additional benefits of this project include the production of by-product sulphuric acid from the pyrite roasting process, which can be used for heap or dump leaching to produce low-cost copper cathodes at Santo Domingo, Mantoverde, and elsewhere in the district.
Q4 2021 project development costs related to Early Works as required by the Environmental Permit (RCA) to include flora and fauna rescue, basic and detailed engineering, land tenure costs, the industrial water pipeline and relocation of Regional Highway C-17. During Q3 2021, the Company commenced major earthworks with respect
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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to the C17 highway by-pass road which provides site access, and work on the electrical substation connection. Also, Capstone has begun brownfield expansion drilling between the Santo Domingo and Iris Norte Pits.
| ($ millions) | Q4 2021 | Q4 2020 | 2021 | 2020 |
|---|---|---|---|---|
| Capitalized project costs (on 100% basis)2 | 9.1 | 2.4 | 27.9 | 9.2 |
| Brownfield exploration | 0.4 | — | 2.3 | — |
| Santo Domingo segment MPPE additions (per | ||||
| financials) | 9.5 | 2.4 | 30.2 | 9.2 |
2 $1.4 million was funded by KORES in Q1 2021.
Exploration
| ($millions) | Q4 2021 | Q4 2020 | 2021 | 2020 | ||
|---|---|---|---|---|---|---|
| Greenfield exploration (expensed to income | 1.2 | 1.9 | 3.1 | 3.1 | ||
| statement) | ||||||
| Brownfield exploration (capitalized to mineral | 1.5 | 1.1 | 5.3 | 5.2 | ||
| properties) – Refer to Cozamin section | ||||||
| Brownfield exploration (capitalized to mineral | 0.4 | — | 2.3 | — | ||
| properties)– Refer to Santo Domingo section | ||||||
| Total exploration | 3.1 | 3.0 | 10.7 | 8.3 |
Capstone’s greenfield exploration is predominantly focused on early-stage project generation in the Americas. Active projects include an option agreement with Kootenay Silver Inc. for the Amapa Prospect (Sonora, Mexico), an option agreement with Lara Exploration Ltd. for the Planalto Prospect (Carajas Region, Brazil), and a portfolio of 100% Capstone claims acquired by staking located in Sonora, Mexico. South American exploration is actively searching for new early-stage projects predominantly in Chile, Peru and Brazil.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Outlook – 2022 Guidance
In 2022, Capstone expects to produce between 82,000 and 90,000 tonnes of copper at C1 cash costs[1] of between $1.85 and $2.00 per pound payable copper produced.
| Santo | ||||
|---|---|---|---|---|
| Pinto Valley | Cozamin | Domingo | Total | |
| Production and Cost | ||||
| Copper production (tonnes) | 59,000 - 64,000 | 23,000 - 26,000 | — | 82,000 - 90,000 |
| C1 cash costs1($/pound) | 2.15 - 2.30 | 1.10 - 1.25 | — | 1.85 - 2.00 |
| Capital Expenditure($ millions) | ||||
| Sustaining capital1 | 65 | 27 | — | 92 |
| Capitalized stripping | 5 | — | — | 5 |
| Expansionarycapital1 | 20 | 30 | 45 | 95 |
| Total Capital Expenditure | 90 | 57 | 45 | 192 |
| Exploration($ millions) | ||||
| Brownfield (Cozamin and Santo Domingo) | — | 3 | 2 | 5 |
| Greenfield (Brazil and Chile) | — | — | — | 2 |
| Greenfield(Copper Cities,Arizona) | — | — | — | 7 |
| Total Exploration | — | 3 | 2 | 14 |
2022 production guidance is 4% higher than the 2021 guidance because of higher planned mill throughput at Pinto Valley, supported by the completion of PV3 Optimization phase 1 and 2 projects, and higher planned copper grade at Cozamin. C1 cash costs[1] guidance is 5% higher than the 2021 guidance because of cost inflation and lower by-product credits at Cozamin with focus on copper-rich zones resulting in no zinc production in 2022.
2022 Pinto Valley sustaining capital guidance includes one-off items totalling $25 million related to tailings and water management. Expansionary capital at Pinto Valley includes upgrades to mill motors and grinding circuit cyclones for two of the six grinding lines while Cozamin expansionary capital includes expenditures on the paste backfill and dry stack tailings plant. Santo Domingo capital guidance to be further refined upon closing of the Transaction.
2022 C1 Cash costs[1] guidance assumes $24/oz silver prices and 20:1 Mexican Peso to US dollar foreign exchange rates. Updated guidance for Capstone Copper is expected to be released after the completion of the Transaction.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Liquidity and Financial Position Review Working Capital Working capital was $131.4 million at December 31, 2021 compared with $64.0 million at December 31, 2020, as follows:
| ($ millions) | December 31, 2021 | December 31, 2020 |
|---|---|---|
| Current assets | ||
| Cash and cash equivalents | 262.1 | 56.6 |
| Short-term investments | 2.3 | 3.4 |
| Receivables | 28.5 | 26.7 |
| Inventories | 62.8 | 58.3 |
| Other assets | 5.9 | 12.9 |
| Total current assets | 361.6 | 157.9 |
| Current liabilities | ||
| Accounts payable and accrued liabilities | 97.4 | 74.9 |
| Other liabilities | 132.8 | 19.0 |
| Total current liabilities | 230.2 | 93.9 |
| Working capital | 131.4 | 64.0 |
Cash and cash equivalents increased by $205.5 million from December 31, 2020 to December 31, 2021. Refer to the Statement of Cash Flows within the Company’s consolidated financial statements for further details surrounding the movement in the cash balance. The change in the cash balance is driven by cash flow generation from both mines however also includes the receipt of the $150.0 million upfront payment for the Cozamin Silver Stream and $30.0 million upfront payment for the Santo Domingo Gold Stream Agreement, which were used to make net repayments of $184.9 million on the RCF during Q1 2021.
As at December 31, 2021, the Company held $2.3 million of highly liquid short-term investments in exchange traded funds. Given their liquid nature, management liquidates these short-term investments to meet cash demands on an as-needed basis.
Other assets decreased by $7.0 million primarily due to the receipt of the first $5.0 million consideration on sale of Minto during Q1 2021.
Accounts payable and accrued liabilities increased by $22.5 million primarily due to the $12.9 million withholding taxes on the purchase of KORES' non-controlling interest in Acquisition Co. in March 2021, and also due to the timing of payments at Cozamin and Pinto Valley.
Other liabilities increased by $113.8 million primarily driven by a $43.4 million reclassification of the payable on purchase of KORES' non-controlling interest in Acquisition Co. to current, the increase in the current portion of share-based payment obligations of $41.9 million due to an increase in Capstone’s share price (increase from C$2.38 opening price to C$5.58 closing price as at December 31, 2021), an increase in income taxes payable of $20.3 million driven by higher income, and $6.1 million related to the current portion of the deferred revenue liability as a result of the Cozamin Silver Stream.
Receivable on Sale of Minto
On June 3, 2019, Capstone completed the sale of its 100% interest in the Minto mine to Pembridge Resources PLC (“Pembridge”) for up to $20 million in cash in staged payments (“contingent consideration”), as follows:
- $5 million received on March 30, 2021;
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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$5 million, within 90 days following two consecutive quarters in which the average London Metals Exchange Cash Copper Bid Price at close ("Average LME Price") is greater than $3.00 per pound within the three years following April 1, 2021, received on December 23, 2021; and
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$10 million, within 90 days following two consecutive quarters in which the Average LME Price is greater than $3.50 per pound within the three years following April 1, 2021. $5 million was received on December 30, 2021. An agreement was reached with Pembridge, that the remaining $5 million is to be received on or before January 15, 2023.
As at December 31, 2021, the receivable on sale of Minto was $5.0 million (December 31, 2020 - $14.9 million). As the Average LME Price was greater than $3.50 per pound for two consecutive quarters, the consideration had been valued at $15.0 million. The contingent elements have been removed and the balance is now presented as a receivable on sale of Minto. The remaining $5 million receivable has been classified in other assets as a noncurrent receivable.
Purchase of Non-Controlling Interest
At December 31, 2021, a liability of $81.8 million has been recognized in other liabilities ($43.4 million in current and $38.4 million in non-current) equal to the discounted amount of the remaining $90.0 million to be paid to KORES as part of the agreement to purchase its 30% share of Acquisition Co. The discounted amount of the remaining $90.0 million will be accreted up to its face value at 5% per annum. During the year ended December 31, 2021, $3.0 million of accretion was recorded in other interest expense in the consolidated statements of income.
Credit Facilities
In conjunction with the closing on the Cozamin Silver Stream for $150 million, on February 19, 2021, Capstone amended its RCF to reduce the credit limit from $300 million to $225 million. The maturity date of July 25, 2022 and all other significant terms were unchanged. The facility pricing grid, starting at LIBOR plus 2.5% and increasing to LIBOR plus 3.5% (or an alternative benchmark rate as selected by the administrative agent) based on the total leverage ratio, will remain in effect until maturity.
The interest rate at December 31, 2021 was US LIBOR plus 2.50% (2020 - US LIBOR plus 2.75%) with a standby fee of 0.56% (2020 – 0.62%) payable on the undrawn balance (adjustable in certain circumstances).
As at March 31, 2021, the RCF was fully repaid and Capstone is in a net cash[1] position with nil long-term debt as at December 31, 2021.
The RCF is secured against the present and future real and personal property, assets and undertakings of Capstone (excluding certain assets, which include Acquisition Co., Far West Mining Ltd., Santo Domingo, and Far West Exploration S.A., and subject to certain exclusions for Capstone Mining Chile SpA). The credit facility requires the Company to maintain certain financial ratios relating to debt and interest coverage. Capstone was in compliance with these covenants as at December 31, 2021.
Provisions
Provisions of $161.1 million at December 31, 2021 includes the following:
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$129.2 million for reclamation and closure cost obligations at Capstone’s operating mines;
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$3.7 million related to other long-term provisions at the Cozamin mine; and
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$28.1 million for the long-term portion of the share-based payment obligations associated with the Share Unit Plan. The current portion of the share-based payment obligations of $50.1 million is recorded in other liabilities.
Share-based payment obligations increased by $47.8 million during 2021. The increase was primarily driven by the increase in the Company’s share price during the year and out performance compared to peers.
Precious Metal Streams
Cozamin Silver Stream
On February 19, 2021, the Company entered into a precious metals purchase arrangement with Wheaton whereby Capstone received upfront cash consideration of $150 million against delivery of 50% of the silver
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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production from the Company’s Cozamin mine until 10 million ounces have been delivered, thereafter dropping to 33% of silver production for the remaining life of the mine.
In addition to the upfront payment of $150 million, as silver is delivered under the terms of the arrangement, Capstone receives cash payments equal to 10% of the spot silver price at the time of delivery for each ounce delivered to Wheaton.
The Company recorded the upfront cash consideration received as deferred revenue and recognizes amounts in revenue as silver is delivered under the arrangement. For the period from February 19, 2021 to December 31, 2021, the amount of the deferred revenue liability recognized as revenue was $16.5 million.
Santo Domingo Gold Stream
On April 21, 2021, the Company received an early deposit of $30 million in relation to the precious metals purchase arrangement with Wheaton effective March 24, 2021. Additional deposits of $260 million are to be received over the Santo Domingo construction period, subject to sufficient financing having been obtained to cover total expected capital expenditures and other customary conditions, for total consideration of $290 million (“Deposit”). Wheaton will receive 100% of the gold production from the Company's Santo Domingo development project until 285,000 ounces have been delivered, thereafter dropping to 67% of the gold production.
In addition to the Deposit of $290 million, as gold is delivered under the terms of the arrangement, Capstone receives cash payments equal to 18% of the spot gold price at the time of delivery for each ounce delivered to Wheaton, until the Deposit has been reduced to zero, thereafter increasing to 22% of the spot gold price upon delivery.
The Company recorded the upfront early deposit of $30 million received as deferred revenue and will recognize amounts in revenue as gold is delivered under the arrangement. For the period from April 21, 2021 to December 31, 2021, there was no amortization of the deferred revenue liability recognized as revenue.
The non-current portion of the deferred revenue liability for both stream arrangements on the balance sheet at December 31, 2021 was $165.7 million.
Financial Capability
The Company’s ability to service its ongoing obligations and cover anticipated corporate, exploration and development costs associated with its existing operations is dependent on the Pinto Valley and Cozamin mines generating positive cash flow and available liquidity[1] . Based on reasonable expectations for our operating performance, a net cash[1] balance of $264.4 million, and additional liquidity options available, including the filing of a base shelf prospectus on June 24, 2021 and the undrawn $225 million on the RCF, we believe we have the financial capacity to manage our liquidity for the foreseeable future.
Capital Management
Capstone’s capital management objectives are intended to safeguard the Company’s ability to support its normal operating requirements on an ongoing basis as well as continue the development and exploration of its mineral properties and support any expansion plans. As part of the Company’s treasury policy, the Company will only hold deposits in Canadian Tier 1 banks, International Commercial Banks with a rating of A- or greater, Canadian and US government bonds, or bankruptcy remote treasury market or exchange traded funds of AAA rating.
Hedging
The Company has hedged certain input costs at lower than budget rates:
- Financial hedges were executed on foreign exchange rates to protect approximately half of the Company’s Mexican Peso exposure from August 2020 through December 2021, through Mexican Peso to US dollar exchange rate zero cost collars (being purchased puts and sold calls with offsetting values at inception). The realized gain on these Mexican Peso zero cost collars was $2.6 million for the year ended December 31, 2021.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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- Pinto Valley contracted for fixed diesel prices with a supplier on its expected 2021 and 2022 diesel consumption at $1.76/gallon and $2.13/gallon, respectively. The contracted diesel prices have resulted in cost savings of $6.3 million during the year ended December 31, 2021.
The Company entered into new hedging contracts during Q4 2021:
- Financial hedges were executed on foreign exchange rates to protect approximately 75% of the Company’s budgeted Mexican and Chilean Peso capital and operating cost exposure from January 2022 through December 2022, through Mexican and Chilean Peso to US dollar exchange rate zero cost collars (being purchased puts and sold calls with offsetting values at inception). No realized gains were recognized for the year ended December 31, 2021 on these contracts.
Commitments
Agreements with the Grupo Minera Bacis S.A. de C.V. (“Bacis”)
Under the terms of the December 2003 option agreement with Bacis, Capstone assumed a 100% interest in the Cozamin Mine with a 3% net smelter royalty paid to Bacis on all payable metal sold from production on the property covered by the agreement.
Agreement with Jetti Resources, LLC (“Jetti”)
Under the terms of the 2019 agreement, the Company is required to make quarterly royalty payments to Jetti based on an additional net profits calculation resulting from cathode production at the Pinto Valley mine. The initial term of the agreement is ten years, renewable for 5-year terms thereafter.
Off-take agreements
The Company has a concentrate off-take agreement with a third party whereby it will purchase 100% of the copper concentrate produced by the Cozamin Mine up to December 31, 2022.
The Company has a number of annual and multi-year concentrate off-take agreements with third parties whereby they will purchase the copper concentrate produced by the Pinto Valley Mine.
Capital expenditure contracted for at the end of the reporting period but not yet incurred was $21.5 million (2020 – $14.8 million).
Risks and Uncertainties
For full details on the risks and uncertainties affecting the Company, please refer to the Company’s Annual Information Form ("AIF") (see section entitled “Risk Factors”) for the year ended December 31, 2020. This document is available for viewing on the Company’s website at www.capstonemining.com or on the Company’s profile on the SEDAR website at www.sedar.com.
Mining is inherently dangerous and subject to conditions or events beyond Capstone’s control.
Capstone’s operations are subject to all the hazards and risks normally encountered in the exploration, development, construction, care and maintenance activities and production of copper and other metals, including, without limitation, workplace accidents, fires, wildfires, power outages, labour disruptions, flooding, explosions, cave-ins, landslides, ground or stope failures, tailings dam failures and other geotechnical instabilities, weather events, seismic events, access to water, equipment failure or structural failure, metallurgical and other processing problems and other conditions involved in the mining and processing of minerals, any of which could result in damage to, or destruction of, our mines, mineral properties, plants and equipment, personal injury or loss of life, environmental damage to surrounding land, vegetation other biological and water resources, delays in mining, increased production costs, asset write-downs, monetary losses, legal liability and governmental action. Our mines have large tailings dams which could fail as a result of extreme weather events, seismic activity, or for other reasons. The occurrence of any of these events could result in a prolonged interruption in Capstone’s operations, increased costs for asset protection or care and maintenance activities that would have a material adverse effect on Capstone’s business, financial condition, results of operations and prospects.
Wildfires and inclement weather conditions, whether occurring at Capstone’s sites, adjacent lands, or supplier and downstream sites, may impact our ability to operate, transport or access and supply sites, and increase overall costs or impact Capstone’s financial performance. In severe circumstances, civil authorities may impose
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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evacuation orders. Our sites in Arizona and Mexico are subject to drought conditions and create a higher exposure to wildfire risk.
Pandemics or other public health crises, including the novel coronavirus (COVID-19), could adversely affect our operations and financial position.
The outbreak of COVID-19, and the future emergence and spread of a similar or other infectious diseases and viruses, could have a material adverse effect on global economic conditions and adversely impact our business and operations as well as the operations of our suppliers and service providers, and impact the demand for copper or base metal prices.
The global effects of the outbreak of the COVID-19 virus are still evolving and could have a material effect on Capstone’s overall financial health currently, and in the future, including but not limited to impacts to revenue, earnings and cash flows, increased volatility in financial markets and foreign currency exchange rates. The effects could have a negative impact on copper prices and cause governmental actions to contain the outbreak which may impact our ability to transport or market our concentrate or cause disruptions in our supply chains or interruption of production. Disruptions in the supply chain for critical components for operations or critical equipment and materials for our construction projects may cause operational and project delays which are outside of Capstone’s control. A material spread of COVID-19 or other pathogens of infectious diseases in jurisdictions where we operate could impact our ability to staff operations or cause governmental action to order a suspension of production including but not limited to a subsequent Federal or State Decree for the suspension of mining operations in Mexico or Zacatecas, or a suspension of mining or other activities in the United States or Chile. A reduction in production or other COVID-19 related impacts, including but not limited to, low copper prices could cause us to defer strategic projects or operational plans in order to preserve cash flows. An outbreak of the COVID-19 or other infectious diseases at our operations could cause reputational harm and negatively impact our social licence to operate. This could negatively impact our share price. An outbreak in jurisdictions that we operate in could cause governmental agencies to close for prolonged periods of time causing delays in regulatory permitting processes. The overall global effects, indirect or direct, could cause any of our surety providers to cancel our bonds or call for alternative security including the Minto Metals Corp.. for which Capstone is an Indemnitor. During the pandemic, there has been a significant increase in cybersecurity and other information technology risks due to increased fraudulent activity and the increased number of employees working remotely. A global pandemic could cause temporary closure of businesses in regions that are significantly impacted by health crises, or cause governments to take preventative measures such as the closure of points of entry, including ports and borders. Any government restrictive measures along with market uncertainty could cause an economic slowdown resulting in a decrease in the demand for copper and have a negative impact on base metal prices.
There are risks and uncertainties related to the proposed Transaction, including failure to receive shareholder and other necessary consents and approvals for the Transaction or in certain circumstances, termination of the Transaction.
The completion of the Transaction is subject to a number of conditions precedent, certain of which are outside the control of Capstone, including receipt of the Final Order, the Key Regulatory Approvals and the Key Consents. There can be no certainty, nor can Capstone provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. If the Transaction is not completed, the market price of the Capstone Shares may decline to the extent that the current market price reflects a market assumption that the Transaction will be completed.
Mantos has the right to terminate the Transaction agreement in certain circumstances. Accordingly, there is no certainty, nor can Capstone provide any assurance, that the Transaction Agreement will not be terminated by Mantos before the completion of the Transaction. If the Transaction Agreement is terminated, there is no assurance that an alternative transaction will emerge that is equivalent or superior, to the Transaction. Certain costs related to the Transaction, such as legal, accounting and certain financial advisor fees, must be paid by Capstone even if the Transaction is not completed. Capstone and Mantos are each liable for their own costs incurred in connection with the Transaction. If the Transaction is not completed, Capstone may be required to pay Mantos a Termination Fee. Capstone would be required to pay a Termination Fee of $75 million if the Transaction is terminated in certain circumstances. This Termination Fee may discourage other parties from attempting to
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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acquire Capstone Shares or otherwise making an Acquisition Proposal to Capstone, even if those parties would otherwise be willing to offer greater value to Securityholders than that offered by Mantos under the Transaction.
The pendency of the Transaction could cause the attention of the Capstone’s management to be diverted from the day-to-day operations, and customers or suppliers may seek to modify or terminate their business relationships with Capstone. These disruptions could be exacerbated by a delay in the completion of the Transaction and could have an adverse effect on the business, operating results or prospects of Capstone. Since the Transaction is subject to uncertainty, the employees and officers of Capstone may experience job uncertainty which could adversely impact both companies’ ability to attract and retain key management and personnel. Further uncertainty associated with the Transaction may be experienced by Capstone's third party suppliers, customers and business partners. Such uncertainty could have a material and adverse effect on the current and future operations, and financial conditions for Capstone. If the Transaction is not completed for any reason, Capstone’s business partners may be negatively affected which can affect the current and future business relationships with Capstone.
We may not realize the currently anticipated benefits of the Transaction due to challenges associated with integrating the operations, technologies and personnel of Capstone and Mantos.
The anticipated success of Mantos with respect to the acquisition of Capstone will depend in large part on the success of management of Capstone Copper in integrating the operations, technologies and personnel of Capstone with those of Mantos after the Effective Date. The failure to successfully achieve such integration could result in the failure of Mantos to realize the anticipated benefits of the Arrangement and could impair the results of operations, profitability and financial results of Mantos and Capstone Copper.
The overall integration of the operations, technologies and personnel of Capstone into Mantos may also result in unanticipated operational problems, expenses, liabilities and diversion of management’s time and attention.
We face added risks and uncertainties of operating in foreign jurisdictions, including changes in regulation and policy, and community interest or opposition.
Capstone’s business operates in a number of foreign countries where there are added risks and uncertainties due to the different economic, cultural and political environments. Our mineral exploration and mining activities may be adversely affected by political instability and changes to government regulation relating to the mining industry. Changes in governmental leadership in the US, Chile, and Mexico, could impact Capstone’s operations and local societal conditions. There may be additional risks and uncertainties following the results of the Chilean Presidential, Chamber and Senate elections that took place on November 21, 2021. Other risks of foreign operations include political or social and civil unrest, labour disputes and unrest, invalidation of governmental orders and permits, corruption, organized crime, theft, war, civil disturbances and terrorist actions, arbitrary changes in law or policies of particular countries including nationalization of mines, government action or inaction on climate change, trade disputes, foreign taxation, royalties, price controls, delays in obtaining or renewing or the inability to obtain or renew necessary environmental permits, opposition to mining from local communities and environmental or other non-governmental organizations, social perception impacting our social licence to operate, limitations on foreign ownership, limitations on the repatriation of earnings, limitations on mineral exports and increased financing costs. Local economic conditions, including higher incidences of criminal activity and violence in areas of Mexico can also adversely affect the security of our people, operations and the availability of supplies. Capstone may encounter social and community issues including but not limited to public expression against our activities, protests, road blockages, work stoppages, or other forms of expression, which may have a negative impact on our reputation and operations or projects. Opposition to our mining activities by local landowners, the ejidos, communities, or activist groups may cause significant delays or increased costs to operations, and the advancement of exploration or development projects, and could require Capstone to enter into agreements with such groups or local governments.
In addition, risks of operations in Mexico include extreme fluctuations in currency exchange rates, high rates of inflation, significant changes in laws and regulations including but not limited to tax and royalty regulations, labor regimes, failures of security, policing and justice systems, corruption, and incidents such as hostage taking and expropriation. There are uncertainties regarding Mexico’s recently approved 2022 Economic Package and Tax Reform, that may have an impact on Cozamin’s operations and profitability. Additionally, as a response to the civil unrest in Chile, a referendum for a new Constitution is in progress and may result in a change to the Chilean political regime and mining related regulations including, but not limited to, changes to royalty structures and
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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environmental and community protection requirements. If approved, the proposed royalty bill being discussed by the National Congress of Chile may have an impact on Santo Domingo’s operations and profitability and would have significant negative implications for future investment in the Chilean copper industry more broadly, reducing the attractiveness of new copper projects. Companies with tax stability agreements in place should be protected from the potential new royalty bill. Capstone retains a tax stability agreement with respect to mining royalties which becomes effective post commercial production for a period of 15 years. Certain investment and other criteria need to be met to maintain the tax stability agreement. These risks in Mexico and Chile may limit or disrupt Capstone’s projects, reduce financial viability of local operations, restrict the movement of funds, or result in the deprivation of contract rights or the taking of property by nationalization or expropriation without fair compensation.
Further, there can be no assurance that changes in the government, including but not limited to the recent change in the federal administration of the United States, or laws or changes in the regulatory environment for mining companies or for non-domiciled companies will not be made that would adversely affect Capstone’s business, financial condition, results of operation and prospects. There are uncertainties related to President Biden’s Made in America Tax Plan which proposes corporate tax reforms that may increase Pinto Valley’s future tax obligations.
Differences in interpretation or application of tax laws and regulations or accounting policies and rules and Capstone’s application of those tax laws and regulations or accounting policies and rules where the tax impact to the Company is materially different than contemplated may occur and adversely affect Capstone’s business, financial condition, results of operation and prospects. Capstone is subject to a multitude of taxation regimes and any changes in law, policy or interpretation of law, policy may be difficult to react to in an efficient manner.
Our operations are subject to geotechnical challenges, which could adversely impact our production and
profitability.
No assurances can be given that unanticipated adverse geotechnical and hydrological conditions such as landslides, cave-ins, rock falls, slump, ground or stope failures, tailings storage facility failures or releases and pit wall failures will not occur in the future or that such events will be detected in advance. Due to the age of our mines and more complex deposits, Capstone’s Pinto Valley Mine pit is becoming deeper resulting in higher pitwalls and underground environments at Cozamin Mine are becoming more complex, potentially increasing the exposure to geotechnical instabilities and hydrological impacts. Geotechnical instabilities can be difficult to predict and are often affected by risks and hazards outside of Capstone’s control, such as seismic activity and severe weather events, which may lead to periodic floods, mudslides, wall instability or an underground collapse.
Capstone’s mine sites have multiple active and inactive tailings storage facilities, including upstream raised dams and legacy facilities inherited through acquisition activities. Our tailings storage facilities have been designed by professional engineering firms specializing in this activity. Capstone continues to review and enhance existing practices in line with international best practices; however, no assurance can be given that adverse geotechnical and hydrological events or other adverse events will not occur in the future. There is no guarantee that our existing tailings storage facilities will be sufficient to support operational expansions in which Capstone may have to forgo future operational expansions or invest in new tailings storage facilities in order to safely operate. Tailings storage facilities have the risk of failure due to extreme weather events, seismic activity or for other reasons. The failure of tailings dam facilities or other impoundments could cause severe or catastrophic environmental and property damage or loss of life. Geotechnical or tailings storage facility failures could result in the suspension of our operations, limited or restricted access to sites, government investigations, remediation costs, increased monitoring costs and other impacts, which could result in a material adverse effect on our operational results and financial position.
We may face risks in connection with our Cozamin Silver Stream Agreement with Wheaton.
Our silver stream agreement at Cozamin Mine is subject to pricing risk. Unexpected spikes in silver prices may result in an increase in silver credit payables compared to receivables and the use of hedging mechanisms may not be economical to reduce to such risks. Capstone is required to meet certain completion requirements before December 31, 2023, under the silver stream agreement, namely, Capstone must construct a paste backfill plant where Capstone must produce at least 105,000 cubic metres of suitable paste backfill that is used in the underground operations at Cozamin over a period of 90 consecutive days during which a completion test has been performed. Failure to achieve the foregoing completion requirements will result in a refund from Capstone to Wheaton up to a maximum amount of $13 million.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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We may face risks in connection with our Santo Domingo Gold Stream Agreement with Wheaton.
Capstone’s ability to access upfront cash deposits under the Gold Stream Agreement for our Santo Domingo project is subject to Capstone meeting certain closing conditions under the Gold Stream Agreement, including but not limited to: (a) obtaining all necessary approvals to achieve completion and to operate the mine in accordance with the development plan; (b) entering into material contracts necessary for the construction and development of the mine; and (c) having obtained project financing on terms and conditions that are not reasonably expected to result in an adverse impact and under which all conditions precedent necessary to draw down on such project financing have been satisfied or waived. There is no guarantee Capstone will be able to meet all of the conditions and draw on the funds from Wheaton pursuant to the Gold Stream Agreement. Further, an initial failure to achieve the completion requirements in the Gold Stream Agreement on or before the third anniversary of the agreement date will result in a delay payment. A continued failure to achieve the completion requirements under the Gold Stream Agreement will result in a refund from Capstone to Wheaton.
Surety bonding risks
Capstone secures its obligations for reclamation and closure costs with surety bonds provided by leading global insurance companies in favour of regulatory authorities in Arizona. The regulators could increase Capstone’s bonding obligations for reclamation and closure activities. Further, these surety bonds include the right of the surety bond provider to terminate the relationship with Capstone on providing notice of up to 90 days. The surety bond provider would, however, remain liable to the regulatory authorities for all bonded obligations existing prior to the termination of the bond in the event Capstone failed to deliver alternative security satisfactory to the regulator. Capstone remains an Indemnitor for Minto Metals Corp.’s surety bond obligations in the Yukon and could be liable for the bonded obligations in the event Minto Metals Corp. does not satisfy those obligations or in the event the surety requires additional or alternative security or the regulators require additional bonding amounts and Minto Metals Corp. is unable to satisfy the new requirements.
The sale of our metals is subject to counterparty and market risks.
Capstone enters into concentrate off-take agreements whereby a percentage of planned production of copper concentrate produced from our mines is committed to various external parties throughout the calendar year. If any counterparty to any off-take or forward sales agreement does not honour such arrangement, or experiences an unforeseeable event preventing fulfillment of the contract or should any such counterparty become insolvent, Capstone may incur losses on production already shipped or be forced to sell a greater volume of our production in the spot market, which is subject to market price fluctuations. In addition, there can be no assurance that Capstone will be able to renew any off-take agreement at economic terms, or at all, or that Capstone’s production will meet the qualitative and quantitative requirements under such agreements.
Capstone is subject to fluctuations in the cost of ocean vessel freight, which could result in higher costs. The cost of ocean vessel freight is impacted by numerous factors including but not limited to the supply and demand of bulk and container vessels, the supply and demand of commodities or goods that require shipment via vessel, the cost and availability of fuel, global crisis or political events, and environmental regulations. Capstone may elect from time to time to enter into Contracts of Affreightment to maintain certainty of freight prices for a specific period of time.
Mineral rights or surface rights to our properties or third-party royalty entitlement to our properties could be challenged, and, if successful, such challenges could have a material adverse effect on our production and our business, financial condition, results of operations and prospects.
Title to Capstone’s properties may be challenged or impugned. Our property interests may be subject to prior unregistered agreements or transfers, and title may be affected by undetected defects. Surveys have not been carried out on the majority of our properties and, therefore, in accordance with the laws of the jurisdiction in which such properties are situated, their existence and area could be in doubt.
A claim by a third party asserting prior unregistered agreements on or transfer of any of Capstone’s properties, especially where Mineral Reserves have been located, could result in Capstone losing a commercially viable property. Even if a claim is unsuccessful, it may potentially affect Capstone’s current operations, projects or development properties due to the high costs of defending against the claim and its impact on Capstone’s resources. Title insurance is generally not available for mineral properties and Capstone’s ability to ensure that
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Capstone has obtained a secure claim to individual mineral properties or mining concessions or related royalty rights may be severely constrained. We rely on title information and/or representations and warranties provided by our grantors. If we lose a commercially viable property, such a loss could lower our future revenues or cause Capstone to cease operations if the property represented all or a significant portion of our Mineral Reserves at the time of the loss.
A claim by a third party asserting royalty rights, including, but not limited to claims by royalty holders asserting increased royalty rights on any of Capstone’s properties, could result in Capstone incurring high costs of defending against the claim, and if such claims were successful, such a loss could lower our future revenues or cause Capstone to cease operations if the property represented all or a significant portion of our Mineral Reserves at the time of the loss.
Changes in climate change regulatory regime could adversely affect our business.
Climate change is an international and societal concern. The countries where we operate are signatories of the Paris Agreement, a legally binding international treaty on climate change, and have agreed to reduce Greenhouse Gas (GHG) emissions as indicated in Nationally Determined Contributions (NDC). Capstone's operations produce GHG emissions, through the direct combustion of fossil fuels and indirectly through electricity consumption. Changes in government policies and regulations aimed at mitigating or adapting to climate change could result in increased costs, and therefore, decreased profitability at some of our operations or projects.
Changes in government policies and regulations aimed at mitigating climate change might include limiting the amount of GHG emissions we can produce, requiring us to look for alternative energy sources. Some risks related to this are, increased competition for renewable energy, which could impact costs of acquiring it or reduce the availability. Our ability to shift our energy mix toward renewables depends in part on our countries of operation investing in renewable power generation. Regulation specific to GHG emissions and energy efficiency is evolving and varies by jurisdiction. Carbon-pricing mechanisms may be introduced in the jurisdictions we operate or conduct business. Other changes in government regulation aimed at adapting to climate change such as water scarcity in our regions of operation may result in limited access to water sources due to increased regulation, impacting our ability to acquire the water needed for our operations. New legislation and increased regulation could impose costs on our operations, customers, and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs to comply with such regulations. Capstone monitors the evolving regulation landscape and engages its local legal counsel to provide updates on regulatory developments. The implementation of regulations and carbon-pricing mechanisms aimed at reducing the effects of climate change could impact our ability to pursue future opportunities, or maintain our existing operations, which could have an adverse effect on our business. The Company may decide to pursue carbon reduction strategies which could result in higher operational costs or increased capital outlays.
Our operations will be adversely affected if we fail to maintain satisfactory labour relations.
The majority of our workforce is not unionized with the exception of approximately 399 of the hourly employees at the Pinto Valley Mine which are represented by six unions, governed by one collective bargaining agreement negotiated by the United Steelworkers Union which is in effect until May 29, 2022. Additional groups of non-union employees may seek union representation in the future. Further, relations with employees may be affected by changes in the scheme of labour relations that may be introduced by the relevant governmental authorities in jurisdictions where Capstone conducts business. Changes in such legislation or otherwise in our relationship with our employees may result in higher ongoing labour costs, employee turnover, strikes, lockouts or other work stoppages, any of which could have a material adverse effect on our business, results of operations and financial condition.
The price of Common Shares is volatile.
Publicly quoted securities are subject to a relatively high degree of price volatility. It should be expected that continued fluctuations in price will occur, and no assurances can be made as to whether the share prices will increase or decrease in the future. In recent years, the securities markets in Canada have experienced a high level of price and volume volatility, and the market price of many companies, particularly those considered exploration or development stage companies, have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. The factors influencing such volatility include macroeconomic developments in North America and globally, and
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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market perceptions of the attractiveness of particular industries. The price of the Common Shares is also likely to be significantly affected by short-term changes in precious metal prices or other mineral prices, the results of further exploration activities, currency exchange fluctuations and Capstone’s financial condition or results of operations as reflected in its earnings reports. Other factors unrelated to the performance of Capstone that may have an effect on the price of the Common Shares include the following:, the extent of analyst coverage available to investors concerning the business of Capstone may be limited if investment banks with research capabilities do not follow Capstone’s securities; lessening in trading volume and general market interest in Capstone’s securities may affect an investor’s ability to trade significant numbers of securities of Capstone; and a substantial decline in the price of the securities of Capstone that persists for a significant period of time could cause Capstone’s securities to be delisted from an exchange, further reducing market liquidity.
Securities class-action litigation often has been brought against companies following periods of volatility in the market price of their securities. Capstone may in the future be the target of similar litigation. Securities litigation could result in substantial costs and damages and divert management’s attention and resources.
There is no assurance of a sufficient liquid trading market for Common Shares in the future.
Shareholders of Capstone may be unable to sell significant quantities of Common Shares into the public trading markets without a significant reduction in the price of their Common Shares, or at all. There can be no assurance that there will be sufficient liquidity of Common Shares on the trading market, and that Capstone will continue to meet the listing requirements of the exchange on which Common Shares are listed.
Capstone has outstanding Common Share equivalents which, if exercised, could cause dilution to existing shareholders.
The exercise of any of stock options, other share-based compensation and share purchase warrants and the subsequent resale of such Common Shares in the public market could adversely affect the prevailing market price and Capstone’s ability to raise equity capital in the future at a time and price which it deems appropriate. Capstone may also enter into commitments in the future which would require the issuance of additional Common Shares and Capstone may grant additional share purchase warrants and stock options. Any share issuances from Capstone’s treasury will result in immediate dilution to existing shareholders’ percentage interest in Capstone.
Capstone has not paid dividends and may not pay dividends in the foreseeable future.
Payment of dividends on Common Shares is within the discretion of the Capstone board and will depend upon Capstone’s future earnings if any, its capital requirements and financial condition, and other relevant factors. Capstone anticipates that all available funds will be invested to finance the growth of its business for the foreseeable future.
Sales by existing shareholders can reduce share prices.
Sales of a substantial number of Common Shares in the public market could occur at any time. These sales, or the market perception that the holders of a large number of Common Shares intend to sell Common Shares, could reduce the market price of the Common Shares. If this occurs and continues, it could impair the Company’s ability to raise additional capital through the sale of securities
Concentration of Share Ownership of Capstone Copper
As at the date hereof, Orion Fund JV Limited, Orion Mine Finance (Master) Fund I-A LP, Orion Mine Finance Fund II LP (collectively, “ Orion Mine Finance ”) collectively own approximately [32.35%] of the outstanding common shares in the capital of Capstone Copper (“ Common Shares ”) and Hadrian Capital Partners Inc. owns approximately [14.65%] of the outstanding Common Shares. As long as these shareholders maintain their significant positions in Capstone Copper, they will have the ability to exercise influence with respect to the affairs of Capstone Copper and significantly affect the outcome of matters upon which shareholders are entitled to vote. Furthermore, there is a risk that Capstone Copper’s securities are less liquid and trade at a relative discount compared to circumstances where these persons did not have the ability to influence or determine matters affecting Capstone Copper. Moreover, there is a risk that their significant interests in Capstone Copper discourages transactions involving a change of control of Capstone Copper, including transaction in which an investor, as a holder of Capstone Copper’s securities, would otherwise receive a premium for its Capstone Copper’s securities over the then-current market price.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Transactions with Related Parties
As described in the Nature of Business section, Capstone has related party relationships, as defined by IFRS, with its key management personnel. On March 24, 2021, Capstone purchased the 30% ownership interest in Santo Domingo that had been held by KORES. During Q2 2021, KORES sold all its previously held Capstone common shares.
Related party transactions and balances are disclosed in the consolidated financial statements for the year ended December 31, 2021.
Off Balance Sheet Arrangements
As at December 31, 2021, the Company had no off-balance-sheet arrangements other than the following:
-
those disclosed under Commitments in the consolidated financial statements for the year ended December 31, 2021;
-
capital expenditure commitments totalling $21.5 million;
-
the indemnification for Minto as disclosed under Other Assets in the consolidated financial statements for the year ended December 31, 2021;
-
five surety bonds totalling $168.8 million; and
-
the guarantee provided to the Chilean Internal Revenue Service for the value-added taxes claimed during the year ended December 31, 2021.
Accounting Changes
On August 27, 2020, an amendment to IFRS 9, IBOR Reform and its Effect on Financial Reporting, was issued and became effective January 1, 2021. The Company has assessed the impact of the amendment on its adoption effective January 1, 2021 and determined it does not currently have a significant effect on the Company’s financial statements.
In May 2020, the International Accounting Standards Board ("IASB") issued an amendment to IAS 16, Property, Plant and Equipment - Proceeds before Intended Use. The amendment prohibits deducting from the cost of property, plant and equipment amounts received from selling items produced while preparing the asset for its intended use. Instead, a company will recognize such sale proceeds and related cost in the consolidated statements of income (loss). The amendment will become effective January 1, 2022. The Company is assessing the impact of the amendment and does not expect it to have a significant effect on the Company’s financial statements.
In May 2021, the International Accounting Standards Board issued Deferred Tax related to Assets and Liabilities arising from a Single Transaction, which amended IAS 12 Income Taxes. The amendments will become effective January 1, 2023. The Company is assessing the impact of the amendment and does not expect it to have a significant effect on the Company’s financial statements.
Alternative Performance Measures
Alternative performance measures are furnished to provide additional information. These non-GAAP performance measures are included in this MD&A because these statistics are key performance measures that management uses to monitor performance, to assess how the Company is performing, and to plan and assess the overall effectiveness and efficiency of mining operations. These performance measures do not have a standard meaning within IFRS and, therefore, amounts presented may not be comparable to similar data presented by other mining companies. These performance measures should not be considered in isolation as a substitute for measures of performance in accordance with IFRS.
Some of these alternative performance measures are presented in Highlights and discussed further in other sections of the MD&A. These measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 35
asset impairment charges, individually significant gains and losses from sales of assets, share based compensation, unrealized gains or losses, and certain items outside the control of management. These items may not be non-recurring. However, excluding these items from GAAP or Non-GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these Non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.
C1 Cash Costs Per Payable Pound of Copper Produced
C1 cash costs per payable pound of copper produced is a measure reflective of operating costs per unit. C1 cash costs is calculated as cash production costs of metal produced net of by-product credits and is a key performance measure that management uses to monitor performance. Management uses this measure to assess how well the Company’s producing mines are performing and to assess overall efficiency and effectiveness of the mining operations and assumes that realized by-product prices are consistent with those prevailing during the reporting period.
All-in Sustaining Costs Per Payable Pound of Copper Produced
All-in sustaining costs per payable pound of copper produced is an extension of the C1 cash costs measure discussed above and is also a key performance measure that management uses to monitor performance. Management uses this measure to analyze margins achieved on existing assets while sustaining and maintaining production at current levels. Consolidated All-in sustaining costs includes Corporate general and administrative costs.
Net debt / Net cash
Net debt / Net cash is a performance measure used by the Company to assess its financial position and is composed of Long-term debt (excluding deferred financing costs), Cash and cash equivalents and Short-term investments.
Available Liquidity
Available liquidity is a performance measure used by the Company to assess its financial position and is composed of RCF credit capacity, Long term debt (excluding deferred financing costs), Cash and cash equivalents and Short-term investments.
Operating Cash Flow before Changes in Working Capital per Common Share
Operating Cash Flow before changes in working capital per common share is a performance measure used by the Company to assess its ability to generate cash from its operations, while also taking into consideration changes in the number of outstanding shares of the Company.
Adjusted Net Income
Adjusted net income is net income attributable to shareholders as reported, adjusted for certain types of transactions that in our judgment are not indicative of our normal operating activities or do not necessarily occur on a regular basis.
EBITDA
EBITDA is net income attributable to shareholders before net finance expense, tax expense, and depletion and amortization.
Adjusted EBITDA
Adjusted EBITDA is EBITDA before the pre-tax effect of the adjustments made to adjusted net income (above) as well as certain other adjustments required under the Company’s RCF agreement in the determination of EBITDA for covenant calculation purposes.
The adjustments made to Adjusted net income and Adjusted EBITDA allow management and readers to analyze our results more clearly and understand the cash generating potential of the Company.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Property Cost per Tonne Milled
Property cost per tonne milled is a key performance measure that management uses to monitor performance. Management uses this measure to assess how well the Company’s producing mines are performing and to monitor costs and assess overall efficiency and effectiveness of the mining operations.
Sustaining Capital
Sustaining capital is expenditures to maintain existing operations and sustain production levels. A reconciliation to GAAP segment MPPE additions is included within the mine site sections of this document.
Expansionary Capital
Expansionary capital is expenditures to increase current or future production capacity, cash flow or earnings potential. A reconciliation to GAAP segment MPPE additions is included within the mine site sections of this document.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 37
Breakdown of C1 Cash Costs and All-in Sustaining Cost Per Pound of Payable Copper Produced
Three Months Ended December 31, 2021 and 2020
| Q4 2021 | Q4 2021 | Q4 2021 | Q4 2020 | Q4 2020 | |
|---|---|---|---|---|---|
| Pinto Valley Cozamin |
Total | Pinto Valley Cozamin |
Total | ||
| Payable copper produced (000s pounds) ($ millions) Production costs of metal produced (per financials) Transportation cost to point of sale Inventory reversal (write-down) Realized gain on Mexican Peso derivatives Inventory working capital adjustments |
35,826 13,945 69.1 17.5 (9.7) (1.3) 0.3 — — (0.6) 2.1 (0.5) |
49,771 86.6 (11.0) 0.3 (0.6) 1.6 76.9 0.58 0.76 0.21 1.55 (0.20) 0.37 1.72 0.05 0.01 0.39 0.02 |
32,942 9,884 55.6 13.7 (5.1) (1.0) (0.3) — — — 4.2 0.3 |
42,826 69.3 (6.1) (0.3) — 4.5 |
|
| Cash production costs of metal produced ($/pound) Production costs Mining Milling/Processing G&A C1P sub-total By-product credits Treatment and sellingcosts |
61.8 15.1 0.56 0.64 0.96 0.26 0.21 0.19 |
54.4 13.0 0.51 0.77 0.95 0.32 0.19 0.22 |
67.4 0.57 0.80 0.20 |
||
| 1.73 1.09 (0.12) (0.39) 0.39 0.29 |
1.65 1.31 (0.09) (0.97) 0.44 0.29 |
1.57 (0.29) 0.40 |
|||
| C1 cash cost($/pound) | 2.00 0.99 |
2.00 0.63 |
1.68 |
||
| 0.02 0.13 — 0.03 0.33 0.58 0.02 — — 0.01 0.01 0.01 |
0.01 0.13 0.13 — 0.31 0.66 0.01 — |
0.04 0.10 0.39 0.01 0.01 0.01 0.08 |
|||
| ($/pound) | |||||
| Royalties Production-phase capitalized stripping / Mineralized drift Sustaining capital Sustaining leases Accretion of reclamation obligation Amortization of reclamation asset Corporate G&A, excluding depreciation |
|||||
— 0.01 0.13 0.61 2.33 |
0.01 0.01 0.01 0.03 |
||||
| All-in sustaining cost adjustments All-in sustaining cost ($/ pound) |
0.38 0.76 2.38 1.75 |
0.48 0.85 |
0.64 |
||
| 2.48 1.48 |
2.32 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 38
Twelve Months Ended December 31, 2021 and 2020
| 2021 | 2021 | 2021 | 2020 | 2020 | |
|---|---|---|---|---|---|
| Pinto Valley Cozamin |
Total | Pinto Valley Cozamin |
Total | ||
| Payable copper produced (000s pounds) ($ millions) Production costs of metal produced (per financials) Transportation cost to point of sale Inventory (write-down) reversal Realized gain on Mexican Peso derivatives Inventory working capital adjustments |
128,794 51,706 269.4 65.0 (28.1) (4.3) — — — (2.6) (0.9) (0.4) |
180,500 334.4 (32.4) — (2.6) (1.3) 298.1 0.60 0.84 0.22 1.66 (0.20) 0.35 1.81 0.05 0.04 0.38 0.01 |
114,978 36,471 235.5 50.4 (21.1) (3.1) 0.6 — — — 5.4 (1.6) |
151,449 285.9 (24.2) 0.6 — 3.8 |
|
| Cash production costs of metal produced ($/pound) Production costs Mining Milling/Processing G&A C1P sub-total By-product credits Treatment and sellingcosts |
240.4 57.7 0.57 0.66 1.07 0.27 0.23 0.19 |
220.4 45.7 0.59 0.75 1.12 0.30 0.21 0.21 |
266.1 0.63 0.92 0.21 |
||
| 1.87 1.12 (0.10) (0.45) 0.39 0.29 |
1.92 1.26 (0.14) (0.85) 0.43 0.28 |
1.76 (0.31) 0.39 |
|||
| C1 cash cost ($/pound PRODUCED) |
2.16 0.96 |
2.21 0.69 |
1.84 |
||
| 0.01 0.13 0.05 0.04 0.33 0.45 0.02 — — 0.01 0.01 0.01 |
0.01 0.10 0.09 — 0.26 0.58 0.01 — |
0.03 0.07 0.33 0.01 0.01 0.03 0.08 |
|||
| ($/pound) | |||||
| Royalties Production-phase capitalized stripping / Mineralized drift Sustaining capital Sustaining leases Accretion of reclamation obligation Amortization of reclamation asset Corporate G&A, excluding depreciation |
|||||
0.01 0.01 0.10 0.60 2.41 |
0.01 0.01 0.01 0.03 |
||||
| All-in sustaining cost adjustments All-in sustaining cost ($/ pound PRODUCED) |
0.42 0.64 2.58 1.60 |
0.39 0.73 |
0.56 |
||
| 2.60 1.42 |
2.40 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
Page 39
Reconciliation of Net debt / Net cash
| ($ millions) | December 31, 2021 December 31, 2020 |
|---|---|
| Long term debt (per financials), excluding deferred financing costs of nil and $1.7 million Less: Cash and cash equivalents (per financials) Short term investments (per financials) |
— (184.9) 262.1 56.6 2.3 3.4 |
| Net cash/(debt) | 264.4 (124.9) |
Reconciliation of Available Liquidity
| ($ millions) | December 31, 2021 December 31, 2020 |
|---|---|
| Revolving credit facility capacity | 225.0 300.0 — (184.9) |
| Long term debt (per financials), excluding deferred financing costs of nil and $1.7 million Cash and cash equivalents (per financials) Short term investments(per financials) |
|
| 225.0 115.1 262.1 56.6 2.3 3.4 |
|
| Available liquidity | 489.4 175.1 |
Reconciliation of Cash Flow from Operating Activities per Common Share
| ($ millions,except share andper share amounts) | Q4 2021 Q4 2020 2021 2020 |
|---|---|
| Cash flow from operating activities (per financials) |
94.5 67.4 553.3 147.2 |
| Weighted average common shares - basic (per financials) |
407,588,618396,658,829405,800,210393,857,183 |
| Cash flow from operating activitiesper share | 0.23 0.17 1.36 0.37 |
Reconciliation of Operating Cash Flow before Changes in Working Capital per Common Share
| ($ millions,except share andper share amounts) | Q4 2021 | Q4 2020 | 2021 | 2020 | |
|---|---|---|---|---|---|
| Operating cash flow (per financials) | 94.5 | 67.4 | 553.3 | 147.2 | |
| Adjustment for changes in working capital (per | |||||
| financials) | 4.8 | (2.4) | (21.8) |
(11.6) |
|
| Other non-cash changes2 | 5.6 | 0.3 | 24.8 | (5.3) | |
| Operating cash flow before changes in | |||||
| working capital1,2 | 104.9 | 65.3 | 556.3 | 130.3 | |
| Weighted average common shares - basic (per | |||||
| financials) | 407,588,618 | 396,658,829 | 405,800,210 | 393,857,183 | |
| Operating cash flow before changes in | |||||
| working capital1 per share($) | 0.26 | 0.16 | 1.37 | 0.33 |
2 Certain of prior period comparative figures have been reclassified to conform with the current year's presentation
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Reconciliation of Adjusted Net Income
| ($ millions,except share andper share amounts) | Q4 2021 Q4 2020 2021 2020 |
|---|---|
| Net income (per financials) | 41.4 27.6 252.9 12.4 1.7 0.3 2.0 (0.7) 0.3 (2.9) 2.5 (2.5) 27.0 16.3 74.0 27.0 0.1 3.2 0.6 (0.2) 3.6 — 3.8 — — (3.4) (5.1) (5.3) — 0.3 — 0.3 — — (92.4) — 0.1 — 1.1 — 0.1 0.2 0.4 0.6 — — — (0.8) (1.1) (6.0) 1.8 (4.4) |
| Inventory write-down - production costs | |
| Unrealized loss (gain) on derivative contracts Share-based compensation expense Unrealized foreign exchange loss (gain) Other expense - non-recurring fees Change in fair value of contingent receivable (RE:Minto) (Gain) loss on disposal of assets Reversal of impairment on mineral properties (RE: Santo Domingo) Non-recurring fees on streaming transactions G&A - care and maintenance Insurance proceeds received Tax effect on the above adjustments |
|
| Adjusted net income | 73.2 35.6 241.6 26.4 73.2 35.6 242.1 26.4 — — (0.5) — |
| Adjusted net income attributable to: | |
| Shareholders of Capstone Mining Corp. Non-controlling interests |
|
| 73.2 35.6 241.6 26.4 407,588,618396,658,829405,800,210393,857,183 |
|
| Weighted average common shares - basic (per financials) |
|
| Adjusted net income attributable to shareholders of Capstone Mining Corp. per common share - basic ($) |
0.18 0.09 0.60 0.07 |
| Weighted average common shares - diluted (per financials) |
416,178,876396,658,829414,093,484398,657,026 0.18 0.09 0.58 0.07 |
| Adjusted net income attributable to shareholders of Capstone Mining Corp. per common share - diluted($) |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Reconciliation of Adjusted EBITDA
| ($ millions) | Q4 2021 | Q4 2020 | 2021 | 2020 | |
|---|---|---|---|---|---|
| Net income(per financials) | 41.4 | 27.6 | 252.9 | 12.4 | |
| Net finance costs | 6.3 | 3.2 | 18.7 | 14.8 | |
| Taxes | 15.7 | 4.3 | 80.9 | 13.4 | |
| Depletion and amortization | 24.7 | 20.4 | 93.2 | 83.2 | |
| EBITDA | 88.1 | 55.5 | 445.7 | 123.8 | |
| Share-based compensation expense | 27.0 | 16.3 | 74.0 | 27.0 | |
| Inventory write-down - production costs | 1.7 | 0.3 | 2.0 | (0.7) | |
| Unrealized loss (gain) on derivative contracts | 0.3 | (2.9) | 2.5 |
(2.5) | |
| (Gain) loss on disposal of assets | — | 0.3 | — | 0.3 | |
| Unrealized foreign exchange loss (gain) | 0.1 | 3.2 | 0.6 | (0.2) | |
| Other expense - non-recurring fees | 3.6 | 3.8 | |||
| Unrealized revenue adjustment | (6.5) | (5.8) |
4.9 |
(2.4) | |
| Insurance proceeds received | — | — | — | (0.8) | |
| Reversal of impairment on mineral properties | — | — | (92.4) | — |
|
| (RE: Santo Domingo) | |||||
| Amortization of deferred revenue - non-cash | (1.1) | — |
(4.9) | — |
|
| financing component | |||||
| Non-recurring financing fees on streaming | 0.1 | — | 1.1 | — | |
| transactions | |||||
| Change in fair value of contingent receivable | — | (3.4) | (5.1) |
(5.3) |
|
| (RE: Minto) | |||||
| Adjusted EBITDA | 113.3 | 63.5 | 432.2 | 139.2 | |
| Adjusted EBITDA by mine | |||||
| Pinto Valley | 74.3 | 45.0 | 281.0 | 82.5 | |
| Cozamin | 45.8 | 25.9 | 171.7 | 74.8 | |
| Other | **(6.8) ** | (7.4) |
**(20.5) ** |
(18.1) |
|
| Adjusted EBITDA | 113.3 | 63.5 | 432.2 | 139.2 |
Amortization of deferred revenue – non-cash financing component has been adjusted for, starting Q2 2021, to align with how EBITDA is determined for Capstone’s RCF covenant calculations. Non-cash financing for deferred revenue is a non-cash interest component on the amortization of deferred revenue. No comparative amounts are required to be restated as the streams are 2021 transactions only .
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Property Cost per Tonne Milled
| ($ millions,except as noted) | Q4 2021 Pinto Valley Cozamin 5,381 355 69.1 17.5 (9.7) (1.3) 0.3 — — (0.6) 2.1 (0.5) 61.8 15.1 0.2 0.4 (2.7) — 0.5 (0.1) 59.8 15.4 11.14 43.79 |
Q4 2020 Pinto Valley Cozamin 5,259 284 55.6 13.7 (5.1) (1.0) (0.3) — — — 4.2 0.3 54.4 13.0 4.1 0.2 (2.7) — (0.3) 0.1 55.5 13.3 10.56 46.87 |
2021 Pinto Valley Cozamin 19,601 1,359 269.4 65.0 (28.1) (4.3) — — — (2.6) (0.9) (0.4) 240.4 57.7 8.9 1.9 (11.8) — 0.8 (0.1) 238.3 59.5 12.16 43.87 |
2020 |
|---|---|---|---|---|
| Pinto Valley Cozamin |
Pinto Valley Cozamin |
|||
| Tonnes of mill feed (000s) Production costs of metal produced (per financials) Transportation cost to point of sale Inventory reversal (write- down) Realized gain on derivative contract Inventory working capital adjustments |
5,381 355 69.1 17.5 (9.7) (1.3) 0.3 — — (0.6) 2.1 (0.5) |
19,674 1,079 235.5 50.4 (21.1) (3.1) 0.6 — — — 5.4 (1.6) |
||
| Cash production costs of metal produced Deferred Stripping/ Mineralized Drift costs Cathode costs Stockpile movement |
61.8 15.1 0.2 0.4 (2.7) — 0.5 (0.1) |
220.4 45.7 10.3 0.2 (8.7) — 0.1 0.2 |
||
| Total property costs Property cost per tonne milled ($) |
59.8 15.4 |
222.1 46.1 |
||
| 11.29 42.72 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Additional Information and Reconciliations
Sales from Operations
| 2021 2020 |
|
|---|---|
| Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total |
|
| Copper (000 pounds) Pinto Valley Cozamin |
38,584 30,101 26,367 32,976 128,028 21,407 29,884 29,859 29,737 110,887 10,581 13,048 13,203 13,858 50,690 8,978 7,987 9,986 9,597 36,548 |
| Total | 49,165 43,149 39,570 46,834 178,718 30,385 37,871 39,845 39,334 147,435 |
| Zinc (000 pounds) Cozamin Lead (000 pounds) Cozamin Molybdenum (tonnes) Pinto Valley Silver (000s ounces) Cozamin Pinto Valley |
2,110 1,789 505 386 4,790 3,013 2,318 3,400 3,198 11,929 302 82 — (1) 383 1,193 74 326 468 2,061 — — — — — 16 12 — — 28 309 355 363 399 1,426 291 248 302 296 1,137 86 55 57 72 270 56 74 67 62 259 |
| Total | 395 410 420 471 1,696 347 322 369 358 1,396 |
| Gold (ounces) Pinto Valley Cozamin |
630 156 369 537 1,692 1,001 1,942 1,575 462 4,980 1 — — — 1 4 — 2 — 6 |
| Total | 631 156 369 537 1,693 1,005 1,942 1,577 462 4,986 |
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Continuity Schedule of Concentrate and Cathode Inventories
| Pinto Valley Cozamin* |
|
|---|---|
| Copper (dmt) Cathode (tonnes) Molybdenum (dmt) Copper (dmt) Zinc (dmt) Lead (dmt) |
|
| Dec. 31, 2019 Production Sales |
3,682 205 9 2,315 172 325 45,526 484 16 14,229 4,168 545 (39,362) (342) (15) (15,407) (3,407) (869) |
| Mar. 31, 2020 Production Sales |
9,846 347 10 1,137 933 1 57,232 505 2 13,761 2,081 86 (54,815) (644) (12) (14,148) (2,717) (82) |
| Jun. 30, 2020 Production Sales |
12,263 208 — 750 297 5 49,402 652 — 17,495 3,954 262 (54,881) (646) — (17,326) (3,919) (258) |
| Sep. 30, 2020 Production Sales |
6,784 214 — 919 332 9 61,900 624 — 17,219 3,344 377 (54,170) (804) — (16,939) (3,662) (338) |
| Dec. 31, 2020 Production Sales |
14,514 34 — 1,199 14 48 63,935 527 — 19,897 2,526 213 (71,056) (485) — (19,779) (2,306) (236) |
| Mar. 31, 2021 Production Sales |
7,393 76 — 1,317 234 25 49,738 497 — 23,583 1,777 55 (53,236) (502) — (23,761) (2,000) (67) |
| Jun. 30,2021 | 3,895 71 — 1,139 11 13 |
| Production Sales |
46,553 538 — 23,792 727 — (46,071) (443) — (23,491) (644) — |
| Sep. 30,2021 | 4,377 166 — 1,440 94 13 |
| Production Sales |
64,133 621 33 24,379 892 27 (59,016) (666) — (25,054) (478) — |
| Dec. 31,2021 | 9,494 121 33 765 508 40 |
- Reported copper concentrate production at Pinto Valley noted in the “Pinto Valley Mine” section of this document includes copper produced in concentrate and in circuit and therefore differs from the copper concentrate production amount noted above.
Capstone’s mining operations at Pinto Valley and Cozamin are not subject to any seasonality with respect to shipping and copper production does not vary significantly from quarter to quarter. As a result, the reported sales volumes are not expected to vary significantly from production levels in each quarter.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Outstanding Share Data and Dilution Calculation
The Company is authorized to issue an unlimited number of common shares, without par value. The table below summarizes the Company’s common shares and securities convertible into common shares as at February 15, 2022:
| Issued and outstanding | 413,766,310 |
|---|---|
| Share options outstanding at a weighted average exercise price of $1.17 | 10,253,690 |
| Treasuryshare units outstandingat a weighted average exerciseprice of $4.13 | 1,093,283 |
| Fullydiluted | 425,113,283 |
Under the Treasury Share Unit Plan, the Company has the ability to settle the units in shares up to 3.5% of the total issued and outstanding common shares of Capstone.
Management’s Report on Internal Controls
Disclosure Controls and Procedures (“DC&P”)
Capstone’s management, with the participation of its President & Chief Executive Officer and Senior Vice President & Chief Financial Officer, has designed DC&P which provide reasonable assurance that material information related to Capstone is identified and communicated in a timely manner. Management concluded the Company's DC&P were effective as at December 31, 2021.
Internal Control Over Financial Reporting (“ICFR”)
Capstone’s management, with the participation of its President & Chief Executive Officer and Senior Vice President & Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”). Any system of ICFR, no matter how well designed, has inherent limitations and cannot provide absolute assurance that all misstatements and instances of fraud, if any, within the Company have been prevented or detected. Capstone’s ICFR is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The Company uses the 2013 Internal Control – Integrated Framework published by The Committee of Sponsoring Organizations of the Treadway Commission (“2013 COSO framework”) as the basis for assessing its ICFR.
Management performed an evaluation of Capstone’s ICFR and concluded that, as at December 31, 2021, ICFR were designed and operating effectively so as to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with International Financial Reporting Standards (“IFRS”).
In March 2020, as a result of the COVID-19 pandemic, the Company supported working from home for the majority of the finance workforce, with working from the office or mine site where necessary and in accordance with the Company’s strict COVID-19 safety measures. Although this continued through the financial close period, there were no changes in the Company’s ICFR that materially affected, or are reasonably likely to materially affect, ICFR during the three-months ended December 31, 2021.
Other Information
Approval
The Board of Directors of Capstone approved the disclosure contained in this MD&A. A copy of this MD&A will be provided to anyone who requests it from the Company. A copy of this MDA is also available for viewing at the Company’s website at www.capstonemining.com or on the Company’s profile on the SEDAR website at www.sedar.com.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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Additional Information
Additional information is available for viewing at the Company’s website at www.capstonemining.com or on the Company’s profile on the SEDAR website at www.sedar.com.
National Instrument 43-101 Compliance
Unless otherwise indicated, Capstone has prepared the technical information in this MD&A (“Technical Information”) based on information contained in the technical reports, Annual Information Form and news releases (collectively the “Disclosure Documents”) available under Capstone Mining Corp.’s company profile on SEDAR at www.sedar.com. Each Disclosure Document was prepared by or under the supervision of a qualified person (a “Qualified Person”) as defined in National Instrument 43-101 – Standards of Disclosure for Mineral Projects of the Canadian Securities Administrators (“NI 43-101”). Readers are encouraged to review the full text of the Disclosure Documents which qualifies the Technical Information. Readers are advised that Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability. The Disclosure Documents are each intended to be read as a whole, and sections should not be read or relied upon out of context. The Technical Information is subject to the assumptions and qualifications contained in the Disclosure Documents.
Disclosure Documents include the National Instrument 43-101 compliant technical reports titled "NI 43-101 Technical Report on the Cozamin Mine, Zacatecas, Mexico" effective October 31, 2020, “NI 43-101 Technical Report on the Pinto Valley Mine, Arizona, USA” effective March 31, 2021 and “Santo Domingo Project, Region III, Chile, NI 43-101 Technical Report” effective February 19, 2020.
The disclosure of Scientific and Technical Information in this MD&A was reviewed and approved by Brad Mercer, P. Geol., Senior Vice President and Chief Operating Officer (technical information related to mineral exploration activities and to Mineral Resources at Cozamin), Clay Craig, P.Eng, Manager, Mining & Evaluations (technical information related to Mineral Reserves at Pinto Valley and Cozamin), and Albert Garcia III, Ph.D., PE, Vice President, Projects (technical information related to project updates at Santo Domingo) all Qualified Persons under NI 43-101.
1 These are alternative performance measures. Refer to the MD&A section entitled “Alternative Performance Measures”.
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