Capstone Copper Outlines Expansion Plans Amid Growth Challenges

Capstone Copper, a Canadian-based multi-asset copper producer, is eyeing significant growth as it expands its operations in Chile and other regions. Listed on both the Toronto Stock Exchange and, as of this year, the Australian Stock Exchange (ASX), Capstone currently operates four mines across Chile, the United States, and Mexico, with additional development projects in the pipeline.

The company has two operational mines in Chile: Mantoverde (70%-owned) and Mantos Blancos (100%), alongside Pinto Valley (100%) in Arizona and Cozamin (100%) in Mexico. Mantoverde, Capstone's most prominent asset, is expected to produce 36-40kt of copper cathode and 25-35kt of copper from sulphide ore in 2024. Mantos Blancos is projected to produce 6-8kt of copper cathode and 43-49kt of copper from sulphide ore. Meanwhile, Pinto Valley aims to generate 58-64kt of copper, along with additional molybdenum production, and Cozamin is expected to contribute 22-24kt of copper in 2024.

In addition to these existing operations, Capstone also has a fully permitted open-pit project called Santo Domingo in Chile. Once integrated with the nearby Mantoverde project, Santo Domingo has the potential to produce 200kt of copper annually, along with significant deposits of cobalt, iron ore, and gold.

Mantoverde stands as the cornerstone of Capstone's portfolio, expected to account for nearly half of the company's operating earnings by 2025, with Mantos Blancos and Pinto Valley each contributing about 20%, and Cozamin adding 11%. Capstone currently ranks as the 30th largest copper producer globally, but analysts at Wilsons foresee potential for the company to rise into the top 15 over the next five years, assuming the successful execution of its growth plans.

The company aims to lift annual production to nearly 400kt by 2029, up from an expected 190kt in 2024. This is a significant goal in an industry where opportunities for increased output are increasingly difficult to come by. The projected rise in production is also crucial in the context of rising global copper demand, driven by electrification and renewable energy projects, while new copper supplies remain limited.

Despite the ambitious outlook, Capstone faces several challenges. The company reported group production of 47.5kt for the September quarter, which was in line with forecasts, but cash costs were 5% above expectations at US$2.83 per pound. While Mantoverde exceeded production expectations, Mantos Blancos and Pinto Valley faced issues, including both planned and unplanned mill downtime, affecting overall performance.

Revenue for the quarter was 3% below consensus, and earnings missed expectations by 14%. Although copper production was on target, revenue was impacted by lower payable production due to stockpiles at Mantoverde, and higher costs reduced earnings. Analysts at Moelis suggest that, while the physical output was as anticipated, the expected boost in earnings is yet to materialize as capital spending concludes and production ramps up.

The company is currently trending toward the lower end of its 2024 production guidance of 190-220kt and has raised its cash cost guidance to US$2.60-2.80 per pound due to slower-than-expected ramp-up at Mantoverde and higher costs at Mantos Blancos related to equipment procurement and maintenance issues.

Looking forward, Capstone's Mantoverde sulphide operation is expected to see significant improvement in the December quarter, with increased mill availability, throughput, and better recovery rates. The company remains focused on optimizing its capital spending to ensure that the anticipated growth translates into improved financial performance, potentially allowing Capstone to deleverage its balance sheet.