King Copper

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Freeport aka Phelps Dodge is a major U.S. success story mining copper, gold, molybdenum, zinc. Capstone is a magical junior I've held since $.60. PCU: my sweetheart, why did I leave you?

[mxsquid]

By Alastair Ford

January 08, 2009

Not too long after the closure of the merger deal between Capstone and Sherwood Copper at the back end of last year, Minesite took the opportunity to have a chat to Mark Patchett of Capstone to find out how it had all gone. The combination brings Capstone’s Cozamin mine in Mexico together with Sherwood’s Minto mine in the Yukon. Both assets are primary copper producers, but between them they now provide the new bigger, better Capstone with significant by-products in gold, silver, lead and zinc. And, get this - the combined Capstone has forward sold more than 120 million pounds of copper at an average price of US$2.56 per pound, a price which should ensure some robust-looking cash flow numbers during a time of supposed weakness in the copper mining business. Capstone’s own literature talks of that hedging as fuelling the company’s cash flow “engine”, and at a time when half the world’s miners are stalling and coming to a dead halt there are far worse positions to be in.

Lest anyone think that the new Capstone is so-called for anything other than pragmatic reasons, Mark Patchett is keen to point out otherwise. He emphasizes that the merger deal was done on as near enough equal terms as you can get, and says that the Capstone name was simply kept on because Capstone itself had, prior to the deal, a full listing on the Toronto exchange, while Sherwood was only listed on the Venture exchange. It’s not a simple matter merging two companies, even if the commercial reasons are compelling, and no doubt the respective directors had plenty else to worry about than the niceties of name changes. Although it was announced as a done deal on 24th November, following court approval on 21st November, the niceties have still yet to completely run their course. On Christmas Eve Capstone issued its offer to purchase the remaining Sherwood debentures, as outlined in the original deal. That process is working its way through as we speak.

But one or two numbers that Mark Patchett runs by us make it clear why the deal’s been done. First off there’s the hedging. Then there’s the average costs per pound of copper produced that the enlarged company expects to incur. At US93cents per pound they’re some of the lowest around, and would mean that even unhedged, Capstone should have stayed profitable throughout the recent price collapse. Which is lucky, because Mark Patchett is in any case refreshingly heretical when it comes to cost cutting – he’s not convinced such exercises really make any material difference. “In mining”, he says, “you’re either feasible or you’re not”. The choices, as he sees it, for those companies that are in distress at current metals prices are stark but clear: you either burn up reserves at a loss, or you shut down operations completely. Presumably the third option is high-grading, but that seems to have become a dirty word in mining these days, and at least as far as Capstone’s concerned, grades are not an issue. The most recent results to come in from step-out drilling on Minto included 63 metres at 1% copper. Eat your hearts out all you political risk-laden DRC copper miners! No wonder Mark Patchett calls the Minto project “unbelievable”.

The other, less loudly trumpeted, aspect of this apparent merger of equals was of course its defensive nature. The new Capstone is surely justified in its claim that it’s now strongly positioned as a mid-tier copper producer, a space that’s fairly lacking in peers or competitors. But had this deal not been done, then someone else less friendly to one or other or both of Capstone and Sherwood might have come along and spoiled the party. As things stand, Mark Patchett is fairly content that although it may take both companies a few months to get used to the post-merger environment, things will settle down fairly quickly. At that point, he says, slightly tentatively, “there may be another merger”. Capstone shares have been hammered over the last few months, just like everyone else’s, but they’re well off the lows. Watch this space.

[mxsquid]

Copper companies are down 69% on average from 1/22/2008 - 1/9/2009

http://megamata.com/mike/html/cu20090109.htm

[mxsquid]

http://megamata.com/mike/html/cu20090206.htm