Capstone Mining Corp (TSX: CS) is a company that mines, explores, and develops mineral properties in the Americas. Specifically, the group has operating mines in the US, Mexico, and Canada, and development projects in Chile and Canada. Capstone's main focus is copper, but the company also produces zinc, lead, molybdenum, silver, and gold. 

Investment Rationales

• Robust Q3 2021 performance: The company reported decent performance in the Q3 2021, with revenue surged by 27% to USD 165.4 million, against USD 130.5 million on a YoY basis and net income rose to USD 35.0 million compared to USD 2.3 million in the previous corresponding period. The healthy performance was driven by improved average commodity prices and increase in % recoveries under copper.

• Higher production from Cozamin Mine: The company’s Cozamin Mine achieved another record quarterly copper production of 14.1 million pounds at USD 0.93 per payable pound of copper produced. The production in reported period was 33% higher than the same period last year, primarily due to the successful utilization of the Calicanto one-way ramp which increased mill rates from 3,090 tpd in Q3 2020 to 3,854 tpd in Q3 2021.

• Record operating cash flow: Due to excellent operational performance, the business generated record Cash flow from operating operations before changes in working capital during the report period, which increased by USD 22.2 million to USD 67.1 million. Furthermore, on YTD basis its generated operating cash flow before changes in working capital, excluding USD 180 million upfront payment from Wheaton and Santo Domingo gold stream stood at USD 272 million, which was the highest in Capstone’s history, driven by production growth and record high copper prices.

Source: Company

• Strong balance sheet: The company's cash and short-term investments climbed by USD 36.7 million to USD 208.2 million in the three months ended September 30, 2021. The Company's total available liquidity was USD 433.2 million, with no long-term debt. The balance sheet was reinforced by continued strong operating cash flow creation in Q3 2021.

Source: Company

• Industry beating margins: Despite the turmoiled period, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q3 2021, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this.

• Robust 2021 Guidance: The management is bullish on the commodity outlook and announced a healthy production profile. In 2021, the company expects to produce between 175 and 190 million pounds of copper at C1 cash costs of between USD1.75 and USD1.90 per pound payable copper produced.

Source: Company

• Risks associated with investment: The company's business is significantly exposed to the volatility in copper prices. Further inherent risks associated with mining and mineral processing such as the company's mines may not perform as planned; uncertainty with the company's ability to secure additional capital to execute its business plans; the speculative nature of mineral exploration and development, including the risks of obtaining and maintaining necessary licenses and permits, including the necessary licenses, permits, authorizations and/or approvals from the appropriate regulatory authorities.

Financial overview of Q3 2021 (In thousands of USD)

Source: Company

• Higher revenue: In Q3 2021, the company posted revenue of USD 165.4 million, increased by 27% against USD 130.5 million in the previous corresponding period. An increase in the revenue was mainly due to higher realized copper prices at USD 4.15 per pound V/s USD 2.72 per pound in Q3 2020, along higher production by 15%.
• Elevated earnings from mining operations: Earnings from mining operations rose enormously to USD 62.7 million in the reported period compared to USD 28.6 million in pcp.
• Increase in G&A expenses: The company increased its G&A expenses to USD 4.4 million compared to USD 3.6 million in pcp, however, it recorded higher income from operation which stood at USD 56.7 million against USD 8.6 million in pcp.
• After foreign exchange losses and other income in the reported period an income before finance cost and income tax stood at USD 57.8 million compared to USD 15.5 million in pcp.
• Income tax expense increased to USD 17.6 million against USD 9.3 million in the previous corresponding period. An increase was mainly due to higher revenue.
• Robust increase in net income: On the back of above discussed rationales the net income in Q3 2021 increased to USD 35.0 million compared to USD 2.3 million in the previous corresponding period.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 44.08% of the total shareholding. GRM Investments, Ltd. and Kores Canada Corporation hold the company's maximum interests at 24.36% and 9.72%, respectively. The company's institutional ownership stood at 14.17%, and ownership of the strategic entities stood at 36.54%.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks. 

Stock recommendation

The company's operating performance in Q3 2021 was excellent, thanks to a mix of better output, decreased costs, and higher copper prices. At C1 cash expenses of USD 1.96 per payable pound of copper produced, its combined copper production reached 44.4 million pounds. The recent surge in commodity prices is benefiting the company, and we can observe a considerable influence on the precious and industrial metal mining company's balance sheet due to this trend. Even the company's record cash flows of USD 272 million YTD are a significant plus.

We believe the company is well positioned to capitalize from rising underlying commodity prices and end FY2021 in good financial shape. Furthermore, the organization is able to get Copper Prices that are higher than the LME Average, which is a significant benefit. The business anticipates producing between 175 and 190 million pounds of copper in 2021, at C1 cash costs1 of between USD1.75 and USD1.90 per pound payable copper produced. In addition, the corporation has a strong balance sheet and is almost debt-free.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 5.3 on November 11, 2021. We have considered Copper Mountain Mining Corp, Ero Copper Corp, Lundin Mining Corp etc. as the comparison's peer group.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Price Chart (as on November 11, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on November 12, 2021, price as well.

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