Capstone Mining Corp.

Capstone Mining Corp. (TSX: CS) is a Canadian base metals mining company, focused on copper. Our two producing mines are the Pinto Valley copper mine located in Arizona, US and the Cozamin copper-silver mine in Zacatecas State, Mexico. In addition, Capstone owns 70% of Santo Domingo, a large scale, fully permitted, copper-iron-gold project in Region III, Chile, in partnership with Korea Resources Corporation, as well as a portfolio of exploration properties. 

Key Positives:

• Improved operations: The company reported improved operating guidance from its Technical Report for its Cozamin Mine in Zacatecas, Mexico. Proven and Probable Mineral Reserves was reported 97% higher to 10.2 million tonnes from FY19, with grading 1.79% copper.
• Higher Liquidity: The company reported higher liquidity of USD 136.3 million compared to USD 112 million in Q1FY20 along with undrawn on the revolving credit facility of USD 50.1 million, which seems sufficient to navigate through the current challenging environment.

Recent News:

• The company would disclose its third quarter FY20 results on October 28, 2020.
• Recently, the company enters a memorandum of understanding with Sigdo Koppers S.A for the company’s Santo Domingo project in Region III in Chile, wherein the company would explore mutual synergies and regional benefits for the proposed port component.

Q2FY20 Financial Highlights:

• CS reported a slide in the Q2FY20 top line to USD 104.7 million from USD 113 million in Q2FY19 due to a lower copper sale (37.8 million pounds vs 45.5 million pounds). The period was marked by a higher copper production of USD 38.5 million against USD 37.7 million in Q2FY19 despite a temporary shutdown of operations as instructed by the Mexican government on account of COVID-19.
• Adjusted EBITDA from continuing operations plunged to USD 12.9 million from USD 29.7 million recorded in the previous corresponding period (pcp), due to a higher consolidated cash cost of USD 1.87/ lb, against USD 1.78/ lb in Q2FY19.
• The company reported net income of USD 4.3 million, as compared to a net loss of USD 27.2 million in the previous corresponding quarter.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: The group’s revenue is directly related to the demand and prices of copper. Any volatility in the prices or demand would dampen the company’s financial performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The group has reported a decent performance despite a challenging operating environment. The company expects FY20 copper production within the range of 140 million to 155 million pounds, while the company expects 20% improvements in the production and 10% lower costs in 2021. The company has shown improved operating performance in the recent past, and the stock soared ~252% in the last six months. The stock moved near the upper band of its 52 weeks trading level of CAD 1.59 and CAD 0.33. We have valued the stock using Price to CF based relative valuation method and have arrived at a lower double-digit downside (in percentage terms). For the said purposes, we have considered Ero Copper Corp, Lundin Mining Corp and Champion Iron Ltd etc., as a peer group. Considering the aforesaid facts, current price movement, we recommend a ‘Watch' rating on the stock at the closing market price of CAD 1.55 on October 16, 2020.

CS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Giga Metals Corp

Giga Metals Corp (TSXV: GIGA) is engaged in the acquisition and exploration of mineral properties in Canada. The company is focused on two of the key metals used in the batteries of electric vehicles: Nickel and Cobalt. 

Investment Rationale 

• Although the company is in a sector which will be hot in demand down the years, as we all are aware of automobile companies shifting their views to clean energy. This means all the global automobile players want to and are foraying in EV segment. The company is focusing on two of the critical metals used in the batteries of electric vehicles. But for GIGA, this will take time as they are on early stages of mining and no mining operations have started.

• As on June 30, 2020, the Company's accrued deficit was CAD 56.7 million. The Company had not advanced its mineral properties to commercial production and the Company has no other source of revenue from its operations.

• At June 30, 2020, the Company had working capital of CAD 0.86 million compared to CAD 2.3 million as of December 31, 2019. The Company do not have sufficient working capital to continue operations for at least 12 months and to conduct an exploration program on the Turnagain project as CAD 0.96 million of working capital was a receivable from the government for the British Columbia mining exploration tax credits. The Company will require additional capital to meet current and future obligations.

Financial Overview

Source: Company

• For the 2QFY2020, the company was able to bring down their Operating expenses to CAD 0.33 million from CAD 0.59 million on the Y-o-Y basis.
• The company posted a loss of CAD 0.30 million compared to a loss of CAD 0.54 million on Y-o-Y basis.

Risks associated to investments

During the period, there was a global pandemic outbreak of COVID-19. The pandemic could continue to hurt the stock market, including trading prices of the Company’s shares and its ability to raise new capital. These factors, among others, could have a significant impact on the Company’s operations. Some of these material uncertainties may cast considerable doubt upon the Company’s ability to continue as a going concern.

Stock Recommendation 

The company’s continuation as a going concern is dependent upon the successful results from its mineral property exploration activities and its ability to attain profitable operations and generate funds. The company had not advanced its mineral properties to commercial production, and they have no other source of revenue from its operations. Keeping in mind about the tight financial condition of the company since its accrued deficit is around CAD 56.7 million as of June 2020, we prefer to remain on the side-line. On the valuation front, the stock was trading at a price to book multiple of 7.7x (TTM) compared to industry (metals and mining) average of 1.9x. Hence, taking all these factors into consideration, we recommend to ‘Avoid’ the stock at the closing price of CAD 0.75 on October 16, 2020.

GIGA daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.