Capstone Mining commences production at the Cozamin Mine
The experts will tell you that junior mining stocks are inherently risky and they are probably right. Layers of uncertainty and volatile trading behavior can make investing in the sector seem more like a thrill ride for speculators. However, some degree of risk is built-in to every investment vehicle, and the challenge is simply to find companies that provide reasonable gains to offset whatever uncertainties may be part of the story.
I did not create the Mexico Mike Portfolio to
serve as a neutral proxy for the entire junior mining sector. There are
thousands of stocks leveraged to mineral exploration to choose from. My objective
in constructing the model portfolio has been to illustrate the superior
performance that can be generated through a careful selection process with an
investment strategy focusing on junior mining companies active in
I was recently able to attend the grand opening ceremony for
Capstone’s Cozamin Mine. During my visit, I had
the opportunity to tour the underground mine workings, and review the wholly
owned mill and recovery plant. Based on my personal observations, I
consider the company to be a first class operation in virtually every category
of comparison.
The Cozamin Mine is located in the premier
silver producing district of the entire world, just 4 kilometers away from the
city of
Want to see the profile of a winner? Capstone has no debt, and a working
capital position of more than US$20 million. Current operations generate
additional positive cash flow every month. Diligent exploration work has
contributed to defining a mineral inventory that will enable the mine to run
for nearly 10 years at the current capacity, and there is every indication that
the company will continue to increase the total resource. And what is even more
important, the grade of the resources is such that the company can expect to
continue to operate profitably even if the metals prices drop sharply from the
current levels, adding one more level of security for the long term outlook.
At the operational level, the entire property area is a mining engineer’s
dream. The host rock is extremely hard and stable, and the competency of the
rock structure enables the luxury of excavating extensive underground workings
without the need for costly and time consuming reinforcing infrastructure to be
installed development is advanced. The resources are concentrated into veins
that occur across wide intervals that can be economically mined with minimal
dilution. The veins stretch for many kilometers with continuous mineralization
and only a small portion of the productive vein system has been developed. And
of key importance, the ore is virtually free of contaminants such as arsenic
and cadmium that could create environmental issues or reduce the value that a
smelter would pay for the concentrates produced.
The recovery plant is a textbook example of the right way to process
ore. Equipment is modern, reliable, and tuned to yield the highest efficiency.
A standard low-tech floatation cell process recovers nearly 90 percent of the
copper values, and in the mid-70 percent range for silver and lead, while about
55 percent of the zinc contained in the ore is recovered. Those results are
exceptional for a poly-metallic deposit. Current production is at optimum
levels at about 1100 tonnes per day, but there is
surplus capacity in the crushing and grinding circuits and it would be
relatively easy to build up expansion to allow for 2000 tonnes
per day in the future.
Shortly after the initial acquisition of the project, the company
commenced several phases of drilling programs in order to confirm the historic
resources that had been defined by the previous operator, and to conduct a
thorough exploration effort that tested the potential for additional resources
both laterally along the extension of the vein system, and at depth. The
results of this work far exceeded the expectations, as progressively higher
grades mineralization were reported with each phase. In particular, the vein
system has been proven to become enriched with depth and numerous intervals
were encountered bearing copper grades above 4 percent, across several meters.
Analysts for junior mining stocks love to talk about strong
management. Just what does that mean? For example, if a senior executive
served with distinction for many years with an established senior mining
company, does that mean they are necessarily going to be a good fit and create
shareholder value for a small mining operation? As far as I am concerned,
strong management means more than just a group of individuals with impressive
resumes. It is necessary to have the right people at every level,
that work together as a team while performing their individual
assignments at the highest level.
I consider the management team at Capstone to be of superior quality.
This group has the background of successful experience that so many advisors
like to see. But more importantly, they understand what it takes to be
effective running a smaller company. They set goals for their company,
communicate the objectives effectively to the market, and then achieve those
targets. That is exactly what an investor needs to see.
Consider the recent history of Capstone. Recognizing that a resource
bull market was upon us, and then choosing to make
It is the balanced professionalism in all the critical areas of
expertise that contribute to the early success for Capstone. For example, Hugh
Wilson serves as the Vice-President of Exploration, and under his direction the
company has been able to complete several phases of drilling that established
wide new zones of mineralization to enable the company to document the
impressive resource estimates, and complete the positive feasibility study
necessary for a development decision. Robert Barnes was appointed
Vice-President of Operations, and his 30 years of direct mine management
experience no doubt contributed to the efficient development of the underground
infrastructure that generates low cost production stability. And John
Wright, who is a co-founder and currently serving director of the respected
mining powerhouse Pan American Silver Corp, was largely responsible for the
rapid development to recommence production at the mine and helped to see the
company through the very difficult transition to a producing mining business.
It is a profoundly difficult enterprise to restart operations at a mine,
and advance through the learning curve to achieve stable and efficient
operations. The combined efforts from the exceptionally talented management
team of Capstone have demonstrated that it can be done with a minimum of
downtime along the way. In so doing, they set the bar very high for the rest of
the industry. And company President Darren Pylot can
take a lot of the credit for that performance due to his selection and
recruitment of the group of industry luminaries.
Going forward, the company is in the enviable position of having a
strong treasury that can serve as a war chest for future acquisitions, or allow
for an aggressive expansion and development strategy. The revenues will
continue rolling in while the worldwide metals prices remain firm. At current
commodity price levels, the company is capable of spinning out 45 cents in cash
flow per share for the first full year of operations, and with the stock
trading at the current price range, it is ludicrously cheap on the basis of a
forward cash flow multiple in comparison to the peer group of smaller mining
companies.
I have been a long time shareholder of Capstone Mining, and believe that
at the current share price, the company represents the best value of any mining
stock listed on a North American exchange. The potential of the property to
yield further high-grade resources, combined with the financial strength, and
the superbly competent management team, will all contribute to remove much of
the risk that goes with investing in the sector. However, the market
capitalization of the company is extremely cheap relative to the fundamentals
and the potential earnings performance that the company is capable of
generating in the years ahead. I buy a double allotment of $20,000 in Capstone
shares, making the company the largest holding of the portfolio.