When you think of stocks hitting record levels, for many investors technology stocks immediately come to mind; however, shares of copper producer, Capstone Copper Corp. CS-T, also closed at an all-time high on Thursday.
In 2023, Capstone Copper’s share price increased over 30 per cent and year-to-date, the share price has already posted a double-digit gain. The stock has a unanimous buy recommendation from 11 analysts and the Street is expecting adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to grow to US$636-million in 2024, up from US$260-million reported in 2023, rising to US$1.14-billion in 2025.
To uncover what’s behind the stock’s price action and determine if the positive momentum can continue, The Globe and Mail recently spoke with chief executive officer John MacKenzie of Capstone Copper. He shared his copper price outlook and discussed why he expects to see the company deliver industry-leading growth.
There’s been supply shocks announced with the suspension of the operations from First Quantum Minerals copper mine in Panama as well as Anglo American’s announced production cuts from its copper operations. How would you characterize the supply/demand fundamentals for copper in the near term and longer term?
When you look at the demand side, it’s very clear that it’s going to be driven by decarbonization. There’s going to be an enormous amount of copper required in the future.
I think what differentiates copper from a lot of the other critical metals is it is very supply-side-constrained. In the medium and the long term, I think it’s fairly unanimous that everybody is forecasting a structural deficit and the deficit that’s going to last for an extended period of time because it takes a long time to bring new copper mines into production.
There was an expectation that we would have a small surplus in 2024 at around 300,000 to 500,000 tonnes. What changed and has pulled that deficit forward are the two issues you mentioned that’s taken out over 500,000 tonnes. What that means is the current forecast is shifting from being a small surplus to being in potential deficit this year.
What are your copper price assumptions?
We utilize analysts’ consensus in our copper pricing models. If we look to long-term copper pricing, we’re utilizing around for US$4 a pound. My belief is that that price is not enough to incentivize the levels of future copper production that the world needs.
We’re fortunate. We’ve got mines that are essentially brownfields. They have a lot of infrastructure in place and they’re fairly high grade so at a copper price of US$4, even sort of US$3.50, they’re very attractive. However, that’s the minority of projects. The vast majority, in my view, will need probably somewhere in the region of a US$4.50 copper price.
How do changes in the price of copper affect your company’s EBITDA?
We are bringing on a new project right now. We finished construction at Mantoverde [in Chile] at the end of last year, and we’re now commissioning that project. We expect during the second half of this year to be at full run-rate on that project. So this year, a 10-per-cent move in the copper price will probably mean around US$125-million of additional EBITDA, but once we get into next year where we have our Mantoverde project at full run-rate, that 10-per-cent move probably increases our EBITDA by around US$200-million.
It’s an exciting year with your flagship Mantoverde Development Project coming online. Can you talk about the potential growth at Mantoverde?
We decided to build this project in phases. I think what’s really exciting is the resource at Mantoverde is able to support a much larger operation, potentially around three times as big as it is today.
We’re fortunate that we’re in a position where we have more copper growth in our company over the next five to 10 years than anybody else in the industry.
We already have a project, which we’re calling Mantoverde Optimized, that will cost around US$150-million and should produce about an extra 20,000 tonnes of copper per year. We hope to get the revised permit for that by the end of this year. We think it will take us about 12 months to put in the additional equipment that we need to get there, which means by the end of 2025 we can move ourselves up by that additional 20,000 tonnes of copper. The project is very high-returning with a payback period that is just over a year.
The company produced 164,000 tonnes of copper in 2023. How is production expected to grow and what will be the impact to your costs?
The 164,000 in 2023 increases to 260,000 tonnes at its full run-rate. Then with Mantoverde Optimized that goes from 260,000 to 280,000 tonnes of copper.
I think what’s really important is what it does to our costs. In 2023, C1 cash costs [a measure reflecting operating costs] were US$2.88 a pound. Once Mantoverde is at its full run-rate, we expect our C1 cash costs to be just under US$2 a pound.
We have another project that comes after that, which is our Santo Domingo project, and that would move us from 280,000 tonnes up to 400,000 tonnes of copper a year. It puts us very much into the sphere of the mid- to large-tier copper miners. And our overall portfolio C1 cash costs will come down to around US$1.50 a pound.
Let’s delve into Santo Domingo, a development project that is just over 30 kilometres away from Mantoverde.
The project is fully permitted. The original feasibility study was done in 2018. We’ve spent the last 18 months updating that feasibility study. We’ve got synergies with Mantoverde, both infrastructure and revenue synergies. That updated feasibility study will come out in the middle of this year.
After that, we plan to spend the next six months bringing in a partner for Santo Domingo, along the same lines as we did at Mantoverde. At Mantoverde, Mitsubishi Materials is a 30-per-cent partner of ours. We intend to bring in a 30-per-cent partner at Santo Domingo. Then, I think in the first part of 2025, we’ll look to raise project financing for the balance of the financing with a view to kicking off the project towards the back end of 2025.
And Santa Domingo should be up and running in 2028. Is that a fair estimate?
We would hope to be getting up to full production during that year.
What is the current environment like for finding project partners right now?
Whilst we don’t have the feasibility study yet to have more granular discussions, we have been having some initial discussions with various parties around the world, and I must say there’s been enormous interest. There certainly are parties out there that are looking to grow their access to copper.
And that feasibility study on Santo Domingo is due out in the months ahead, so the middle of the year?
I would say sometime in June. And that’s the same time that our Mantoverde Optimized feasibility study will come out.
What’s your exit strategy for Capstone Copper?
I think we have the opportunity to become a major player in the global copper industry. When you look at the projects I’ve mentioned, they get us up to 400,000 tonnes of copper at an extremely competitive cost. Beyond that, we still have further expansions to Mantoverde. We believe there’s a large opportunity in Arizona to create a world-class mining district. I don’t think we’re short of ideas as to how we can continue to grow and generate fantastic returns over multiple decades.
Are there AI applications in the mining industry that can be used to improve geological data analysis and enhance the company’s mining operations?
I think it’s an area that’s in development.
Is it an investment that you plan to make?
We are starting to look at AI opportunities. We had a recent conversation with our board about how we look at the risks and the opportunities of AI in our business in areas like optimizing recoveries and plants. Even a very small percentage increase in recovery can make quite a big difference to your bottom line.
There are not a lot of projects that have the growth profile that you do, which makes me think of you as a potential acquisition target.
Our objective is not to be acquired. And I think the best way of achieving that is to deliver on our projects to make sure that our stock is expensive. The more expensive we are, the more we are able to preserve our own independence.
On a personal note, you have an entrepreneurial spirit. You founded Mantos Copper, which later merged with Capstone Mining to form Capstone Copper. What important lessons have you learned during your professional journey? What’s your advice to entrepreneurs?
One has to have perseverance. I don’t think there’s any shortcut to success. One does hit bumps in the road but it’s really determination and perseverance that makes the difference.
Is there anything that you would like to add?
To me, two things that make for a successful mining company are obviously great resources and reserves on the one side, but on the other side is having great people. When I look at the team we’ve been able to assemble, I do believe we’ve got one of, if not the best, mine operating and mine build teams in the industry today.
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Jennifer Dowty