Pembridge buys Capstone's Minto mine for US$20M

Fifteen months ago, Pembridge Resources (LON: PERE) agreed to acquire Capstone Mining's (TSX: CS) Minto mine in the Yukon for US$37.5 million in cash and a 9.9% equity stake in its company.

But the U.K.-based company couldn't come up with the money to seal the deal, so Capstone put the copper-gold-silver mine, 240 km north of Whitehorse, on care and maintenance.

This week, a new agreement was reached that sees Pembridge acquiring the asset in an all-cash transaction of up to US$20 million, based on certain copper price thresholds.

Under the arrangement, Pembridge will make its first payment of US$5 million once Minto reaches a steady state of 60% mill capacity. A second payment of US$5 million will be due when the copper price has averaged over US$3.00 per lb. for two consecutive quarters, and the final US$10 million will be paid when copper averages US$3.50 per lb. for two consecutive quarters.

"We're happy to complete the deal and allow Minto to get back into production," Paul Johnston, Capstone's vice president business development and investor relations, says by phone from Vancouver.

"Initially they were looking to do a conventional deal - make the announcement and go to the capital markets and arrange equity - but they just fell a bit short, the markets went against them," he says. "But they've come back and have new financial backers to help them get it back into production."

Proceeds from the sale will be used to reduce outstanding debt under Capstone's revolving credit facility. The deal will also "derecognize an approximate US$24 million asset retirement obligation in its financial statements this quarter; and will recognize an accounting charge of approximately US$20 million to US$30 million due primarily to the reversal of non-cash, cumulative translation adjustments related to foreign exchange at Minto which currently reside in equity," Captsone states in a press release.

An aerial view of Capstone Mining's Minto copper-gold-silver mine in the Yukon. Credit: Capstone Mining.

The sale will allow Capstone to focus on its core operations, which include two producing mines, the Pinto Valley mine in Arizona, and the Cozamin polymetallic mine in Mexico's Zacatecas state. Capstone also owns 70% of the Santo Domingo copper-iron project in Chile in partnership with Korea Resources Corporation.

As for Minto, the open pit and underground mine just didn't fit Capstone's requirements.

"From our perspective, it had a four-year reserve life left, and at prevailing copper prices we weren't making a significant financial return for the amount of time, effort and risk associated with that investment," Johnston says. "It just wasn't making a contribution to Capstone, as well, so rather than deplete a finite resource that wasn't adding a ton of value, we thought, at best, put it on care and maintenance and continue to pursue investment."

For its part, Pembridge sees Minto as a "transformational opportunity," and believes there are opportunities to extend the mine life and "significantly improve on previous operating margins" at the mine.

"While market conditions impacted closing of the transaction, we were able to use this time to achieve a deal and financing package, which we expect to be value accretive for Pembridge shareholders," David Linsley, Pembridge's CEO states in a press release.

Added Frank McAllister, Pembridge's chairman: "It was vital to ensure that the company achieved favourable deal terms rather than pursuing a deal at any cost regardless of the time it may take to complete."

The new was made possible with a US$10 million financing from Copper Holdings LLC, a New York-based private equity group, and Cedro Holdings I, LLC, an entity managed by Lion Point Capital, LP, an asset manager, also in New York.

Copper concentrate in a storage facility at the Minto mine. Credit: Capstone Mining.

Under the financing arrangement, Copper Holdings and Lion Point will provide a total of US$10 million to Minto with an 8% coupon, and acquire non-voting B shares in Minto represent a one-third share each in Minto once the debt has been repaid. However, Pembridge has the right to buy out their respective interests.

Minto started operation as an open pit mine in 2007, and Capstone added an underground component in 2014, using room and pillar and long-hole stoping retreat mining methods. A 4,000-tonne per day processing plant produced concentrate averaging 35% and 40% contained copper.

In 2017, Minto produced 16,332 tonnes of copper, 170,809 oz. silver and 25,205 oz. gold.

Pembridge notes that between 2008 and 2012 Capstone invested about US$24 million on exploration and added over 500,000 contained tonnes of copper resource.