UPDATED: Capstone Mining, Mantos Copper to merge

Canada’s Capstone Mining (TSX: CS) and Chile-focused Mantos Copper, run by British investment firm Audley Capital Advisors and Orion Mine Finance, are merging to form a new copper producer called Capstone Copper.

The new miner, which will trade on the Toronto Stock Exchange, will have a combined 2021 copper production base of more than 175,000 tonnes of the metal and joint reserves of 4.9 million tonnes, the companies said.

Based in Vancouver, B.C., Capstone Copper will have operations in the United States (Pinto Valley), Mexico (Cozamin) and Chile (Mantos Blancos, Mantoverde and Santo Domingo).

The plan is to boost the combined company’s production by 45% by 2024 to 260,000 tonnes of copper per year from fully-financed projects with Mantos Blancos currently ramping up and construction underway at Mantoverde, in which Mitsubishi Materials owns a 30% stake.

Under the deal, each current Capstone Mining shareholder will receive one share of the new company per share owned of Capstone Mining. Current Capstone owners will own 61% of the new company, while Mantos shareholders will own 39%.

Mantos executive chairman, John MacKenzie, will lead the combined company as its chief executive officer, while Capstone boss Darren Pylot will take the role of executive chairman.

Mantos Copper acquired Mantoverde and Mantos Blancos copper mines from Anglo American in 2015.

The Mantoverde open pit mine, in the arid Atacama Desert, holds an estimated 2.1 million tonnes of copper reserves.

The company recently completed an expansion of the sulphides concentrator at its other operation, Mantos Blancos, which extended the asset life until 2035.

The deal is expected to close in the first quarter of 2022, the parties said.

In a research note to clients, BMO analyst Rene Cartier said that overall, he estimates that the transaction “is accretive to our NAV estimate, with synergy potential representing further upside.”

“Pro forma, we estimate Capstone will generate meaningful cash flow, providing the company with the opportunity to pursue additional value-enhancing opportunities to drive further production growth and lower costs.”

He noted that Mantos Copper’s Mantoverde mine is just 30 km southwest of Capstone’s Santo Domingo project, “with the opportunity for meaningful synergies.”  Santo Domingo is a fully permitted copper-iron-gold project, about 50 km southwest of Codelco’s El Salvador copper mine, and 130 km northeast of the city of Copiapo.

“On the conference call, management indicated that a six-month study period will be undertaken post-close to review the synergy potential,” he wrote. “Though still a work in progress, and not yet factored into our estimates, synergies are likely in excess of $100 million, in our view.”

Canaccord Genuity analyst Dalton Baretto described the transaction as a “tremendous opportunity for Capstone, with the combined entity likely to be the go-to copper name given scale, growth, leverage to copper and portfolio diversity.”

He noted that “the emergence of an interloper is possible,” which he says could be Lundin Mining or Hudbay Minerals, but also said that “given the synergies between Santo Domingo and Mantoverde as well as the $75 million break-fee,” he believes the “economics will be challenging.”

“That said, once consummated, we believe the combined entity could be an attractive target for larger players,” the analyst wrote in a research note.

Baretto increased his target price on Capstone Mining to $9 per share from $7 per share. At presstime Capstone was trading at $6.31 per share within a 52-week trading range of $1.80 and $6.64 per share.

Copper, used in construction and power, has become one of the most sought-after commodities due to its key role in the transition to a greener economy. The red metal is needed for battery storage, EV charging stations and related grid infrastructure.

Chile is the world’s largest copper producer, meeting more than 30% of global demand. The metal accounts for up to 15% of the country’s gross domestic product.