Capstone Reports Strong Q2 Production, Tougher Q3 Ahead

VANCOUVER — Despite lower grades milled at its Minto mine, Capstone Mining (CS-T, CSFFF-O) managed to hold fast on copper production in the second quarter of 2009 even as it came off record copper production in the first quarter.

But Capstone warns of dipping output in the coming third quarter as it experiences more painful than expected water woes at its Minto mine near Carmacks in the Yukon, and plans third-quarter mining of lower-grade ore at its Cozamin mine in Zacatecas state, Mexico.

Nonetheless, Capstone maintains a copper production outlook of 95-105 million lbs. for 2009.

Overall in the second quarter, Capstone produced 23.1 million lbs. copper at a total cash cost of US97¢ per lb. copper, beating its US$1 forecast by a few hairs. Combined with first-quarter production, in the first six months of 2009 Capstone churned out 49.2 million lbs. copper at a cash cost of US93¢ per lb.

Byproduct production in the second quarter was 3.3 million lbs. zinc, 3.5 million lbs. lead and 455,566 oz. silver. Capstone estimated gold production, which is not assayed onsite, at 7,564 oz.

Production was steady despite falling copper grades at Minto. In the first quarter, Capstone milled 233,530 tonnes of ore grading 3.39% copper, while in the second quarter it pushed through 267,250 tonnes ore grading 2.41% copper.

Heavier spring runoff is to blame for the dip in copper grade.

During the second quarter, Capstone diverted spring runoff waters into its open pit to avoid noncompliant water discharges. In so doing, it flooded higher-grade ore it had only recently exposed as part of a phase-three south push-back. The diversion forced Capstone to rely on lower-grade stockpiles instead.

Though the water diversion was an anticipated measure, Capstone reports that because this year spring runoff began early and snow-pack was heavy, the deluge of diverted water hit it harder than it had expected.

Thus Capstone warns in a 2009 outlook that due to the runoff water at Minto combined with plans to mine lower-grade copper ore at the Cozamin mine, production will fall in the third quarter.

Yet Capstone sees a brighter fourth quarter on the horizon.

With resumed access to higher-grade copper at Cozamin — gained by mining the lower grades in the third quarter — and at Minto, Capstone says production will ramp up again and allow it to meet its 2009 production target. Capstone had pegged its 2009 outlook at between 95 and 105 million lbs. copper in a 2008 annual report.

Capstone also says that to resolve runoff issues at Minto, it is developing a water-management plan that it will submit to regulators in July.

Capstone shares recently traded at $2.77 in a 12-month range of 65¢- $3.79. The company has about 195.9 million shares outstanding.