‘Everybody wins’ at Capstone’s Cozamin reopening (November 13, 2006)

Zacetecas, Mexico — Just three years after acquiring the past-producing Cozamin property on the outskirts of this historic city, Capstone Mining (CS-T, CSFFF-O) has officially opened an expanded and modernized underground mine that is expected to produce an average of 16 million lbs. copper, 700,000 oz. silver, and 4 million lbs. of zinc annually over its initial 6.5-year mine life.

More than 600 guests were on hand as Amalia Garcia Medina, governor of Zacatecas state, cut the ribbon to mark the reopening of Cozamin, which has been expanded to 1,000 tonnes per day from its 750-tonne-per-day capacity at the time of purchase. A Mariachi band added a fiesta-like atmosphere to the event, which also attracted local dignitaries and hundreds of Mexican miners and their families.

The governor thanked Capstone for investing $30 million and generating employment for more than 300 people in the region.

“We’re glad you’re here,” she said, “not just because of the employment and investment, but also because we want companies to be socially responsible and take care of the environment. In good relationships such as (this), everybody wins.”

Capstone president Darren Pylot said the Vancouver-based company was pleased to be in Zacatecas, a state noted for its strong mining heritage and mineral potential.

“We hope to be here for a very long time.”

This is no vague promise, as Capstone is already drawing up plans to double production to 2,000 tonnes per day by 2008 as part of its strategy to become a mid-tier copper producer. Toward that end, the company is continuing underground and surface drilling programs to upgrade and expand resources and extend the mine life to at least 10 years.

Three years ago, however, Capstone was a low-profile junior scouring Mexico for gold-silver exploration projects. The company seized an opportunity to acquire the dormant Cozamin mine and five exploration properties from Minas de Bacis, a family-owned Mexican mining company. Bacis had closed the struggling copper mine in 1988, a year after acquiring it from Peoles, in order to redirect resources to its core silver mines elsewhere in Mexico.

“They wanted out at the same time as we wanted in,” Pylot told The Northern Miner, adding that copper prices at the time were only starting to rebound from their sharp drop to below US$1 per lb.

Capstone inked a deal to acquire 90% of the mine property and five exploration projects in Durango and Sinaloa states by spending US$10 million on exploration and development over five years, paying US$250,000 in cash, and issuing 3 million shares. The Mexican miner had the choice of retaining a 10% interest and 1.5% net smelter return royalty (NSR), or a 3% NSR, and chose the latter.

At the same time, Capstone closed a $7.5-million financing to advance Cozamin, which offered both near-term production and “blue-sky” exploration potential.

Historic district

Attracting skilled personnel to the project wasn’t a challenge. The mine is a few kilometres from Zacatecas City, which offers services and amenities reflecting its dual status as one of Mexico’s most popular tourist destinations and one of its most important mining centres.

The Zacatecas mining district ranks among the oldest in the Americas, with historic silver mines dating back to the 1500s. Modern-day mines in the district typically exploit epithermal and mesothermal vein deposits containing silver, gold and base metals.

The most prominent vein on the Cozamin property is Mala Noche, which has been traced for more than 5.5 km in length, and ranges from five to 18 metres in width. It strikes east-west and dips on average at 60 to the north.

The Mala Noche vein system was first exploited in the 1500s. More than a dozen shafts provide access to its historical workings, which extend from the San Roberto mine in the west to the San Bernabe mine in the east.

For the first year or so, Capstone focused its exploration efforts on the San Roberto mine, the area with the largest historical workings. The first phase of exploration drilling was conducted from surface to test the strike and dip extensions of the Mala Noche vein system. The results confirmed that higher-grade copper- silver-dominant mineralization was continuous along strike for 1.4 km, and extended more than 350 metres below the historic workings.

Contractors and personnel were hired in late 2004 to dewater the underground workings, rehabilitate the San Roberto hoist and shaft, escape-ways and other infrastructure, and clean up working levels. This work continued into 2005, which allowed underground definition drilling and channel sampling aimed at delineating sufficient resources to justify a positive production decision.

A production ramp was also rehabilitated and extended and previously mined stopes were prepared for mining. Development work and delineation drilling continued into early 2006, with results incorporated into a feasibility study and updated resource estimate.

In mid-2006, Capstone reported measured and indicated resources of 2.76 million tonnes grading 2.5% copper, 1.12% zinc, 0.47% lead and 85.42 grams silver per tonne, at a 1% copper cutoff grade. Inferred resources add another 3.09 million tonnes of 2.22% copper, 1.29% zinc, 0.27% lead and 79.07 grams silver. These updated resource estimates include proven and probable reserves of 2.2 million tonnes grading 2.16% copper, 0.99% zinc, 0.56% lead and 76 grams silver.

The 2006 independent feasibility study projected capital costs of US$10 million to reopen Cozamin, with almost half the amount directed to the underground mine. The study examined an initial planned mill throughout of 350,000 tonnes per year, with average grades of 2.16% copper, 76 grams silver, and 1% zinc.

Pretax operating costs are estimated to average US42 per lb. of copper produced (net of byproduct credits) over the life of the mine, while total costs (including transportation, smelting and refining) are estimated to average US80 per lb. of copper produced.

Capstone received approval for the Mexican equivalent of its environmental impact assessment statement in late August 2005, which allowed the company to begin construction activities. Approval to expand the operation was granted in early 2006. The mine already had a tailings facility, and a plan was submitted to expand it to store at least another 4 million tonnes of tailings.

Production

The expanded flotation mill was commissioned in June, reached 57% of design capacity in July, and 80% by August. The full capacity of 1,000 tonnes per day was achieved in September, resulting in production of 1,307 tons of copper concentrate grading 25% copper, 700 tons of zinc concentrate grading 48% zinc, and 205 tons of lead concentrate grading 65% lead for the full month.

Head grades to the mill averaged 1.3% copper, 0.6% lead, 1.9% zinc, and 68 grams silver that month, while recoveries averaged 82% for copper, 58% for zinc, 70% for lead and 72% for silver.

In early October, Capstone received an 80% advance of US$3.25 million on 2,696 tons of copper concentrate grading 25% copper, containing 1.5 million lbs. copper and 52,000 oz. silver.

Salable concentrates at the end of September stood at 3,360 tons of copper, 1,521 tons of zinc, 443 tons of lead, with 109,500 oz. silver contained in these concentrates.

Copper accounts for about 75% of the total value of metals produced at Cozamin, followed by about 16% for silver and 9% for zinc. Glencore International will market the mine’s entire concentrate production under an off-take agreement effective through 2008.

Revenue from ongoing production will help the company fund its expansion budget, estimated at about US$11.4 million. Of this total, roughly US$1.5 million will be used to expand the crushing plant and flotation circuits, while about US$4 million will be spent on underground development and on the equipment and infrastructure required to support the expanded production rate.

Capstone has set severa
l other objectives for the year ahead, including converting the mining method from mechanized cut-and-fill to long-hole stoping wherever possible to increase tonnage to the plant.

An underground tour led by Robert Barnes, vice-president of operations, revealed good ground conditions, with minimal support in a few areas affected by faulting. Large haul trucks, rather than load-haul-dump machines, transport ore from the underground stopes accessible by the spiral ramp, a practice not uncommon in Mexico. New dump pockets and loading stations at the main production shaft were nearing completion to allow for expanded (and lower-cost) production.

Barnes has previous experience managing mines in Mexico, most recently at various projects held by Pan American Silver (PAA-T, PAAS-Q) in Zacatecas and nearby states. Several of his former colleagues joined Capstone’s advisory board to help plan and execute the expansion program.

Another priority in the coming year is to complete 15,000 metres of underground infill drilling to convert inferred resources to the measured and indicated categories, along with 5,000 metres of surface exploration (stepout) drilling below existing resources and along strike. More than half the surface drilling will target areas on the western side of the property, where previous exploration had returned significant results, including areas relatively near surface.

“We’re optimistic that ongoing drilling will result in additional resources that would be relatively easy and inexpensive to develop,” Barnes said, noting that this portion of the property is underexplored.

Capstone’s near-term goals are to expand resources and production at Cozamin and use the project as a springboard for future growth. The project has potential to generate more profits than projected in the feasibility study, which used “base-case” assumptions of US$1.25-per-lb. copper, silver at US$6.25 per oz., zinc at US50 per lb. and lead at US38 per lb. At these conservative assumptions and using a discount rate of 5%, the project has an estimated net present value of US$17.9 million and a pretax internal rate of return of 43%.

In order to keep its newly established “copper focus,” Capstone has spun out its gold-silver projects to a new public entity. The five exploration properties are now held by SilverStone Resources (SST-V, SVRCF-O), which completed its initial public offering in June, by way of distribution as a “dividend- in-kind” to shareholders of Capstone on the basis of one unit of Silverstone for every three shares of Capstone.