Sherwood and Capstone to merge (September 08, 2008)

Vancouver So long as shareholders at Sherwood Copper (SWC-V) bless the marriage, Sherwood and Capstone Mining (CS-T) will merge to form a single company with about a half billion dollar market capitalization.

“It’s exactly what shareholders are looking for,” Sherwood president Stephen Quin says. “They didn’t want us to go blow the company on some big project that ends up not getting permitting.”

Although the deal will see Venture-listed Sherwood becoming a subsidiary of TSX-listed Capstone, it is essentially a marriage of equals. For each Sherwood share, Sherwood shareholders will be issued 1.566 shares of Capstone. In total Capstone will issue about 84 million shares or 105% its current 82.5 million.

“This doesn’t happen very often. It’s really a true merger,” Quin says.

The new company will operate as one, pooling resources and sharing the same office, and will put Capstone president and CEO Darren Pylot into the Chairman and CEO position and Quin into the President and chief operating officer position.

With Sherwood’s assets in Canada’s north it operates the Minto mine in the Yukon and owns the Kutcho property in northern B.C. and Capstone’s assets in Mexico it operates the Cozamin mine in Mexico it’s clear that benefits from the merger won’t come from a decrease in production and shipping costs, or the price it gets for concentrates.

The chief benefit? “It really comes down to the diversification of risk, the increase in capital and the enhanced balance sheet,” Quin says.

Sherwood and Capstone’s operations are similarly sized and focused on small tonnage, high grade and low cost copper resources. In the last quarter Capstone produced 6.7 million lbs. of copper and Sherwood 12.8 million lbs.

The costs per lb. to produce that copper was about the same, US90 for Capstone and US96 for Sherwood.

As for reserves, Capstone reported in 2007 that Cozamin’s stood at 3.7 million tonnes grading 2.37% copper, 0.4% lead, 1.18% zinc and 82 grams silver per tonne. In 2006 Sherwood’s reserves at Minto came in at 9.13 million tonnes grading 1.93% copper, 0.74 gram gold per tonne and 7.73 grams silver.

And as for that enhanced balance sheet Capstone has about $49 million cash and no debt versus Sherwood’s $52 million of debt. As Quin puts it, “At Sherwood we followed the debt approach (to bring Minto online) whereas Capstone took the equity approach and went for a silver royalty.”

If Sherwood and Capstone’s production forecasts come in on target, the combined company will produce 85 million lbs. of copper in 2008 and then 110 million lbs in 2009, as well as gold, silver, lead and zinc by-products.

It will also continue to advance exploration programs at its existing operations and at Sherwood’s Kutcho property, which is near a production decision.

Adjacent to its open pit at Minto, Sherwood has been drilling at Area 118 and Ridgetop to upgrade inferred resources there.

At Area 118 Sherwood has so far outlined 6.6 million inferred tonnes grading 0.97% copper, 0.27 gram gold and 3.07 grams silver and 4.9 million tonnes grading 0.85% copper, 0.23 gram gold and 2.01 grams silver at Ridgetop.

Likewise, Capstone plans to release an updated resource for Cozamin from a 32,000 metres drilling campaign that has been assessing the potential to expand operations in the Mala Noche vein. Its current resources sit in a 1.5 km section of a 5-km long strike length that Capstone controls.

At Kutcho, in a June 2008 preliminary economic assessment, Sherwood announced a resource estimate of 17.3 million tonnes grading 1.56% copper, 2.12% zinc, 0.29 gram gold and 26 grams silver.

If the project goes ahead, Sherwood has said it would operate a 4,000 tonne a day mine with 7.3 years mine life.

“Minto could be duplicated at Kutcho,” Sherwood chief operating officer Kevin Weston says.

On news of the merger Sherwood shares jumped 19 to close at $4.64 and Capstone dropped 12 to close at $2.78.