Capstone Mining (TSX:CS, Financial) (5.2% portfolio weight) – During the last eighteen months, copper and several other base metals have experienced strong price appreciation. For copper, unlike lumber for example, supply disruption is not a meaningful contributor to higher prices. The price of copper today is the result of a growing acknowledgement that years of underinvestment, in an environment of growing demand, is likely to leave the copper market increasingly undersupplied. It has become better understood that the copper market is already undersupplied, which is reflected in steadily shrinking global copper inventories. At the end of September, global visible copper inventories were at their lowest level in more than a decade. Should clean energy technologies begin to proliferate rapidly, the strains on the copper market are likely to be far greater than they are today.
“Copper prices rose on Monday as stockpiles in Chinese exchange warehouses dropped to their lowest levels in more than 12 years” Reuters – September 27th 2021
For Capstone specifically, its operations in the United States and Mexico continue to run as well as they have during our ownership of the company. The company’s U.S. mine, Pinto Valley, is a relatively higher cost operation and is therefore more sensitive to copper prices, making it a particular beneficiary of rising copper prices. Operating cash flows have improved enormously in recent quarters allowing the company to produce and retain substantial free cash flow. The company moved into a net cash11 position in the first half of 2021, also a first during our ownership. For the remainder of 2021, we will be awaiting news on developments related to Santo Domingo, the company’s copper, iron ore, and cobalt project in Chile. It is one of the largest fully-permitted copper projects in the world today and the company has done extensive work to bring in infrastructure and financing partners. We had expected an announcement related to a final financing plan for its development in the third quarter but that timeline has slipped into the fourth quarter, hopefully not beyond. Additionally, Capstone has frequently discussed the possibility of creating a much larger operation around its Pinto Valley mine by incorporating several dormant mine operations surrounding Pinto Valley that are presently owned by mining majors such as BHP, Freeport, and KGHM. We have less specific timing expectations for this development but the idea appears logical and potentially transformative.
From the Third Avenue Value Fund (Trades, Portfolio)'s third-quarter 2021 commentary.
