Capstone Mining (CS.to): Nice looking hedge book

After melding, fusing and gobbling up Sherwood Copper late last year, the newly grown Capstone Mining (CS.to) published a very interesting PR last night. Here's the link so go look for yourself, and you need to look because there's plenty of info about how the company has lightened its debt burden and moved the financial shells around.

This quick post is more of a headsup about the details of the hedge book, pasted below. Lots of lines and numbers and things as per normal with these tables, but the thing to take away is that CS.to is going to sell around 40% of its 2009 copper production at around U$2.61/lb. It's also got about 30% hedged at U$2.38/lb for 2010.

The whole hedge book is worth U$115m if marked to market at current prices, with the book heavily weighted to the next three years. Of if you like, you can consider that if copper averages $1.50/lb in 2009, CS.to will sell its produce at a total average of U$1.94/lb thanks to this hedge. And as the company expects cash cost to come in at around $1.45 to $1.50/lb (and I guess that's dropping too thanks to industry price cuts) CS.to has found itself in a very good place to ride out the worst of this storm.

I'm telling you now that there's a lot more to understand about this company than my quick post shows you. The financials aren't straightforward and would take plenty more to explain even semi-properly. But with that said, Otto says there are plenty worse ways to put copper exposure into your portfolio, if that's what takes your fancy. I don't own at the moment but did reco the stock recently at various prices under $0.90 (so bite me Casey and your "nice company but not going anywhere" call at the same time last month). DYODD dude, don't waste your money at Doug's house of mediocrity.

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Weighted Averages
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                                            Price       Price
Year           Tonnes             lbs         (US$/t)    (US$/lb)
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2009 Q1         5,564      12,266,520       5,961.32        2.70
2009 Q2         5,084      11,208,301       5,808.86        2.63
2009 Q3         4,600      10,141,264       5,680.60        2.58
2009 Q4         4,281       9,437,989       5,546.56        2.52
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Total 2009     19,529      43,054,075       5,764.59        2.61

2010 Q1         4,131       9,107,296       5,380.45        2.44
2010 Q2         4,131       9,107,296       5,264.99        2.39
2010 Q3         3,765       8,300,404       5,190.35        2.35
2010 Q4         3,582       7,896,958       5,103.77        2.32
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Total 2010     15,609      34,411,955       5,240.54        2.38

2011 Q1         3,282       7,235,571       4,860.60        2.20
2011 Q2         2,402       5,295,504       5,135.88        2.33
2011 Q3         2,774       6,115,623       5,596.87        2.54
2011 Q4         1,654       3,646,446       5,985.29        2.71
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Total 2011     10,112      22,293,144       5,311.93        2.41

2012 Q1           300         661,387       7,097.50        3.22
2012 Q2           300         661,387       7,097.50        3.22
2012 Q3           300         661,387       7,097.50        3.22
2012 Q4           300         661,387       7,097.50        3.22
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Total 2012      1,200       2,645,547       7,097.50        3.22

2013 Q1           225         496,040       6,875.00        3.12
2013 Q2           225         496,040       6,875.00        3.12
2013 Q3           225         496,040       6,875.00        3.12
2013 Q4           225         496,040       6,875.00        3.12
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Total 2013        900       1,984,160       6,875.00        3.12

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TOTAL          47,350     104,388,881       5,550.05        2.52
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Capstone Mining recovering well. Any fool looks good in a bull (with the emphasis on 'fool')

Right now, Capstone Mining up 15.5% at $1.34. Here's what I wrote on December 31st:

There are plenty of beneficiaries from this base metals move, but one that's caught my eye is Capstone (CS.to), up 8.75% at $0.87. According to company literature, today's copper spot is around the point that CS.to has its cash cost.

And here's what I wrote on January 1st:

Last but not least, Capstone Mining (CS.to) up 10% today, the base metals play that was mentioned earlier this week. It's the right size and with the right costs make-up to get good leverage from any BM upmove. Here's the five day chart that might not be as spectacular as BWR.to but it's still very cool; a win is a win.

Since then, the chart has done this. That's a nice gain for sure..... $0.75 to $1.34 in five trading days works for me anytime.
So what's the point here, apart from pointing out that I nailed a good trade in the "Trading Post" series and then preening and crowing like the arrogant git that I am in front of my audience? Here are a few bullet points:

• Any fool looks good in a bull market. Those with short memories will at this time be sharpening their pencils to write their own versions of "hey look at me" for online consumption.

• BUT THIS IS NOT A BULL MARKET! To follow the example above, it's great to point at the 20% rebound in copper but that doesn't suddenly make copper exposure a sure-fire winner. So very cool to point to a stock that gains 50% but let's not worry about where the stock was this time last year. We're currently enjoying a relief rally in a bear market. It's very welcome all the same, but that's all it is and anyone telling you otherwise is just plain wrong. Copper at $1.50/lb isn't going to get a single financier thinking about throwing a billion at an unbuilt mine, I promise you.
  

• In my opinion, the rebound so far has been for monetary reasons and not based on true supply/demand factors. For sure supply is being restricted (see the post earlier this morning about Volcan for a topical example) but there's not much sign of demand pick-up as yet. We need to see a change in direction of macrofundamentals before we're allowed to change our minds again.
  

• You should expect pullbacks to happen in the current atmosphere because that's what happens during a bear market. Period. So the logical conclusion to that is to say loudly and clearly, "DO NOT BE AFRAID TO TAKE PROFITS." If you make good coin in a bear market trade, take it. Cash it in. Bank it. Keep a chunky position on the sidelines for the next opportunity. Be nimble. I could come out with a dozen other clichés, but you should have the message by now.

• Selling well is, of course, even more difficult than buying well. On a personal level, very occasionally I get a call just right (e.g. this recent one on GORO.ob), but more often than not calling "take profits" at the very top of the price curve is either luck based or impossible. As a recent example, I said that taking profits on GRZ would be wise with the stock at $0.95, and since then it has motored on to stand at $1.21 right now. So be it, but the main thing here is that you take YOUR profit. Not his, or hers, or watch the thing keep on moving and shout "D'OH!" all week, cos that's silly. Baruch was one of the most successful stock market players of all time and he said, "I made a fortune by selling too early." Think about that one.

The bottom line here is that it's not some kind of ego-based "you-vs-them" game here. This is not a drill (as Gary Biiwii likes to say). Be clear that the tactics used by successful investors in bear markets are wholly different to those needed during a bull. Bear markets are rarer than bulls and this one is a nasty example, too. That means there are a lot of things you're used to doing that should be ignored right now. In my case, when I see a great, undervalued mining company such as Capstone my temptation is to stay inside my value investor's shell and say "yeah, it's up 50% but the numbers say that if copper keeps moving like it's moving I'm holding a potential 5 bagger" or variations thereof. So I buy and hold, then buy again and hold some more and then buy another value stock and hold that and suddenly my cash reserve has gone and I'm trading on margin. Trading on margin in a bear market is NUTSO.

Moral of the story is be conservative, take a chunky profit and thank the market gods when you do. Don't look back in anger and PRESERVE YOUR CAPITAL. The time to buy and hold will come eventually, as day follows night.

DYODD, dude.

Nice quarter from Capstone (CS.to)

This is the small-but-growing copper company that is in the process of merging with Sherwood Copper. CS.to returned a 3q08 EPS of $0.2o which looks very smart against its current $1.14 share price (P/E of 1.4X on a producing miner anyone?) But watch out folks, because it sold copper at an average of U$2.91/lb and Zn at $0.78/lb in the period and now....well...you know the score. Here's the link to the summary results PR.

Zinc isn't the big problem going forward, as copper makes up 80% of sales (so watch that chart I posted just minutes ago). Another thing to note is how CS.to will benefit from the weaker loonie in its US dollar driven revenues. Production growth continues to impress. The other benefit is the nice cash pile the company is sitting on.

Going forward, the copper cash cost of $1.29/lb means that the company is in very good position to ride out the lean times. But make no mistake; this is the last of the sexy quarters and the lean times are about to come, even to the good plays such as CS.to. Just to put your mind in the ballpark, if the company makes 20c/share from a margin to cash cost of $1.62, what does it make at a margin of $0.52? Yeah, two thirds less...you got it. So the question to ask yourself is would you be happy owning CS.to with an annual EPS of $0.30 or so and a P/E of 4X? Extremely ballpark and DYODD, but those are the kind of numbers you need to assume to get the current situation.

All in all Capstone looks like a good defensive position for your mining money, and one that will get immediate bounce from any upturn in commodity prices.