Capstone Mining Corp Down 2.5% as Credit Suisse Analyzes Far West Acquisition; FWM Down More Than 1%

Credit Suisse has lowered its estimates and target price, but kept an Outperform rating on Capstone Mining Corp. (CS.TO), which is down 2.5% at $3.53.

Far West Mining is down more than 1% at $7.40.

Event: "Capstone announced on April 17th that the company and Farwest Mining (FWM.TO) have entered into a definitive agreement whereby Capstone will acquire FWM and its Santo Domingo copper-iron-gold project in Chile for a total transaction value of approximately C$725 million. The deal will consist of shares and a maximum of $79M in cash, and is already supported by 38% of FWM's shareholder base. The involvement of KORES at the corporate and project level significantly de-risks the deal, from a financial perspective.

"Funding Santo Domingo will not require further external financing on Capstone's part. Capstone will receive net inflows of $315 million from the deal, which is almost sufficient to meet its minimum $319 million equity commitment. While KORES is obligated to provide debt financing for up to 65% of the estimated $1.3 billion in capex required, we believe that Capstone will be able to meet this, as well as its Kutcho capex commitments, from deal inflows as well as cash from operations."

Deal provides growth as well as diversification. "The Santo Domingo project will likely produce up to 240 Mlb of copper annually in the early part of its life, versus 2010 Capstone production of 76 Mlb. We also expect the mine to produce up to 5 Mt of iron concentrate annually, adding revenue diversity and reducing cash costs."

Valuation: "We view the transaction as essentially NAV neutral, as our new NAVPS of $5.19 compares to our previous NAV of $5.14. We continue to rate Capstone Outperform, but we have reduced our target price to $5.00 from $5.50. The decrease in our target price is the result of a change in methodology, whereby we increase our weighting of the 1.0x NAVPS multiple to 80% (from 70%), and decrease the weighting on the 5.0x EV/EBITDA multiple to 20% (from 30%) in order to better reflect the proportion of the development projects (Kutcho and Santo Domingo) in our NAVPS estimate. We are lowering our EPS estimates to $0.49 from $0.65 for 2011, to $0.39 from $0.69 for 2012 and to $0.34 from $0.60 for 2013."

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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