Junior producers plan Mexi-Can merger

Sherwood Copper Corp. and Capstone Mining Corp. Sept. 8 said they signed a letter of agreement to combine their operations to create a copper mining company with two producing mines in mining-friendly jurisdictions in North America.

The two companies agreed to combine on an "at-market" basis with Sherwood shareholders receiving 1.566 shares of Capstone for each share of Sherwood stock. The boards of directors of Sherwood and Capstone unanimously approved the transaction.

Called a true merger by Sherwood President and CEO Stephen Quin, the combination is expected to close by year's end and would create an intermediate-level copper production company. Capstone and Sherwood forecast a combined production of 85 million pounds of copper in 2008 that will increase to 110 million pounds in 2009, with significant by-product credits of gold, silver, lead and zinc. Both operations have a production cost of less than $1 per pound of copper.

The combined company will share one office and be led by Capstone President and CEO Darren Pylot as vice chairman and CEO and Sherwood's Quin as president and COO.

The companies foresee that low production costs at Minto and Cozamin will generate significant cash-flow, while diversifying operational and geographical risks.

They also outlined a number of other benefits from the combination. They include significant downside protection through the combined forward sales positions that extend into 2011 and beyond, yet with significant upside leverage to metal prices since more than half of the production will be delivered at spot prices during that period. And that doesn't account for benefits of proposed production expansions (which would increase exposure to spot prices), the company said.

The current plan to combine the companies is for Capstone to acquire all of the issued shares of Sherwood and Sherwood would become a wholly-owned subsidiary of Capstone. However, the parties may consider an alternative form of transaction, such as an amalgamation or other form of business combination.

The transaction would be subject to certain standard conditions including approval by Sherwood shareholders and lenders. Sherwood has scheduled a special meeting of its shareholders for Nov. 14 to vote on the proposed business combination with Capstone.

Assets include Capstone, Minto and Kutcho

Capstone's production is derived from its 100 percent owned Cozamin copper-silver-lead-zinc mine located in Zacatecas State, Mexico. During the second-quarter, the Cozamin Mine produced 6.7 million pounds of copper at a cash cost of C90 cents per pound. The Vancouver B.C-based junior has about 80.3 million shares outstanding and is well financed with zero bank debt and about $100 million in working capital and marketable securities, Capstone had reported.

Sherwood Copper, also based in Vancouver, operates the wholly-owned high-grade Minto copper-gold mine in Yukon Territory. Minto went into production in 2007, shipping its copper-gold concentrates to smelters in Asia through the State of Alaska terminal in Skagway.

It produced 12.8 million pounds of copper at a cash cost of C96 cents per pound in the second-quarter. Sherwood had about 53.8 million shares outstanding at the end of the second quarter, about C$51.7 million in project-related debt, C$43.6 million in convertible debentures, and C$8.1 million drawn against a corporate credit facility after repaying $16.9 million in the first six months of 2008.

Sherwood said it completed a 120-hole drilling program this year and Sept. 18 posted assay results from another 17 holes of that program showing thick intervals of copper-gold mineralization.

Quin said the drilling results are expanding the Ridgetop mineralization to the east where it appears to remain open, with significant thicknesses of good grade copper-gold mineralization.

"The mineralization at Ridgetop is both thick and near surface (coming to surface on its western edge) suggesting significant potential for large volumes of good grade, low strip ratio copper mineralization," he said.

In addition to the Minto mine, Sherwood owns 100 percent of the high-grade Kutcho copper-zinc-gold-silver project in northwestern British Columbia, where a preliminary economic assessment has indicated potential for annual production of 45 million pounds of payable copper at a cash cost of less than C$1 per pound. The study also outlined several opportunities for further project enhancements.

Sherwood said Sept. 22 that drilling results from its 2008 program at Kutcho continues to deliver strong results, with excellent grades over significant thicknesses.

"We appear to be successful in linking up high grade areas within the Main deposit, which should result in improved grades versus the previously reported resource estimate," Quin said. "Overall, the Main deposit is emerging as a robust, high grade, near-surface copper resource with significant zinc, gold and silver by-products."

The Main deposit is a volcanogenic massive sulphide deposit that outcrops in the south and dips at about 50 degrees to the north, the same direction as the hillside, which helps keep strip ratios modest, Sherwood said.