Capstone Mining (CS)

[GettinThere]

Sherwood & Capstone Announce Combination to Create Intermediate Copper Producer





VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 09/08/08 -- Sherwood Copper Corporation (TSX VENTURE: SWC)(TSX VENTURE: SWC.DB) and Capstone Mining Corp. (TSX: CS) have entered into a Letter Agreement to combine, by way of a plan of arrangement or other form of business combination, to create a well-funded, low-cost, growth-oriented, copper company with two producing mines in mining friendly jurisdictions in North America. The two companies have agreed to combine on an "at-market" basis whereby each Sherwood shareholder will receive 1.566 shares of Capstone (based on the 20-day volume weighted average share price of the two companies). The boards of directors of Sherwood and Capstone have unanimously approved the terms of the transaction.




Transaction Rationale



Capstone and Sherwood believe this merger will realize significant benefits for each of the company's shareholders, including:



- Significant production growth, with forecast production of 85 million pounds of copper in 2008, increasing to 110 million pounds in 2009, with significant by-products of gold, silver, lead and zinc, as previously disclosed;



- Low cost production with forecast total cash costs of under US$1.00 per pound of payable copper in 2008 and 2009, including all off-site costs and net of by-product credits, generating significant free cash flow to fund corporate growth opportunities;



- An aggressive, growth oriented company focused on maximizing the value of its existing high grade mines, Cozamin and Minto, through sequential increases in resources, reserves and production; the pursuit of value through continual improvements at its operations; the advancement of the high grade Kutcho project towards a production decision and accretive merger and acquisition opportunities.





- Diversification of operational and geographic risk with the high grade open pit Minto copper-gold-silver mine in Canada and the high grade, underground Cozamin copper-silver-zinc-lead mine in Mexico.




- Increased market capitalization that should improve trading liquidity for shareholders of the combined company.




- Continued focus on optimization and cost reduction strategies, with the Cozamin mill throughput set to increase to 3,000 tonnes per day and Minto to 3,200 tonnes per day by the end of 2008. Minto will also reduce exposure to high fuel costs for electrical power generation by connecting to grid power in Q4/08.




- Excellent exploration upside at both the Cozamin and Minto mines, where high grade resources have been increased by 47% and 140%, respectively, over the past two years, exclusive of the results from major exploration programs completed in 2008, many of the results for which are still pending. Sherwood completed 120 holes at Minto and 81 holes at Kutcho in 2008, the results for approximately half of which remain to be reported, while Capstone has completed 7,000m of underground and 25,000m of surface drilling at Cozamin, the results of which are to be incorporated into an updated resource and reserve estimate.




- A combined management team with complementary experience and a proven track record of building and profitably operating mines to create shareholder wealth, supported by a seasoned and experienced board of directors.




- Exposure to the potential development of the high grade Kutcho copper-zinc-gold-silver project in northwestern British Columbia, where a preliminary economic assessment (see Sherwood news release dated June 12, 2008) indicated potential for production of 45 million pounds of payable copper per year at a cash cost of less than $1.00 per pound (net of by-product credits) and outlined several opportunities for further project enhancements.




- Strong balance sheet to support growth strategies.




- Enhanced market exposure for Sherwood's shareholders through access to Capstone's TSX listing and increased weighting in the TSX composite index.




- Broadened research coverage for Capstone's shareholders through Sherwood's analyst coverage, presently at nine firms across the spectrum of Canadian brokerages.




Capstone and Sherwood further believe that their shareholders will benefit from the tax-effective combination of the two companies and allow for participation in the upside from the significantly enhanced business platform.




Board & Management



The board and management structure of the combined company will draw on the expertise of both companies and the board will include four current Sherwood directors, one current director of Capstone and one nominee of Capstone. Colin K. Benner has agreed to serve as non-executive Chairman. Darren Pylot (currently President & CEO of Capstone) will become Vice Chairman and CEO and Stephen Quin (currently President & CEO of Sherwood) will become President & COO of the combined company. Richard Godfrey (currently Chief Financial Officer of Sherwood) will become Chief Financial Officer of the combined company; other senior management from both companies will be integrated into the senior management of the combined company, retaining many of the same responsibilities. Capstone and Sherwood intend to capitalize on the success of their respective strategies for the operation, expansion and exploration of the high grade Cozamin and Minto copper mines, located in Zacatecas, Mexico, and Yukon, Canada.




"Capstone and Sherwood have each looked at numerous merger and acquisition possibilities over the past year and have concluded that this is the most compelling consolidation opportunity in the sector," said Darren Pylot, President & CEO of Capstone. "The combined management teams are a great fit, with complementary skills and experience and a common focus on acquiring and operating high grade, low cost operations in mining-friendly, politically stable jurisdictions. Operationally, the high grade Cozamin and Minto copper mines are tremendous assets, and each is undergoing a third expansion program and, combined, should produce more than 100 million pounds of copper at cash cost of less than a dollar per pound in 2009. These operations provide an excellent platform for future growth."



"The combination of Sherwood and Capstone is a highly complementary transaction," said Stephen Quin, Sherwood's President & CEO. "Capstone's strong cash and investments and modest copper hedging program is complementary to Sherwood's more leveraged balance sheet and larger copper hedging program (through the end of 2011). Both Sherwood and Capstone have production expansion opportunities at their Minto and Cozamin mines, which we aim to advance as soon as practicable, and Sherwood offers significant organic growth potential through continued exploration success at Minto and a high grade development opportunity at its Kutcho copper project."



Transaction



Capstone and Sherwood anticipate that the transaction will be carried out by way of statutory plan of arrangement of Sherwood whereby Capstone would acquire all of the issued shares of Sherwood and Sherwood would become a wholly-owned subsidiary of Capstone (the "Arrangement"). The transaction would be subject to certain standard conditions including that not less than 66 2/3% of the issued and outstanding shares of Sherwood being voted at a shareholders meeting being in favour of the transaction. However, the parties may consider an alternative form of transaction, such as an amalgamation or other form of business combination, as mutually determined by Capstone and Sherwood.




Full details of the offer will be included in the formal Arrangement Agreement and Management Information Circular to be filed with the regulatory authorities and mailed to Sherwood shareholders in accordance with applicable securities laws. Under the Arrangement Capstone will acquire all of the issued and outstanding shares of Sherwood in consideration for the issue of Capstone shares on the basis of 1.566 Capstone shares for every Sherwood share. The Arrangement is an "at market" transaction with no premium to either party, based on the 20-day volume weighted average price of each of Capstone and Sherwood to September 5, 2008. Based on the current Sherwood shares outstanding, the transaction would involve the issuance of approximately 84 million Capstone shares, which equates to 105% of Capstone's shares outstanding.




The proposed transaction is expected to be completed before the end of 2008 and is subject to certain customary conditions, including receipt of all necessary court and shareholder approvals and dissent rights to the Arrangement shall not have been exercised prior to the effective date of the Arrangement by holders of Sherwood shares representing in the aggregate 5% or more of outstanding Sherwood shares at such time. It is anticipated that a special meeting of shareholders of Sherwood (the "Meeting") will be held at a time yet to be determined to approve the proposed transaction.




Under the terms of the Arrangement, each Sherwood shareholder will be entitled to 1.566 Capstone shares for every one Sherwood share held. Sherwood's outstanding options and warrants adjusted in accordance with their terms so that the number of Capstone shares received upon exercise and the exercise price are adjusted proportionately to reflect the exchange ratio described above.




The transaction is subject to the consent of Sherwood's lenders under the provisions of its debt facilities.




Following a change of control event in Sherwood, Capstone must, within 30 days of the occurrence of the change of control, make an offer to redeem all of Sherwood's convertible debentures then outstanding. The offer to purchase must be made at a purchase price equal to 101% of the principal amount of the debentures, plus accrued and unpaid interest thereon, if any, up to but excluding the date set for the completion of the offer to purchase. Capstone has had indications of interests from a financial institution in providing a debt facility up to the amount of the convertible debentures, should Capstone decide it wishes to avail itself of this option.




Capstone has engaged Scotia Capital as its financial adviser and Blake, Cassels & Graydon LLP as its legal advisor in respect of this transaction. Sherwood has engaged Haywood Securities Inc. as its financial advisor and Gowling Lafleur Henderson LLP as its legal advisor in respect of this transaction.




Conference Call



Capstone and Sherwood will hold a conference call at 11:00 AM Toronto time (8:00 AM Vancouver time) on Tuesday September 9, 2008 to allow shareholders, securities analysts and investors the opportunity to hear management discuss the business combination outlined herein. The call can be accessed by dialling (toll free) 1-866-334-3876 or at 416-849-4292. The call will also be webcast by Vcall; the call and presentation can be accessed at Capstone's or Sherwood's websites at www.capstonemining.com or www.sherwoodcopper.com, respectively. The call will also be available for replay by dialling (toll free) 1-866-245-6755 or 416-915-1035 (Passcode 130485) for 14 days.




About Capstone Mining



Capstone is a Canadian based mining company currently operating the 100% owned Cozamin copper-silver-lead-zinc mine located in Zacatecas State, Mexico. The Cozamin Mine produced 6.7 million pounds of copper at a total cash cost of US$0.90 per pound in the three months ended June 30, 2008. Capstone has approximately 80.3 million shares outstanding and is well financed with no bank debt, and approximately US$100 million in working capital and marketable securities as of June 30, 2008, based on current share prices.




Additional information on Capstone Mining and its Cozamin Mine is available on Capstone's website at http://www.capstonemining.com.




About Sherwood Copper



Sherwood Copper owns 100% of the high grade Minto copper-gold mine in Yukon, Canada, which was built on budget and ahead of schedule in 2007. The Minto Mine is one of the highest-grade open pit copper-gold mines in the world, and is forecast to be a low cost producer. With 140% growth in resources in two years, followed by a successful 2008 drilling program, Sherwood plans to evaluate options for further significant production expansions. Sherwood also has a 100% interest in the high grade Kutcho copper-zinc project in BC, Canada, which it is advancing towards production. The Minto Mine produced 12.8 million pounds of copper at a total cash cost of C$0.96 per pound in the three months ended June 30, 2008. Sherwood has approximately 53.8 million shares outstanding and, at June 30, 2008, had approximately $51.7 million in project related debt, $43.6 million in convertible debentures, and $8.1 million drawn against a corporate credit facility, after repaying US$16.9 million in the first six months of 2008.




Additional information on Sherwood and its Minto Mine can be obtained on Sherwood's website at http://www.sherwoodcopper.com.