Ero Copper Corp. (NYSE:ERO) Q1 2024 Earnings Call Transcript

Ero Copper Corp. (NYSE:ERO) Q1 2024 Earnings Call Transcript May 10, 2024

Ero Copper Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. This is the conference operator. Welcome to the Ero Copper First Quarter 2024 Operating and Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Please go ahead. Presenter Speech

Courtney Lynn: Thank you, operator. Good morning and welcome to Ero Copper’s first quarter earnings call. Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements and MD&A for the three months ended March 31, 2024. On the call with me today are David Strang, Ero’s Co-founder and Chief Executive Officer; Makko DeFilippo, President and Chief Operating Officer; and Wayne Drier, Chief Financial Officer. We will be making forward-looking statements that involve risks and uncertainties from which actual results may differ materially. We would refer you to our most recent annual information form available on our website SEDAR and EDGAR for a discussion of the risk factors of our business and their potential impact on future performance. As a reminder and unless otherwise noted, all amounts are in US dollars. I will now pass the call over to David Strang.

David Strang: Thank you, Courtney, and thank you everyone for joining us today. We’ve had a great start to 2024, driven by the strong execution of our growth strategy coinciding with highly favorable market conditions for copper and gold. During the quarter, copper prices rallied to their highest levels in nearly two years, fueled by rising demand expectations while the supply outlook remains extremely constrained as evidenced by our recent treatment and refining charge negotiations where we locked in two-year TC/RC terms in the low teens on roughly one-third of our projected concentrate production. At the same time, due to macro and geopolitical uncertainty, gold prices hit all-time highs. These positive trends in both copper and gold markets arrive at an opportune time as we are on track to reach our highest annual production levels ever.

This includes anticipated contributions from the Tucuma project, which is now approximately 97% complete. I’m also happy to share that commissioning of Tucuma is advancing ahead of schedule and as a result we are narrowing our projected time line for initial production to early Q3 2024. While Makko will delve into more detail on our progress at Tucuma, I want to express my deepest gratitude to our team on the ground, which just marked over five million hours of work completed with zero lost time injuries. This is an incredible achievement and I commend our leadership team at Tucuma for the strong safety culture built over the past two years. As we rapidly approach an important inflection point in our consolidated copper production profile, I’m also pleased to report that our Xavantina operations are on track to deliver record gold production again this year.

In fact, during the first quarter, we produced 18,234 ounces, representing an increase of nearly 5,800 ounces or approximately 47%, compared to the first quarter of 2023. This increase is attributable to the successful completion of the NX 60 growth initiative last year, as well as higher than expected gold grades, which averaged over 16 grams per tonne during the period. This performance also resulted in unit operating costs for the quarter that were below our full year guidance. More specifically C1 cash costs averaged $395 per ounce in the quarter versus our 2024 guidance range of $550 to $650 per ounce. And all-in sustaining costs per ounce averaged $797 versus a full year range of $1,050 to $1,150 per ounce. Given the continuation of positive grade reconciliations and additional visibility into mineable grades for the remainder of the quarter from indoor development channel samples, we are raising our 2024 gold production guidance from 55,000 to 60,000 ounces to a range of 60,000 to 65,000 ounces.

Consequently, we are guiding to the low end of our full-year gold C1 cash cost and all-in sustaining cost guidance. With gold prices continuing to hit all-time highs, we are well positioned to deliver record operating margins and cash flows at Xavantina this year. At our Caraiba operations, our performance during the quarter was largely in line with our expectations. From a strategic execution standpoint, we made good progress at the new external shaft, where we remain unscheduled to reach a projected depth of approximately 600 meters by year-end. Upon our anticipated project completion at the end of 2026, this shaft is expected to reach a depth of over 1.5 kilometers, making it the second deepest shaft in South America. From an operational standpoint, we started to see the positive impact of the recently completed Caraiba mill expansion during the quarter, with tons processed up over 5% compared to Q4 at approximately 853,000 tons.

This increase in mill throughput partially offset a planned decrease in mined and processed copper grades that was compounded by delays in underground development during the period. As a result, a higher portion of ore was mined from lower-grade stokes than planned, resulting in average processed copper grades of 1.08% and production of 8,091 tons after recoveries of approximately 88%. At the same time, we benefited from the sale of copper concentrate inventories carried over from the fourth quarter, resulting in copper tons sold being nearly 1,400 tons higher than tons produced during the quarter. With respect to full-year production, we are reaffirming our guidance range of 42,000 to 47,000 tons, with production expected to be weighted towards the second half of the year.

Conversely, copper C1 cash costs, which averaged $2.30 per pound produced during the quarter, are expected to decrease throughout the year due to projected sequential increases in copper grades and production over the next three quarters. As a result, we are reaffirming our full-year cost guidance at Caraiba of $1.80 to $2 per pound. It is worth noting that there is potential for unit costs to improve further as we continue to lock in more favorable concentrate treatment and refining charges than we had assumed in our guidance. Before I pass the call to Makko for a deeper dive into project execution, I will share a few highlights of our first quarter financial performance. As mentioned, we experienced a fortunate culmination of high copper and gold prices, record production operating margins at Xavantina, and the sale of copper concentrate inventories carried over from the last year at Caraiba.

Collectively, these factors drove solid first quarter cash flow from operations of $17.2 million and adjusted EBITDA of $43.3 million. I’ll now hand the call over to Makko, after which Wayne will provide more detail on our first quarter financial results.

Makko DeFilippo: Thank you and good morning, all. As we turn the corner towards the finish line on the construction phase of the Tucuma Project, I want to reiterate what David said and recognize our site leaders, our operational teams, and our third-party partners at the Tucuma Project for their continued commitment to safety. Since green lighting, the Tucuma Build, our top priority as an organization has been to deliver the project safely. While we have had many successes at Tucuma over the past few years, I speak for all of us here at AERO in saying that our performance on safety is what we are most proud of. Whether looking at our safety record, reaching 97% physical completion this quarter, achieving key commissioning milestones ahead of schedule, or the line-of-sight visibility we now have on our unchanged $310 million capital cost estimate, to put it simply, we are finding a lot to celebrate at Tucuma these days.

Looking at where we are at in terms of commissioning and production sequencing for the balance of the year, we have continued to make excellent progress towards the start of operations. Following the successful completion and ramp-up of our crushing screening and conveyance systems earlier this year, we have been able to focus all of our attention to the systematic completion of our milling, flotation, and filtration systems in order to commence integrated commissioning. With the recent completion of our freshwater intake system as well as the conclusion of major mechanical and subcomponent commissioning steps throughout the process plant, we expect to initiate integrated commissioning just prior to the end of the quarter. On the mining side at Tucumã, which is already in full operational mode, our cumulative operational performance remains well ahead of schedule, despite strong rains during the second half of March.

We ended Q1 with approximately 36000 tonnes of ore in a run-of-mine stockpile and an additional 160,000 tonnes of stripped ore in the mine ready to be blasted. With the rainy season well behind us, a significant amount of sulphide ore available for processing and new commissioning milestones being reached on a daily basis, we are in an excellent position to achieve first concentrate production in early Q3 and reach commercial production, which we define as 80% of nameplate capacity by the end of the third quarter. At our Caraíba Operations, while the quarter had slightly lower grade mine in process versus our expectations due to development delays in the Pilar Mine, since the beginning of the second quarter we have made strong progress on development and production and we are reaffirming our full year production guidance.

As it relates to the construction of the new shaft for the Pilar Mine, also at our Caraiba Operations, shaft sinking continues to progress as planned and we remain on track to achieve our target depth of approximately 600 meters by year-end. In terms of specific milestones on this project, it’s worth highlighting that we successfully and safely concluded the second and longest raise bore segment of the shaft at the end of April. At its finished length of approximately 720 meters, the segment has set a new record for the longest raise bore ever completed in Brazil. Underground development and infrastructure installations required for the ore handling system of the shaft including our pressure chamber, conveyance levels. as well as ore and waste silos are progressing on schedule and the project continues to remain on track for shaft handover to operations in Q4 of 2026.

Lastly, we had an incredibly strong start at our Xavantina Operations during the first quarter, which has been well covered by David. If there are any specific questions on the progress at Xavantina, I’ll be happy to address those in our management Q&A. I will now turn the call to Wayne to discuss our financial results.

Wayne Drier: Thank you, Makko. As David highlighted, our financial results for the quarter reflected several positive factors. These included rising copper and gold prices, record production and margins at the Xavantina Operations and the sale of copper concentrate inventories carried over from the fourth quarter at the Caraiba Operations. In addition, a favorable move in foreign exchange led to a realized gain on our foreign exchange hedges of $2.1 million that contributed to first quarter cash flows from operations of $17.2 million and adjusted net income attributable to the owners of the company of $16.8 million or $0.16 per share on a diluted basis. Subsequent to quarter end, we elected to take advantage of another favorable move in the exchange rate and added a layer of zero cost collars for the second half of this year with floor and ceiling rates of $5.15 and $5.62 respectively.

The real has since strengthened against the US dollar falling back to a rate of approximately $5.05 yesterday. As at the end of last month, the total notional value of our foreign exchange derivative position for the remainder of 2024 including both the zero cost collars and forward contracts was a little over $250 million. These hedges cover nearly all of our real-denominated operating expenses and the majority of our major project capital expenditures for the remainder of the year and have a weighted average floor and ceiling of $5.02 and $5.38 respectively. Of the total hedge program, approximately $65 million is allocated for major project capital expenditures with a weighted average floor and ceiling of $5.10 and $5.23 respectively. The quarter saw a significant decrease in our capital expenditures with standard Tucumã quickly winding down as we approach initial production.

As a result, we ended the quarter with a total liquidity position of $156.7 million including $51.7 million in cash and cash equivalents plus $105 million of undrawn availability under our senior secured revolving credit facility. We have also entered into a $50 million non-priced copper prepayment facility subsequent to the quarter end. This facility provides cost-effective capital in a favorable physical copper market, particularly in light of persistently higher interest rates. The repayment of this facility is structured over 27 equal monthly installments, of 272 metric tons of copper beginning in October 2024. Should the market value of the copper delivered in any given month exceed $2.1 million, we will receive a repayment for the excess amount.

I will now pass the call back to David, to share some closing thoughts.

David Strang: Thank you, Wayne and thank you everybody, who joined the call today. Before we proceed to the Q&A session, I want to extend my deepest gratitude to our teams in Brazil and Canada for their continued commitment and hard work in executing on both our operating plan and our organic growth strategy. I look forward to our third quarter earnings call, when I expect to discuss the ramp-up of production underway at Tucuma. Now I will hand the call back to the operator, to open the line for questions, Operator?

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question is from Gordon Lawson with Paradigm Capital. Please go ahead.

Gordon Lawson: Hey Good morning and thanks for taking my questions. So starting with Caraiba to hit the 2024 guidance is it reasonable to model nearly four million tons of throughputs for the year? And what average grade, would you be expecting for the remainder of the year here?

Makko DeFilippo: Great question. Thanks for that. Yeah, look, I think — if you look at what we accomplished in Q1 in terms of our cadence on production for the year, in terms of copper we’re expecting our production to be second half weighted. I think it’s reasonable to assume that we’ll be slightly below that four million-tonne target like our original guidance for the year was just below that given the ramp-up of our mill expansion circuit in Q1. And we anticipate grade being obviously slightly higher through the full year, but around 1.2% to 1.3% in the full year.

Gordon Lawson: Okay. Okay. Yeah. That works out here. And just looking ahead, so there’s been a lot of significant success on exploration at Caraiba and reading what’s going on at Pilar right now so I’m just curious if there are other expansions being evaluated further down the pipeline.

David Strang: Yeah. We do have. And we’ve been open with regards to a number of ore bodies that we’ve identified in the northern part of the project and the property. We are evaluating longer-term and nothing imminent, but certainly longer-term opportunities in order to try and extract value from those ore bodies which may include longer term — the potential to construct a second concentrated plant in the north, but that’s very preliminary right now. Where we stand overall with regards to our operations at Caraiba, is the focus now is purely on getting the shaft completed, which will allow us to then access very high-grade material in the deepening project. And then, further take us back to the position that we’ve always wanted to be and have been as one of the lower-cost producers of copper in the world by accessing these high-grade ore bodies to depth in the Pilar Mine.

Gordon Lawson: Okay. Thank you very much. I appreciate it.

Operator: Thank you. The next question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw: Good morning. Questions for Makko around the, Tucuma, ramp-up and completion here, I mean you’re guiding to a start up in early July so call it two months from now. What would you consider to be sort of the big critical path items that need to happen in order to achieve that timeline?

Makko DeFilippo: Yeah. Great question, Orest, look, I think we’re — if you strip it all down and you look at what needs to happen between now and July I’d say we’re in the final — the home stretch which I would define as electrical installations, automation and some of the minor piping like Compressed Air Reagent Pipelines et cetera. So if you look at the project holistically from a critical path perspective, we really are down to the final straw. And we continue to make excellent progress on those initiatives. So, in terms of our progress on, I would say, non-critical path piping also the automation circuits that we’re putting electrical cabling and instrumentation that’s really where our focus is for the next two months.

David Strang: Just to add to that I mean where we are right now, we are already running water through the filtration. That means through the flotation circuits and the Jameson Cells. We’re in the process of turning the mill on. As we’ve previously put in, all dry commissioning has been completed and we have all now sitting on the — not the core source stockpile, the run-of-mine stockpile. And so really as Makko has pointed out there, we’re really down to the final little straws here. We’re looking forward to turning on the tailings filtration plant over the course of the next couple of weeks. And then moving as aggressively as we can towards full running of the wet circuit over the course of the next three weeks.

Orest Wowkodaw: Thanks David. Just following up I mean earlier you mentioned that you hope to exit Q3, I think I heard it 80% of throughput. I mean that’s a pretty quick ramp up if we’re talking to start up in early July. Like what are you seeing that gives you that kind of confidence in terms of compressed ramp-up schedule?

Makko DeFilippo : Yes, I don’t think to be honest I don’t think it’s that compressed. I mean I think we’ve given ourselves a better runway on the early Q3 startup. I think the other thing I would point to is that we are commissioning these independent systems again on a daily basis here. So, if you look at our flotation system, as Dave mentioned, our Jameson Cell, our filtration systems are being run and it’s been designed independently. So, I think there’s a lot of activity happening that gives us comfort in the timeline. But if you look at our total ramp-up schedule, obviously, we have a relatively I would say standard ramp-up rate to achieve 80%. We’re not forecasting achieving 100% nameplate capacity for about nine months as our total ramp-up curve.

So, said differently, I think in the initial phase, I think we’re in really good shape to achieve that 80% nameplate. Obviously, the ramp-up will continue over that nine-month period. But I don’t think that our ramp-up curve is — well, I know for fact in looking at many different projects that our ramp-up curve is right in the middle of the fairway.

Orest Wowkodaw: Okay. Thank you. And just a final question if I could. I remember the current mine plan for Tucuma, obviously, has very high copper production in the first two years or so. Then I’m wondering if you’re seeing anything on the exploration side that could potentially extend that high-grade sort of high production level for longer beyond 2026 and maybe what the time line might be to see an updated mine plan around that?