Ero Copper Corp. (NYSE:ERO) Q3 2023 Earnings Call Transcript

Ero Copper Corp. (NYSE:ERO) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Third Quarter 2023 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Courtney Lynn, Senior Vice President, Corporate Development and Investor Relations for opening remarks. Please go ahead.

Courtney Lynn: Thank you, operator. Good morning, and welcome to Ero Copper’s Third Quarter 2023 Earnings Call. Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements and the MD&A for the three and nine months ended September 30, 2023. 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 are speaking to you today from our offices in Sao Paulo, Brazil at the end of a weeklong tour with our Board, during which we visited each of our operations. I’m happy to share that everyone is buoyed from the visit, especially seeing the great progress our team is — in Brazil has made in each of our major growth initiatives. Our third quarter financial results reflect our team’s exceptional strategic execution and operating performance amid challenging market conditions. Despite the macroeconomic headwinds that led to weaker metal prices and a stronger Brazilian reais against the US dollar, we remained focused on executing and broadening our growth strategy, positioning Ero for long-term value creation as the global energy transition gains momentum.

During the quarter, our near-term growth projects achieved several critical milestones. The Tucuma project, as announced last month, reached over 70% physical completion. Furthermore, a significant achievement was realized at the Xavantina operations, where we successfully initiated production from the Matinha vein, resulting in record gold production and operating margins. Meanwhile, at our Caraiba operations, we continue to advance our Pilar 3.0 initiative as we near completion of the mill expansion project and prepare to commence main sinking at the new external shaft. In parallel, we continue to bolster our medium and longer-term growth pipeline through ongoing regional copper and nickel exploration programs at the Caraiba operations, as well as through the execution of a binding term sheet a to earn a 60% interest in Vale Base Metals Furnas copper project, which we announced earlier this week.

Before I hand over the call to Makko to provide more detail on the execution of our growth projects, I will summarize our third quarter operating and financial performance. At the Caraiba operations, copper production was in line with our forecast at 10,766 tonnes of copper in concentrate. While our C1 cash costs for the quarter were also in line with our forecast in BRL terms when converted to US dollars at the average third quarter exchange rate of BRL4.88 BRL per US dollar, our copper C1 cash costs in US dollar terms remained elevated at $1.82 per pound of copper produced. Copper production is expected to be strongest in the fourth quarter due to higher anticipated mined and processed copper grades. As a result, we are reaffirming our 2023 copper production guidance of 44,000 to 47,000 tonnes.

Due to higher expected copper grades and with the current quarter-to-date exchange rate averaging over BRL5.05 per US dollar, we also expect to deliver lower C1 cash costs in the fourth quarter. For the full year, our copper C1 cash cost guidance range based on the original assumed foreign exchange rate of BRL5.30 per US dollar remains $1.40 and $1.60 per pound of copper produced. Yet, given the continued strength of the BRL against the US dollar, we are also providing a sensitivity range of $1.50 to $1.70 per pound of copper produced should the BRL to US dollar exchange rate remain at current levels for the remainder of the year. At our Xavantina operations, as I mentioned earlier, we successfully initiated production from the Matinha vein during the quarter, which contributed to a quarter-on-quarter increase of over 40% in both processed gold grades and gold production.

As a result, we produced a record 17,579 ounces of gold at C1 cash costs of $371 per ounce. Due to our strong year-to-date operating performance at the Xavantina operations, we are increasing our 2023 gold production guidance range from 50,000 to 53,000 ounces to 55,000 to 59,000 ounces. We are also reducing our full year C1 cash cost guidance from $475 to $575 to $375 to $475 per ounce of gold produced and lowering our all-in sustaining cost guidance range from $1,000 to $1,100 to $900 to $1,000 per ounce of gold produced. Our financial results for the period reflect a combination of our strong continued operating performance as well as the metal price weakness in BRL strength that I mentioned earlier. As a result, adjusted EBITDA for the third quarter was $42.9 million and adjusted net income attributable to the owners of the company was $17.3 million or $0.18 per share on diluted basis.

As planned, our capital expenditures remained elevated at just over $120 million during the third quarter, largely due to the strong progress being made at our Tucuma project. In an effort to maintain the momentum we have carried forward from the second and third quarters, we have elected to accelerate select work streams originally slated for the first quarter of 2024 to the fourth quarter of this year. As a result, we have adjusted 2023 capital expenditure guidance for the Tucuma project to include estimated increase of approximately $15 million to $20 million due to the expected shift in timing of associated payments. We have also provided foreign exchange rate sensitivities across our capital expenditures to guidance ranges to reflect the potential impact of the BRL to US dollar exchange rate remaining at current levels through the end of the year.

I will now pass the call to Makko to discuss the highlights around our third quarter project execution after which Wayne will discuss our financial results for the quarter.

Makko DeFilippo: Thank you, Dave, and good morning, everyone. With respect to progress on our strategic initiatives, I am incredibly proud of our operational teams and we’re able to continue execution through the third quarter after an excellent first half of the year. Before discussing each of our projects in detail, I would like to congratulate all of our employees and contractors at the Tucuma project currently totaling over 1,700 people on site on achieving over 2 million hours without a lost time injury. In terms of the progress at Tucuma, we achieved a major construction milestone of over 70% physical completion, as you would have seen in our project update from October. Noteworthy achievements on site include the completion of earthworks, completion of all major civil concrete pours, major advancements in steel fabrication and erection as well as installation of several key pieces of process equipment, including our primary crusher, ball mill and tertiary crushers.

As evidenced in our updated site photos, we are making excellent progress in flotation cell installation and site-wide plate work and piping. In parallel, our main substation and power line installations are both tracking ahead of schedule and we expect to tie into the national grid at the end of this month. As a result, mechanical completion testing and the first commissioning phases of installed equipment are expected to commence prior to year-end. With the progress made on procurement, manufacturing, equipment deliveries and construction to date, our primary focus on the project has transitioned to piping, cabling instrumentation installations as well as our operational readiness planning, all of which is progressing on schedule. As Dave mentioned, given the excellent performance and momentum we have been able to achieve this year, in particular, on the pre-stripping and electrical power installation front, we expect to accelerate select work streams related to both mining and plant commissioning from the first quarter of 2024 to the fourth quarter of this year, which has been reflected in our updated guidance.

While our expected project delivery date remains unchanged, we believe the acceleration of these work streams will continue to de-risk our overall commissioning and ramp-up schedule. Our total direct project capital estimate for the completion of the Tucuma project remains unchanged at approximately $305 million. It is worth noting that a Q2 redesign of our haulage route combined with decreased emotion costs, below budget earthworks tailings, and waste on construction costs and reductions in duties on imported equipment versus our budget have largely offset the impacts of a stronger-than-anticipated foreign exchange rate and increases in forecast electromechanical erection costs through project completion. At our Caraiba operations, we continue to advance the new external shaft of the Pilar mine and the expansion of our Caraiba mill, both part of our Pilar 3.0 initiative.

During the third quarter, we finalized the installation of the head frame for the new external shaft, concluded installations and are currently commissioning both the stage and personnel winders. We remain fully on track to commence main sinking activities prior to year-end. With respect to supporting infrastructure underground at the Pilar mine, we are in the final commissioning stages on our underground batch plant, are reaming the waste and ore silos for our ore flow system and are preparing for the second phase excavation of our crusher chamber. I’m pleased to report that all of our underground development requirements remain on schedule for shaft handover to operations in Q4 of 2026. Back on surface at the Caraiba mill. Installation of our new ball mill, Jameson cell and associated electrical installations were nearly completed during the third quarter.

We anticipate an on-schedule physical completion of the expansion project prior to year-end. Last, but certainly not least, at Xavantina, we successfully developed into and commenced mining of the Matinha vein during the quarter, a fundamental component of our NX60 initiative. During the quarter, we mined ore from three different production levels within the Matinha vein. Our record production results this quarter and revised full year guidance ranges for the Xavantina operations speak to the positive impact from this initiative. As Dave noted, we are expecting a strong fourth quarter at each of our operations and continued execution across our project portfolio. I will now turn the call over to Wayne to discuss our financial results.

Wayne Drier: Thank you, Makko. As Dave mentioned earlier, our third quarter financial performance reflected record gold production and operating margins, which partially offset a decrease in copper production as well as continued copper price weakness and a stronger BRL, which averaged BRL4.88 against the US dollar for the period. This drove operating cash flows of $41.9 million that helped to fund capital expenditures of $121.4 million, which were primarily directed towards the ongoing execution of our organic growth initiatives. We ended the quarter with a strong liquidity position of approximately $238 million. This includes cash and cash equivalents of $45 million, short-term investments of $43 million and $150 million of undrawn availability under our senior secured revolving credit facility.

Regarding our BRL to US dollar exchange rate hedge program, we reported realized gains of $3.5 million for the quarter. Consistent with our conservative strategy and in response to a favorable move in exchange rates towards the end of the quarter that extended into October, we opportunistically expanded our foreign exchange rate hedge program to cover the majority of projected operating costs and capital expenditures through the end of 2024. These hedges have a weighted average floor and ceiling of BRL5.04 and BRL5. 43 per US dollar, and includes approximately $145 million designated for major project capital expenditures with a weighted average floor and ceiling of BRL5.10 and BRL5.23 per US dollar, respectively. It’s also worth noting that we remain hedged on approximately 75% of our copper production for the remainder of the year through the zero cost collar hedge program we initiated in January.

The copper hedge contracts provide a floor price of $3.50 per pound on 3,000 tonnes of copper per month through the end of December 2023. With that, I’ll now hand the call back to David to share some final remarks.

David Strang: Thank you, Wayne, and thank you again to everybody who’s been on the call. I think the theme for the quarter has been us operating extremely well, as a team, both operationally and on the capital projects in a dynamic macro environment, dealing with exchange rate and metal price volatility on the copper side of things. I cannot thank our team enough both in Vancouver and here in Brazil for the strong efforts they have done in terms of continuing to move our projects forward and continue to operate our operations. And while we don’t want to single out any particular operation versus others, the exceptional performance of our team at the Xavantina operations. And with that, operator, I will turn it over to you for a question period.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dalton Baretto of Canaccord. Please go ahead.

Dalton Baretto: Good morning guys. Dave, I actually wanted to kick off by talking about this new Furnas project that you didn’t actually mention on the call. And I’m wondering, can you talk a little bit about the project itself, the rationale for the deal? Maybe why Vale didn’t run with it and how this thing will compete for dollars versus your existing portfolio?

David Strang: Thanks, Dalton. I think we did mention it at the beginning of the call. But with respect to Furnas, I think there’s a couple of things we like to be able to point out. Number one, we’ve always said that we always want to continue to grow our business here in Brazil. And when we look on the longer-term basis of the future of this company, when the opportunity came to us with respect to Furnas and Vale’s approach to us if we would be interested in looking at it, it was something that, for us, is extremely dynamic. And I’m being somewhat hesitant here because with respect to the rules under 43-101 and what we can and cannot say with respect to the project. But what I can say with regards to it is, as you know, Mike and the team and from the geology side of things, have a great understanding with regards to a lot of projects here in Brazil.

The work that Vale has put into this project, drilling over 90,000 meters and over 240 drill holes. The opportunity to be able to work with Vale, and this is a bigger relationship that’s starting to be established. The context between ourselves and Vale were based upon Vale’s viewpoint of a partnership that could help look at something that they’ve looked at historically from let’s say, an open pit perspective, and our opportunities in terms of how we operate underground in Brazil. Our strong focus on ESG was something that gave Vale comfort that this — we are a company that they feel comfortable that they would enter a relationship like this. That’s the general realities I can say right now as we continue to move forward, as we continue to work on the project.

So I think it will become a lot more self-evident in the world with respect to the opportunity that’s available to us with respect to Furnas. Furnas is a long-term growth opportunity for Ero Copper. We will be working on it, as I said, ideally, we’d like to be able to accelerate it faster than the program that we have but we will be working on that project for the next five years. Within that, the competition for exploration dollars does not exist between what we’re doing in the Curaca Valley and our nickel projects there and what is happening around Furnas. We have — and are extremely comfortable with the budgets that Mike and the team have put together with regards to the work we need to do at Furnas. And remember, with over 240 holes already drilled on the project, the work that Mike and the team there are doing is a lot of compliance-related work with regards to 43-101 and bringing that project into the ability to discuss the resource with resource with the marketplace under 43-101.

So it is a great, great growth initiative for this company. Yeah, we will be talking a lot more about it over the course of the next 12 to 18 months. And I think in the fruit of time, I think the market will come to understand the great opportunity we have here and also the great relationship that we’re starting to develop with one of the biggest mining companies in the world and working with them. And I think that should be taken into consideration as well with regards to this. Brazil and Vale being synonymous and the opportunity to work with the biggest mining company here in Brazil is a great opportunity for Ero Copper in the future.

Dalton Baretto: Great. Thanks for that, Dave. And then maybe switching gears to Tucuma. So you’re still guiding to first production in H2 2024, but the mine is almost [into the sell-sides] (ph), you’re going to kick up plant commissioning by year-end. Is there any upside to your guidance? And what are some of the key risks between now and then?

Makko DeFilippo: Yeah, this is Makko. Great question, Dalton. Yeah. Look, I think we’re — obviously, things are going really well. We’ve continued to build on the momentum from the first half of the year. Obviously, we’ve seen a big jump in fiscal completion relative to last quarter. I think in terms of starting the first commissioning phases and having a power site early, obviously, is going to help us de-risk our commissioning ramp-up schedule. With respect to project completion, the — we’re working as hard and fast as possible to get ahead. I think the risk is always the same, and that’s the rainy season and how much progress we can make. We’ve planned for that in our current start-up schedule. And I think that’s part of the reason that we’re moving capital from Q1 next year into Q4 and also continuing to maintain our current plan, which is second half of next year.

So while there is some opportunity there, I think given the uncertainties involved, we’re going to stick to our second half guidance for now.

David Strang: Yeah. Dalton, just to reaffirm that, we’re taking a conservative approach with regards to what we’re doing. Yes, the project is moving forward very, very well, but we are not in a position nor do we feel comfortable right now to change any guidance with regards to when commissioning and commercial production comes into play. Maybe we have a conversation with the marketplace in the first half of next year with regards to that, but we’re not changing guidance right now.

Dalton Baretto: Thanks guys. I’ll jump back in queue.

Operator: The next question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw: Hi, good morning. Makko, did I hear you say earlier that the impacts of the FX have been largely offset by savings elsewhere on Tucuma and that’s why the total project CapEx of $305 million is unchanged?

Makko DeFilippo: Yeah, that’s exactly right, Orest. So obviously, there was an impact stronger this quarter or in Q3 relative to or if you look at the big offsets there, it’s going to be on the redesign of the mine haulage route, so both in terms of pre-strip and also when we’re starting to get into building our RodoMine stockpiles, Q2 redesign was able to shorten that haul route fairly significantly. We’ve also seen savings on emotion costs and then primarily in some of the — as well as import duties on some of the equipment that’s arriving on site, that’s all flowing through our forecast. Obviously, as we look ahead, we’re seeing a couple of things moving in the opposite direction, including increased electromechanical, erection costs for completion.

So I think as we continue to build this project out, both in Q4 and through the first half of next year to project handover, we’re going to continue to see positive adjustments and negative adjustments. Fortunately, to date, those have largely offset each other. And we’re continuing to anticipate cost of completion of $305 million. But again, those are — that’s our best estimate, things are going up and down on a regular basis.

Orest Wowkodaw: Okay. And just as a follow-up, I mean, given there’s a lot of moving parts here, you’re bringing forward some CapEx, you’ve got some currency changes. And now you’re also introducing some spending for Furnas. What does CapEx look like for 2024 on if we think company-wide?

Makko DeFilippo: Yeah. Look, for us — we’re — as I think all companies are from discussions I had with my counterparts at various companies, we’re all in the process of budget season right now. So I think it would be premature to talk about company-wide capital in advance of our budget. With respect to Tucuma, all I can say is that we’re anticipating the cost of completion of that project to be at the time of handover to be $305 million, subject to the variations we talked about. In terms of company-wide CapEx, we’re in that process right now.

Orest Wowkodaw: Okay. Thank you.

Operator: Next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.