Ero Copper Corp. (ERO) Q3 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Third Quarter Financial and Operating 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 Noel Dunn, Executive Chairman of Ero Copper for opening remarks. Please go ahead.

Thank you, operator, and good morning everyone. The news release announcing Ero's third quarter 2021 financial results is available on our website, as are our financial statements and MD&A for the three-months and nine-months ended September 30, 2021. We will be making forward-looking statements on this call that involve risks and uncertainties concerning the businesses, operations, and financial performance of the Company. We would refer you to our most recent AIF available on our website, SEDAR and EDGAR for a discussion of the Risk Factors of our business and their potential impact on our future performance. Unless otherwise noted all amounts discussed in this call are in U.S. dollars. Joining me today are David Strang, Co-Founder and Chief Executive Officer; Makko DeFilippo, President; Wayne Drier, Chief Financial Officer; and Courtney Lynn, Vice President, Corporate Development and Investor Relations. Our third quarter was about the execution of milestones and objectives, which are key to our growth strategy. As results of our updated Boa Esperança project, highlighted this past quarter, we remain focused on creating long-term shareholder value by maintaining quality margins and continue to execute upon high return low capital intensity projects. This formula has been the basis for the industry-leading returns on invested capital, which we have generated and is the basis for our approach to future growth as well. As mentioned the Boa Esperança project serves as a great example of this formula. In addition to doubling life of mine copper production, compared to the 2017 study. We increased annual production volumes, increased mine life and have identified additional upside opportunities within the current design that we are well advanced in pursuing. Importantly, this project is also one of the lowest carbon intensity copper development projects globally. During the quarter, we delivered on three additional milestones integral to our strategy. These include: the safe conclusion of the two mill shell replacements at our MCSA Mining Complex in preparation for expanded operations; the successful commissioning of the Phase One cooling plant, the first of its kind of the Pilar mine; and three, closing the previously announced Goal Stream with Royal Gold. In all, our team has made significant progress this quarter in positioning our company and the balance sheet for a successful phase of investment in meaningful growth that we will expect to span the next several years. Looking back at when we acquired our asset portfolio, the goal was to get the MCSA Mining Complex and the NX Gold mine on a solid footing. We would say that we would accomplish that goal over the last four years, including the nearly two-year backdrop of COVID, we've more than doubled production volumes and reserve life at MCSA. We've developed a robust and low cost operation at NX Gold. We've significantly reduced our unit operating costs across our portfolio; we've built out one of the largest exploration programs in the world; we've made meaningful investments to modernize and optimize our processing operations; we've reinforced and expanded upon our commitment to support our local communities and achieved multiple records in the history of our assets with respect to safety performance, and significantly reduced our lost time incident rates over the years. As we turn our attention to the execution of our two main projects over the coming years, the new external shaft for the Pilar mine and the construction of the Boa Esperança project, our balance sheet has never been stronger. In addition to the strong operating cash flows generated by our mines, our balance sheet was bolstered during the quarter due to the $100 million of upfront proceeds received in connection with the NX Gold Stream. Progress in Brazil on COVID-19 front during the quarter has also gone a long way in building our operational resilience. Case counts have improved throughout the country with the rollout of vaccination campaigns at the federal, state, and municipal levels. Our colleagues in Brazil have made significant progress in protecting themselves their families and communities in which we operate with over 95% of our mine site employees vaccinated with at least one dose, and over 50% of our workforce now fully vaccinated. I will now pass the call over to David to provide an overview of our operational performance. And then over to Wayne, who will cover the Ero's third quarter financial performance. As always, our team will be available for questions immediately following this call.

Thank you, Noel. I'd like to echo Noel's sentiments about how far we have come as an organization and also talk about how far we plan to go over the coming years. We've built a culture of innovation and optimization, and a strong team that will continue to allow us to convert our strategy into reality and shareholder returns. At the MCSC mining complex, we have a strong and stable foundation that serves as a cornerstone in our vision of building an expanded Hub-and-spoke operating model. With a ramp-up of Surubim open pit operations, we are increasing number of ore sources to the mill from two to three. We also continued to make a meaningful investment in exploration across the Curaçá Valley with an expectation that the success we are seeing on the drill booked will translate to additional sources of mill feed over time. At the Pilar mine, we are finalizing our review of the 2020 shelf design for the deepening extension project. While the improved shelf design in larger diameter will require a higher upfront capital investment, we believe that decision is more than justified by the expected improvements in operating efficiencies, and the inherent potential afforded to significantly increase production volumes from Pilar over the medium to long-term. Previously mentioned, we successfully completed the second and last phase of mill maintenance at the MCSA mining complex during the quarter in preparation for continued growth of our operation. Our third quarter results reflect the planned downtime associated with this work. In total, mill throughput totaled approximately 570,000 tonnes grading 1.9% copper. The stability of our increased metallurgical recovery rates across grade profiles was evident again this quarter thanks to the recent HIG mill installation, which continues to benefit our operations. Strong copper production of just over 10,000 tonnes was achieved through a combination of favorable grade reconciliations in active areas within the Pilar mine and ongoing planning efforts to produce supplementary high-grade tonnes from within the upper levels of the mine. With the completion of mill maintenance, during the third quarter, we expect higher mill throughputs volumes to drive higher copper production in the fourth quarter, despite lower expected process grades related to the ramp-up of processing of ore from the Surubim open pit. As a result, we continue to guide towards the high-end of our full-year production guidance of 42,000 to 45,000 tonnes of copper. Our operating costs and KPIs during the third quarter were reflective of lower copper production as a result of reduced mill throughput and inflationary pressures impacting many other key input consumables. While these inflationary pressures have continued into the fourth quarter, we expect our unit costs to MCSA this quarter to also benefit from higher mill throughput and copper production rates. Given year-to-date, C1 cash costs MCSA that remain below the low-end of our guidance range and the expectation that we will deliver strong cost performance in the fourth quarter, we continue and maintain our guidance to the lower end of our full-year C1 cash cost guidance range of $0.75 to $0.85 per pound of copper produced. Capital expenditure guidance for the full-year has been updated to reflect acceleration of Phase 2 of our cooling project for the Pilar mine. The placement of long lead order items for our new external shaft, which we now expect to incur during the fourth quarter, and the impact of inflation and specifically higher consumable pricing on our capitalized development. The increases in forecasted capital expenditures for the full-year at the Pilar mine and deepening extension project, have been partially offset by CapEx reductions in the fourth quarter for MCSA and Surubim as we have prioritized higher return projects. At our NX Gold operations, we produce just over 9,400 ounces of gold during the quarter and our tracking towards the high-end of our full-year production guidance for the mine. Cash costs, all-in sustaining costs and operating cost KPIs at NX Gold was similarly impacted by inflationary pressures. However, we reprioritize some of our CapEx activities during the year, and shifted some of the sustaining capital to 2022. As a result, we're lowering our full-year all-in sustaining cost guidance range to $650 to $725 per ounce of gold produced. At Boa Esperança, we have increased our capital guidance for the full-year as we advance road construction, detailed engineering, and exploration activities in preparation for construction decision during the first half of 2022. Full details of our reaffirmed production guidance, cash cost guidance, and updated capital guidance can be found in our news release and MD&A. Before I hand the call over to Wayne, I want to recognize the incredible work that we are doing as an organization to support our communities, which are still recovering from the financial toll of the pandemic. So far this year, we have donated approximately 10,000 food baskets to families in need within the area of influence of our operations. And we expect to continue this program throughout the end of the year. During the third quarter, we also broke ground on a multi-year $4 million hospital clinic renovation that we expect will greatly improve the access to and quality of medical care for all of the stakeholders in the Curaçá Valley. Just on a side note, as this is Remembrance Day, I just like to pass on and remember, those who made the ultimate sacrifice. Wayne over to you.

Thank you, Dave and good morning everyone. Our solid operating performance during the third quarter, combined with continued metal price strength, and higher quarter-on-quarter copper sales volumes due to reduction in finished goods inventory drove adjusted EBITDA to $72.9 million bringing year-to-date adjusted EBITDA to approximately $245 million. We also reported record quarterly cash flows from operations of $150.7 million, driven primarily by the $100 million in upfront cash received upon the closing of the NX Gold Stream with Royal Gold. As a result, we have generated nearly $300 million in cash flows from operations year-to-date. I think it is worth noting the accounting treatment for the Stream agreement. The $100 million in upfront cash consideration was recorded on our balance sheet with offsetting current and non-current deferred revenue liabilities. As we deliver the ounces under the Stream, as we did during the third quarter on a prorated basis to reflect the May 1 effective date, our revenues for these stream sales will be comprised of two components. The cash revenues based on a percentage of spot call prices and non-cash revenues, or the amortization of deferred revenue liabilities related to the $100 million of upfront Stream proceeds. Additional detail on our realized pricing buildup for the NX Gold Stream sale is in our MD&A. With respect to our foreign exchange derivative contracts, we reported realized settlements during the quarter of $4.4 million, representing a decrease of approximately $1.5 million compared to the second quarter, when we opportunistically accelerated to the settlement of a portion of these contracts to take advantage of temporary strength in the Brazilian Real. As I've shared on our prior earnings calls, we continue to expect foreign exchange settlements to amount to somewhere between $4 million and $6 million per quarter, provided the Brazilian Real stays relatively range bound at these levels. I would also like to add that these foreign exchange derivative settlements are reflected in our adjusted EPS numbers but not reflected in adjusted EBITDA as we view the foreign exchange hedging as an ongoing corporate level activity, but not part of our underlying operating business. Our headline net income for the third quarter was $26.4 million, of which $26.1 million or $0.28 per fully diluted share was attributable to Ero Copper shareholders. After adjusting for non-cash components, including unrealized foreign exchange gains, our adjusted net income was $45.7 million or $0.49 per fully diluted share. As previously mentioned, our balance sheet strengthened considerably during the third quarter, due to the receipt of $100 million upon the closing of the NX Gold Stream. With these proceeds, we repaid $100 million of principal on our $150 million revolving credit facility, resulting in available liquidity at quarter-end of nearly $220 million, which is comprised of approximately $120 million in cash and short-term investments and $100 million in revolver availability. I'm also happy to report that for the first time since our IPO, our balance sheet is in a net cash position of approximately $64 million. With that, I'll hand the call now back to Noel; he will share some final comments.

Thank you, Wayne, and everyone who joined the call today. Before we open up the call for Q&A, I'd like to recognize and thank the Ero team, and especially our colleagues in Brazil for the hard work they do every day to deliver both strong operating performance and also achieve the milestones, critical to the advancement of our growth strategy. As we embark on a multi-year phase of growth investment, our company and our team have never been stronger. And I'm excited to see this demonstrated in the execution of our strategy and the value we are creating for our shareholders. I will now turn the call back to the operator to open the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Hi, good day, everybody. I was hoping we could get a little bit of color on where your current thinking is on the new Pilar shaft. I realize, it sounds like you want to make it bigger and obviously; it'll be more expensive because it's bigger. And it sounds like you had some inflation. But obviously, you still get the upside of a bigger shaft on the production profile. Can you share any color on sort of how you see all this coming together and then when the market could get some visibility on what some of these details may look like?

Sure, Orest. So with the continued success with the exploration, deeper into the mine, deeper resources which remain open to depth, there was an opportunity for us to look at deepening the shaft. And in doing so and deepening the shaft allowed us to then look at what other areas of efficiency we could get. So the current plan for the shaft, I believe, is another 200 to 300 meters of depth. Along with that, by widening the shaft, we're going to see efficiencies in three main areas. Number one, a reduction and to potentially limiting all taking of waste out of the deeper part of the mine through the ramp and using trucks for that, we will now be able to use the shaft to do that which increases our efficiencies and lowers our costs. Number two, is an increased and quicker turnaround in the shift time between shifts in terms of the movement of men up and down that shaft. And the third thing is and while it's less one, we feel it's quite important, freeing up the ramp now with regards to also using the shaft to move consumables up and down from the deeper levels of that. And what that ultimately will allow us to do and evaluate is by having greater opportunity to use the ramp particularly in the shallower parts of the mine, there is longer term potential to look at greater efficiencies and longer term opportunities to increase production in the upper areas of the mine as well. With respect to how that plays out, obviously, we -- the technical report that we have out right now as of last year is not being updated. We don't see a material change to the business to warrant a change in the 43-101 report. And we are now moving to a five-year guidance methodology. And so while the shaft will be constructed during that period of time, unfortunately, within that you won't see all the reflected upside potential once that shaft is completed. But as we move forward on year-on-year basis, you will see that come through in terms of greater production coming from the depths -- the deeps and that's the other area I forgot to mention. We believe we will be able to mine more material from the deeps, you will see greater efficiencies and operation with regards to reduction of costs as well. And that's why we feel this is a great time to do that now and do a robust construction of the shaft.

As a follow-up to that, when do you see the projected timeline for the shaft completion and entering operation?

We see that somewhere in late 2024.

Okay. Okay. And then you mentioned, you're moving to a five-year guidance. I presume that means January for that, although I could be wrong there.

Correct.

But will that include both a production profile, a cost and CapEx or just strictly sort of all three? Okay, excellent. Okay, thank you very much. I'll let somebody else join the queue.

Thanks, Orest.

Our next question comes from Jackie Przybylowski of BMO Capital Markets. Please go ahead.

Thanks very much. I guess I wanted to ask about Boa. I know it says in the report that Boa is still pending approval, I guess from your Board. I was wondering what the timing on that is? What the Board needs to see to make that decision, and what that changes in terms of how you move forward with spending or plans?

Good questions, Jackie. With regard, the Board has reviewed this feasibility study, what we wanted to do, and while we feel that the Board could make a decision on this feasibility study. We felt it more prudent from our perspective, that we include some of the more detailed engineering work along with some of the drilling work that is going to be included from the gap zone to have that and that project be reviewed by the Board. And so it's not -- the Board and management do not see any fatal flaws with regards to the project is merely that we would prefer the Board to make a final decision on the project with the best information prior to construction. And so that is what we've management decision in conjunction with the Board has decided to do. However, as you will see, we are -- we have spent some and we'll be spending some money in the fourth quarter of this year with regards to some development at the project, particularly in some civil works around on roads, there will be additional capital spent ahead of formal Board approval towards the latter part of the first quarter with regards to some additional work that we need to get done. It's not material expenditures in terms of cost, but work that needs to be done in order to keep approve project moving forward on the basis of the timeline that we'd like to keep in place. And that is a construction decision. I mean, beginning construction civil works around about the April, May timeframe.

That exactly was why I was asking the question. You're totally right. And I guess, I mean, to go back to what or in terms on guidance. I'm assuming that for 2022 and the five-year guidance, you would be working under the assumption that Boa is going to be approved and so will be included in that, and then I guess I mean in some instance that it wasn't for whatever reason you'd probably revise guidance at that point. Is that the right way to think about it?

What we will do with regards to that is we will have a budget that the Board will approve, that will feed into obviously guidance for 2022 and onwards. What we -- and therefore there will be some capital associated with that that will go into the general capital budget, our sort of number. And then we will do a line item below that highlighting the Boa costs during each year thereafter. So we'll make it easy for you guys to be able to differentiate between the two and when numbers get triggered.

Perfect. Thanks very much.

Does that make sense?

Yes, Noel, that's perfect. Thanks.

[Operator Instructions]. Our next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

Yes, thanks very much, guys. Just curious if there's any further updates, or maybe not just on the ore sorting progress and your thoughts on that, in terms of implementing it?

With regards to ore sorting, like anything else that we're doing in the district, we're constantly evaluating, and that's the beauty of this company. It's our ability to evaluate opportunity sets, and when and what makes the highest return for our shareholders. With regards to that, as you know, N8/N9 the deposits near Vermelhos and the open pits there, their construction is contingent with regards to us implementing ore sorting. Right now we see other opportunities in the near-term for other sources of ore that are giving us a higher return than those projects. And so ore sorting is very much tied in terms of our implementation of that with regards to N8/N9. And we see other opportunities in the portfolio right now, whereby we can get higher returns, while maintaining our copper production over the next few years to suggest that we can maybe defer some of that construction and implementation.

Got it. I think, as we talked about before, certain other deposits like Surubim, for example, are don't necessarily lend themselves as well to ore sorting?

Yes, well, it's not necessarily that it's when you have a portfolio like we have, and the flexibility to adjust we have this optimization project that we're doing within the Pilar mine. Specifically areas that we've seen and you'll see there's a significant difference between the reserves and resources highlighted for Pilar. We see opportunity there, and we're starting to see opportunities within that mine that allow us to mine higher grade material and evaluate higher grade material that gives mined at a lower cost and obviously less capital requirements versus these projects, and give us the same amount of copper production. So naturally, what you would do is you would do that before you build those.

Our next question is a follow-up from Orest Wowkodaw, Scotiabank. Please go ahead. Orest, your line is live.

Sorry about that. Just indicating short queue today. Thanks for allowing me to follow-up. You've talked about inflation a couple of times in the release and in the update today. I'm just curious with Boa itself, I mean you've recently updated the capital number there, I think it's $294 million. Is that still a fairly valid number, I just don't or can you give us some color on that?

Absolutely.

Okay, so that reflects current input costs?

That actually reflects input costs as it related to mid-year. And as you all know, there are two components, significant components of that kind of capital number related to steel and cement costs. What we have seen actually subsequent to the capital estimate, there's obviously steel costs have mitigated over the course of the third quarter. And we've seen that reflected also in some of our costs that we've been incurring at other mines, where we've seen steel pricing come down. So I would say right now that our capital costs for Boa have fully loaded for the costs that were estimated at mid-year this year.

Okay, that's excellent. And what can you remind me what contingency percentage is built into that?

Orest, it's round about between 5%, don't hold me between 5% and 8% which is reflective of 7% which is reflective of the level of detailed engineering that's been completed today.

Okay, in terms of the development plan for Boa, do you have a plan to build it themselves or do you plan to outsource that to an EPCM? Just wondering what the approach will be?

Yes, we will be working and doing an EPCM or EPC contract with regards to the construction of it.

This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Operator. Just thanks everybody again coming out today on Remembrance Day, with regards to participating in the call. And again, just to reiterate what Noel said, a great thank you to our team, continuing to work diligently to make our company a success. And thank you to everybody for their efforts in following us and our shareholders for supporting us. With that operator, we will end the call. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines. Thanks for participating and have a pleasant day.