Ero Copper Corp. (ERO) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Fourth Quarter and Full-Year 2021 Financial and Operating Results Conference Call. As a reminder, all participants are in a 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 and good morning, everyone. News release announcing Ero's Fourth Quarter and full-year of 2021 financial results is available on our website. As are our financial statements and MD&A for 3 months and 12-months ended December 31st, 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'd refer you to our most recent AIF available on our website and also on SEDAR and EDGAR for a discussion of the risk factors of our business and their potential impact on future performance. As per usual, unless otherwise noted, all amounts are in U.S.. dollars. Joining me on the call today is Makko DeFilippo, the President. Wayne Drier, Chief Financial Officer, and Courtney Lynn, Vice President Corporate Development and Investor Relations. Unfortunately, David Strang, Ero's Co-Founder and Chief Executive Officer is unable to join us today due to an urgent family matter acquiring his attention and travel overseas. Before we discuss Ero's operating and financial performance during the fourth quarter and full-year of 2021, I'd like to touch on important strategic momentum we've built up over the last 18 months and highlight the clear and fully funded pathway now in front of us, to double our corporate reduction to approximately a 100,000 tonnes per annum and achieve sustainable gold production levels of approximately 60,000 ounces per annum. Our strategy tends to unlock value from our portfolio, has remained consistent over the years and includes; 1. Maintaining high operating margins to organically fund production growth. 2. Deliver year-on-year increases to our underlying resource base across our asset portfolio through ongoing exploration programs. 3. Optimizing newly identified and existing quality growth projects within the portfolio, prioritizing low capital intensity and high returns. Highlighted most recently by the teams work at the Boa Esperança Project, as well as the pillar 3.0 and NX60 initiatives. And lastly, maintaining a balance sheet capable of supporting our growth initiatives across a range of metal price scenarios. Just last month, our Board formally approved the Boa Esperança Project, which we expect to commence construction during the second quarter of this year. Commercial production from the mine is expected during the second-half of 2024 with the first full-year production oversee being in 2025. Bond completion consolidated the Copper production of the company is expected to reach nearly a 100 thousand tonnes at first-quarter operating costs. At our operating assets, our new strategic initiatives are well underway, including the Pilar 3.0 and the NX60 initiatives, which are expected to continue to generate high returns on invested capital for the company. At the Pilar Mine, exploration successes and optimization efforts in the shallower portions of the mine, paired with the construction of a new external shaft, is expected to increase combined production from the mine to approximately 3 million tonnes per annum compared to the 1.3 million tonnes of ore produced in 2021. At NX Gold, production from the Santo Antônio Vein, combined with the planned production from the Metinya Vein beginning in 2024, is expected to result in sustained gold production of approximately 60 thousand ounces per annum. Excess mill capacity at both assets continues to support our focus on value creation through exploration. To support our growth strategy of the coming years, we bolstered our balance sheet earlier this year with a $400 million offering of eight-year senior unsecured notes. We priced the notes prior to the recent increase in market volatility, and as a result, we're happy to lock in a coupon of 6.5%. Our liquidity position is now strong at approximately $550 million on a pro forma basis, including approximately $475 million in cash and $75 million in revolving availability. Whilst recent geopolitical tensions presented new set of challenges to the businesses -- to businesses globally, they've also highlighted a tangible sense of urgency for both government and consumers to transition to renewable energy sources. The [Indiscernible] to benefit to Ero Copper has been positive with a couple of prices rising to all time highs, more than offsetting the impacts of higher consumable pricing and the influences over recently strengthening BRL on operating costs. As a result, the margins of our business and cash flows are expected to remain strong, further supporting the execution of our strategy in 2022. I will now pass the call over to Makko DeFilippo out to provide an overview of our operational performance, and then over to Wayne, who will cover Ero's fourth quarter and record full-year financial performance. As always, our team will be available for questions immediately following the call.

Thank you Noel. Full-year production results were previously released along with 2022 guidance and our five-year operating outlook earlier in the year. Operating highlights for 2021 included record production of over 45,500 tonnes of copper and production nearly 38 thousand ounces of gold, surpassing the high-end of our full-year production guidance ranges. Copper production at the MCSA Mining Complex during the fourth quarter was approximately 11,900 tonnes, representing a 19% increase relative to the third quarter. The increase in copper production was driven primarily by higher mill throughput. Which improved during Q4 relative to prior periods due to the successful completion of planned mill maintenance and upgrade activities during Q2 and Q3. In addition, higher mine copper grades during the fourth quarter from our underground operations, particularly at the Vermelhos Mine, combined with higher metallurgical recoveries contributed to increased quarter-on-quarter production. C1 cash costs at the MCSA Mining Complex during the fourth quarter were $0.96 per pound of copper produced, resulting in full-year C1 cash costs of $0.77 per pound falling at the low end of our annual guidance range. Increased C1 cash costs during the second half of 2021, including during the fourth quarter, reflect a combination of industry-wide inflationary pressures on consumables, combined with increases in the relative proportion of export versus domestic concentrate sales during the fourth quarter. Production at the NX Gold Mine during the fourth quarter was over 8500 ounces of gold, while tonnes mined and processed increased by approximately 10% over the third quarter, increases in mine production were offset by lower grades from within the Santo Antônio Vein relative to prior periods. As a result, C1 cash costs and all-in sustaining costs per ounce of gold produced. The increased modestly relative to prior periods to 582 and $910 per ounce respectively. For the full-year C1 cash costs and all-in sustaining costs at the NX Gold Mine were $525 and $732 per ounce respectively. As noted previously, we are reaffirming our production cost and capital expenditure guidance for 2022. With respect to setting expectations for production cadence on the year at the MCSA Mining Complex, copper production is expected to be equally weighted between the first and second half of the year. While we expect strong mill throughput rates throughout 2022, copper production is expected to be lower during Q1 due to planned stope sequencing of our underground operations. And the relative increases in contributions from our Surubim open pit operations. The NX Gold Mine, we expect production be weighted slightly to the second half of the year. First quarter gold production is expected to be in line with that of Q4. As we move development and production activities from the current areas of the mine into higher grade levels of the Santo Antônio Vein, which we will access beginning in the second quarter. Capital expenditures are expected to be weighted to the second half of the year, largely due to ramp-up of construction activities at Boa Esperança. Whereas Noel mentioned, we anticipate mobilization to occur during the second quarter. At MCSA, our mill expansion project remains on track with long lead item orders placed, including the third ball mill for our concentrator. The construction of the new external shaft at the Pilar Mine, which commenced in Q3 last year, and our cooling project, both part of the Pilar 3.0 initiative, all remain on budget and on schedule. An integral component of our overall strategy as a company remains our focus on organic growth through exploration. We are pleased to be hosting an exploration technical session tomorrow at noon Eastern Time via webcast. A new format for us, our goal with this session is to provide additional context on our exploration strategy, further detail our plans for 2022, and outline some of the organic growth opportunities we are pursuing across our portfolio. Webinar details can be found in our March 8th press release, which has been posted to our website. This session will be available for replay for approximately 90 days. With that, I will turn the call over to Wayne to review our fourth quarter and full-year financial results.

Thank you Makko. And good morning everyone. The fourth quarter capped a record year of financial results for Ero Copper driven primarily by a record full-year copper production and higher copper prices compared to 2020. Increased copper concentrate sales during the fourth quarter drove an increase in revenues by over $23 million or more than 20% compared to the third quarter to approximately $135 million. Full-year revenues increased by over 50% compared to 2020 to a record $490 million driven by a higher year-on-year copper prices, as well as increased sales of copper concentrate and Gold. Other record 2021 financial results included, adjusted EBITDA of approximately $332 million, cash flow from operations of approximately $365 million and adjusted net income per diluted share of $2.37. As a result of our strong operating financial performance, we ended the year with over $230 million in available liquidity, including over $130 million in cash and cash equivalents, and $100 million of undrawn availability under our senior secured credit facility. This represents a quarter-on-quarter increase of $11 million and a year-on-year increase of $156 million. A portion of the year-on-year increase is attributable to the upfront payment of $100 million received in the third quarter in connection with the NX Gold Stream. As we explained on our third quarter call, this upfront payment is amortized as deferred revenue, as ounces are delivered under the Stream. In 2022, we expect amortization of deferred revenue to total between $13 and $15 million. With respect to our foreign exchange derivative contracts, we reported realized settlements during the fourth quarter of $6.2 million, representing an increase of $1.8 million, compared to the third quarter. This increase was related to the opportunistic early settlement of a portion of our foreign exchange derivative contracts, to take advantage of strengthening BRL that happened during the fourth quarter. We expect foreign exchange settlements to continue to amount to between $4 million and $6 million dollars per quarter for the first half of this year, and then decrease substantially in the second half of the year as our contracts' positions expire. As Noel mentioned, subsequent to year-end, we completed an offering of US $400 million of senior unsecured notes due 2030 and concurrently reduced the size of our senior secured credit facility from $150 million to $75 million. We used approximately $50 million from the notes offering to repay the outstanding balance under the senior secured credit facility. The net result is a pro forma year-end available liquidity position of approximately $550 million, representing an increase of roughly $320 million over what was reported at year-end. Based on the 6.5% coupon on the notes, accrued interest on a quarterly basis is expected to be around $6.5 million, with accrued interest in the first quarter of this year expected to be slightly lower at just over $4 million, due to the issuance happening in February. Cash interest payments on our bonds of $13 million will be paid semi-annually every August and February. With metal prices going from strength to strength, we have the potential to deliver another year of exceptional financial results in 2022. With that I'll hand the call back to Noel to share some final comments.

Thank you Wayne and everyone who joined the call today before we open up the call to Q&A I'd like to recognize and congratulate my colleagues on an excellent 2021. As we embark on a multi-year phase of growth of the company. The team and balance sheet as you presume the recognized in this call has never been stronger. I'm excited to see this demonstrated execution of our strategy and the value we create for our shareholders. I will now turn the call back to the Operator and we will open up the line for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will pause for a moment as callers join the queue. The first question comes from Karl Blunden with Goldman Sachs. Please go ahead.

Good morning. Thanks very much for the time. Obviously, a lot of volatility in the commodity landscape and some of it's benefiting you from a price realization standpoint. I just wanted to focus briefly on your expected project costs for the build-out at Boa. And I wanted to get your take, please, on any exposures you have there that may influence the total cost of the project whether it's energy costs or other raw materials like steel. Just want to get a sense of your comfort for the budget there.

Look, when we put together the -- we did the feasibility study, we updated the cost of that project last summer at a time when steel and concrete costs in Brazil was super highly inflated. And they have come down since then. So it's a bit of a game of swings and roundabouts. Obviously, it would be naive for us to sit here and say that we see no inflation in costs or perspective costs around Boa. There are some things that will cost more, obviously. But there are other things which have turned out to be less than we expected. So it's a bit of swings and round about. A bit early to say where it will come out, but let's take a step back. What is Boa? Boa is a super low capital intensity, very high return project. And I think that is really was the reason why we chose this project. It has a 42% return on IRR and is only a $300 million buildup. So in the context of our overall business it's relatively small. It's not like we're drilling a $3 billion hole in the ground, where we're super vulnerable to price inflation.

That's very helpful. During the quarter, you had announced some safety incidents. I was curious. It's been a couple of weeks now, what any changes that have been made at the company since then, if that was necessary, and just employee response to any initiatives?

Well, I guess that's a very fair question. It was obviously a significant tragedy for the company. It's a core tenant of our business that people should be able to go to work and return home to their families safely every single day of the year. And so we always take these events that happen rarely, but we take them very seriously. And in each case, in line with all authorities and regulatory agencies within Brazil, we will review the facts and circumstances of each event and we then audit own procedures to see if there's any changes necessary or if we miss anything is there a better way of doing things. That's just par for the course. I think what we do when we have these events is that we focus very clearly on two things. 1. The family of the poor person involved and that's our first priority. And the second is communication with our employees that's also an equal first priority. These are the two things that are the most important that every is aware of what's happened and what's going on. And so that's how we communicated our workforce, they knew immediately we put out a -- we put out information to them very, very quickly on the occurrence of that type of event. Now, it's been a month or so since it happened. We've not had it -- there's not been any, I would say -- this is an ongoing type of discussions. We have to be quite sensitive to these things. But our initial analysis is really no changes in our own operating procedures around these matters, that we have very strong operating procedures. Unfortunately, sometimes events happen, but there's been no change on that front. But and also no changes in the way we communicate with our own people. But as I said, it's unfortunate, and remains a key priority of our business to try and make sure these things do not happen.

Appreciate the update. Thank you.

The next question comes from Jackie Przybylowski with BMO Capital Markets. Please go ahead.

Thank you very much. I'm not used to being second on the list. Maybe my first question I'll ask is about your mill. I know you mentioned in the release that you're working on the mill expansion at MCSA. But can you talk about what work you might be doing or what you might be thinking about in terms of subsequent mill expansions or -- I know David has mentioned in the past, maybe a potential to build a second mill. Is there any work that's actually being done on those next steps yet, or is that also pretty early days?

Hey, Jackie, this is Makko. I think, obviously, we've outlined our five-year guidance to the expansion of our mill to 4.2 million tonnes a year and that is happening as we articulated here today. We placed the long lead items related to that next phase. But I think taking a step back and thinking about what we're trying to do, we're always looking at ways to continue to grow our business to grow production, to continue delivering high returns. And so there's a whole suite of projects that we're evaluating on an ongoing basis as to specifically how it relates to either a further mill expansion or discussions around a potential new mill. I'd say those are part of a wide variety of portfolio projects that we continue to evaluate in the context of prevailing market conditions; also, what we're seeing on the exploration side. And I think it's fair to say that over the past five years and certainly in the future, our goal is to continue to strategically execute on the highest return projects, as we've done and I think demonstrating here in -- so far in 2022.

Thanks Michael. And the second question, maybe if I can, I know you guys have touched on this already, so apologize. If it sounds like I am repeating, but we're getting more questions about cost inflation, and whether it's at the project level or in operating costs, maybe I'll add more on the operating cost side because I think you were just talking about on the project side. So on the operating cost side, how much cost inflation are you seeing in terms of labor or fuel or other sources of inflation maybe on the FX side, and is there anything that you guys can really do about that? And I guess. So we're looking in the context of the guidance that you came out within January, how comfortable are you, I guess still with that with that range? Thank you.

Great questions, Jackie. Obviously, one is at the conference that we're quite topical last week at the BMO Conference, and we continue to get questions. Look, I think, again from -- from our perspective, we have seen throughout 2021 inflation in Brazil both in terms of labor and key input commodities as an alluded to, steel and cement, both up significantly. That was paired with a significant weakening in the second half of 2021 in the BRL, which from a U.S.. dollar operating cost perspective, soften that impact, labor adjustments are annual in Brazil, so that will be that's obviously been carried forward through our guidance period. I think kind of looking more on a forward-looking basis for this year. What can we do to impact those potential impacts on inflation? I think if you look at the key drivers of our operating costs are obviously labor. And as I mentioned, that adjustment happened in Q4 of last year. And then on the other ancillary impacts like diesel-related products, we've been getting a lot of questions on diesel prices. Those represent roughly 10% of our variable operating costs. And diesel as you know, is subsidized in Brazil. So I think that the largest single swing factor in our U.S. dollar denominated operating costs is the BRL. And we have seen strengthening in the BRL here in the first quarter of 2022.

I said before, we're not naive, you've got to have some inflationary factors. But the reason why we operate a high-margin business is for precisely this reason. We are all going to see some inflation in cost. But at the same time, we're seeing offset by a significant increase in the Copper price. And we have one of the highest margin in copper businesses in the world. Therefore, yes, we will have a negative impact, but relative to everybody else, it's going to be rather minimal for us.

And that's great, that's super helpful. Thanks, Noel and Makko and congrats on a great quarter.

Thank you.

The next question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Hi. Good morning. Just building on Jackie's question there around cost inflation, I realize it's a topical subject here, but you're starting two big projects, both the Boa Project and the new underground shaft at Pilar. I'm just wondering if you can give us a sense of -- have you been able to lock in a certain percentage of those costs or equipment? And whether you're considering locking in the FX rate at all, or do you plan to go fully exposed there with respect to those projects, the CapEx related to those projects.

Yeah. Maybe I'll touch on the capital side and then Wayne can touch on the FX. Wayne don't touch on the that's so on the capital side orders for our major projects, we've purchased as we announced, I think it was in Q4, we announced some acceleration of long lead items related to the shaft. So some of those items have been fixed as of Q4. Some of the largest items in that capital, largest single items in that capital profile. And then as I mentioned we just put down the -- or just confirm the long way item order for the mill. So those are at MCSA, some of the chunkier components that CapEx have been have been fixed at Boa. We're in the process right now. We're just. In the last few weeks, all of [Indiscernible] Noel said, it's a bit too early to comment specifically on Boa in terms of fixing those, but that will happen here in the coming weeks.

And Orest, Wayne here. Just to pick up on the FX piece of that. I mean, I think the approach we're taking at Boa is, we're not signing a single EPC contract there. It's a -- it'll be a series of work packages, so kind of think of it as sort of a hybrid EPC model. And obviously some of those work packages may be denominated in BRL particularly around, let's say, earth moving and site clearing. I think once we're in a position where we've got visibility on that, we may consider hedging the exposure on that contract per se. But I don't think there's any desire to go out and hedge the entire project or anything like that. I mean, I think the reason we went and did the bond offering a few weeks ago was to provide ourselves the flexibility to basically weather any inflationary or FX -- short-term FX movements in the next year to 18 months.

Yeah. Like we said, it's low capital intensity projects, it's a super fast build to get into production in two years, I think you could go in that context and we're sitting here what 470 copper, and [Indiscernible] and our balance sheet and a strict [Indiscernible] business school accounting kind of thinking by doing the [Indiscernible] deal. For precise the reason that we live in a volatile environment. And so whether it was couple of prices being volatile, energy prices is being volatile, that's the reason why we did the bond deal, so we can hopefully get through these two years. But the capital intensity of Boar is so small, it's very easy for us to do that. So in a sense yeah, you can say [Indiscernible] I guess that cost are going to go up, but you have to put that in the context of what's going on with a couple of price. And the call price is dramatically increasing faster, and put it this way the carbon price benefits to us significantly outweigh any inflation that we perceive in some of the costs. And as I said, it's strings and round about because the team has sourcing products about from different sources. And so we're winning on some and you lose and others, that's why it's a bit hard today to say, oh, it's going to be much more expensive, it's not going to be much more expensive because the guys are working on different solutions. So I think it's a little early to say. And similarly with the energy prices. If you could tell me that the oil price is going to be a $125. So the rest of the year, okay, then we can give that into our numbers. But the issue on oil prices and issue on those inputs is how long are they going to remain where they are today? And that's very difficult to predict.

Thanks for the color. Just on the -- call it, the diesel costs. I think Makko mentioned, it's about 10% of variable OpEx. Can you remind us what was assumed in the guidance this year with respect to the oil price? Like what was the base case that the guidance cost guidance was driven on?

We used the average for last year for us leading up into our guidance period across input costs.

Average of 2021 basically?

Correct. Yeah, average of 2021. And I would additionally note sir -- and just to clarify, the 10% of our total cross structure is diesel and diesel -related products. So that includes reagents, emulsion, the whole lot.

Okay. Thank you very much.

And spot these on oil prices you see on your screen at Bloomberg do not -- they correlate, but not terribly well to what happens in Brazil. As you can also see on Bloomberg, if you look at that. So the diesel prices lags significantly to what's going on in the spot market. And if you think about the politics in Brazil, that's likely to continue.

Right.

[Operator Instructions] The next question comes from Dalton Barreto with Canaccord Genuity. Please go ahead.

Thanks. Good morning, guys. I realize this may be front running tomorrow's session but where are we at in terms of drilling out the gaps out and bringing some of that into the mine plant at Boa.

That is front running tomorrow session. And we have -- we're we at the guys have done a really good job on it and they will reveal small news that tomorrow, but we're very happy with the results that we have on the gap zone is. So it's been very productive shall I say without stealing their thunder.

Great. Just to -- just to expand that, I think across our portfolio, whether -- whether you're looking at Para, Vermelhos, Nx Boa,I think the theme here has been continuing in Hallmark value. And I think Boa is another strong example in that sequence. And we're really excited with the results that we see, and not just in Boa, but also Para, Vermelhos and NX Gold as well. And we'll talk about them more tomorrow.

Okay, great. Then maybe switching gears, but staying with Boa. You guys have talked in the past about Boa kind of being the regional hub, given a lot of earlier-stage opportunities in the Eastern carge out there. I'm just wondering how active an acquisition program do you have on or is that more of a backward thing?

No. Look, I mean, first of all, we're in the western [Indiscernible] but we've already are in the process of sinking an acquisition of a nearby property, which I think once you built the Boa mill and you worked your way through the Boa property in fact, there's an underground component of Boa that we will probably talk about too, because we keep finding more interesting things at Boa itself. Boa is essentially a hill, that's why it's got such high economic, returns is because you mining into a hill, but there is a future of Boa underground as well, but at the same time, playing on the same logic we have in the Curaçá Valley, once you build that mill, you can create a hub and spoke type of operation. And there are other properties in the hood that we've looked at and we're talking to people about thinking ahead down the road. And as to continuing in the life of all the production facility in that area. On a wider basis [Indiscernible] is an interesting places. It's still relatively unexplored, certainly on the west. And there's plenty of opportunities there. And so I think you would expect us over the next five years to be seeking to build a much bigger leg to our business in that part of Brazil. I don't think you should think of Boa as being one isolated little operation that we build and then we close up and go away. That's just not the way we're thinking about it. We're thinking about it as being a meaningful additional leg to the business.

That's great. Thanks, Noel, that's all for me.

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

Again, thank you to everyone for attending our call today and for your questions. We look forward to speaking to you again in just a few weeks to discuss our first quarter 2022 results. And as ever, if you've got any more questions or queries, please contact us directly and we're happy to talk about things. Thank you very much.

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