Ero Copper Corp. (ERO) Q4 2022 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 2022 Financial and Operating Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Courtney Lynn, Vice President, Corporate Development and Investor Relations for opening remarks. Please go ahead.

Thank you, Brenda. Good morning and welcome to EroCopper fourth quarter and full year 2022 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 and 12 months December 31st, 2022. 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 and 12 months December 31st, 2022. On the call today are David Strang Ero's Co-founder and Chief Executive Officer; Makko Defilippo, President; 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 and 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 U.S. dollars. I will now pass the call over to David Strang.

Thank you, Courtney and thank you everyone for joining us today. 2022 proved to be another pivotal year for Ero Copper as we kicked off a major growth phase for the company. We commenced several projects that are expected to double our annual copper production to approximately 100,000 tons of copper per year by 2025 and increase our annual gold production to 60,000 ounces. In early 2022, in preparation for the construction of the Tucuma Project, we significantly strengthened our balance sheet through the timely issuance of 400 million in senior notes. Throughout the year, we made significant progress across our portfolio of growth initiatives. At Caraiba, we continue to advance our Pilar 3.0 initiative. This ongoing initiative includes the mill expansion and construction of the new external shaft at the Pilar mine. Following our third quarter earnings call, we announced an updated strategic life of mine plan for our Caraiba operations, showcasing the success of project Honeypot and the notable extension of mine life to approximately 20 years. Integration of project Honeypot enabled us to defer the delivery of the new external shop by approximately nine months, improving the pace of our capital spend at Caraiba for maintaining production levels and operating margins. On the exploration front, we launched a dedicated nickel exploration initiative in early 2022 and commenced drilling on the first target in April. Just five months later, we were thrilled to announce the discovery of a new nickel sulfide system in the Curaca Valley, located less than 20 kilometers from our Caraiba mill. Based on the success of the 2022 program, we have made nickel exploration a core component of our exploration focus for 2023. Turning to our Tucuma project. The road upgrades and drainage infrastructure completed during the third quarter 2022 were instrumental in allowing us to build momentum during the fourth quarter's rainy season. As a result, we achieved our 20% physical completion by year-end and have made substantial progress on pre-stripping activities, which remain ahead of schedule. Subsequent to year-end, we completed the onsite concrete batch plant and mobilized our Civil Works contractor who began pouring concrete for the plant foundation last month. It's worth mentioning that our current project capital estimate of a project approximately $305 million remains unchanged from the third quarter, demonstrating of team's diligent efforts to deliver this project as close to budget as possible. We're also trained proud to have partnered with the National Service for industrial training, a highly regarded non-profit organization focused on improving the competitiveness of Brazil's manufacturing sector through vocational education. Together we have launched comprehensive training programs in the city of Tucuma and surrounding communities to enhance the skills of the local workforce, which will in turn support the development and operation of the Tucuma project. In addition to the strategic advances made in 2022, our team in Brazil delivered record operating results including copper production of nearly 46,400 tons, and gold production of just end of 42,000. At our Caraiba operations, we proceeded -- processed nearly 2.9 million tons of oil representing a year-over-year increase in mill throughput of approximately 500,000 tons. On average, processed copper grade for the year of 1.76% exceeded our budgeted grade of 1.6%, largely due to the addition of high grade Honeypot stokes to the production plan beginning in the second quarter. As a result, we exceeded our full year copper production guidance of 43,000 to 46,000 tons. At our Xavantina operations, we delivered both record fourth quarter and full year production and surpassed 2022's goal production guidance of 39,000 to 42,000 ounces. The average process grade during the fourth quarter was approximately 10.2 grams per ton, representing an increase of nearly 20% in process grade compared to the third quarter. For the full year, high than planned mill throughput of approximately 190,000 tons drove a year-on-year increase in gold production of 13%. Despite our strong operating performance, our 2022 financial results, including unit operating costs were impacted by inflationary pressures experienced across the broader mining industry. At our Caraiba operations, obstacles allowed domestic smelter necessitated a higher allocation of copper concentrate sales to the export market, resulting in reduced tax benefits during the year. And full year C1 cash costs of approximately $1.36 cents per pound of corporate produced. At Xavantina operations, the impact of inflation was partially offset by higher processed gold grades during the year, resulting in full year C1 cash costs and all in sustaining costs of $560 and $1,124, respectively per ounce of gold produced. While our 2023 copper C1 cash cost guidance of $1.40 to $1.60 per pound assume 100% of our copper concentrate is sold to the export market, we resume domestic sales on a limited basis subsequent to year-end. However, lower planned copper grades in the first quarter are expected to result in copper C1 cash cost range for the period that are slightly above the full year guidance range. We anticipate that production levels at both of our operations will be higher in the second half of 2023 as we continue to execute on Pilar 3.0 and Annex [ph] 60 growth initiatives. At Caraiba stope sequencing reflecting the incorporation of Project Honeypot as well as the anticipated completion of the Caraiba mill expansion in the fourth quarter are expected to give us a strong end to the year. At our Xavantina operations, the commencement of mining from the Matinha vein and the second half of the year is expected to drive higher mill throughput levels. The timing of our growth initiatives is becoming increasingly favorable due to the scarcity of new copper development projects around the world and the expected surge in demand from global decarbonization efforts. These tailwinds are providing greater support to copper prices, which have been performing well since the beginning of the year. As a result, we are witnessing stronger than expected operating margins as we entered 2023 and remain well-positioned to execute on our growth strategy. With that, I will now turn the call over to Wayne to review our fourth quarter and full year financial results.

Thank you, David and good morning everyone. As he noted, our fourth quarter and full year financial results reflect a combination of record operating performance and strong project execution, as well as the impact of a challenging macroeconomic environment impacting the broader mining industry. We face some unique obstacles related to our domestic smelter PMA, which required us to allocate more concentrate sales to the export market, resulting in reduced tax benefits and increased C1 cash costs at our Caraiba operations during the year. We also entered into an agreement with PMA prior to its financial restructuring announcement in late November to convert outstanding amounts receivable of $23.9 million into a note receivable. This note is guaranteed by certain assets belonging to PMA and is payable in monthly installments over a 24-month period beginning in February, 2023. As a result of this arrangement, we recognized a credit loss provision of $3.3 million in other finance expense during the quarter, which reduced our fourth quarter and full year adjusted net income attributable to owners of the company by approximately $0.04 per diluted share to $0.24 and $0.91, respectively. I'm pleased to report that subsequent to year-end, we resume domestic sales on a limited and prepaid basis to PMA and will continue to review our sales channel allocations as they progress through their financial restructuring process. Our fourth quarter and full year financial results were also highlighted by adjusted EBITDA of $58.2 million and $208.6 million, respectively, as well as cash flow from operations of $34 million and $143.4 million, respectively. Our capital expenditures were nearly $90 million in the fourth quarter as construction activity related to the company's strategic growth initiatives ramped up. Full year capital expenditures, including deposits on contracts was just under $300 million, below 2022 capital expenditure guidance of between $308 million and $354 million. This primarily due to the success of Project Honeypot and the subsequent deferral of the new external shaft. As we execute on our transformational growth projects, we also continue to protect and strengthen our balance sheet. Subsequent to year-end, we entered into a zero-cost collar program on 3000 tons of copper per month for February through December of 2023. The collar established a floor price at $3.50 per pound of copper on total hedge volumes of 33,000 tons of copper, representing approximately 75% of full year production volume in 2023. The program protects a meaningful portion of the company's revenue at our budgeted copper price of $3.50 per pound, which was used for capital cash flow and liquidity planning purposes. At the same time, we have maintained exposure to the upside with a cap of $4.76 per pound, which is within 5% of the all-time high copper price. The hedge contracts are financially settled on a monthly basis. In January of this year we also closed our amended senior secured revolving credit facility, increasing its capacity from $75 million to $150 million and extending the maturity from March, 2025 to December, 2026. We also achieved improved terms on this facility, including a 25 basis point reduction to the applicable margin on drawn funds and reduced standby fees on undrawn commitments. At December 31st, 2022 available liquidity was $392 million, including cash and cash equivalents of $177.7 million, short-term investments of $139.7 million and $75 million of undrawn availability under the credit facility. With the close of the amended credit facility, pro forma year-end liquidity was $467.4 million. With that, I'll hand the call back to David to share some final comments.

Thank you, Wayne and everyone who joined the call today. Before we open the call up to Q&A, I'd like to thank our Co-Founder and Chairman, Noel Dunn, who recently announced his retirement from our executive team to support his family's interest in wildlife's conservation. Noel has made tremendous contributions to our company over the past seven years and will continue to do so in his capacity as Chairman of our Board, and we expect that the wildlife conservation programs that he is now supporting, particularly rhino conservation, will benefit in the same way that IRO has from his contributions and efforts. I would also like to thank our team both here in North America and in Brazil for another quarter of fantastic operating performance and project execution. And with that, I will now turn it back to the operator to open the line for questions.

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

Good morning and thanks for the update. Just curious if you still plan on releasing an updated five-year outlook. And if so, what the timing of that may be?

Great question Orest, probably should addressed it in my comments. We are doing that, but what we are doing in order to do that, we have to finalize the Xavantina updated resources and reserves. We're anticipating that happening over the course of this month, and I hope that we will be putting something out towards the end of this month with respect to that.

Okay. Should -- that makes sense. Should we also anticipate, like if you're going to update the reserves for Tucuma, will there also be some kind of mine plan update with that as well? Or would that likely come later?

I think, right now, we've moved closer to finalizing the Tucuma life of mine plan in terms of its update. I think apart from what we've released previously in October, beginning of November when we saw you, there's no material change to the life of mine plan that requires a new technical 43-101. But what you will be able to see within the five-year plan is those metric impacts and changes with respect to those first couple of years or first three years that we have previously highlighted where we saw this grade reconciliation to the upside with respect to that. But as it stands right now, no material change to the technical report to the resources and therefore, we don't anticipate doing a new updated 43-101 or additions to a 43-101 with regards to Tucuma at this stage.

Okay. Very helpful. Thank you.

[Operator Instructions] The next question comes from Gordon Lawson from Paradigm Capital. Please go ahead.

Hey. Good morning and thank you for taking my call. Just to follow-up on that, can you please clarify if the 2023 estimates at Caraiba include the Honeypot deposit, or is that expected to be updated with the five-year guidance?

No. Honeypot was incorporated, into our updated 43-101 that we released, I believe, in January. I will say that Honeypot is an ongoing evolution in terms of how we continue to optimize Honeypot with regards to our mine plan over the next few years, but certainly Honeypot as we released in November and introduced to the marketplace at that particular time, that portion of Honeypot has been integrated into our life of mine plan, and so is in the public domain. As I said, there are other areas in and around Honeypot. We are investigating to see whether there's additional amounts that we may be able to add to Honeypot over the course of the next 12 to 24 months, and we will add those on an -- as on the come basis. Likewise, as we continue to get greater and greater comfort with regards to our mine plan with regards to Honeypot, which I think is reasonably conservative right now. So, we may adjust the amount of material we mine in the future relative to what we've released in the public domain right now.

Okay. Thank you very much. I'm switching to Xavantina, tax rates there have been in the 5% to 15% range for the past two years. Is there any guidance you can provide for next year and a little bit beyond?

Yeah. This has Makko. There's been no change to overall corporate tax rates in Brazil. What -- the only thing I'd add to the tax discussion as it relates to Mato Grosso, is that late last year there was some state level legislation that passed an administrative tax for the state of Mato Grosso, that's based on a pronounced production. It's $19 per ounce depending on using prevailing gold prices. And that tax is related to the state being largely responsible for administering the licensing and permitting. And so, it was, again, state level tax that was implemented. And we'll see that flowing through, but no change overall to the corporate tax rates.

Okay. Great. Thank you very much. That’s it for me.

This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks. End of Q&A:

Thank you, operator. And thanks to everybody who's joined us today on the call. We look forward to talking to you all at the next quarterly update, which will be in May when we'll be releasing our first quarter results. Until then, the team here, Courtney and the rest of the IR team are always available to you with regards to any additional comments or questions you might have. So, with that, we'll close the call and thank you very much.

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