Ero Copper Corp
TSX:ERO
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Ero Copper Corp
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Thank you for standing by. This is the conference operator. Welcome to the Ero Copper First Quarter 2019 Financial and Operating Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Noel Dunn, Chairman. Please go ahead.
Thank you, and good morning, everyone. Welcome to Ero Copper's First Quarter 2019 Results Call.The news release announcing our first quarter results is available on our website and on SEDAR as are our financial statements and MD&A for the 3 months ended March 31, 2019.The comments made on this call contain forward-looking statements that involve risks and uncertainties concerning the business, operations and financial performance of the company. For a discussion of the risks and factors which may lead to actual performance being different from the projections contained in such forward-looking statements, please refer to our 2018 annual information form also available on SEDAR. Unless otherwise noted, all amounts discussed in this call are in U.S. dollars.With me in the room today are David Strang, Ero's Co-Founder, Chief Executive and President; Wayne Drier, Ero's Chief Financial Officer; Makko DeFilippo, Vice President Corporate Development.As will be discussed by my colleagues in greater detail on this call, our strong Q1 operational and financial results clearly demonstrate continued quarter-on-quarter and year-on-year improvement, reflecting one of the core objectives of our management team, which is to continue to generate the highest return on capital investment via the organic growth of our portfolio.With each of our operations now on a stable footing, highlighted this quarter by the main ore bodies of the Vermelhos mine coming into production, increased recoveries and our continued improvement in local currency operating metrics and C1 cash costs firmly in the first quartile, we are able to focus on the 2 remaining objectives of our MCSA operations.These are: One, extend the mine life through exploration; and two, increase throughput to our underutilized processing facilities to grow production.It cannot be stated enough that we benefit from an incredible asset base and we have tools and resources in place to support this strategy both in Brazil and in Canada.In addition, we ended the first quarter with a total cash position of $22.1 million and a collected undrawn working capital lines of $20.4 million. So we remain well positioned to advance our objectives in 2019.With that, I will now pass the call over to David to provide a brief review and update of our operations, and Wayne will provide a review of the company's financial performance. Our total team will be available for questions immediately following the call.
Thank you, Noel. Our production results for the first quarter were released last night and reflect strong operational performance in line with our expectations.During the first quarter, we produced 10,645 tonnes of copper in concentrate with 530,133 tonnes milled grading 2.19% copper and average metallurgical recoveries of 91.8%.As Noel mentioned, during the period, we commenced mining of Sombrero, one of the high-grade main ore bodies at the Vermelhos mine, resulting in a significant overall increase in grades mined and processed during the period.In addition, we are pleased to start seeing the benefits of several low-cost milling and floatation improvement initiatives that combined with the higher milled head grades, contributed to the improved recoveries during the period.With respect to our milling operations, detailed engineering and procurement activities for our previously announced vertical regrind mill is well underway, which we expect will significantly improve overall plant performance and metallurgical recoveries once operational during the second quarter of 2020.As was mentioned, at the Vermelhos mine, grades increased by over 34% relative to the fourth quarter of 2018 with 139,143 tonnes mined grading 3.71% copper.We expect Vermelhos to continue to meaningfully contribute to our annual copper production going forward and longer term are very excited about the exploration potential we see building before us within the Vermelhos mine and district.At the Pilar underground mine, the decrease in grades mined to 1.67% copper compared to 2.21% copper during the prior period were expected due to normal stope sequencing. And we expect grades from Pilar to improve through the balance of the year.In January, we commenced open pit mining operations at R22W located just north of the CaraĂba Mill. During the period, 57,433 tonnes of ore were mined grading 0.37% copper. The low grades mined were largely a result of above cutoff grade material modeled as waste that was mined during pre-stripping. We expect both ore tonnes and grades to improve as operations ramp up into the second quarter.For the quarter, C1 operating costs were $0.91 per pound of copper produced, an improvement of $0.08 per pound as compared to the fourth quarter of 2018. This improvement was driven by the contribution from Vermelhos, improved metallurgical recoveries and continued improvement in the efficiency of our underground operations.At our NX Gold Mine, we produced 10,119 ounces of gold at C1 cash costs of $486 per ounce of gold during the first quarter.As was announced at the end of April, we now have 6 drill rigs at the NX Gold Mine that continue to define the new discovery made adjacent to existing infrastructure known as the San Antonio vein.To date, mineralization has been defined over approximately 400 meters in strike-length and 200 meters down-dip and remains open to depth.Drilling at NX Gold will continue to evaluate -- continuity of this zone as well as infill to incorporate San Antonio into the updated NI 43-101 [ compilation ] technical report at mine plan expected to be delivered during the second half of 2019.Production and cash cost guidance for the year remains unchanged at 36,000 to 38,000 tonnes of copper at between $1 and $1.10 per pound for MCSA. And at NX Gold, we expect production and cost to be in line with 2018 of 38,000 to 39,000 ounces of gold at approximately 520,000 -- excuse me, $520 per ounce, respectively. It is worth noting that at MCSA, [ quality ] copper production is not linear and will vary due to normal grade variability that occurs from stope to stope.With respect to exploration in the Curaçá Valley, our geology team has now completed the full regional data compilation and prioritization work using all available datasets. Our team has identified and continues to refine a significant number of high-priority exploration targets, some of which are reasonably close proximity to our existing operations.In total, we now have 24 drill rigs operating throughout the region and are drill testing the first regional target based on the regional data compilation program.At the Vermelhos mine, we now have 13 drill rigs operating, including 2 underground drill rigs. Immediate exploration activities are focused on expanding the nonmineral resources at the Vermelhos mine, delineating the previously reported East Zone discovery and deep mineralized zones below the N8 Deposit, previously known as the Vermelhos West deposit.Further, with the results of the geological compilation work that include the airborne survey, we now have identified a geological relationship over a 5.5 kilometers north, northeast structural trend that includes the known 1.1-kilometer trend that encompasses the main Vermelhos ore bodies for the East Zone and the N8 Deposit.With 2 drill rigs, we have now begun to test the first new targets identified during the geological data compilation work on this 5.5-kilometer trend.In addition, we continue to drill, test deeper electromagnetic anomalies highlighted during our systematic downhole electromagnetic program in and around the Vermelhos mine.At the Pilar mine, 11 drills are currently operating. Exploration activities continue to be focused on targets that are within or adjacent to the existing Pilar mine infrastructure, including the recently announced Southern high-grade portion of the West Limb and the deepening expansion zone. In addition, we continue to evaluate extensions within the Pilar district, south of the Pilar mine.On the regional exploration basis, now that the data -- geological data compilation work has been completed and numerous targets have been identified, we have placed an order with our largest drilling contractor for a truck-mounted RC drill rig to start initial testing of these targets. The arrival date of the rig has not been confirmed, but we are hopeful that we will -- we can begin our regional drill program during the second quarter.I will now pass it over to Wayne, our CFO, who will review the details of our financial performance for the quarter.
Thanks, David, and good morning, everyone. The first quarter of 2019 produced a very solid financial result. I would like to reiterate that our interim financials now include the full consolidation of NX Gold with corresponding adjustments to prior periods.During the quarter, the company sold 10,033 tonnes of copper in concentrate and 10,023 ounces of gold for revenues of $72 million.It is worth noting that we ended the quarter with over 2,000 tonnes of concentrate in the shed, which would have been shipped and sold to our local customer, had they not suffered a minor conveyor breakdown in their receiving yard over the last few days of the quarter.As David mentioned, C1 cash costs were $0.91 per pound for the quarter, a significant improvement from the prior period and our lowest C1 cash cost achieved to date.Adjusted earnings before interest tax, depreciation and amortization was $39.3 million with $25.1 million in cash flow from operations during the quarter.Adjusted net income for the quarter was $15.3 million or $0.17 per share. As evidenced in our segment disclosure, this result is highlighted by a very strong contribution of our MCSA operations to the company's net income, a very significant improvement from prior periods. The cash position at quarter end was $22.1 million, essentially in line with the previous quarter. However, we did see a significant build-up in working capital assets, particularly in inventories and receivables.As Noel mentioned, this resulted in a meaningful improvement in our overall working capital position.With undrawn lines of credit in Brazil totaling approximately $15.4 million and approximately $5 million undrawn on our corporate revolver, we are very comfortable with our liquidity position.On a more technical point, this quarter was the first since the adoption of IFRS 16 reporting for operating leases. The impact on Ero was not particularly significant, with only $4.9 million recognized on the balance sheet. However, it is worth pointing out that it did negatively impact working capital by approximately $3.5 million due to the short-term nature of the leases we have.With that, I'll hand the call back over to Dave.
Thanks, Wayne. Firstly, I would like to again recognize the continued hard work across our company, both in Brazil and in Vancouver. We continue to push this organization to higher levels of achievement. Last but certainly not least, I would like to mention that, as most of you know, we are a small team here in Vancouver, and we recently lost a young member of our team, Mackenzie MacWilliams, who worked in our accounting department, following an unexpected sudden illness. Our hearts go out to Mac and Mac's family, especially his wife, Amber, and his young son, Luke.With that, I'd like to thank you all for joining the call. And we'll now turn it back to operator to open the line for questions. Thank you, operator.
[Operator Instructions] The first question is from Justin Chan with Numis Securities.
First of all, my condolences for the loss of a team member. My first question is just on the operating results. It looks like you've had a really good start to the year. And I was wondering, especially on grade from Vermelhos, was that really -- was that part of the plan or did grade come in a little bit better than where you thought? And similarly on costs, you've had a really good start to the year. I'm wondering because the plan suggests that you're going to be reverting back within guidance or is that guidance number more prudent to this point?
Thanks, Justin. We were just noting that you should go and play Jeopardy! because you always seem to beat everybody to the buzzer on being the first question.With regards to grade at Vermelhos, I think it's a little early -- let's say this, we're very happy with regards to how reconciliation has occurred at the moment with regards to grade versus the model. But I think it's still a little early to jump up and down and get too excited about it. But certainly, we are very encouraged with the grades that we have mined in first stope as part of the Sombrero mining operation.With regards to costs, certainly, we are seeing some benefits from exchange rate in Brazil that accounted for a small portion of this improvement in costs. But I think at this stage, as we move forward, I think we'd like to get through the second quarter before we take a much different view with regards to guidance, with regards to how we see cost going for the second half of the year.
All right. That makes sense, very prudent. And thanks for the compliment on my -- the buzzer speed. Just on -- just 2 more from me and I'll clear the line for other people. First, on the plant, you had really good progress there, and I was just wondering, do you view this as a base level? And where do you think recoveries can get with the regrind? And I guess another question would be, have you added a flash flotation circuit or anything? Or is this really a case of incremental improvement?And then my last one's just on the West Limb, given all the data that you now have and freeing up the drills to kind of test some of the new areas. What are you expecting or what color can you give in advance of the midyear update in terms of what we should expect there in terms of additions or just on a high level, what are you expecting?
I'm going to answer the second question first and then I'm going to let Makko answer the stuff about the plant. With regards to -- I think as I said in my comments, it's important to still remember that the majority of our drilling that is occurring in Pilar is still directed at the West Limb and the deepening zone. We have not freed up rigs necessarily to go and start testing other targets. We have 1 rig that is starting to do that, but the majority of the work is still concentrated on West Limb as you -- as we gave in the April exploration update, the identification of the seventh zone now of the West Limb has allowed us to start expanding that drill program there.I think the second part, I need to reiterate and I didn't say in my notes. With regards to the updated technical report, with regards to as much information as we are getting, that report will be coming in the second half of the year. I would not be looking for that report or guidance to be given by midyear.I would say, the way we're looking at it right now is closer to the end of the third quarter with respect to that. And that is a function just merely of the amount of data that we're processing and making sure that we are able to, at the same time, as we are running -- we are actually running 2 parallel paths with regards to our work, which is unusual for a company of our size to be able to do this.At the very same time, as we are running resource drilling and development, our reserve team and our mine planning team are converting that significant portion of that into reserves and into the mine plan. As you can imagine that is a massive undertaking, particularly as we continue to do things like expand the South Limb -- the West Limb to the South. So please be on the lookout more for a later in the year technical report with respect to that.I'll pass it over to Makko who can talk a little bit more with regards to the plant.
Justin, thanks for the question. It's a great one. As you all probably know, guidance within the 88% range for recoveries at 2% copper. Obviously, we had a great quarter operationally coming at 91.8% recovery in the first quarter.This is really a function, obviously, relative to last year of increased grades, but also the -- as I said, low-cost improvement initiatives. Those include some optimization work around the flash, including valves, piping and pumps. This allowed us to better control our pulp density both in the flash circuit and in our rougher circuits.And also, putting in particle size analyzers that allow us to better monitor and control both our reagent addition and plan for changes in [ metrology ]. So I think that's a -- those are sort of the highlights in terms of replicating the core or setting a baseline.Again, as Dave mentioned with grade, we're really excited about what we're seeing at Vermelhos. As you probably noted, we took a conservative view in the technical report capping Vermelhos recovery at 90%. We're obviously seeing numbers higher than that initially, but again, I think it's too early to extrapolate straight line from here other than to say we're very excited about what we're seeing. And we'll continue to work hard to make sure recoveries stay up as high as possible.With respect to the regrind circuit that will be installed, we still see that baseline improvement of around 3% up to 6% depending on grade. But I think 3% is a good baseline level, and certainly, what we look at with respect to budgeting and improvement. And that tends to hold true across most grade ranges, just given the increased liberation of the [ mid-wings ] there.
I see. So if the old target was, say, between 91% and 93%, it could be higher but perhaps too early to commit to it at this point?
Exactly.
The next question is from Orest Wowkodaw with Scotiabank Global Banking and Markets.
I wanted to -- I had couple of questions about the exploration. First of all, I'm just curious what the cutoff date's going to be for drill holes or FAs in order to make it into the new reserve resource update coming out.And then I'm also curious on whether at this point, you anticipate upping the throughput in the current mine plan to take advantage of some of the underutilized [ low ] capacity or whether we should think of this more as a life-extension type of reserve resource update or perhaps both?
Thanks, Orest. With regards to the cutoff, we need the cutoff -- last year, the cutoff was as of end of May. We're moving that to probably the end of August. Actually, that work right now is being done this week. We hired a new VP of Resources and Reserve for Ero itself. And he's currently doing that work, so we'll have a much better idea with regards to what the exact cutoff is going to be over the course of the next couple of weeks. But we anticipate right now, the moving targets around the end of August.With regards to the work right now, obviously, we would like to see not only a lengthening of the mine's life, but our target is to get to 10 years of reserves through -- with regards to that being the baseline and then grow from there.We are -- we've got some very, very preliminary numbers that have been shown to us from our team that show that we are going to start seeing incremental increases in throughput, but when they hit, the production profile remains to be seen. Obviously, I think from a normalized position, we'd love to see that coming in next year, but that's not guaranteed. I think it's more likely we'll see that coming in 2021 going forward. But again, this is extremely preliminary. There's a number of things that are occurring right now, that we don't -- I'm not at liberty to discuss, that could change that so it's a bit of a moving target. And apologize that we don't -- I can't give you anything more definitive than that right now. But as you can well imagine, we are running at 110% of power, putting everything together.
Okay. And you've got 24 drill rigs going now. Given the success you're having, has the exploration budget increased for the year?
Yes.
And can you give us that number?
With regards to a number, that's an interesting one, Orest. With regards to the budget increasing, with regards to drill meterage, yes. We are currently operating better than budget with regards to cost per meter drilled. So I can't give you the exact number right now with regards to that, but we are under budget relative to what our expectations were for exploration in the first quarter.
I see, so you're not necessarily increasing the dollars committed, you're just getting more bang for your buck. Okay.
No. We are getting -- it's one of the initiatives that we've done with drill contractors. Obviously, Major is now a major -- ignore the pun, drilling contractor and we've been working with the senior management team there, both in Brazil and in Canada working on better efficiencies and we're starting to see the benefits of that on both sides. And so we've seen drill meterage increase per rig per month and that, obviously, allows us to drop our fixed cost component on the exploration budget.
Okay. That's awesome. And then just a quick one for Wayne. Is that working capital draw we saw in Q1, should we anticipate that completely reverses now in Q2?
No. I think particularly on the receivable side, you can -- that will be probably a number that you should run going forward. We did transition to sort of longer, slightly longer payment terms with PMA this year. So I think you can sort of expect that number to stay steady in terms of our working capital draw now going forward.
Oh, really? Okay. And payables the same? Is that a good run rate?
Yes. I think the payables was probably about right. I think the payables will probably come down a little bit, but I think on the receivable side, that's probably a good number.
The next question is from Jackie Przybylowski with BMO Capital Markets.The next question is from Stefan Ioannou with Cormark Securities.
Just maybe switching over to NX Gold. I mean obviously, with the mine plan, the reserves were kind of looking to run out I guess in April. Just between now and when you can table a new mine plan for the operation, given all the exploration you're doing. How can we -- how should we sort of think about the production profile over the next quarter or 2?
As a 16th century alchemist with just [ hundred ] of gold [ nowhere ]. No. I think we've given guidance for the year with regards to production. And as you can see, the first quarter was extremely good with regards to that. It's just one of the issues that we have and everybody has with 43-101. We're in a unique situation with regards to this company operating mines that were under-invested in terms of exploration.So in fact, every time we put a -- I mean 43-101 was built around the fact that you would drill out a deposit, it would have a baseline and then you'd go and mine it. Obviously, we have the reverse here. We have all this mine infrastructure with no reserves and resources at both mines. And so 43-101 is just a moment in time snapshot of the sort of viability of the operation.It's clear, we are not -- in any of our statements, we have not made any statement with regards to reduced production or anything like that. So I think you can continue to look at guidance for the year as being where we see it, and we continue to mine at normal operating rates at NX.
[Operator Instructions] The next question is from Jackie Przybylowsk with BMO Capital Markets.
Sorry, about my technical difficulties earlier. I just had a question for you. I was wondering if you would be able to give me a little more detail on the grades for -- I know you said that they're expected to go up later this year. On Page 7 of the MD&A, under the guidance section, it says copper production is expected to have a slight weighting towards the first half due to higher grade sequencing in the first half. So I was wondering if you could maybe walk through a little bit more on what you've seen in the grades doing this year.
I don't have those numbers right in front of me, Jackie, on a quarter-by-quarter basis. As we did say, the things right now are tilted somewhat to the first half of the year from a grade perspective. But I mean I'll give you case in point, we have a stope that we are just about to mine at NX -- at Vermelhos, which has grades just over 2%. The previous stope that we'd be mining there in the first quarter had grades closer to 5%. Likewise, where we had been mining at -- in Pilar, we'd been mining primarily in areas of what we would term in [ verticles ] "lower grades" for Pilar in the 1.5% to 1.75% areas.Certainly, as we move forward, we get greater contributions from some of the higher grade zones, particularly in the deeps where we will see grades in excess of 3%. So that's why in the comments I gave, we will see this variability on a quarter-by-quarter basis. And it's just merely because of the grade sequencing. We do our utmost to try and smooth that, if we can, but with -- particularly with a mine like Vermelhos, where we are typically mining from 1 or 2 stopes because they are very large stopes, that grade -- on a month-by-month basis, that grade is more difficult to smooth out. And so to give you a more homogenized annual grade output. But that's the best that we can tell you right now with regards to that.
Jackie, this is Makko. I need add to that -- to what Dave's saying. We mined from Pilar at 1.67% copper. Our guidance for the year was around 1.8% copper. So obviously, indicative there, if we're going to get back to our guidance range for the year at Pilar from a underground perspective. Grades, by definition, have to come up during the second half. So...
Yes. Okay. Okay. And maybe just one other question. Can you give us a little bit more color on the regional geo program that you mentioned? How many rigs -- I think you're bringing 1 rig in. Like how many rigs are you expecting by later this year? And maybe a little bit about what you're hoping to achieve in 2019 on the regional program.
Jackie, that's a great question. So now that we are finally getting comfortable with the data compilation, we're to bringing in this first rig. This first rig is essentially a scout rig. It can drill 150- to 300-meter holes on the initial targets and we want that rig to be able to go and start testing. The great thing is, as we get through this 43-101, we will now transition some of our other rigs from near mine, now that we'll have the 10-year mine life at a base production rate, we then start looking to -- more towards Vermelhos and at -- particularly at the Vermelhos mine and the Pilar mine, we now look at reserve replacement on an annual basis. That will then free up some of those rigs that we can then start allocating to some of the regional discoveries we intend to make over the course of next 6 to 8 months.So that should give you a bit of a sense, certainly -- I mean it's been well said from me to everybody, I still don't think we have enough rigs with regards to being able to drill all of the opportunities we see. So what we are trying to do is be the most efficient we can with regards to converting the data and information we have form the geological interpretation work into initial discovery, and then drilling out and continue to drill out opportunities that can come into the mine plan as quickly as possible.In the immediate term, the best place to bring things into the mine plan are near existing mines and hence, the -- we are doing some of the initial regional exploration work adjacent to the Vermelhos trend. Because the majority of that is adjacent to the existing mining license and that can be converted relatively quickly into mineable material.
Okay. So we could see the number of rigs actually go up this year, is what you're saying again?
It's -- right now -- yes, we actually have -- we're awaiting 3 rigs to be delivered to site. We talk about the [ OneX ] regional one, but we're getting another 2 rigs as well. That's as far out as we can see right now.
This concludes the question-and-answer session. I would like to turn the conference back over to David Strang, Chief Executive Officer, for any closing remarks.
Thank you, operator. And again, thanks to everybody for attending the call, we really appreciate that. And as always, please do not hesitate to contact any one of us here today if you have any additional questions or comments. Thanks, again, everybody.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.