Ero Copper Corp
TSX:ERO
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Ero Copper Corp
Earnings Call Analysis
Q2-2024 Analysis
Ero Copper Corp
Ero Copper has made significant strides with the Tucuma Project, achieving its operational license and successfully producing its first copper concentrate by late June. By mid-July, the company exceeded expectations, producing saleable copper concentrate at grades above the designed targets. The successful initial performance sets the stage for Ero Copper to reach commercial production levels—defined as achieving 80% of design capacity—by the end of the third quarter of 2024.
For the second quarter of 2024, Ero Copper reported an adjusted EBITDA of $51.5 million, backed by strong production metrics across their operations. The company reported a net income of $18.6 million, or $0.18 per share. This solid performance is attributed to not only strong operational results but also favorable market conditions, including record-high copper prices, positively impacting overall gross profit margins.
The company benefited from significant reductions in treatment and refining charges in the copper concentrate market. Ero Copper secured a blending treatment charge of $5 per tonne and a refining charge of $0.05 per pound for 100% of its production from May through year-end, compared to previous fees averaging $80 per tonne. This, coupled with a stronger U.S. dollar reducing operating costs, drove a decrease in C1 cash costs to $2.16 per pound, enhancing overall profitability.
Looking ahead, Ero Copper is optimistic about increased copper production in the second half of 2024, driven by Tucuma's ramp-up. They anticipate maintaining production guidance for copper at Caraiba but have tightened the range to the lower end of previous estimates. Moreover, in the gold sector, they are reducing their full-year C1 cash cost guidance by $100, bringing it down to a range of $450 to $550 per ounce, and their all-in-sustaining cost guidance down by $150 to a range of $900 to $1,000 per ounce.
Ero Copper has signed a definitive earn-in agreement with Vale Base Metals on the Furnas Copper Project, symbolizing a strategic move towards expanding its footprint in the Carajas mineral province. The company initiated environmental studies and resource validation efforts with expectations of publishing a resource estimate by year-end. This opportunity would allow Ero Copper to leverage its underground mining expertise and align it with Vale’s prior findings, eyeing high-grade zones in the project.
Ero Copper's liquidity remains robust at approximately $170 million at the quarter's end, which is expected to strengthen as production ramps up. Despite the positive growth outlook for Tucuma, attention will also be dedicated to deleveraging the balance sheet as 2025 approaches. Overall, Ero Copper appears poised for continued growth in both copper and gold production, while navigating the current market landscape to optimize performance.
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Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Second Quarter 2024 Operating and Financial Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Please go ahead.
Thank you, operator. Good morning, and welcome to Ero Copper's second quarter 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 3 and 6 months ended June 30, 2024.
On the call with me today are David Strang, Ero's Co-Founder and Chief Executive Officer; Makko DeFilippo, President and Chief Operating Officer; and Wayne Drier, Chief Financial Officer.
We will be making forward-looking statements that involve risks and uncertainties from which actual results may differ materially. We would refer you to our most recent annual information form available on our website, SEDAR, and EDGAR, for a discussion of the risk factors of our business and their potential impact on future performance. As a reminder, and unless otherwise noted, all amounts are in U.S. dollars.
I will now pass the call over to David Strang.
Thank you, Courtney, and thank you, everyone, for joining us today. Before we discuss our second quarter results, I want to acknowledge what a challenging week this has been for our organization. As announced earlier this week, one of our colleagues at the Caraiba operations was fatally injured in an incident involving a light-duty pickup truck on surface, and another of our colleagues remains in critical condition.
We are providing our full support to the families and coworkers of the individuals involved during this incredibly difficult time. Out of respect for those affected, we do not plan to discuss the incident further. Safety is a non-negotiable aspect of our operating philosophy, and we remain unwavering in our commitment to this mission.
With that said, we will now turn our focus to discussing updates from our second quarter. During the quarter, the Tucuma Project was awarded its operational license and achieved first concentrate production at the end of June. In mid-July, we achieved production of first saleable copper concentrate at above designed target concentrate grades.
While Makko will discuss our ramp-up schedule in greater detail, I can share that the Tucuma plant continues to perform well, and we remain on track to reach commercial production levels by the end of the third quarter. As we advance towards doubling copper production next year, we continue to execute on our longer-term growth strategy.
These efforts were highlighted by the announcement last week that we signed a definitive earn-in agreement with Vale Base Metals on the Furnas Copper Project in the Carajas mineral province. This agreement aligns with the terms outlined in our previously signed binding term sheet, detailed in our press release on October 30, 2023.
Earlier this year we commenced baseline environmental studies, core re-logging and validation programs at Furnas in support of an inaugural NI 43-101 resource estimate, which we expect to publish later this year.
In parallel, we have continued to compile and update the extensive work previously completed on the project by Vale, which includes significant metallurgical, geotechnical, environmental, process design, and site planning studies. With the definitive agreement now in place, we expect to initiate our first exploration campaign later this year.
Before I turn the call over to Makko and Wayne, I will touch briefly on our operating results at Caraiba and Xavantina, as well as financial results for the quarter. At Caraiba, we continue to see the benefit of our mill expansion completed late last year, reflected in quarterly throughputs, with tonnes processed up 12.2% quarter-on-quarter and 17.9% compared to Q4 2023.
This higher throughput volume offset slightly lower processed copper grades compared to the first quarter, resulting in a 9.6% increase in copper production of 8,867 tonnes in concentrate. While we had success in catching up on development of high-grade stopes at the Pilar Mine in April and May, mining from these high-grade stopes came later in the quarter than planned, and one high-grade stope in particular experienced higher than planned dilution.
When combined with lower milled grades of Vermelhos due to mine sequencing and a higher proportion of mill feed from the Surubim open pit, processed copper grades averaging 1.03% for the quarter.
With respect to our C1 costs, we are starting to see the impact of persistent tightness in the copper concentrate market, which has led to some of the most favorable treatment and refining terms we have ever seen. Over the last several months, we capitalized on these dynamics by entering into longer-term contracts with our copper concentrate customers.
We secured a blending treatment charge of just over $5 per tonne and a $0.05 refining charge on 100% of our consolidated copper production, including both Caraiba and Tucuma, from May through the end of the year. By comparison, our copper concentrate treatment and refining charges averaged nearly $80 per tonne and $0.08 per pound from January through April of this year.
The significant reduction in our treatment charges as well as the strengthening of the dollar against the Brazilian reais contributed to lower copper C1 cash costs of $2.16 per pound of copper produced during the second quarter. This decrease in unit operating costs coupled with copper prices that hit all-time highs during the period, drove increased gross profit margins at Caraiba compared to the first quarter.
Our Xavantina operations also saw another exceptional quarter, with an expansion in gross profit margins during the second quarter, reflecting a continuation of elevated grades and record gold prices, which have rallied even higher in the third quarter. Gold production at Xavantina was 16,555 ounces, with tonnes processed up 6.9% quarter-on-quarter and gold grades continuing to trend above long-term block model grades.
As a result, unit operating costs remain below budget, with C1 cash costs and all-in-sustaining costs coming in at $428 and $842 respectively, per ounce of gold produced. The combination of solid production across our operations and strong market tailwinds resulted in second quarter operating cash flow of $14.7 million, and adjusted EBITDA of $51.5 million.
As we look to the second half of the year, we expect consolidated copper production to increase sequentially each quarter, driven largely by the ramp-up at Tucuma. We also expect higher mined and process grades at Caraiba to result in higher production and contribute to lower unit operating costs in the second half of the year. While we are reaffirming all of our copper production cash cost guidance ranges, we are now guiding to the lower end of our copper production guidance range for Caraiba.
At Xavantina, we expect mined and processed gold grades,to remain above budget in the second half of the year, based on channel sampling from development drives. While grades should remain elevated, they are projected to decrease relative to the second quarter, leading to slightly lower production and higher unit costs in the second half compared to the first half of 2024.
However, due to strong year-to-date operating cost performance, full year unit operating costs are now projected to be lower than we had originally budgeted. And we are reducing our full year gold C1 cash cost guidance by $100 to a range of $450 to $550 per ounce of gold produced. We are also lowering our all-in-sustaining cost guidance by $150 to a range of $900 to $1,000 per ounce of gold produced.
I'll now pass the call to Makko, after which Wayne will provide more detail on our financial results.
Thank you, and good morning, everyone. As David mentioned, the ramp-up of Tucuma is advancing well. We successfully produced first concentrate in late June, and by mid-July in line with our internal target dates, achieved a pivotal milestone of producing first saleable copper concentrate.
Our primary focus during this first phase of ramp-up was to stabilize material flow rates throughout the process plant and produce a quality concentrate at near-design recoveries. While early in our ramp-up, we've been extremely pleased with the performance of the plant thus far. As noted previously, we've been able to achieve above design concentrate grades while maintaining recoveries.
Transitioning into August, our primary priority will shift to steadily increasing throughput volumes, while maintaining concentrate quality and recovery rates. Based on our performance to-date, we are on the right track to achieve commercial production levels, which we define as 80% of design mill capacity, and 80% of design recovery rates by the end of the third quarter.
On the mining side, we continued to make strong progress during the quarter, completing the mines' pre-strip phase in April well ahead of schedule. By the end of June, we had approximately 460,000 tonnes of ore sitting on our run-of-mine stockpile, and another 44,000 tonnes grading above 2% copper blasted in the mine available for transport.
Given the strong pace we've been able to maintain our mining rates as well as the early completion of pre-stripping and the build of run-of-mine and crushed ore stockpiles, we've increased our capitalized ramp-up expenditure guidance for Tucuma to reflect the additional 2.5 months of mining, ancillary costs associated with the early run rates of our crushing conveyance and screening systems as well as costs associated with the now fully operational laboratory on site.
It is worth noting that Tucuma's growth CapEx guidance range update reflects a revised tax position, resulting in approximately $12 million of capitalized taxes that have been deemed to be non-recoverable. With the Tucuma construction complete and a ramp-up underway, we will be shifting the focus of our Tucuma engineering and project execution team to the Furnas project.
Over the last few months, working closely with the Vale Base Metals team, we've transferred approximately half of the 90,000 meters of historic drill core to our core logging facility in [ Parauapebas ] and commenced re-logging, resampling, and validation work programs. As David mentioned, we expect to publish a main resource estimate on the project incorporating this work later this year, as well as kick off our Phase 1 drill program.
At Caraiba, shaft sinking is progressing on schedule to achieve our target depth of 600 meters by year-end. During the quarter, we successfully connected the main shaft with the interface between the first and second raisebore legs, and civil works for the third raisebore leg of the shaft commenced on schedule. Raiseboring of the third leg is underway and we expect to continue through year-end.
In parallel, we have continued to advance underground infrastructure in support of the Deepening project, including development and underground support related to the shaft's ore handling and conveyance systems, as well as the underground crusher chamber. The project continues to remain on track for shaft handover to operations in Q4 of 2026.
I will now turn the call to Wayne to discuss our financial results.
Thank you, Makko. As Dave highlighted, our quarterly financial results reflect a combination of solid operating results and favorable market dynamics that drove an increase in gross profit margins across our operations.
This resulted in higher adjusted EBITDA of $51.5 million, and adjusted net income attributable to the owners of the company of $18.6 million, or $0.18 per share on a diluted basis when compared to the first quarter of 2024.
The favorable market conditions we experienced during the second quarter included a strengthening of the U.S. dollar against the real, causing the exchange rate to increase from [ 5.01 ] on March 31st to [ 5.55 ] on June the 30th. While this move has benefited our operating costs and capital expenditures, it resulted in non-cash unrealized foreign exchange losses, primarily related to the translation of U.S. dollar-denominated intercompany debt in Brazil, for which the functional currency is the real.
With respect to the cash settlement of foreign exchange derivatives, we recognized a loss of $1 million for the quarter, but a net gain of $1.1 million for the first half of the year. Our liquidity position at the end of the quarter remained strong at approximately $170 million. With construction of the Tucuma Project now complete and production ramping up, our cash flow profile and liquidity position are expected to strengthen significantly through the second half of the year.
With that, I'll pass the call back to David to share some closing thoughts.
Thank you, Wayne, and everyone who joined the call today. Before we proceed to the Q&A session, I want to extend my deepest gratitude to our teams in Brazil and Canada for their continued commitment and hard work in executing on both our operating plan and our organic growth strategy. In particular, I would like to thank Makko for his outstanding leadership on the senior management team in terms of moving the company forward, in terms of getting Tucuma to where it is today.
It is always a team effort and I certainly don't want to pick out one individual in particular, but I think at this point that is warranted. We are well-positioned to achieve both record copper and gold production this year and look forward to continuing this growth journey over the coming quarters.
Now, I will hand the call back to the operator to open the line for questions. Operator?
[Operator Instructions] The first question comes from Orest Wowkodaw with Scotiabank.
Congratulations on getting Tucuma to the finish line. I was wondering if we can get some -- a little bit more color in terms of how the ramp-up is going -- for Makko, specifically, like what you're seeing in terms of recoveries and throughput in these early days?
Thanks, Orest. Yes look, I think it's probably a bit too early to talk specific details on recovery concentrate grade. I guess at a general level, given we're sort of a couple weeks since we achieved saleable concentrate. But what I can tell you is that based on the feed grades that we're seeing which -- as you can imagine during this first couple weeks of ramp up here, are low.
Obviously, we want to save some of that extremely high-grade material for when things are -- recoveries have improved and throughput rates are higher. But based on the grades that we've seen so far, I can say that our concentrate grades are quite a bit above what we were expecting if you look at the expectations in the feasibility curve, and our recovery rates are near design targets, so just slightly below given the grades that we're feeding at.
In terms of throughput volumes, we've been able to steadily increase so far to about 40% to 50% of the design throughput capacity which, given the performance we're seeing on recovery and concentrate grades, is a good sign. Or to put that into context, we're about halfway through to our 80% commercial production level in terms of mill throughput.
That's impressive to hear. Just a question from Wayne around this on the accounting side. Should we expect no financials related to Tucuma until you reach that commercial production, or should we be modeling effectively since the start of -- I guess, the start of Q3? I'm just wondering how the third quarter is going to shape up from an accounting perspective?
Sure. So, Orest, in the third quarter, because we're now generating, or expect to generate revenue with our first sales, we will be expensing some of the costs. That's the requirement under the new accounting guidelines that came in a few years ago. But until we hit commercial production, it's only a portion of those costs that ultimately get expensed. So -- and that's a direct ratio.
So until we reach the 80% throughput and recovery, a portion of the costs will be expensed and a portion of the costs will be capitalized. And as it relates to the mining costs specifically, there, all costs will go into inventory, all waste costs will be capitalized until we declare commercial production.
So in essence, you will see some expenses against Tucuma in Q3, assuming we make, obviously, sales, which is our expectation. But it will be significantly less than, obviously, the steady state which we would expect to see in Q4.
And then one -- just quick one, if I could, just on the big picture. So with Tucuma now ramping up, your free cash flow is going to significantly improve. Is the focus -- the focus for 2025, is that going to be on deleveraging the balance sheet? Or should we expect expenditures to ramp up for exploration around Furnas and other endeavors?
Thanks, Orest. With regards to the second part of your question, with our commitments to Furnas, we don't expect our overall exploration budget to materially change from what it currently is. There may be some reallocation of some exploration from some of the other projects that we had been working on to Furnas.
So, we don't expect a big material change in exploration expenses with regards to that. But the focus is obviously to delever the balance sheet, and that is going to be the prime focus of Wayne and his team as we move into '25.
The next question comes from Bryce Adams with CIBC Capital Markets.
Appreciate the update here today. First question is, can you confirm if there was a seismic event at Caraiba late last week, like a small earthquake in the region? And then I don't want to -- I'm not trying to link it to the fatality, but were those 2 events distinctly separate from each other?
Thanks, Bryce. This is Makko. Yes, look, the Caraiba operations, like most active mining operations that are operating deep underground, has seismic events. We have a micro-seismic monitoring system that we -- has been in place since we started the company in 2017. The 2 events are completely unrelated.
So then, and just on...
As far as our initial assessment goes.
Can you -- and so, the seismic event, was it bigger than typical one, or are there any impacts on site from that?
Yes. Bryce, look, we did have a seismic event. I'd say that in terms of its magnitude, it was in line with our expectations and what we've seen historically. We did as a matter of protocol evacuate the mine temporarily so that our Geotechnical team could do a full assessment of all operating levels. And we've returned to operations.
Sticking with Caraiba, you mentioned the high grade started to come through in -- late in Q2. What are your grade expectations for the second half of the year? What's in that mine plan? And then how confident are you in that plan?
So Bryce, you mean Tucuma, correct? You meant -- you said Caraiba?
Yes, I meant Caraiba, actually. Like, the grades have been lower in the first half. I thought you mentioned there was some high grade very late in Q2?
Yes, there was high grade. So, as we mentioned in the first quarter call, we mine a combination of low and high-grade stopes. The high-grade stopes typically are 30% to 40% of total stopes that we mine. And so, when we get those, it's always about trying to make sure that we mine them as efficiently as possible and as carefully as possible. We ran into dilution in one of these super high-grade stopes with some overbreak on one of those, so we didn't get the same grades as we were expecting.
Typically, these high-grade stopes can run anywhere between 3% and 5% on average grade, and we have them scattered amongst our production for the rest of the year. Our expectation with respect to the rest of the year is that proportion of high-grade stopes to low-grade stopes leans more to the high-grade stopes, and hence the reason our expectation of higher grades will be coming through.
The next question comes from Dalton Baretto from Canaccord.
Dave, I agree with you. Makko, great job on the Tucuma construction and ramp-up here. I'm wondering if you're starting to think already about 2 years from now when the grades start to come off fairly significantly, and I'm just wondering what the thinking is there today around sort of backfilling that?
Thanks, Dalton. Thanks for taking away our happy moment and enjoying and starting the mine up. Yes, we're already on top of that. We actually -- as you may or may not remember, for those who don't know the story as well, going back longer term, we do have an underground resource at Tucuma. It is contained in terms of -- a portion of that is contained in our resource estimates that you can find in our 43-101 report for the project.
We have now mobilized the drill rigs to come back in. We're now -- I believe in September the rigs will be turning and we're now in the process of continuing to drill and continue the drilling of the underground resource. Ideally what we would be and a situation would be, is by 2027 we want to reasonably aggressively drill the underground resource, just be in a position to start supplementing, or replacing some of the lower grade material in the open pit with some higher grade material from the underground mine, that we hope that will be able to be developed over that time period.
It's early days with regards to that process, so I wouldn't be adjusting any models. But you did ask, and so this is the plan that we want to do in terms of the work here is start to work towards that development plan. So that's the best I can tell you right now. Probably in the fourth quarter, end of the year, we'll be in a better position to start discussing how the results of the drill program are going.
And then just sticking with drill rigs here. I wonder if we can get an update on exploration in the Caraiba camp, and if there's any change in strategy following some new personnel additions you've just made?
Well, for those -- that was cryptic. For those who don't know, a gentleman named Mike Hocking has joined our team, and to join Mike's team -- for those who know Mike, he needs no introduction. For anybody who doesn't know Mike, Mike Hocking is one of the great up-and-coming GOs in our business and we're really, really happy that Mike has joined our team. Mike and -- the 2 Mikes are working with our team with regards to their exploration programs in and around Caraiba.
We are working primarily in and around -- continue to develop material in the Pilar Mine, in and around the project Honeypot. We continue to do work up in the Vermelhos area with regards to continuing to look at what we call the UG4 deposit type, which is a deposit that has been identified between Vermelhos and Siriema. And then, of course, we continue to do work, albeit at a lower rate than previous on nickel in the general district.
The next question comes from Gordon Lawson with Paradigm Capital.
Can you just provide a little color on the current mining rates at Pilar versus Vermelhos, and how the grades are expected to compare through 2024?
Yes, sure. So thanks for the question. I'd say, what we're -- our target for the second half of the year at Pilar continues to be around the levels that we've been achieving through the first half, higher here in Q2 and Q3. As we've increased some effort on development of additional stopes, we've been averaging close to 150,000 tonnes a month from Pilar, and we expect those rates to increase here in Q3 -- we are seeing increases into Q3 and we expect those increases to continue into Q4 as well.
So I'd say that the second half, in terms of mining rates from Pilar, are expected to increase. Vermelhos will be consistent in terms of its contribution to our plan. I'd say that the mining rate is a little bit different at Vermelhos.
What you see in terms of mill throughput is what's transported to the plant. We are looking at ways to potentially increase those volumes in the second half of the year by adding additional transport shifts given the performance that Vermelhos has had to-date.
For the open pit, is it still reasonable to assume around 0.5 million tonnes a year?
Are you talking about the Surubim pit?
Yes, that's right.
No, we're mining about 800,000 tonnes a year from Surubim for the full year.
And switching over to Xavantina. Just looking at some of the veins that have been talked about in the past. How close or how far into the Matinha and Santo Antonio veins are we now mining? And if you can comment on any drilling progress on these fronts?
Yes, happy to. Santo Antonio has been the basis of operations for the last 4 or 5 years. So we're quite ways into it. And Matinha, we entered the Matinha vein last year. With respect to what we're seeing, and I'll just reiterate, I'm not sure if we went into any detail in the first quarter call. We have always known through the center of the Santo Antonio vein structure, particularly as it went to depth, that they were significantly higher grades.
The zone isn't particularly wide. It's probably 30 to 40 meters wide. And we historically had maybe 4 or 5 holes of the total drill database that intersected that zone.
What has come to pass as we've been mining is obviously that zone is, due to resource calculations historically, particularly using the [ kriging ] methodology. You top cut your gold grades. And so, what we have now seen is that, that zone remains and has remained for the last 12 to 18 months consistent with regards to elevated grades against the historical resource and reserve estimate.
So, we now have a bit of, some would call it a [ quandary ]. What do you do? From our perspective, we think it's not worth the time or the money to start drilling out the zone in more detail, to try and upgrade the resource, but rather keep it as such and try and give as much guidance as we can from the development work that we do and then the sampling for that.
So, as we mentioned previously on the call today, we now have visibility through the end of the year, from development drives and sampling of those development drives, that we will continue to see these elevated grades at Santo Antonio through the end of the year. Exploration drilling continues both down dip and lateral extensions of the Santo Antonio vein and we continue to see similar grades that we've released historically with regards to that work that we've done there.
The next question comes from Stefan Ioannou with Cormark Securities.
Most of my questions been answered. Maybe just circling back on Bryce's question about the grade at Caraiba, the head grade being lower sort of for the first half of the year. Could you -- just to clarify, was that then an issue of dilution of the higher grade stopes or just getting into enough high grade stopes to bring the grade up?
Yes, we ran into a couple -- there's a couple of issues that happened. In the first quarter, we got behind on some of the development. So, we mined a high proportion of lower grade stopes to higher grade stopes during the first quarter, and that was the problem there. We've subsequently worked on that with regards to accelerating our development work, and are getting back on schedule with regards to that.
However, as we were mining some of the higher grade stopes in the second quarter, one in particular, which was a quite important stope for us in the second quarter, we encountered some overbreak -- some significant overbreak with regards to some of the work that we did there, and that resulted in dilution of the stope.
Bear in mind, when we start getting into grades, they're 4%, 5%, 6%. That material becomes quite friable, and some of the wall rock surrounding it remains that way as well. So when we do get into these very high areas, as much as we try to be -- as careful as we can be with regards to our blasting patterns, et cetera, on occasion, not all the time, on occasion we will see over break occurring and dilution occur.
Now, the interesting thing about it, the dilution was actually coming in around about 1.2% copper. So it was still reasonable copper grades. But our expectation on that stope was to have grades significantly higher coming into the mill than that lower grade. So ultimately, we will recover all of that copper material. Unfortunately, it's just not going to be at the same highest grade as we expected to come out in the second quarter. As we've gone into the third quarter, we have seen some of the stopes that we've targeted in terms of higher grade come into production.
In general, we've had a pretty good start to the third quarter, albeit with regards to the accident last week. We did shut operations for 3 days as a result of the investigation, but also with respect to the families and allowing our workforce to attend the funeral of our colleague. So, we've had a reasonably good start to the third quarter, and we expect August and September to continue on track.
And then maybe just one sort of housekeeping question and my apologies, I missed it. You mentioned the TCs are locked in kind of for the rest of the year, down at like $5 a tonne. What was the number you said it was prior to that, that you were sort of seeing?
$80.
[Operator Instructions] The next question comes from Dalton Baretto from Canaccord.
Dave, with the earn-in agreement on Furnas now behind you, are you able to give us a sense in terms of broad strokes what this project looks like, and then sort of timeline to first production post the resource?
Dalton, I'm going to allow the resource to speak for itself when we come out with it in preparation of that. And hopefully, that resource comes out before next time that we will have a chat in terms of the quarterly, is that -- we think that's a good starting off point. Vale has done a -- did a great job with regards to identifying and drilling out a very, very large area. And it's our job now to identify and take a slightly different approach from what they did.
As you may or may not know, they took an approach of looking at from an open pit mine perspective. We see opportunity to look at Furnas as an underground mine. That requires us to do some more infill drilling on what we see as a very high grade zone in the center of the deposit, as well as doing work in terms of extending the deposit to depth below the valley floor. So with respect to that, yes, I mean, we wouldn't have done this deal if we weren't excited about it.
I don't think Vale would have done the deal with us had they not seen that we have something to bring to the project in terms of some of our underground mining experience. And I think, the opportunity to work with Vale Base is a great one for us. And we hope this is the beginning of a greater longer term relationship with the company.
The next question comes from Ralph Profiti with 8 Capital.
Wayne, the strategy around the Brazilian real, from the MD&A you capped out at around $5.38. And this morning we're sitting at $5.7. Just wondering if the philosophy around hedging the currency was more to do with Tucuma or can you at this point be, maybe say, financially opportunistic?
Yes, good observation. I think that the way you sort of [ catched ] it exactly that. I mean the hedges we had in place were certainly front end weighted this year. And it really was to protect the significant capital spend. I think now that we're past that, we will be a little bit more opportunistic. We're obviously seeing significant weakness here in the BRL. We do take advantage of that at times.
And I would say that we will look to basically give ourselves some downside protection, but it gives us as much cap as possible so that we're not paying away. But obviously, at those kind of -- the kind of levels we're at today, the benefit that we see through our operating costs and our local costs on the ground are of very, very significance.
So we always look at that, we balance that out and then -- try and be opportunistic. So I think -- certainly going forward, I don't think you're going to see us have as heavier foreign exchange derivative program. It'll be a little bit more opportunistic.
And just a quick follow-up. What's the grade of that stockpile at Tucuma? I believe you had that crushed ore sort of early around the sequencing at around 440,000 tonnes at 2% copper. Just wondering what -- is the stockpile grade similar?
All right, just to clarify the number, it's 44,000 tonnes at 2% that's in the mine. The overall stockpile of 460,000 tonnes has been broken up into various grades. Say the average is right around 1%. We have low-grade, high-grade mixed in that 460,000 tonnes of stockpile that's sitting in our run-of-mine [ yard ]. Is that clear?
The next question comes from Orest Wowkodaw with Scotiabank.
Just a quick follow-up. Notice that your total CapEx guidance was pretty much unchanged, but you did increase Tucuma by about $20 million corresponding with a decline at Caraiba of $20 million. Can you maybe speak to sort of what's driving the increase at Tucuma and then what you're cutting back at Caraiba?
Yes. Thanks, Orest. So maybe starting first with Tucuma, I think you pointed out obviously that -- one of the things that I -- we'd mentioned in terms of these tax -- the impact on the non-recoverable taxes, the taxes that we deem non-recoverable, which is about $12 million. There's additional $4 million associated with the increase in capitalized ramp up, particularly around mining and some of the early work.
The acceleration of mining that has continued into Q2 faster than we expected. And then, the ancillary costs associated with that ramp up, which includes building -- running our primary crusher, secondary crusher, tertiary crushing screening systems, and getting our laboratory up and running full capacity to support that increase in mining operations. So there's a few things that go into that $4 million bucket, but that gets us to $16 million.
We gave ourselves a bit of flexibility given the accounting treatment on the range that we increased, but we're feeling pretty confident with our overall capital assessment at Tucuma at this stage.
In the -- at Caraiba, the largest reduction in capital came from synergies associated with some of the tailings management that we do. So I think, as you know, we use a co-disposal system where we allow tailings to dry fully in our co-disposal piles. And then we move those dry tailings to a permanent storage facility.
We had another project running in parallel associated with closure of our oxide heap leach pile. And we've been able to recognize versus our budget a pretty significant savings in using that material from the dried tailings co-disposal as the base for our oxide pile closures. So that's probably the biggest. There's other items in there, of course, but the biggest single item is the synergies related to integrating those 2 projects which we have worked on in the first half of the year.
This concludes the question-and-answer session. I would like to turn the conference back over to David Strang for any closing remarks.
Thank you, operator, and thanks to everybody for attending the call today. We really appreciate the questions and the detailed nature of them all. We look forward to seeing many of the analysts who are on the call today in September during our analyst visit, in which we will be visiting both Tucuma as well as Caraiba. And with that, we hope you all enjoy the rest of your summer and look forward to talking to you again in November on our third quarter earnings call. Thanks again. Thank you, operator.
This brings to an end today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.