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 Fourth Quarter and 2017 Year-end Financial Results Conference Call for Ero Copper Corp. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Strang, President and CEO of Ero Copper. Please go ahead.
Thank you, operator, and good morning, everybody. Thank you very much for coming on the call. I'd like to welcome you all to Ero's fourth quarter and year-end results call, our second quarterly results call as a public company since listing on the TSX in October last year. The news release announcing Ero's fourth quarter and year-end results is available on our website and on SEDAR, as are our year-end audited financial statements and MD&A. I would like to remind everyone that comments made on this conference call contain forward-looking statements and information that involve risks and uncertainty -- excuse me, uncertainties concerning the business, operations and financial performance of the company. For a discussion of the risks, uncertainties and factors which may lead to the actual financial results and performance being different from the projections contained in the forward-looking information, please refer to the Annual Information Form for the year ended December 31, 2017. With me on the room today are Noel Dunn, Ero's Cofounder and Executive Chairman; Wayne Drier, Chief Financial Officer; and Makko Defilippo, Vice President Corporate Development. I will kick off the call with a brief review and update of our operations, Noel will provide a review of key corporate activities and Wayne will provide a review of the company's financial performance during the quarter. Unless otherwise noted, all amounts discussed on the call are in U.S. dollars. As always, our team will be available for questions immediately following the call. So let's move on to the updates. We had another good operational quarter to end a truly transformational year for the company, following the full restart of mining and milling operation in February of 2017. Continued outperformance of our operations throughout 2017 is a real testament to the quality of our operating teams in Brazil. The teams' efforts and continued execution, particularly with respect to the development of our new Vermelhos mine, which we now fully expect to be operational by the fourth quarter, have facilitated the previous announced increases in our production guidance for 2018 to between 25,500 tonnes and 27,500 tonnes of copper, a 27% to 37% expected increase in production relative to our 2017 full year results. Full year production for 2017 totaled 20,143 tonnes of copper, which was approximately 1,100 tonnes ahead of our production forecast, as outlined in the 2017 technical report. During 2017, we processed approximately 1.8 million tonnes of ore, grading 1.31% copper, at average metallurgical recoveries of 86.8%. During the fourth quarter, we processed approximately 452,000 tonnes at an average grade of 1.36% copper, producing 5,334 tonnes of copper during the quarter and after recoveries of approximately 86.9%. During the fourth quarter, we fully transitioned our open pit operations from Suçuarana and began ramping up production at our Surubim mine. Relative to third quarter, the slight quarter-on-quarter decline in open pit [ trans ] mined was partially offset by higher grades as we transitioned from Suçuarana to Surubim during the quarter. With respect to local currency operating costs, our KPIs with respect to the mining costs and operating costs on tonnes mined and tonnes processed, full year cost metrics were in line with expectations at BRL 125 per tonne mined underground, BRL 12.65 to BRL 12.68 per tonne mined open pit, BRL 30.97 per tonne processed and indirect costs of approximately BRL 11.11 per tonne processed. Fourth quarter metrics were BRL 133.68 per tonne mined underground and BRL 9.29 per tonne mined open pit, BRL 34.23 per tonne processed and indirect costs of approximately BRL 11.06 per tonne processed. Key operating initiatives undertaken during the year, which we will continue to focus on during 2018, include the aggressive exploration programs throughout the Curaçá Valley; continued work to accelerate the primary ramp and ventilation development to the depot and higher glide areas of the Pilar mine; and now placing a renewed focus on development and production from shallow ore bodies in Pilar, including the P1P2 northeast section of the mine, and of course, the recently announced discovery of the north section or North Extension. Vermelhos' development continues to rapidly advance, again, a real testament, as I said before, to our operating teams in Brazil. During the fourth quarter, we completed a total of 821 meters of development, including 306 meters of primary ramp development and 71 meters of auxiliary ramp development, accessing the -- to access the UG1 Target area. Development has now been advanced to the top stopes -- or the top of the first stopes of the main Vermelhos ore body and in-ore gallery development has commenced at UG1. Our aggressive strategy for exploration throughout the Curaçá Valley is now underway. As we've highlighted in our recent quarterly exploration update, I am pleased to say that we now have 15 drill rigs operating at each of our operations within the valley, Vermelhos, Surubim and Pilar, that are actively focused on expanding our nonmineral resources and reserves. At Pilar, 5 drill rigs are actively drilling both exploration- and resource-upgrade programs, including continued drilling in the deepening area of the mine where we have continued to drill high-grade mineralization outside the current mineral resource and at the recently discovered -- excuse me, and at the recently announced new discovery of the North Extension. The new discovery was highlighted by recently announced drill intercept of 43 meters grading 1.7% copper, including 19 meters grading 2.49% copper. The interceptor is located just 300 meters below surface, 100 meters west of the planned mining area of P1P2 northeast and only 250 meters from the main ramp. Suffice it to say, the new discovery underscores our long-held and quickly solidifying belief that the exploration story at Pilar is focused -- excuse me, I believe that the exploration story at Pilar is related to more lateral expansion of the existing resources that are also close to infrastructure. That work is ongoing, and we hope over the next year to be able provide the market greater solidified results with regards to that work.At Vermelhos, 5 drill rigs are actively drilling, including 4 surface core rigs and 1 reverse circulation rig that is targeting oxide mineralization. Our infill drilling campaign and the development into the UG1 ore body has continued to reaffirm the high-grade nature of the Vermelhos mine. In addition, the commencement of our airborne geophysical survey is imminent. All required equipment has arrived on site. We have received a number of the requisite permits to fly the survey and are currently awaiting the authorization from the Department of Defense for the final permit required. In the interim, we have mobilized a downhole electromagnetic crew to perform surveys targeting near-mine extensions both at Pilar and at Vermelhos. The crew is currently following up on the North Extension discovery discussed previously, and we hope to be able to provide greater information around that work as we progress through the year. In summary, 2017 was a transformational year in almost every way. Looking forward to 2018, the key themes during the first half of the year will still be oriented towards stabilizing operations for the long term. As it relates to 2018 production, it is worth reiterating, our guidance is heavily weighted towards the second half of the year as a result of the startup at Vermelhos and also due to stope sequencing at Pilar and stripping at Surubim. With that, I'd like to pass it over to Noel, Cofounder and Executive Chairman of Ero, who will provide a review of our corporate initiatives. Over to you, Noel.
Good morning, everyone. As we have mentioned previously, we've successfully completed an IPO and began trading on the Toronto Stock Exchange in October of last year. The -- in that process, which inaugurated 13.5 million shares, including 3.5 million shares of the greenshoe, at CAD 4.75 for total proceeds of $50.9 million that is subject to a 6% fee for the underwriters for their services. During the fourth quarter, we also purchased at a discount senior secured notes issued by our subsidiary, MCSA, with -- of the -- with a face amount of $75.6 million. We financed this purchase through our $50 million facility from Bank of Nova Scotia. And as a result, we recognized a $25.6 million reduction in total consolidated debt during that process. The combination of the debt purchase and the proceeds of the IPO during the fourth quarter, obviously, significantly improved the net debt position of the company to -- at year-end and net debt position of $85.9 million. In addition, and subsequent to the year-end, we've also cleaned up some outstanding items in our capital structure. We forced a conversion of a $2.75 million convertible, all the lien holders elected to convert into common shares, resulting in the issuance of approximately 4 million shares. In addition, just over 1 million warrants were exercised for gross proceeds for USD 1.2 million to the company. So as of March 28 of 2018, we now have 84.5 million common shares outstanding, 3.7 million stock options, and 3.3 million warrants issued and outstanding, and that would give us a fully diluted share count of $91.5 million. So -- or 91.5 million shares. With that, I will now send it over to Wayne, our CFO, who'll give you a review of the details of our financial performance.
Thanks, Noel, and good morning, everybody. From a financial perspective, the Q4 results built upon the positive trends in Q3. During the quarter, the company sold 5,448 tonnes of copper in concentrate for revenues of $37.8 million, resulting in a realized copper price of $3.15 per pound. Full year revenue came in at $115.4 million on sales of 19,719 tonnes. C1 cash costs were $1.54 a pound for the quarter and $1.45 a pound for the full year, reflecting management's expectations. Especially pleasing was cash flow from operations that improved to $11.2 million in Q4 from $6.9 million in Q3, underscoring the progress made at MCSA during 2017. The debt refinancing was a major highlight during the quarter and had a significant positive impact on earnings for the quarter and the full year. Earnings before interest, tax, depreciation and amortization was $31.4 million for the quarter and $52.9 million for the year. After adjusting for extraordinary items, notably the discounted debt purchase, it was still a robust $28.2 million for the full year. Attributable net income for the quarter was $19.5 million or $0.24 per share on a fully diluted basis. For the year ended December 31, 2017, attributable net income amounted to $22.5 million or $0.34 per share fully diluted. As Noel mentioned, the company ended the year with a robust liquidity position as a result of proceeds received from the IPO early in the fourth quarter as well as the accelerated conversion of warrants. Cash on hand at year-end was $53.3 million. Our working capital improved from a deficit of $4.3 million at the end of Q3 to a surplus of $42.6 million at the end of the year. It's perhaps stating the obvious, but it will be fair to say that the company ended 2017 in a much better overall financial position than when it began the year. With that, I'll now turn it back to David for some closing remarks.
Thanks, Wayne. So in summary, everybody, I would like to reiterate what has been said before and throughout this call. 2017 has been a highly transformative year for both the company and our shareholders. From operations and exploration program growth through to execution on many of the broader corporate initiatives, including markedly improving our balance sheet in 2017, the company has been placed on a solid foundation to affect our growth strategy going forward. I'd just like to thank you all again for coming on the -- and joining the call, and we will now turn it back to our operator so that we can open the line for questions. Thank you.
[Operator Instructions] Our first question comes from Justin Chan of Numis Securities.
My question is just on Vermelhos. And it appears you're well ahead of schedule there, although, your guidance remains Q4. I was just wondering from here through to the first production, could you take us through what activities remain? And what the original budgeted amounts of time were to complete them?
With respect to the requirements going forward in order to get where we need to go, as you know, the critical factor of -- with any development or any underground mine is always going to be development. And I think, as we've pointed out, the development is pretty much way ahead of schedule to the point that we are now, as we said on the call, comfortable with regards to fourth quarter guidance. Moving anything more aggressively forward on that is related primarily to equipment delivery that is scheduled to happen during the summer, and that's really the last of the major requirements needed. We started construction on the road to deliver the materials to the plant. The power line has been -- will be energized. We expected it sometime maybe this week, but it's probably over the course of next 2 weeks. We're all ready to receive the power, it's up to the utility just to turn the power on. We're comfortable with regards to where we are on our permitting, with regards to the last of our operating permits. And so really it's -- where we are right now is comfortable to say for the quarter, but we'll have to wait and see if there's anything ahead of that depending on equipment delivery.
I see. And is there latitude to accelerate those equipment deliveries and it's just a case of not wanting to guide for that until it's confirmed, is that a fair characterization of where you are?
Exactly. Yes, exactly.
Our next question comes from Ian Grundy of Scotiabank.
I was just wondering on your production guidance, you said it was supposed to be heavily weighted towards the back half of the year. Is that kind of like a 60-40 mix? Or can you give us a little bit more specifics around how much will come at the end of 2018 versus the first half?
Makko is going to deal with this one.
This is Makko here. Great question. Look, I think if you look with respect to our guidance, and pull out Vermelhos and just look at sort of being in Pilar, I think you're on track in terms of the 60-40 number. We can certainly have a follow-up call in regards to its -- to a little bit more specifics. But the key theme, as Dave mentioned on the call, is going to be sequencing of Pilar and some of the stopes we have. As is evident in some of the network and, obviously, as well as the -- just the overall resourcing reserve estimate in the 2017 report, we do get variability between operating stopes in terms of grade. So year -- over a -- in a year period, obviously, that blends out very nicely. But quarter-on-quarter, there are some changes there. And Surubim, as we've discussed, working to extend the life there in terms of open pit. We also had continued mineralization at Suçuarana that extended the production there, which pushed back some of the weight stripping from when we originally thought we were going to do it into Q4. So Q1 is going to be lighter on open pit tonnage just as a result of pushing that weight stripping into Q1, if that makes sense.
I would like to turn the conference back over to the company for any closing remarks.
Thank you, operator. Again, thanks, everybody, for coming on the call. We really appreciate it. Just to let -- as you all know with regards to -- we're always available for further on comments, questions if you have. Please feel free to call Makko, Noel, myself and Wayne at any time, and we'll be more than happy to help. But thanks, again, and we look forward to talking to you during the quarter and as we continue to move forward this year. Thanks, operator.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.