Ero Copper Corp
TSX:ERO
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Ero Copper Corp
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Welcome to the Ero Copper Corp. Fourth Quarter 2019 Financial and Operating Results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]I would now like to turn the conference over to Mr. Noel Dunn, Executive Chairman. Please go ahead, sir.
Thank you and good morning, everyone. The news release announcing Ero's fourth quarter and 2019 year-end results is available on our website and on SEDAR, as are our financial statements and MD&A for the year ended December 31, 2019. Comments made on this call contain forward-looking statements that involve risks and uncertainties concerning the businesses, operations and financial performance of the company. For a discussion of the risks and factors which may lead to actual performance being different, please refer to our most recent AIF also available on SEDAR. Unless otherwise noted on this call, all amounts 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. Before discussing the operational and financial results of the quarter, I want to start today's call by addressing the obvious uncertainties reflected in the global economy. Like you all, we are monitoring the situation closely. I'd like to take this opportunity to reiterate to all our key stakeholders that we are very well positioned in this environment. Our business has and is continuing to run very well. You will hear this theme repeated throughout today's call. As many of you have heard me say in the past, the best hedge in uncertain commodity price environment is to be a low-cost producer. We have worked hard over the last several years to ensure that our operations continue to produce copper and gold at first quartile levels, as was highlighted by our 2019 C1 cash cost of $0.93 per pound of copper and 2020 guidance ranging from $0.85 to $0.95 per pound. At the current U.S. dollar-Brazilian currency exchange rate of around BRL 4.80 and the copper price of around BRL 2.47, our operations today are more profitable and generating more free cash flow that we projected in our budget earlier this year, emphasizing the benefit of earning U.S. dollars and having Brazilian currency costs. Furthermore, we're fortunate to have well -- fortunate to have mature organizational structures in Brazil to support our operations. So whilst in current conditions, our underlying business is running well ahead of budget, we are not complacent in thinking through the potential impacts on our operations, on our supply chains, of the pandemic as it evolves in the -- throughout the world and, inevitably, in South America. With all of that said, let me reiterate for those who are now just joining the call, our underlying business continues to run extremely well. We are reiterating our guidance for 2020. We are favorably positioned to continue to execute on our growth strategy despite global macroeconomic headwinds. 2019 was a fantastic year for the company, underscored by the headline earnings per share of over $1 on a fully diluted basis, which is a big change when reflecting back on the 4% loss per share in 2018. 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, and our whole team will be available for questions immediately following the call.
Thank you, Noel. As Noel said, our operations performed well during the fourth quarter of 2019 and have continued to perform well thus far into 2020. As a result, we are reiterating our guidance for the year. Our fourth quarter and 2019 full year operating results were pre-released along with 2020 guidance in early January, so we'll just touch on a few highlights from 2019 as well as some of the programs underway this year so as to leave sufficient time for questions following the call. During the fourth quarter, we produced 11,526 tonnes of copper in concentrate, resulting in full year production of 42,319 tonnes of copper, a 39% year-on-year increase in production. The operational performance throughout the year was highlighted by an excellent fourth quarter, which set a new record for contained copper mine as a result of strong contributions from both the Vermelhos and Pilar Mines. 618,303 tonnes of ore were mined, grading 2.22% copper during the fourth quarter, resulting in full year production of 2.46 million tonnes of ore, grading 1.98% copper. For the quarter, C1 operating costs at our Curaçá Valley operations were a record $0.80 per pound of copper produced, resulting in total C1 cash costs of $0.93 for 2019. Significantly below our guidance of approximately $1 per pound of copper produced, and we continued to see improvements in our operating costs as we enter 2020. Our guidance for 2020 reflects a continuation of year-end mine performance. We are guiding for a total of 2.2 million tonnes of ore, grading 2.15% copper to be mined and processed during the year, producing between 41,000 and 43,000 tonnes of copper in concentrate after metallurgical recoveries of 90%. Improving metallurgical recoveries remains a focus of the company, and our high-intensity grinding mill project remains as planned, with delivery and commissioning during Q2 of 2019. We expect the installation of this unit to materially improve recoveries during the second half of the year. Additionally, we commissioned our 200,000-tonne per annum ore sorting plant in January. While encouraged by some of the early results, we will continue to run 100,000-tonne test program over the next several months using different ore sources throughout the Curaçá Valley to fully evaluate the potential for unlocking additional value from our operations. At our NX Gold Mine, we were pleased to see production improve during the fourth quarter with just over 6,000 ounces of gold produced and C1 cash costs of $980 per ounce as we continue to transition into the new Santo Antonio vein. A new NI 43-101-compliant resource and reserve update, a new life-of-mine plan was completed late last year, outlining an initial 3-year mine life, producing an average of 40,500 ounces of gold and C1 cash costs below $500 per ounce. For 2020, we are guiding between 38,000 and 40,000 ounces of gold production and C1 cash costs of between $475 and $575 per ounce of gold produced. We continue to expect production to be weighted towards the second half of the year as a result of developing productive working phases within the new ore body. In addition, there are currently 4 drill rigs operating at the NX Gold mine focused on extending mine life through conversion of inferred resources and drill testing extensions of the Santo Antonio vein to depth. Additionally, the first regional exploration program ever conducted on the property commenced during the first quarter. With respect to exploration at our Curaçá Valley operations, strong operational and financial performance has allowed us to continue to run one of the most comprehensive exploration programs globally, and we currently have 26 drill rigs operating. Our exploration programs continue to focus on the exciting in- and near-mine priority programs of the deepening extension of the Pilar Mine where we announced the discovery of a new Super Pod in late December, and the extensions of the Vermelhos orebodies to depth. With these projects well underway, we will increase the number of drill rigs allocated to regional exploration throughout the year. We are projecting approximately 60% of the meters drilled in this year's program will be allocated to our regional drilling by year-end. Our greenfield exploration efforts are currently focused within the Vermelhos District, where we have 4 drills located; and in the Central Surubim District of the Curaçá Valley, where we have 3 drill rigs allocated to high-priority exploration targets. Outside of our regional programs, in the Vermelhos District, where we have 8 additional drill rigs operating, we continue to follow several promising developments in and around our existing mining operations and known deposits of the Vermelhos system: a 10-kilometer semi-continuous trend of exploration targets and anomalies that surrounds the Vermelhos Mine; our Siriema discovery; extensions of the N-8 and 9 deposits; and notable extensions along strike to north and south along the system. 2 new deposits at the Northern-Southern extension of the system were announced in our December exploration update. In the Pilar District, where 11 of the 26 drills are operating, we continue to press forward with a number of in line initiatives that will meaningfully change the production profile of the mine and extend high-grade production, including in the deepening zone. We are currently working to further delineate an exploration target in this zone with potential for between 7 million to 12 million tonnes, grading 2% to 2.5% copper based on drilling to date. In addition, we continue to drill south of the historic Pilar open pit in the Baraúna zone, where we are following shallowing mineralization from the infrastructure of the underground mine towards surface as we move further south. We anticipate providing additional detail and results on each of these programs in our upcoming quarterly exploration update typically released 4 to 6 weeks following our financial results. With that, I will now pass it over to Wayne, who will provide an overview of our financial performance.
Thank you, David, and good morning, everyone. 2019 was a record year for revenue, cash flow from operations and earnings for the company. The year-on-year improvements reflect growth from both an operational and financial perspective. On a consolidated basis, our income statement and balance sheet all showed significant improvement compared to this time last year, reflecting the hard work throughout the organization, not only to grow, but to also strengthen our business. During the fourth quarter of 2019, the company sold 11,595 tonnes of copper in concentrate and 5,810 ounces of gold for revenues of $75.7 million. Copper and gold sales volumes were 14% and 27% higher, respectively, compared with the prior period, contributing to a 25% increase in revenues during the quarter. As David mentioned, we achieved record C1 cash costs of $0.80 per pound for the quarter and $0.93 for the full year 2019, significantly better than the bottom end of our full year guidance range of $1 per pound. Adjusted earnings before interest, tax, depreciation and amortization was $31.2 million for the quarter and $134.1 million for the full year. Cash flow from operations during the quarter and full year was $35.9 million and $127.8 million, respectively. Once again, reflecting the strong operational close out to 2019. During the quarter, the company also booked an asset related to tax loss carryforwards that were previously not recognized in the Brazilian subsidiary. With the company now generating ongoing income tax profits, these tax losses can and will be used to offset income taxes payable in the near future. Net income for the quarter was $45.2 million or $0.49 per share, while adjusted net income was $40.7 million or $0.44 per share. For the full year, net income per share and adjusted net income per share were $1.01 and $0.94, respectively. The total cash position at year-end was $23 million, including restricted cash. The overall liquidity position of the company remains robust with undrawn lines of credit in Brazil totaling approximately $16 million as well as $14 million of headroom in our corporate revolver, giving us over $50 million of liquidity. As Noel mentioned previously, the combination of a weaker Brazilian real and ongoing operational performance at both of our operations provide for strong operating cash flows. And with a strong balance sheet, ensures that our capital investment program remains on track. I'm aware that in these turbulent times, lending covenants come into focus. We have a limited set of covenants, all of which we are comfortably exceeding at this point. At spot Brazilian real levels, we would have to see an unprecedented collapse in the copper price to see any pressure on our covenants. With that, I'll hand the call back over to Noel for some closing remarks.
Thank you, Wayne. If I may, I'd like to reiterate the main message of this call. Firstly, we are monitoring the COVID-19 situation closely and have contingency plans in place to manage our business under a variety of different scenarios. Secondly, strong operational performance in 2019 is expected to continue into 2020, and we are reiterating guidance. Thirdly, our business continues to operate ahead of budget at prevailing commodity and foreign exchange rates. And thus, we are well positioned to fully fund our capital investment program, including the comprehensive regional exploration program comes underway. Finally, our assets are extraordinary. The combination of first quartile operating costs, low capital intensity and tremendous untapped exploration potential and a high-quality team of people both in North America and in South America, driving the organization forward, give me great confidence in the continued growth of the company in 2020 despite of the world around us. Thank you very much for joining the call. We will turn it back to the operator to open the lines for questions.
[Operator Instructions] Our first question comes from Raphael Souza with CIBC.
So first one is, I'm just wondering at what copper price levels we could start seeing some changes -- some potential changes to our exploration strategy and budget.
Raphael, good to hear from you, mate. We are -- we have been running stress tests on our cash flows with regards to various metal prices. We've also been running scenario planning with regards to how we would look at changing the exploration program in terms of various scenarios there. I don't want to get drawn into specific numbers with regards to metal prices because, as you know, all these things are metrics-related. But as it stands currently, we are extremely comfortable with regards to our programs. And I think we'd have to see a significant drop in metal price before we would be looking to start changing the program materially. However, these are uncertain times, and I think we all have to be aware of what is happening in the world right now. So we're not -- what I think the message we'd like to leave with everybody listening today is we are ahead with regards to contingency planning, with regards to our exploration programs as it relates to the current -- what's happening in the world right now. And so we are comfortable that at this particular moment, we are comfortable in saying that we will continue with our 26 drill rig program as it stands today.
Just to add to that. I mean, I think it's important to reemphasize, it's not simply a copper price discussion, it's a Brazilian currency and copper price discussion. So -- and the Brazilian currency is acting as a tremendous cushion to us so we can tolerate very low copper prices, given the fact that our costs are in Brazilian currency. It's hard to conceive of a time with Brazilian currency strengthening when the copper price is depreciating. That would seem to be rather odd. Never say never, but it seems unlikely. So I think that relationship needs to be borne in mind. And it really is one of the great strengths of operating in Brazil.
Yes. No, absolutely. And I know most of the majority of your OpEx is BRL-denominated. I was just wondering if this thing applies to your CapEx and exploration.
Yes. That's a good question. Obviously, with regards to the HIG's Mill, that is not. That capital is in foreign currency. But the vast majority of the capital spend to date, or most of the capital for the HIG's been spent. So our exposure to fluctuations with regards to costing on the HIG's is not extreme. With regards to our exploration drilling, it is all denominated in Brazilian reais.
Okay. And just 1 last question. So you're guiding to 91% copper recovery this year. Does that include any benefit from the [ regran mill ]?
It had some. Does that help? Yes. It doesn't kick in to the second half of the year, Raphael. So when you're looking at an overall basis of 91%, we -- as I said, we've guided for the year at 90%. We guided what? 91%? Obviously, we've done -- sorry, that's right. I've got my things around. We did 90% recovery in the fourth quarter. So even without the HIG's Mill, we have seen some good operating performance throughout the mill. We expect the HIG, as we've guided, to see somewhere in the order of a 2% to 4% improvement in recoveries that will be in the second half of the year, so where we stand right now with regards to operating performance, we are seeing improvement in operating performance through a couple of other initiatives that we've initiated in the mill that have seen improvement. So it is possible, although we don't want to get into any guidance right now, that we may see even better improvement in terms of mill recoveries than what we've guided to for the year.
Our next question comes from Dalton Baretto with Canaccord Genuity.
I just want to unpack the stellar $0.80 C1 number here. Beside from exchange rates, can you guys tell me what else is really driving it? And then part B of that question is, just given where the BRL is right now and the grade you plan to mine this year, how sustainable do you think that is? Because it's below your guidance.
Dalton, I'm just hesitating a little bit, just working through my brain the other KPIs in which we're seeing improvements. We do see some improvements in KPIs in Brazilian reais with an operating performance. To give you a specific area where we're seeing that, we see in a number of different places. Obviously, recoveries help, and we see improvements there over what we thought in the budget for -- or what we were guiding to for fourth quarter last year. We see some areas in terms of differentials with regards to improvement in some of the size of the stopes that we're mining, particularly in [ west ] deposit, where we saw improvements there. We also have seen some improvements with regards to -- in terms of the metal that we're mining per tonne of ore with respect to reconciliation as it relates to geological and mining losses. So there's no 1 specific area I can sort of point to and give you guidance to exactly where it is. We're seeing a number of initiatives kicking in, operating efficiencies and improvements by the team that are also playing its part. But certainly, the biggest one we have seen has been the BRL.
Dalton, this is Makko. Just to expand that to you on -- with respect -- one thing to keep in mind with the fourth quarter here. Obviously, we process very high grade material coming in at 2.16% copper in the fourth quarter. Obviously, had a big benefit, along with other initiatives Dave mentioned. I think what's probably most relevant about the fourth quarter here is that 2.16% versus our full year guidance for 2020 at 2.15%, obviously, bodes well for given where the BRL is for continued performance on C1 cash cost basis.
Yes. I mean, obviously, the FX is a major component part. You can see where the BRL went out at the end of last year, and you can draw your own conclusions what that's doing to our costs, given how much its depreciated from that point to where we are today.
Okay, great. That's helpful. And then maybe switching gears to the ore sorting. Dave, you mentioned that you're going to keep testing here. But how close are you guys in terms of being able to make a decision on whether this will unpack or unlock some of the open-pit type resource on your property?
Well, we're a month in, so 5 months. No. It's been flipping -- what we're doing right now, as I said, we're encouraged by what we're seeing. But we're very -- still very much in the early stages. So I think once we get through -- this is one of those questions. I don't think we want to be drawn into that. We are testing all sorts of different areas, we've seen some remarkable recoveries in some areas that we didn't anticipate. We haven't seen some things in some areas that gave us lower performance than what we saw. But overall, it's better than worse. So we're very, very encouraged. But from the standpoint of where we're going to be in the situation to feel 100% encouraged that we can start rolling this out, I think I don't want to -- and none of us want to be drawn into this until midyear to start at -- being able to discuss that more publicly.
The only thing to add, the wholesale has been working 24/7. It hasn't broken down yet, so that's good news. One of the key components we were looking for.
Yes. Look, that's -- availability has been very, very good, but we're only 3 or 4 weeks into this. So -- but running it -- it's really great to be in a situation to be running it 24/7. Small things have been highlighted to us. The ability -- running it at night versus running in daytime with the fact that you're using a Seeing Eye technology is important to be able to look at how you calibrate the algorithms, et cetera, et cetera. And as I said, so far, we're very encouraged by what we're seeing, but we don't want to be drawn into anything -- any conclusions just yet. There's a lot more work that needs to be done.
Okay, that's fair. And then just maybe one last one on exploration. You've had the drills turning for 2 months now. Can we get a sneak peek in terms of what you're seeing on the regional side?
No. To be honest, we had -- to start-up this year in terms of the program was a little slow than anticipated. So with the 26 rigs, the final rig started up last week. So we have been building back up as rigs came back from maintenance through the January period. I think with regards to the greenfield's exploration work, that given our experience in the past and given that we would prefer that we only announce new discoveries once we have a comfort level that they will be coming through resource reserve, I would anticipate that we won't be ready to be able to see anything towards the -- until the second half of the year. I think the way that Mike and the team are starting up and the way that we're testing, I think that's the best thing we can give you right now. As you know, we only released Siriema after 19 drill holes. So we are going to take a very methodical approach. I think it's been beneficial to us longer term. Historically, that not getting ahead of ourselves with anything that we're drilling. The program is going well. We are comfortable with what we're doing at the moment, but we're not going to be, I think, ready to talk in any great detail until the second half of the year with regards to anything greenfield's.
[Operator Instructions] Our next question comes from Stefan Ioannou with Cormark Securities.
Maybe just on the budget. I know your CapEx budget for the year of $74 million is underpinned by a $2.65 copper price. And you mentioned that, obviously, some of that CapEx is discretionary. Can you just give us maybe a little bit of granularity on sort of what that discretionary component looks like?
Well, the largest single discretionary component is, obviously, the exploration program. But even within that, we have different levels of how we can adjust and operate with respect to that. That's the biggest number there, and we've certainly broken that out for you guys before. The other areas that we can look at, should we have to look at it. But again, that's -- we're a long way off from doing that. Is some of our capital development in the mining industry? You can never have enough development. But from a capital development perspective, we are doing well. And there is a possibility that we can look at capital development if we needed to look at that in such a way that the company would be in a good position to be able to reduce that, if necessary, and still be able to meet its obligations this year and next year. Those are 2 of the more general areas, I would say, with regards to discretionary in terms of our capital and where we stand with regards to that.
But 2.5 months into this year, we're already building more cash than we anticipated because we're making more money than we anticipated.
That's correct.
So that all feeds into the whole discussion. Yes. So you mentioned the 4 60 -- the $2.65 copper price, but important is, obviously, that $4 -- BRL 4 component...
Our next question is from Jackie Przybylowski with BMO Capital Markets.
Congrats on a good quarter. I just have a couple of quick ones for you. I guess, first of all, it's a topic that's been coming up more and more often. Can you just talk a little bit about, if you're seeing any impact to your business from the coronavirus situation, whether that's in terms of acquiring consumables or in terms of placing your concentrate on the market?
Good question, Jackie. No. At a very early stage in this, we banned all travel from north to -- North America, South America to provide some isolation around our operations. We didn't want people randomly taking the virus ahead down to there, and that's worked out very well for us. The guys in Brazil had instituted some very extensive work and thinking through all their supply chains. And I have to say, to this point, we've had no impact whatsoever on any of the things that we're dealing with in our business. But as I said in the call, we're not being complacent. We're thinking through, okay, where do we get all basic materials from, the vast majority of which come from Brazil. We've talked to the suppliers. How are you guys doing? Everybody is fine. And then, obviously, thinking through, well, what do we really need to keep in supply, stores, et cetera, to keep us rolling? And we're running through various -- as David said, we're running through various scenarios just to make sure that our business remains robust. But so far, so good.
Yes. Just to expand a little bit on that. Within Pilar, we have a coronavirus committee that has been formed between our senior leadership, along with the local medical professionals. As you know, the primary impact that you can have today is on the educational side with regards to distancing, with regards to washing hands and these types of things, and there's a great emphasis on that within the site. Nonessential travel. Naturally, there has been a ban on travel by our senior management in Brazil between São Paulo and site. So we have moved to video conferencing and those types of metrics with regards to that. It's interesting that we're testing in Brazil is fairly good. We've had some people tested in São Paulo, in which we've seen 24-hour turnaround on coronavirus testing. We had some people have traveled overseas. 4 or 5 people. They have been self-isolated with respect to operations. And so, we have taken a very vigorous approach to this. Likewise, on the supply side, just to expand away from now, letters were sent to all of our suppliers last week, requesting confirmation that they can supply it to us. There is now an ongoing bi-weekly contact from our purchasing department with all of our suppliers to continue those kinds of levels of discussion. And then on top of that, there has been a strategic review with regards to our team, both here and in Brazil with respect to essential consumables. And what we need to do, if anything, to increase those in order to be in a situation that we see minimal disruption to our business.
That's great color. Another quick question, I guess. On gold, I mean, gold prices have been super strong lately, and it's looking like the NX Gold Mine will continue to add a lot of value to the company. And I probably keep asking this every quarter, but have you thought at all about the strategy for NX Gold in light of the current environment? Is there any option to maybe expand it or to take advantage of current gold prices in any way?
We're going to continue to grow it. It's got a huge land position. As David said, we've got the exploration in that land position. We've got -- this area was heavily mined -- surface heavily mined by [ Gai Pinheiros ] before the company bought it. So we know there's a lot of gold in the NX district, the wider district, and we are only just tapping a very small part of it. So it strikes us that there's huge amount of value to be gained just by growing that business. And as you've noted, the cash flow is welcome and important and interesting. Another interesting hedge to our business in terms of the base metals company, having that asset. So we'll continue to grow it. To go the other direction, if we were to think of disposing it is really a point of this conversation today because it's got 3 years' worth of reserves, and you very quickly run into a futile discussion with any particular buyer. So it doesn't make any sense to us. Keep it and grow it.
We're here to unlock value. As we've jokingly said, NX Gold is mini me to the Curaçá Valley. It has large land position, underutilized mill. Mike and the team have quietly been doing a lot of regional work. And with us now into the Santo Antonio vein, we are starting to get ready to start expanding our programs to start looking at drilling regional targets and increasing our drill programs there as we move forward here. So it's a good asset and 1 that we will not be disposing of in the near future.
Sounds great. And finally, on exploration. I know Dalton asked you about it earlier, but if I could just ask, so what we're expecting in terms of news flow this year on timing-wise? I know last year, you put out the updated reserve resource statement in the fall. Is that consistent again this year? Are you expecting drilling through the summer and then putting the reserve statement out in the fall again? And if so, maybe can you give us a sense -- I know it's still...
I'll give you guidance. So with respect to exploration, we will continue with our quarterly updates, and they will come out 4 to 6 weeks after every quarter. Should we make a new regional discovery or a material discovery, obviously, those will be handled in a separate news release, as we've reiterated. And I said earlier, a material discovery for us that has its own news releases is, one, that we have a strong opinion that it will come into resource and reserve. With respect to the 43-101, that will be coming out in November this year. The reason they will be coming out in November is we are -- we have initiated the feasibility study with regards to the deepening project. That study will be presented to the board at the beginning of November. And thereby, following that, we incorporated into our updated 43-101 that will be released after that board meeting. So that's the guidance that we can provide with respect to this year.
Our next question is from Phil Ker with PI Financial.
Just a question on the -- you had a fairly sizable tax recovery on your income statement and still carry some tax assets. Could you just maybe give some color on how we could potentially see those unwind over the coming quarters or years, for that matter?
Yes. Sure, Phil. It's Wayne. I think you've got to think more of it from an accounting perspective. But really, what we had is when we acquired the business, the business had significant dips or have significant losses in Brazil, which hasn't been recognized. And subsequent to us acquiring the business, we needed to get -- well, ourselves and our auditors need to get comfortable that we had a business that could generate ongoing profits, before we felt comfortable actually bringing those onto the balance sheet. And we decided to do that at the end of, obviously, the end of last year. So what I think it means really is lower cash taxes payable. Effectively, we booked the deferred tax asset, and we'll -- that will sort of be credited against future taxes payable. So I think from a cash perspective, it will result in lower cash taxes going forward. Ultimately, you'll just see us amortizing that deferred tax asset over the coming years through the balance sheet and income statement.
This concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, operator. We'd just like to thank everybody for coming on the call. Interesting times that we're all experiencing right now. We just wish you all, all the best as we all navigate the situations that we're dealing with, and all the best to you and your families. And we look forward to seeing you all when we can in the coming months. So thanks very much, operator. And all the best to everybody.
Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.