Ero Copper Corp
TSX:ERO
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Ero Copper Corp
Earnings Call Analysis
Q4-2023 Analysis
Ero Copper Corp
The year 2023 marked a pivotal moment for the company, showcasing a blend of milestone achievements and ambitious progress across key growth initiatives. A particular spotlight shone on the substantial efforts to double copper production to about 100,000 tonnes by 2025 and the accomplishment of a gold production target close to 60,000 ounces. The Tucuma project, which is now over 90% complete while staying within the forecasted capital expenditure of $310 million, has seen seamless commissioning phases including an earlier-than-planned completion of the crushing circuit. In parallel, the Caraiba operations saw a mill expansion and the kick-off of the main shaft sinking, contributing to improved cash flows, which leaped by $20 million year-over-year to reach $163 million.
Besides operational successes, the company smartly navigated macroeconomic challenges through fortifying its foreign exchange hedge program. The gains from this program surpassed $11 million, cushioning the effects of a robust Brazilian Real. Strategic maneuvers also included a financing offering that infused around $104 million in net proceeds, thus buttressing the liquidity position to $262 million by year-end.
The company enthusiastically reported an upbeat copper market outlook, indicating supply deficits that may occur in the upcoming years. Capitalizing on this, it has proactively secured smelting terms for a significant portion of its concentrate production through 2025. The Caraiba operations processed 3.2 million tonnes of ore, a 13% increase from the previous year, yielding 43,857 tonnes of copper concentrate. Though there was a slight throughput volume shortfall due to unexpected downtime, the overall production met expectations with a consistent copper grade and recovery rate. The full-year C1 cash costs at Caraiba were recalculated due to methodological changes, resulting in $1.80 per pound, with revenue adjustments balancing the reported costs.
Regarding gold, the Xavantina operations pressed forward, realizing a full year production of 59,222 ounces and maintaining competitive C1 cash costs and all-in sustaining costs. Positive trend alignments show that the mined gold grades are outperforming expectations, and the highest quarterly production levels for the year are projected in the first quarter. Topping off the operational readiness, the company has successfully recruited all key site operational leadership and contracted over 60% of the operational workforce, drawing from local community engagement and training initiatives.
As for future projections, the company anticipates handing over the shaft to operations in Q4 of 2026 and reaching 80% of the Tucuma project's capacity by the end of the third quarter of this year, all in line with the yearly guidance. Tucuma's project capital costs were adjusted slightly from $305 million to $310 million due to the stronger Brazilian Real. Financial strategies have been effective, with adjusted net income for owners amounting to $82.8 million for the year, or $0.87 per share. This careful fiscal management is reflected in the comprehensive foreign exchange hedge position of over $375 million, structured to protect against volatility and safeguard capital expenditures slated for 2024.
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Thank you for standing by. This is the conference operator. Welcome to the Ero Gold -- sorry, Ero Copper Fourth Quarter and Full Year 2023 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 Fourth Quarter and Full Year 2023 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 12 months ended December 31, 2023. 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, 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 all for joining us today. 2023 was a cornerstone year for our company, highlighted by significant accomplishments across our organic growth initiatives. In addition to making significant strides towards doubling copper production to approximately 100,000 tonnes in 2025, we achieved targeted gold production levels of nearly 60,000 ounces, following the successful completion of Xavantina's NX 60 initiative. I'm pleased to share an update on our Tucuma project, which Makko will elaborate on, where we've surpassed 90% physical completion while maintaining our forecast capital expenditure guidance of $310 million. I'm also happy to report that commissioning is advancing smoothly. We completed dry commissioning of the crushing circuit in February, beating our timeline by 1 month, and expect to put first ore through the mill in April.We also made significant progress on the Pilar 3.0 initiative at our Caraiba operations. This included completion of the mill expansion project, where we achieved design capacity prior to year end, and the initiation of main shaft sinking at the new external shaft in December, following the completion of supporting surface infrastructure. While these growth initiatives or growth investments drove elevated capital expenditures in 2023. They have also started to reflect positively in our cash flows from operations. More specifically, record gold production drove a meaningful expansion of operating margins at the Xavantina operations that contributed to a $20 million year-on-year increase in consolidated Ero Group cash flow from operations, which totaled $163 million.Our 2023 financial performance also reflects the opportunistic implementation of risk mitigation measures throughout the year, including an expanded foreign exchange hedge program that yielded realized gains of over $11 million and helped to soften the impact of a stronger Brazilian Real against the U.S. dollar. We took an additional proactive measure during the fourth quarter amid a challenging macroeconomic landscape that drove short term copper price uncertainty, and both stood our balance sheet with a bought-deal equity financing. This offering generated net proceeds totaling approximately $104 million and contributed to our year-end liquidity position of $262 million.Since the offering in early November, the copper market outlook has improved, with supply/demand fundamentals now signaling supply deficits in 2024 and 2025. The shift reflected in the copper price as well as copper concentrate treatment and refining charges, which have dropped to their lowest levels since 2013. Seizing this opportunity, we are proactively securing smelting terms for the majority of our concentrate production through the end of 2025. These developments come at a favorable time as we approach initial production at Tucuma. With capital expenditures on this project winding down through the first half of this year, we're approaching an exciting inflection point in our consolidated copper production and cash flow profile. We also look forward to finalizing a definitive Earn-in Agreement with Vale Base Metals on the Furnas Copper project. With the necessary paperwork progressing smoothly, we expect to embark on the first phase of drilling later this year.Before turning the call over to Makko for a deeper dive into our project execution, I will briefly touch on our operating performance. At the Caraiba operations, we processed 3.2 million tonnes of ore during the year. While this represented an impressive increase of approximately 13% compared to 2022, fourth quarter and full year mill throughput volumes slightly missed out targets due to approximately 1 week of additional unplanned downtime related to the completion of the mill expansion project. However, processed copper grades and metallurgical recoveries were in line with our expectations, averaging 1.49% and 91.4% respectively, and resulting in full year copper production of 43,857 tonnes of coppering concentrate, including 11,760 tonnes of coppering concentrate in the fourth quarter.Regarding our C1 cash costs at Caraiba, we reported $1.75 for the fourth quarter and a $1.80 for the full year. These figures reflect our new C1 cash cost calculation methodology that was updated in light of changes to Caraiba's copper concentrate sales channels. While Wayne will provide more insights on this methodology change, I want to note that the impact on our C1 reported -- on our reported C1 cash costs is counterbalanced by an equivalent increase in reported realized copper prices.As we quickly approach the end of the first quarter, the cadence of production and cash costs is aligned with our expectations. More specifically, Caraiba's production is expected to be lowest in the first quarter, with processed copper grades projected to be the lowest for the year and processed tonnenage expected to increase between 5% and 10% compared to the fourth quarter. Consequently, we expect C1 cash costs to be the highest in the first quarter of this year.Turning to our Xavantina operations, we reported another stellar quarter, capping a year of record gold production and record operating margins, thanks to contributions from the new Matinha vein. Processed gold grades continued to exceed our expectations during the fourth quarter, averaging over 17 grams per tonne and resulting in production of 16,867 ounces at C1 cash costs and all-in sustaining costs of $413 and $991 per ounce, respectively.For the full year, production was up 39% compared to 2022, driven by a nearly 100% increase in processed gold grades. This resulted in full year production of 59,222 ounces and C1 cash costs and all in sustaining costs of $422 and $957 per ounce, respectively. As we progress through the first quarter, we continue to absorb -- observe positive grade reconciliations with mined gold grades at Xavantina trending above 15 grams per tonne. Consequently, our expectations around the cadence of full year production remains consistent with our previously issued guidance, with the first quarter anticipated to deliver the highest quarterly production levels in 2024.I'll now hand the call over to Makko to provide more comprehensive detail on our project execution, after which Wayne will touch on our financial results.
Thank you, David, and good morning, everyone. Highlighting what was said earlier, we have continued to make outstanding progress across the entirety of our project portfolio. Starting at Tucuma, where we continue to make huge strides across all work streams throughout the project, our most notable achievement to-date is reaching 4 million hours without lost time incident. Our primary goal at Tucuma is to deliver the project safely, and our performance to-date demonstrates the commitment of our site teams and construction partners in achieving this goal. As David mentioned, we completed the construction and commissioning of our crushing circuit as well as our screening and conveyance systems in order to place first crushed ore on the reclaimed stockpile approximately 1 month ahead of schedule.On the Milling and Flotation side, mechanical equipment is installed and completion testing is well underway. The last piece of milling equipment, our high intensity grinding mill, is currently en route to site from Salvador and its delivery on-site remains fully aligned with our project execution schedule. We are currently focused on completing piping, cabling, instrumentation and ancillary installations around the mill and flotation areas and are preparing to run first ore through the mill in April. During the month of May, we expect to complete the commissioning of the flotation circuit as well as the high-intensity grinding mill to initiate integrated commissioning across the whole project in June.On the Mining side, we continue to progress well ahead of schedule. The continued outperformance by our mining contractor has allowed us to close February with approximately 25,000 tonnes of ore in the run-of-mine stockpile and an additional 70,000 tonnes of stripped ore in the mine ready to be blasted. We currently expect to have over 300,000 tonnes of ore available on the run-of-mine stockpile by the end of the first quarter. If I take a step back from the details for a moment and think about the major component parts required for a successful ramp up of any project, we are extremely well positioned.On site, we have completed all power infrastructure, our water reservoir is full, we have an ore stockpile ready to be processed, our equipment installations are on track, we are ahead of our commissioning schedule, and in addition we have hired all of our site operational leadership and currently have more than 60% of our operational workforce contracted through our existing partnership with SENAI. In short, we feel we are in a strong and enviable position to have a successful ramp up.We anticipate reaching commercial production, which we define as 80% of nameplate capacity by the end of the third quarter, and this ramp up curve is aligned with our guidance for the year. As we announced in our January update, our total direct project capital estimate for completion of the Tucuma project was updated to approximately $310 million from $305 million to reflect the impact of a stronger BRL in the fourth quarter, and this remains unchanged.At our Caraiba operations, the execution of our Pilar 3.0 initiative delivered 2 important milestone's during the fourth quarter, as David touched on. At the Caraiba mill, we completed the integration of the expansion circuit in December and achieved design capacity of over 12,600 tonnes per day, or approximately 4.2 million tonnes per year, just prior to year end. At the shaft project of the Pilar mine, we initiated the vein sink phase of the project just prior to year-end as planned, following completion and commissioning of the head frame, personnel and stage winders as well as supporting surface infrastructure. We are currently reaming the second and longest raised bore leg of the shaft, which we expect to complete by the end of the second quarter.Civil works are currently underway to set up the third and deepest raised bore leg of the shaft, which we expect to complete during the second half of this year. All underground development and infrastructure installations for the ore handling system of the new shaft are progressing on schedule. At our expected average daily development rate, we anticipate reaching a depth of over 600 meters by year-end, and the project remains on track for shaft handover to operations in Q4 of 2026.Lastly, touching briefly on our partnership with Vale Base Metals on the Furnas project, in parallel with finalizing definitive Earn-in Agreements, we have already initiated baseline studies and have commenced a QA/QC program on the historic drill database. Barring any requirement for twin-hole drilling, we expect to be in a position to issue the first NI 43-101 resource estimate during the second half of this year.I will now turn the call to Wayne to discuss our financial results.
Thank you Makko. As Dave highlighted, our financial results for both the fourth quarter and full year positively reflected the execution of our growth strategy, particularly at the Xavantina operations. At the same time, we navigated persistent macroeconomic challenges, including copper price volatility and a BRL that was stronger than we projected at the beginning of 2023. In line with our prudent financial approach, we took decisive steps to protect our cash flows with an expansion of our foreign exchange hedge program, beginning in the third quarter. This resulted in realized gains of $4.2 million in the fourth quarter and $11.4 million for the full year, and contributed to fourth quarter and full year cash flow from operations of $49.4 million and $163.1 million, respectively.Adjusted net income attributable to the owners of the company for the quarter and year were $20.7 million and $82.8 million, respectively, or $0.21 and $0.87 per share on a diluted basis. It's worth noting that during the quarter we recorded approximately $3 million of writedowns related to obsolete inventory and fixed assets. This negatively impacted our earnings by approximately $0.03. As we closed the year, the total notional value of our foreign exchange derivative position, including both zero cost collars and forward contracts, exceeded $375 million. These hedges, which cover nearly all of our Brazilian Real denominated operating expenses and the majority of our major capital expenditures in 2024, have a weighted average floor and ceiling of BRL 4.99 and BRL 5.36, respectively. Of the total hedge program approximately $115 million allocated for major capital project expenditures with a weighted average floor and ceiling of BRL 5.13 and BRL 5.22 respectively.With respect to major project, the Tucuma project is a case in point where we are observing a decline in monthly capital expenditures, as we near the end of construction. Although we anticipate our total capital expenditures year to be weighted towards the first half, our strong financial position, including available balance sheet liquidity of approximately $262 million at year end, and cash flow from operations during the first half of this year that are projected to be consistent with the second half of 2023, ensures we are fully equipped to support these investments.I'll now pass the call back to David to share some closing thoughts.
Thank you Wayne, and thank you, everyone, who joined the call today. Before we proceed to the question-and-answer session, I want to extend my deepest gratitude to our teams in Brazil and here in Canada for their continued commitment and hard work in executing on both our operating plan and our organic growth strategies.With that, I will now hand the call back to the operator to open the line for questions.
[Operator Instructions] The first question comes from Ralph Profiti with Eight Capital.
Makko, you talked about this 60% number with respect to labor hiring and just wondering for clarification, is that the number that we should think about sort of for the permanent and operational workforce? And I'd like to know your thoughts on whether or not you're seeing any pressures on sort of the rate of hiring or, say, wage rates as we think about labor costs -- the labor component of those operating costs?
I had missed the first part about the 60%, but maybe just to kind of illustrate some of the key factors here. So it's important to note that on the mining side, we are using contract mining. So our component of the workforce is really related to the plant, the administration, and the operational support areas such as the lab, security, warehousing, et cetera. So it's a smaller component of the total workforce. The 60% that contracted to-date is in partnership with the National Labor Development Authority, SENAI, and they're facilitating the training for the operation of the project. We'll continue to increase that number as we ramp up here. I think the main objective for us -- and focus at this stage, was really on the operational leadership, which would be our managers, our coordinators and supervisors. And all those roles are 100% fulfilled.In terms of Inflation and Labor. I think, it continues to be top goal I think across the whole industry. We've obviously reflected what the current labor rates are in our guidance for the second half of the year at the Tucuma project and don't anticipate any variation this year. Obviously, as we look ahead. It depends on the overall inflation picture, not only in Brazil, but also throughout the broader mining industry.
I'm just going to. This is David Strang, just add a little bit more to that to make sure everybody understands who we're talking about with regards to SENAI. So as Makko rightly pointed out, the most significant focus in the short term has been on hiring our leadership team, which is now all in place. When we talk about SENAI. SENAI is this wonderful organization in Brazil, which is a parastatal organization that is involved in the training of local people to be able to do increased skills and provide them with the skills to be able to operate and do functions on mining operations in Brazil, farming activities, other industrial applications.We are drawing our workforce primarily from the town of Tucuma and the local communities, where there is an excess of available labor pool. It's our focus to make sure that our labor pool is drawn from the local communities as much as possible. And [ Fagundes ], our mining contractor has given us a very strong pathway on how they have done it in working with SENAI in terms of hiring the workforce that is running our trucks, our excavators and other equipment in the mine for the last almost 2 years. So we are very confident with regards to the work that SENAI is doing in terms of working with us in partnership to identify our local workforce and hire up that team to be ready for us, executing on commercial production in the third quarter.
That's excellent for clarity, David and Makko. I do have a follow-up, just coming back and switching gears to the Furnas exploration budget of $6 million. Just wondering, is that for the full Phase 1, 28,000 meters? And I think just for clarification, the clock has not started ticking on that initial Phase 1, right, because we have not yet signed the DFS?
That's exactly right. The clock has not started ticking until we sign the definitive Earn-in Agreement. Our objective for this year is to start drilling in the second half of the year. So it won't cover the full first phase of the program. What that covers is the work that we're doing now. In parallel, with working to sign the definitive Earn-in Agreement, which is progressing well. We've -- with our partners at Vale Base Metals have mobilized the team to site to start several work streams, as I mentioned, including the baseline environmental studies and in parallel starting our QA/QC program.So what you see in the budget for this year is the execution of the initial leg work, I would say, in the project to make sure that we're in a good position to start drilling in the second half. And mostly, the second half drilling for the project, this year.
The next question is from Gordon Lawson with Paradigm Capital.
Can you please elaborate on the development work at Xavantina in terms of ongoing and expected production from the Matinha and Santo Antonio veins through 2024. Just trying to get a clear picture on H1 versus H2 wage and such?
Yes. Good question. I'd say that in our -- what we did for this year's guidance is we've continued to assume that the grades mined revert to our long-term block model grades, which has been reflected in our guidance. I'd say that we continue to see here in the first quarter or the first few months, favorable grade reconciliations, most notably in the Matinha vein. So obviously, that has a potential impact in terms of weighting. But right now, it's -- our guidance range is split 50/50 for first half, second half. Again, we are seeing a positive reconciliation in the first 2 months. So we'll continue to, I guess, hope for that, but haven't planned for it through the balance of the year.
Yes. Let me elaborate a little bit on that. In terms of the drilling activity we did when we discovered the Matinha vein and brought that into a resource that was ready to be mined. Following standard work that you do with regards to gold, we had a couple of intercepts that intersected this high-grade area. And due to the extreme high-grade nature of it, we top cut those intercepts. As such, and Makko's pointed out, we are not going to change our guidance nor are we going to adjust our resource estimate to reflect this high-grade zone. We continue to encounter it through the middle of the vein structure. We do not know how long it will continue to go.Obviously, everybody always hopes it's going to be longer -- greater for longer, but we are not going to be adjusting our resource for that. So guidance is, as we said, based upon our 9 to 10 gram estimate for the year, but we are during the first quarter so far this year, continuing to see grades well in excess of 15 grams a tonne.
And over to Caraiba, if you can just help me clarify the math on the new numbers, the restatement of treatment charges. Going back to 2022, it looks like a doubling on how you're reporting that now. Can you just help me -- help explain how to get there?
Gordon, it's Wayne. I don't have the '22 numbers in front of me, but I think really the only difference we've had is that we -- effective Q4 '23, we're now including the freight -- the sea freight that was charged by our customers as part of the treatment refining and other costs. And this was previously presented as a reduction in our realized copper price, which is in line with the GAAP reporting. So in terms of '22, what you'd have to go back and just look at the change in the realized price there as well.
I see. Okay. So I mean that all ties together. And is the exclusion of the ForEx hedging also a part of this?
Forward hedging.
The hedging -- yes. No, we don't have -- we don't -- we show both methodologies. I think we show without the hedging, and then with the hedging. Obviously, the headline number is without hedging that we're reporting.
Okay. Just want to -- I just want to make sure I understood that.
[Operator Instructions] The next question is from Stefan Ioannou from Cormark Securities.
Gordon got my question on the Xavantina, so that's great to hear the grade may continue for longer. That would be nice. Just while I got you, any comments on where the nickel exploration is at these days?
Yes, Stefan, thanks for asking about that. We continue to work with regards to accumulating land positions on the trend that we have identified. We continue to wait for the government to initiate the auction process. Our latest guidance from the government was that process was going to start during March. But in a conversation I had with the Head of the A&M, which is a government agency that runs it suggests that, that may be delayed by up to 30 days.So with respect to our nickel exploration, our work continues to be very much dedicated in terms of identifying the trend, which is now going multiple to tens to in excess of 100 kilometers in strike length, in which we are seeing nickel mineralization expressed at surface in gossan type structures. Our drilling work, though, we are doing more work to, in my mind, to get a better return on the drill bit. And what I mean by that with regards to that is I think it's fair to say that we can drill 0.5% nickel material here to the [ Costco home ].The question about it from our mind is, are we able to better identify pre-drilling those areas that are more prospective for higher grade. As you know, we have encountered nickel grades up to 7% a massive sulfide structures. And we had like, and if we continue to work and grow nickel exploration is to figure out that sort of equation. So I think the best we can tell you now is we continue to evaluate it. It continues to grow. We think we may be on to something that may be generational in terms of size and that we will hopefully be able to -- and I know it's been a bit of a broken record because of the delays of government be able to talk about this in much greater detail in the second half of the year. That's the best guidance I can give you right now.
All right. That's very helpful, and it's still very exciting. Appreciate it.
This concludes the question-and-answer session. I'd like to turn the conference back over to David Strang for any closing remarks.
Thank you, operator, and thanks again, everybody, for coming on this call. This is now, I think, our sixth year -- year-end for Ero Copper. And it has been a fantastic year from the standpoint of investing in our future. And we really look forward to this year as we transform our company into a multi-mine copper producer and one that continues to look to grow our business in Brazil into the future.As always, we are always available for additional questions you may have that you did not necessarily want to have on the call. And please feel free to contact Courtney, myself, Wayne and Makko, and [ Bruna ] at your earliest convenience. And with that, we'd like to thank you again for joining. Thank you. Bye-bye.
This brings to an end today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.