U.S. Markets open in 2 hrs 45 mins

Edited Transcript of ERO.TO earnings conference call or presentation 9-Aug-19 3:30pm GMT

Q2 2019 Ero Copper Corp Earnings Call

Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Ero Copper Corp earnings conference call or presentation Friday, August 9, 2019 at 3:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Noel Dunn

Ero Copper Corp. - Executive Chairman of the Board

* David Maxwell Strang

Ero Copper Corp. - CEO, President & Director

* Makko DeFilippo

Ero Copper Corp. - VP of Corporate Development

* Pablo Mejia-Herrera

Ero Copper Corp. - VP of Exploration

* Wayne Drier

Ero Copper Corp. - CFO

================================================================================

Conference Call Participants

================================================================================

* Dalton Baretto

Canaccord Genuity Corp., Research Division - Analyst

* Justin Chan

Numis Securities Limited, Research Division - Analyst

* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals

* Raphael De Souza

CIBC Capital Markets, Research Division - Research Analyst

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Corp. Second Quarter 2019 Financial and Operating Results. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Noel Dunn, Executive Chairman of Ero Copper. Please go ahead.

--------------------------------------------------------------------------------

Christopher Noel Dunn, Ero Copper Corp. - Executive Chairman of the Board [2]

--------------------------------------------------------------------------------

Thank you and good morning, everyone, and welcome to Ero Copper's Second Quarter 2019 Results Call. The news release announcing Ero's second quarter results is available on our website and on SEDAR as are our financial statements and MD&A for the 3 and 6 months ended June 30, 2019.

Comments made on this call contain forward-looking statements that involve risks and uncertainties concerning the business, operations and financial performance of the company. For a discussion of the risks and factors that may lead to actual performance being different, please refer to our most recent AIF, also available on SEDAR. Unless otherwise noted, 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, Chief Financial Officer; and Makko DeFilippo, Vice President, Corporate Development.

Before delving into our operational and financial results for the quarter, I would like to start today's call by reflecting on the remarkable growth of the company and congratulate all of our operating teams on their continued execution during the first half of 2019.

During the first 6 months of this year, we produced more copper than our total production of just 2 years ago and reduced our C1 cash cost by approximately $0.40 over the same time period, a pretty good achievement by any measure. Our results from the first half of this year illustrate why it was fundamental to our overall business plan to execute on the acceleration of Vermelhos, increasing production and reducing costs to first quartile levels.

Our improved balance sheet with strong overall liquidity position demonstrates how well positioned we are by design to continue to effect our organic growth strategy despite an uncertain copper price environment. This is particularly true now as we shift focus to increasing our regional exploration efforts and look to increase further throughput to our underutilized processing facilities.

Our revised full year production guidance now calls for 2,000 more tonnes of copper to between 38,000 and 40,000 tonnes. And as a result, we are also guiding towards the low end of our C1 cash cost guidance range. These achievements are among the many tangible examples of this team's continued focus on generating high returns on our invested capital for our shareholders.

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. All of us will be available for questions immediately following the call.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Noel. Our production results for the second quarter were released last night and reflect the continuation of the strong operational performance we saw during the first quarter.

During the second quarter, we produced 10,473 tonnes of copper in concentrate with 717,000 tonnes milled grading approximately 1.62% copper with average metallurgical recoveries of 90.2%. The performance of our mining units combined with great metallurgical recoveries was a key highlight of the quarter.

At Vermelhos, where we are continuing to ramp up production volumes, we saw a noticeable increase in tonnes mined relative to the first quarter. I am pleased to say that we continue to see positive copper reconciliation and correlation relative to our reserve model at Vermelhos, which is a contributing factor towards our increased production guidance for the year.

In the processing site, we have achieved 2 consecutive quarters with recoveries over 90%, a key objective of our plant operational team after several low-cost improvements were made in late 2018. It is worth noting that our recovery gains are expected to advance further with our previously announced regrind mill project, which we expect to improve overall plant performance and metallurgical recoveries once operational. The project remains on track for commissioning during the second quarter of 2020 and is the first project within our medium-term strategic plan to return the plant to its original design capacity of 5.5 million tonnes of annual throughput.

As I mentioned at the Vermelhos Mine, tonnes mined increased by approximately 27% relative to the first quarter with 177,000 tonnes mined grading 2.46% copper. Relative to the first quarter, the decline in grades mined was anticipated due to normal stope sequencing and we expect grades for the full year to average approximately 3.25% copper.

At the Pilar underground mine, we saw an increase in both tonnes and grades mined with 331,000 tonnes grading 1.76% copper, which is in line with our full year grade expectation of 1.75% copper.

At our R22W open pit operation, continuity of the orebody beyond what was modeled in reserves resulted in approximately 100,000 tonnes of additional ore being added to the mine plan. Our mining activities have now concluded at R22W. We continue to transport and process the remaining stockpiles.

For the quarter, C1 operating costs were $1.04 per pound copper produced which compares favorably to the first quarter when you account for the increase in open pit tonnes mined and processed during the period.

At our NX Gold Mine, we produced 9,917 ounces of gold at a C1 cash cost of $517 per ounce of gold during the second quarter. Drilling at NX Gold during the period was predominantly focused on infill drilling to incorporate the Santo Antonio vein into the updated National Instrument 43-101 compliant technical report and mine plan expected to be delivered during the fourth quarter.

We are increasing our production guidance for the year by approximately 2,000 tonnes of copper to between 38,000 and 40,000 tonnes and are guiding to the low end of our cash cost guidance range of $1 to $1.10 per pound. We are increasing our full year capital expenditure guidance by approximately $8 million to primarily reflect additional exploration drilling planned for the second half of the year. In total, we are now budgeting for approximately 200,000 meters of drilling for 2019.

Our revised capital estimate also includes the purchase and delivery of a 200,000-tonne per year ore sorting pre-concentration plant that we expect to commission during the fourth quarter. Test work to date has shown that ore from our operations in the Curaçá Valley is amenable to upgrading due to its heterogeneous nature. This plant is designed to validate our test work as we continue to seek opportunities to optimize our current and future production portfolio.

If you look at the production for the first half of this year, for example, which came from a portfolio of operations with grades ranging from 0.48% to 3.2% copper and an average head grade of 1.86%, the opportunity to further optimize the head grade entering the mill existed had we been able to upgrade the ore from R22W, which fell at the low end of this range. The ability to reduce waste rock processed through the mill with the successful implementation of ore upgrading would have decreased operating cost below our average C1 costs of $1.04 per pound for the first half of the year which is already first quartile.

At NX Gold, we expect softer second half gold production as we transition mining operations from the Bras vein into development and first production from the first stopes of the Santo Antonio vein.

With the exploration, excuse me, with respect to exploration in the Curaçá Valley, where we now have a total of 27 drill rigs operating, we continue to be excited about our first regional discovery, Siriema, which was announced at the end of July. Located approximately 1.5 kilometers south of Vermelhos, the Siriema discovery represents a compelling proof of concept for our exploration team as we continue to step out regionally away from our mining operations into the more than 50 targets identified during the targeting exercise our geological team performed. While the copper mineralization encountered to date at Siriema is predominantly disseminated, we are following up several high-grade massive-sulfide intercepts that we drilled within the system. This work remains ongoing and there are currently 2 drill rigs operating on the Siriema project.

As we have now completed our drilling work for the updated resource and reserve estimate to be announced during the fourth quarter, we are now shifting our focus towards our greenfield exploration program. Currently 5 drill rigs, including the Siriema rigs, are on this program and additional rigs will be deployed to greenfield targets in the coming weeks and months.

Elsewhere within the Vermelhos District, where a total of 13 drill rigs are operating, exploration activities continue to focus on follow-up drilling beneath the Toboggan orebody as well as testing the 5.5-kilometer strike length of the recently defined Vermelhos system that extends from Siriema in the south to the north of the N8 Deposit, previously known as Vermelhos West.

In the Pilar District, we recently announced the newly discovered mineralized zone known as Baraúna, extending over 450 meters in strike length and from outcrop in the south portion of the Pilar open pit connecting to mineralization at depth within the Pilar Mine. The zone remains open to the south and there are currently 3 drill rigs operating within the zone.

Elsewhere in the Pilar District, where a total of 14 drill rigs are operating, our focus remains on extension and infill drilling within the previously announced West Limb, South Extension and in the Deepening Extension zones with notable intercepts of high-grade copper mineralization throughout the mine continuing to indicate mineralization remains open to depth and to the south.

I will now pass over to Wayne, our CFO, who will review the details of our financial performance.

--------------------------------------------------------------------------------

Wayne Drier, Ero Copper Corp. - CFO [4]

--------------------------------------------------------------------------------

Thanks, David, and good morning, everyone. The second quarter of 2019 produced a financial result reflective of the good operational quarter. Just a quick reminder that our interim financials now include a full consolidation of NX Gold with corresponding adjustments to prior periods.

During the quarter, the company sold 10,931 tonnes of copper in concentrate and 9,343 ounces of gold for consolidated revenues of $76.5 million.

C1 cash costs at MCSA were $1.04 per pound for the quarter. As David indicated, these results are in line with our expectations after accounting for the increased contribution from the R22W open pit during the second quarter. C1 cash costs at NX Gold were $517 per ounce reflecting the continued steady performance at that operation.

Adjusted earnings before interest, tax, depreciation and amortization was $36.4 million for the quarter and $75.5 million for the 6 months ended June 30. Cash flow from operations was $37.3 million and $62.4 million for the quarter and 6 months, respectively.

Adjusted net income for the quarter was $15.3 million or $0.18 per share. These results were in line with the prior quarter resulting in $0.37 a share for the first half of the year.

During the period, the company also successfully refinanced a loan held by MCSA by extending our corporate revolving credit facility from $50 million to $70 million. At the end of the quarter, we had approximately $14 million undrawn on this corporate facility. It is worth noting that our current net debt to 12 months trailing EBITDA ratio is 0.9 which reflects a very robust balance sheet.

The total cash position at quarter end was $35.7 million including restricted cash, a significant increase from prior periods. With undrawn lines of credit in Brazil of approximately $16 million as well as the headroom on our corporate revolver, we are very comfortable with the company's liquidity position and we are well positioned to accomplish all of the objectives set out for the second half of the year despite the challenging copper price environment.

On that, I'll hand the call back over to Dave.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Thank you, Wayne. As always, the team here in Vancouver would like to recognize the valuable work currently underway with our teams in Brazil. And Noel and I and Wayne would like to thank our team in Vancouver for all the work they do in continuing to push this organization forward.

Thank you all for joining us on this call. We will now turn it back to the operator to open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Orest Wowkodaw with Scotiabank.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [2]

--------------------------------------------------------------------------------

As you're working on the updated 43-101 mine plan coming out, I guess, in about 2 months or so, just curious at this point whether you've got a good handle on whether -- the throughput levels might be on the new mine plan and whether we should anticipate something going above the installed capacity, I guess, of the 3.2 million tonnes a year. Just curious where the thinking is on that right now.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thanks for that, Orest. With regards to the thinking, we are working on -- I don't want to get into numbers, but let's just say, we're starting to work on an operational plan to be able to move the plant into a phased increase of throughput through the plant. Obviously, the first movement of that is with the mill and the vertical mill and that both, as you all know, works towards increased recoveries, but also provides the basis for increased milling capacity within the mill.

With regards to the plan, as we continue to roll it out, we would be looking at next year to maximize our current throughput. The following year to increase that, so to maximize throughput through with the vertical mill and then thereafter, the next year, to maximize throughput with regards to the full plant capacity, the historical plant capacity of 5.5 million tonnes.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [4]

--------------------------------------------------------------------------------

Okay. And then just curious on the drill program. I think you said there's 100,000 meters left to go in the second half of the year. Can you give us an idea of how much of that is dedicated towards near mine exploration around either Vermelhos and Pilar versus, say, total greenfield?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [5]

--------------------------------------------------------------------------------

Okay. So we've got to make sure that we're all on the same page with greenfield and brownfield. A project like Siriema would be considered greenfield to us as it's brand-new discovery, likewise certain other work that we're doing around the Pilar area. With regards to this 100,000 meters, I would argue about 40% to 45% of that would be new greenfield with the remaining being extension drilling within the Baraúna deposit, the work that we're doing below the Toboggan deposit in terms of starting to drill that deposit out and the Deepening zone and the areas to the south of the existing infrastructure within the Pilar Mine. All of these areas in terms of what we are looking from a exploration perspective are all significant opportunities for us. So whether they are considered pure greenfields or whether they are continuing to be extensions of the existing mines, we consider them all value add to everything that we're trying to do here.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question is from Justin Chan with Numis Securities.

--------------------------------------------------------------------------------

Justin Chan, Numis Securities Limited, Research Division - Analyst [7]

--------------------------------------------------------------------------------

My first question is just on plant recoveries. They've continued to hold up really well even with the grade down a little bit. With the regrind, are you still thinking that adds through to 6%, which was the previous guidance? And on that basis, I guess, you'd be in the low to mid-90s from mid next year on. Is that in line with your thinking?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Justin Chan, Numis Securities Limited, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Okay. Very succinct. And then on Vermelhos, with the drilling you're doing and the current infrastructure you have, without putting in much more in the way of infrastructure, where do you think you can get tonnage there? And also I guess on the tonnage question, what are your thoughts for the second half of the year there?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [10]

--------------------------------------------------------------------------------

With regards to that, that's a very good question. As the team is getting more and more comfortable, so we are starting to see them starting to view that they can continue to increase tonnages with regards to transportation at the ramp as well as accessing additional stopes and areas. As we mentioned on my notes, one of the pleasant opportunities we have seen is the significantly positive correlation. And when we compare what we are mining to the reserve and resource models, the positive correlation that we have there.

So with regards to that, Justin, the guys are still feeling their way out, but we continue to see opportunities to continue to increase production at Vermelhos with regards to being able to transport material out of that mine. I don't want to get tied up here with regards to giving specific numbers right now. As I said, that mine has now only been running for 7 months and the guys month-on-month, quarter-on-quarter continue to show us that they have the ability to continue to increase and optimize that mine. In some areas, significantly more what we had originally planned or anticipated.

--------------------------------------------------------------------------------

Justin Chan, Numis Securities Limited, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Okay. That's great. And then just the last one on TC/RCs. They're at quite a low level. I'm just wondering if I could ask you what you're seeing there, what you're able to share. And should we expect any material improvement in terms of the numbers you're seeing now versus, say, even earlier in the year and how they're coming through?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [12]

--------------------------------------------------------------------------------

Yes. So our TC/RC with our main customer, Paranapanema Smelter, in Salvador is based on a pricing mechanism that works once a year. We have and do continue to sell certain lots on the international market where we get significant opportunities with TC/RC pricing due to the quality of our material. But we don't see, with respect to our numbers and what we're doing now, any changes until we bring in the new contract with Paranapanema or new pricing. It's not a new contract. It's under the existing contract but with new pricing for 2020 later this year. Certainly, the pricing that Antofagasta did earlier this quarter with regards for next year with the Chinese is certainly one of the benchmarks. And we'll be eagerly watching how some of the other larger producers are negotiating their TC/RCs as we get close to LME Week and the traditional negotiation period.

--------------------------------------------------------------------------------

Justin Chan, Numis Securities Limited, Research Division - Analyst [13]

--------------------------------------------------------------------------------

Okay. So I guess the guidance will be perhaps hold off on making any changes for next year but keep an eye on it?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [14]

--------------------------------------------------------------------------------

Well, no, I mean, there will be changes. I mean, if you look at Antofagasta at $55 and $0.055 and our current contract of $82 and $0.082, our expectation is, all else being equal, that next year we will see a decrease in TC/RCs. That's the current market feeling. I don't think we're any different from anybody else in the market with the expectations of continued tightness in the concentrate market going into 2020.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

Our next question is from Stefan Ioannou with Cormark Securities.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst [16]

--------------------------------------------------------------------------------

I don't want to belabor the whole sort of throughput question but maybe just a little bit of sort of just in terms of your thinking with the updated study coming out. Would it be fair to assume that obviously sort of moving towards something north of 3 million tonne a year throughput would come from Vermelhos and then Pilar and then you kind of mentioned eventually getting out towards that 5 million tonne original nameplate capacity. Is it fair to assume that would require some additional discoveries to provide that feed or would you be looking to expand the underground development of the existing mines?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [17]

--------------------------------------------------------------------------------

I think that's a good question, Stefan. What we have said publicly is our first priority is to build out from Pilar and Vermelhos a consistent, foundational production platform from those 2 mines that will generate a 40,000 to 45,000 tonnes of production per year over the next 8 to 10 years. That has been our goal and that provides us with significant security and longer-term outlook for this company which it's never had before. Up until when we acquired the company, it was typically 3 to 5 years of reserves. We have now taken those to 10, allows us to do now some more significant longer-term planning and strategic planning with our team.

As you may or may not know, we have other projects that we generally have not talked about. Historically, we are looking at all opportunities within the production. We have within the -- so if you look at just the existing Pilar Mine, the existing Vermelhos Mine, that's where our thinking looks. When you look at things like the West Limb, when we look at Baraúna at Pilar, when we look at Siriema, when we look at N8 at Vermelhos and a couple of other projects that we have, we would look at those as being additive in terms of production. And that's the work that is being done now is to see at what point can we sequence those into our mine plan already.

I think while it's early days with regards to a project like Siriema, I think it's important to understand that we made that discovery in April with the first drill hole. We will be including a portion of that in our 43-101 coming up in October. And as our team is working right now, we are already looking at potentially mining some of that material and putting a mine plan together for some of that material. Now whether that comes in next year or the year after is uncertain, but I think what is important that I think the investment community will learn about our abilities is the ability to go from discovery to production in a very relatively short period of time compared to the industry standard out there.

So our job is over the next 12 to 18 months is to pull together a mine plan to be able to be in a situation that we can start showing the investment community that we will be able to produce 5.5 million tonnes of throughput through this mill in the near to medium term. I don't want to get drawn into specific dates yet because that would be unfair to us and unfair to our team as we start putting this 43-101 production plan together. We are cognizant of it and we are moving very aggressively to put the infrastructure in place and to be able to be in a position to do that.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst [18]

--------------------------------------------------------------------------------

Okay. Great. That's very helpful. And then maybe just one quick one, just on the -- you mentioned the ore sorting plant, 200,000-tonne a year, should we start thinking of that in the context of other smaller sort of R22W open pit targets that are out there that you know about that are like sort of 0.5% copper or would you be using that for some of the more underground disseminated-type ore as well?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [19]

--------------------------------------------------------------------------------

Everything is on the table. This plant is the first plant of what we hope will be a series of plants being put in throughout the district. So this plant will go in and we're hoping to have it commissioned in the fourth quarter. For the first 6 to 8 months, that plant will be running ore from 5 different operations to test that material. What is great about these plants, these ore sorting plants, is our ability from purchase to installation is relatively short on a comparative basis. So when we look at ore sorting, we gave an example with regards to R22W and the opportunities with regard to recoveries that we've missed with regards to our ability to upgrade that material and put it through our plant and thereby increasing our recovery.

We are a company that -- and we have stated this numerous times, return on invested capital is paramount to us. We are going to be a company that is going to have a portfolio of opportunities to mine to put through that plant. What we want to be able to do is to have all options on the table for us to increase grade as much as we can. There may be opportunities in which it may be worthwhile taking 3% to 4% material and upgrading it to 5% to 6% if the heterogeneous nature of that particular ore at that particular time makes that worthwhile. So whether it's looking at it to make a marginal project fit in our portfolio or whether it's to take the high-grade material on our portfolio and even increase it, we view pre-concentration ore sorting as a opportunity to optimize our operation.

Remember, with a 5.5 million-tonne throughput in that plant and let's say we have the opportunity ultimately to be able to mine for 5 and ideally 10 opportunities at any one time, we want to be able to have all the tools available to us to optimize the grade and the material going through that plant. So it's part of what we overall think is looking at the entire portfolio and moving this company as aggressively forward to be able to put that higher-grade material through that plant making the highest return on capital and profitability.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Our next question is from Raphael De Souza with CIBC World Markets.

--------------------------------------------------------------------------------

Raphael De Souza, CIBC Capital Markets, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Most of my questions have already been answered but I had a last one. So my question relates to capital structure. So how should we think about your strategy for capital structure? Are there any changes with the current challenging macro environment?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [22]

--------------------------------------------------------------------------------

Raphael, thank you and good to speak to you. We haven't had the chance to speak on the conference call before. To try and understand with regards to capital structure and what you're saying, we, in all of our work in our modeling of our cash flows going forward, we do not see a need with regards to changing our capital structure at this particular time to manage our operations.

--------------------------------------------------------------------------------

Wayne Drier, Ero Copper Corp. - CFO [23]

--------------------------------------------------------------------------------

Yes. Everything we do is financed from retained earnings. There's no need for us to raise outside capital to meet our objectives.

--------------------------------------------------------------------------------

Makko DeFilippo, Ero Copper Corp. - VP of Corporate Development [24]

--------------------------------------------------------------------------------

And Raphael, this is Makko. I would just add to that, that it's important to note that we're benefiting now and expect to continue to benefit from a weaker BRL. If you look at copper price since mid-July, for example, there's been about 7% to 8% decline in U.S. dollar terms in copper price, but in BRL terms only about 0.5% decline. So that's obviously helping the business at the moment. And again speaking, just reiterating what Dave and Noel said, no changes to the capital structure to fund our business.

--------------------------------------------------------------------------------

Christopher Noel Dunn, Ero Copper Corp. - Executive Chairman of the Board [25]

--------------------------------------------------------------------------------

I mean the fundamentals point that David was explaining was having a basic production profile of 40,000 to 45,000 ounces, the bottom line of that is you create a very strong and resilient cash flow engine which we used to meet all our exploration and planned expansion requirements. That's the fundamental engine of this company. And that does not require outside capital in the form of debt or equity.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [26]

--------------------------------------------------------------------------------

Sorry, operator. Just to reiterate with regards to what Noel just said there. And we want to make this perfectly clear. We, as a management team, do not feel that this company is going to be producing 45,000 tonnes of copper per year going forward. We are intent on growing that and we intend to be able to maximize throughput through that mill. 45,000 tonnes of copper production in our forecast right now is based purely on Pilar and Vermelhos coming in at between 2 and 2.4 million tonnes of throughput through the mill. So there is significant opportunity with regards to the work that we're doing right now with our exploration program, with our resource development program, with existing projects to be able to increase throughput through the mill over the next few years and increase our production of copper over that same time period.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Dalton Baretto with Canaccord.

--------------------------------------------------------------------------------

Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [28]

--------------------------------------------------------------------------------

Dave, I thought you said that there's 5 rigs now that have been diverted to regional exploration. How many more do you anticipate diverting towards, I guess, targets that you haven't quite named yet?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [29]

--------------------------------------------------------------------------------

We've got 5 running right now. Mike and Pablo are in the process of working through how many more we can release. It's a gradual release, hence, might come at the next weeks and months as we start to divert rigs away from certain other areas. I won't lie that we have had certain exploration success in certain areas that is going to delay some of that because we continue to hit some really, really good intercepts in certain areas that require us to spend a little more time drilling there as we go forward in some areas. So I can't give you a specific amount, Dalton. It is a moving target as this continues and Mike and Paolo get more comfortable with respect to releasing more and more rigs into the work that we're doing.

Certainly, where we stand right now, we have a targeting exercise -- our targeting exercise, as you know, has identified over 50 of these opportunity sets. And within those 50 opportunity sets, there are in some areas multiple targets. We are working with a continual rolling preparatory number of 5 to 7. And as we look at one and whether we have success or not success, we then add in another one going forward, going forward, going forward. So any one time, we are in a position to be able to look at 5 of these. Ideally, what would be great for us is to be able to have rigs on all 5 at any one time. And that's what we need to work towards in the next year is to be able to get into that system whereby we're testing that amount. But as we're starting to ramp up here, as I said, we currently have 5 rigs. We're testing one, including Siriema 1, 2, 3, 4.

--------------------------------------------------------------------------------

Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [30]

--------------------------------------------------------------------------------

Okay. That's actually a great segue to my next question. So how are Mike and Pablo prioritizing these targets?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [31]

--------------------------------------------------------------------------------

Pablo?

--------------------------------------------------------------------------------

Pablo Mejia-Herrera, Ero Copper Corp. - VP of Exploration [32]

--------------------------------------------------------------------------------

So you know we work with several layers of information and the geo-chem methodology is helping a lot in identifying the main areas. And as you know, we use the EM as a second layer of information, trying to obtain from that the best target in terms of amount of metal that we can find in a target. And finally when we drill the first target, we use downhole EM to try to find the target. So this is essentially the methodology that we use to prioritize is to find the best geo-chem anomalies, the best EM anomalies. We fire on those and we run the downhole EM exercise. And this is -- I think this is the...

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [33]

--------------------------------------------------------------------------------

Yes. So just to give a more 100,000-foot view with regards to that. The best areas to look in the near term are around areas that we have existing infrastructure. Those are the easiest ones to come on and for us to be able to put in production. We continue to get more and more excited about the work that we're doing in the Vermelhos District and the opportunities that get seen there. And certainly, that is one of the areas. It would be silly for us to run away and drill somewhere else when we've got all the infrastructure around there.

Likewise at Pilar, we have uncovered certain other target areas within our mining license in that area that have provided us with the ability to be able to move potentially quickly to production on those. And we're going to look at those immediately. We have 1 rig that is doing some preliminary work. I wouldn't say that rig is doing some significant detailed work yet outside the general boundary areas of new targets. I'd call it more of an administrative rig than anything else. But we are slowly starting to move out and will be moving out over the next 3 to 4 months into some new target areas that are -- as I think some people want to see significantly further away from any of our infrastructure.

--------------------------------------------------------------------------------

Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [34]

--------------------------------------------------------------------------------

I guess that was the crux of my question. So kind of potential speed to production is just as important as the strength of the geological picture.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [35]

--------------------------------------------------------------------------------

Exactly. Exactly. And we are finding -- as you know, the targeting exercise continually gets refined with regards to the work we're doing and success. Not only has Siriema been important to us from a discovery perspective and proof of concept, but there is something that we have learned with respect to Siriema that is allowing us to optimize our exploration technique and the targeting exercise and re-prioritizing certain things that may have been low at prioritization but now are growing in priority due to the fact that the cause and effect, the drilling results at Siriema are changing things. Some of the EM work, the airborne EM work, there are certain signatures now that we see subtly that have greater impact and having a very significant signal with respect to the flight. And so these are all good things with regards to us refining and continuing to work. The #1 best thing that we can do and continues to be the best methodology is to be able to go in an area, be able to put down on a downhole EM probes and be able to drill off their responses. We get significant success off the downhole EM probes.

--------------------------------------------------------------------------------

Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [36]

--------------------------------------------------------------------------------

Okay. Great. And then just maybe switching gears to some of these newer mine discoveries like Baraúna, West Limb and the Lower Toboggan. Which of these are you prioritizing to bring into next year's mine plan?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [37]

--------------------------------------------------------------------------------

As many of them as possible. I think Lower Toboggan, that's just a very initial work there. That is probably -- there's no way we'll have anything there next year. Baraúna is becoming a lot more interesting to us with every drill hole we drill there. The work is being done on extensions to the East Limb and West Limb. I think West Limb is probably a 2-year away project, not that I have seen the work that has been done. I think we're more likely to see East Limb and Baraúna coming into the mine plan sooner than those ones.

But again, we also have some other projects that we have not spoken to the market directly about that are historical. That as we have now been able to compile more information about them, as we've been able to have more time as we built out our team particularly on the resource and reserve side of things to be able to interrogate that data, we are seeing some opportunities that may be able to come into the 43-101 as well that may be able to come into the mine plan. I'm not going to say sooner, but there's always potential there. We're right at the stage now of compiling that. So the resource is near complete. We're waiting for some last of the drill holes. We then move in the next phase in. And concurrently, the teams are now taking those resources and putting mine plans, reserves around them, mine plans around them, and then we'll start looking at how we want to bring them into the mine plan for the operation.

The great thing is, is the flexibility we have. Our operations aren't static. We are a portfolio. It's almost like we're, for lack of a better term, a fund manager. And we have a portfolio of opportunities within our fund. And what we are looking at is, with what's available to us at this particular time, how do we optimize that portfolio? Fully aware that as we move forward every year, that portfolio may change from a production standpoint. We are lucky to be able to be in that position because of the district we have, because of the opportunities we have. We're not a single, large open-pit mine where we have to take everything that's in front of us with respect to the development of those mines. And so we have significant flexibility within our operation as we go forward here to be able to put things into mine plans in the near term and be able to adjust those longer term.

--------------------------------------------------------------------------------

Dalton Baretto, Canaccord Genuity Corp., Research Division - Analyst [38]

--------------------------------------------------------------------------------

Okay. Now that's great. And maybe lastly, if I can just clarify your answer to Orest's question on the phase ramp-up. So did you say that next year, the 2020's mine plan, will look to maximize the 3.2 million tonnes per annum and then the 2021 would be kind of 4.4 million with the Vermelhos and then 5.5 million after?

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [39]

--------------------------------------------------------------------------------

You're very perceptive. That is what we're working towards.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

This concludes the question-and-answer session. I would like to turn the conference back over to David Strang for any closing remarks.

--------------------------------------------------------------------------------

David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [41]

--------------------------------------------------------------------------------

Thank you, operator. Again, everybody, thanks very much for coming to the call. We really do appreciate everybody's following of our company. We're privileged that we have as many analysts as we do following our company and we look to continue to execute and provide shareholder return more than how we have to date. So thanks again. As always, we are always available for calls and chats should you wish to chat to us. Thanks very much, everyone. Bye-bye.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.