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Edited Transcript of ERO.TO earnings conference call or presentation 15-Mar-19 3:30pm GMT

Q4 2018 Ero Copper Corp Earnings Call

Mar 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Ero Copper Corp earnings conference call or presentation Friday, March 15, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Wayne Drier

Ero Copper Corp. - CFO

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Conference Call Participants

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* Justin Chan

Numis Securities Limited, Research Division - Analyst

* Philip Ker

PI Financial Corp., Research Division - Precious Metals Analyst

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Corp's 2018 Year-end Results Conference Call. (Operator Instructions) And 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.

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

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Thank you, and good morning, everyone. Welcome to Ero Copper's 2018 Year-end Results Call. The news release announcing Ero's fourth quarter and 2018 annual result is available on our website and on SEDAR as are our financial statements, the MD&A for the 3 and 12 months -- and the MD&A for 3 and 12 months ended December 31, 2018. As a reminder, 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, uncertainties and factors which may lead to the actual performance being different from the projections contained in such forward-looking statements, please refer to our 2018 annual information form also available on SEDAR.

Unless otherwise noted, all amounts discussed are in US 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; and Makko DeFilippo, Vice President, Corporate Development.

As was noted during our third quarter results call, we set ourselves 3 main objectives when we acquired our assets in Brazil. Those objectives are worth repeating: one, extend the mine life through exploration; two, increase throughput to our underutilized processing facilities to grow production; and three, reduce operating cost to the bottom quartile. Reflecting on the successes and milestones achieved during 2018, our execution of these objectives is centered upon our primary focus, which is to generate the highest return on invested capital via organic growth of our portfolio. We do benefit from an incredible asset base and we have quality teams in place to support this strategy.

While much of our attention on today's call will be focused on our copper operations in the Curaçá Valley, it is worth briefly mentioning that these same foundational objectives are mirrored at our high-grade NX Gold mine, which has been consolidated during the fourth quarter for the very first time. Currently producing nearly 40,000 ounces of gold per annum at cash costs around USD 500 per ounce, it is supporting its own organic growth strategy and has a high return on invested capital.

In addition to executing our significant milestones during 2018, finishing the year with a strong balance sheet was an important corporate objective of ours. Key to this was the successful refinancing of the company's U.S. dollar denominated debt via a new $130 million debt financing with Scotiabank and BMO. The refinancing materially reduced our cost of borrowing when compared with the prior debt structure.

We ended 2018 with a total cash position of $21.9 million, approximately $15.5 million in undrawn working capital lines at MCSA plus an additional $5 million available under our revolving credit facility. So suffice to say, we are well positioned to advance all our core objectives in 2019.

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 team will be available for questions immediately following the call.

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

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Thank you, Noel. I want to start the call by recognizing the outstanding and continued performance of our teams in Brazil and Vancouver. Of all the milestones achieved in 2018, we are most proud of the fact that throughout the considerable ramp up in operating and exploration activities during the year across each of our operations, we ended 2018 with the best safety record in the 39-year operating history of the company, a remarkable achievement, and I would like to congratulate our entire team on the result.

Our production results for the fourth quarter and full year were released previously and reflect the continued growth of our operations. During the fourth quarter, we produced 12,104 tonnes of copper in concentrate, resulting in full year production of 30,426 tonnes, a 51% year-on-year increase.

More importantly, the fourth quarter set a new high-water mark for the company in terms of tonnes milled. The 777,000 tonnes milled during the quarter equates to an annualized run rate of over 3.1 million tonnes, well above our current forecast for the next several years of approximately 2 million tonnes per annum. As Noel mentioned, one of our core objectives is to increase production to more effectively utilize this excess capacity in the near term. And over the medium- to long-term look, increase production through the low-cost mill expansion.

At the Pilar underground mine, we saw a significant increase in grades mined during the fourth quarter, which averaged 2.21% copper as compared to 1.59% copper during the prior period. This quarter-on-quarter increase in grades was a result of our [outpost] development undertaken throughout 2018, which aimed to increase the speed of development and production from several high-grade zones, and we're pleased to see the initial benefits of these investments in the fourth quarter.

Open pit production from Surubim exceeded expectations during the fourth quarter, contributing 307,000 tonnes of ore mined grading approximately 0.76% copper, an increase in tonnes and grades mined when compared to the third quarter. At year-end, the Surubim mine reached the natural conclusion of open pit mining activities, and we commenced operations at R22W at the beginning of 2019. Our 2019 guidance reflects this change over. Vermelhos, our newest underground mine, continued to meaningfully contribute to the operational results of the company. Contribution for the quarter totaled 143,700 tonnes of ore grading 2.77% copper, primarily from the UG1 mining area.

Development has continued to advance into the main high-grade Vermelhos ore bodies, which we have now commenced mining. At our mill we processed 777,500 tonnes of ore during the fourth quarter at an average grade of 1.77% copper, with metallurgical recoveries of 87.8%. As we previously mentioned, this reflects an annualized throughput of approximately 3.1 million tonnes, demonstrating that we are capable of running at much higher throughput than outlined in our current mine plan.

I'd like to also mention that we have commenced detailed engineering on an upgraded regrind circuit, which we expect will significantly improve overall plant performance and metallurgical recoveries once operational during the second quarter of 2020.

For the quarter, C1 operating costs were $0.99 per pound of copper produced, in line with the prior quarter, bringing our full year C1 operating costs to $1.19 per pound, within our guidance range.

Costs during the period were impacted by scheduled shaft maintenance, resulting in an increase in haulage cost at the Pilar mine during the period. In addition, due to the strong production during the fourth quarter, we elected to undertake a spot market concentrate export sale late in the fourth quarter at less favorable terms when compared to domestic sales, which adversely impacted costs. However, the benefit of conducting this sale outweighed the incremental cost increase in our operating cost.

At our NX Gold mine, we produced 39,808 ounces of gold at C1 cash costs of 522 -- excuse me, $520 per ounce of gold in 2018. Following on what Noel said, I believe this speaks volumes to the strength across our asset portfolio. We now have 5 drill rigs undertaking exploration programs at NX Gold mine in Mato Grosso, and we expect to provide more clarity on this program leading up to the midyear National Instrument 43-101 update.

With respect to exploration at MCSA, our geology department's analysis and disciplined targeting efforts on the back of our airborne geophysical survey makes us more excited today than ever about the potential of the Curaçá Valley. Our team is incorporating over 40 data sets to prioritize our programs and many of the highest-priority targets are within close proximity to our existing and fully permitted operations.

With capital expenditures of the Vermelhos mine construction behind us and successful ramp-up of the mine, we have increased our exploration efforts in the Curaçá Valley. We now have 21 drill rigs operating, and we expect approximately 130,000 meters of drilling through the end of the third quarter this year.

At the Vermelhos mine, we have seen the largest increase in exploration activity with 9 drill rigs now operating, including the first underground rigs mobilized to the mine. Exploration activities are focused on testing Vermelhos at depth for the evaluation of the geological relationships between the East Zone, the main Vermelhos ore bodies and the high-grade portions of the Vermelhos West deposits, a 1.1-kilometer trend encompassing the Vermelhos mine that remains open along strike and to depth.

We are starting to test near-mine anomalies located on the same north-northeast structural trend as well as continued extensions of the high-grade Vermelhos ore bodies, and similarly, are following up on several promising electromagnetic anomalies highlighted in our systematic downhole electromagnetic program.

At the Pilar mine, 10 drill rigs are currently operating, 7 underground and 3 at surface. Exploration activities continue to be focused on targets that are within or adjacent to the existing Pilar mine infrastructure, including near-mine electromagnetic anomalies highlighted during our airborne survey and downhole electromagnetic surveys.

In the Surubim district, drilling activities continue to focus on evaluating new target areas adjacent to the Surubim open pit mine. Currently, 2 exploration drill rigs are operating within the district. We intend to release our next quarterly exploration update on the timeline consistent with prior quarterly exploration releases, approximately 1 month after our financial results.

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

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

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Thanks, David. And good morning, everybody. Q4 was a standout quarter for the company and this is reflected in our operational and financial performance. I would like to reiterate that with the company deciding to keep NX Gold, the business is now being consolidated into the financials with corresponding adjustments to prior periods.

During the quarter, the company sold 12,900 tonnes of copper in concentrate and 10,008 ounces of gold for revenues of $85.1 million. Full year revenue came in at $233.1 million on sales of 30,107 tonnes of copper in concentrate and 39,808 ounces of gold.

As David mentioned, C1 cash costs were $0.99 per pound for the quarter, and $1.19 per pound for the full year, which was in line with guidance.

Due to accelerated startup of Vermelhos and outperformance of our operations, the company did elect to sell a portion of production late in Q4 via a spot market export sale, as the local smelter was unable to accept the material on short notice. The terms under this spot export sale were less favorable and consequently resulted in a higher cash cost for the quarter than would have otherwise been realized under the domestic contract.

Adjusted earnings before interest, tax, depreciation and amortization was $39 million for the period and $99.9 million for the full year. This represents a nearly threefold increase over full year 2017.

The company's financial results were also highlighted by $25.1 million in cash flow from operations for the quarter and $82.9 million for the full year. Adjusted net income for the quarter was $7.9 million or $0.09 per share. Full year adjusted net income was $10.9 million or $0.12 per share.

Income for the quarter and the year was certainly impacted by a number of extraordinary items. These include: taxes, both current and deferred that relate mainly to the NX Gold consolidation as well as approximately $2.5 million in incentive payments that were approved and paid to our Brazilian management teams in recognition of their role in the recovery of the assets following the acquisition by Ero in 2016. Additionally, the company's 2018 incentive compensation reflects the significant achievement of bringing Vermelhos into production ahead of time and on budget as well as the significant increases in resources and reserves announced midyear, which both represent transformational milestones for this company.

Cash used in investment activities was $100.9 million for the year, which was slightly above our guidance at the beginning of 2018 of $96 million but this was largely related to increased exploration and an earlier startup of Vermelhos, which obviously accelerated some ongoing capital.

Cash position at quarter-end was $21.9 million, essentially in line with the previous quarter. Our increase in accounts receivable to $7.2 million at year-end were reflective of

(technical difficulty)

Our working capital position, although still negative, improved quarter-on-quarter and this is expected to continue on this positive trajectory with Vermelhos now in full commercial production. As Noel mentioned, we have maintained open lines of credit in Brazil, and we have approximately $5 million undrawn on our corporate revolver in Vancouver.

With that said, the company finished 2018 on a strong note, and coupled with the debt refinancing in late Q4, we are well positioned to continue delivering on our growth strategy in 2019.

On that note, I'll hand the call back over to Noel for concluding remarks.

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Christopher Noel Dunn, Ero Copper Corp. - Executive Chairman of the Board [5]

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Thank you, Wayne. Some concluding remarks. Firstly, I'd like to echo David's comments and recognize the excellent work undertaken by our teams in Brazil and in Vancouver. They continue to be the strongest assets of Ero Copper and our success reflects their work.

As mentioned by my colleagues, 2019 stands to be yet another transformational year for the company as we continue to execute our organic growth strategy, reinvest in our operations and considerably ramp up our exploration efforts this year. Thank you very much for joining the call. We will turn it back to the operator to open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Justin Chan with Numis Securities.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [2]

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Congratulations on a year where all of your major objectives you have accomplished. Just my first question is on the plant. Could you remind us of your latest thoughts there? And has the verti mill been approved? Is that part of your CapEx guidance? And what are your targets for recoveries towards the end of the year? And my second question would be on NX Gold. And what are your thoughts this year in terms of what you're expecting production and cost-wise? And what are your long-term plans there? What's the latest that you can give us on that?

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

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Thanks Justin. With respect to the regrind circuit, yes, the Board did approve that at our board meeting yesterday. And so the plan is for us to put that in over the course of next year. It will take approximately 1 year to install. Part of that is reflected in the long lead time with regards to some of the electrical equipment, primarily the transformer that is required to operate that piece of equipment. So our expectation is, commissioning will be at the end of the first quarter of 2020.

The regrind circuit, our view and the test work has shown that depending on the head grade, we should see somewhere between a 3% to 6% increase in recoveries and that's the primary purpose of why we're putting the mill in. There is a secondary effect with respect to the mill, albeit, that we are still quantifying the exact number with respect to that, and that is related to our ability to more cost effectively increase our throughput through our milling circuit.

And that is a result of us having less retention time in the large mills because the vertical mill that we're putting in place, we are putting within it a step-down gearing system that'll allow it to be able to operate at different weights, thereby, allowing us to potentially increase our milling circuit with regards to throughput above and beyond the 3.2 million current capacity of the milling circuit.

With respect to NX Gold, our expectations are largely in line with what we did this year with regards to production. And we have guided around 40,000 ounces of gold and roundabout C1 costs in line with what we did this year. Our long-term plan as outlined with regards to the exploration work as we have currently 5 to 7 -- we have 5 rigs on site. We have 7 -- we'll have an additional 2 for a total of 7 over the course of the next couple of months. And we expect to be able to provide the marketplace its first drill results in our quarterly update that should be out in the next month.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [4]

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Okay. And just a bit of clarification on the regrind. So is the CapEx mostly this year and included in the CapEx estimate or is it not?

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

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Sorry, Justin, I made an error. I should have -- no, it was not because it was -- the board only approved it yesterday. It is an additional capital item. The capital amount will be spread out over the course of the next year. I think -- and I made -- everybody's going to -- everybody is giving me finger signs right here, but we're looking at an additional $6 million of capital spread out over the course of this year.

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Justin Chan, Numis Securities Limited, Research Division - Analyst [6]

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Okay, that's really helpful. And just my last one is a bit more of a high-level strategic question. Last year, the objectives were pretty clear: deliver Vermelhos, hit guidance, redo the debt. This year, I guess, the main target is exploration. Is there -- are there any sort of key deliverables that you're looking for other than achieving and beating guidance? Or is it really for the drills to discover?

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David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [7]

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Well, obviously, the first thing is increased production. And we're guiding a production as another significant increase over 2018, with another decrease in operating costs we're guiding. So obviously, those -- from an industry perspective versus our peers, it's always good to see continued growth with continued improvement in margin.

Obviously, everybody who knows Ero knows about the district and the opportunity from the district. And a key component for the company is its continued exploration and development program, not only of continuing to increase the life of the operations in terms of our life of mine plan, but also starting to work towards -- starting to show a strategic plan towards increasing production and starting to utilize more of the capacity that we have in the mill. Those are key objectives to us. We will continue to push as aggressively as we can on the exploration front with regards to continue to not only increase the reserves and resource in our existing operations, but also -- to then also find new opportunities to continue to increase production.

We will say that we continue to be surprised at the opportunities that we find, both within our existing mines and adjacent to our existing operations with regards to exploration and resource growth. And so those are very happy, for lack of a better term, problems to have from the standpoint that we have mining licenses in place in these opportunities -- in these operations, and therefore, our ability to increase production sooner from the standpoint of developing additional resource and reserves at existing operations is obviously a clear value-add -- quicker value-add than anything else that we could be doing.

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Operator [8]

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Our next question comes from Stefan Ioannou with Cormark Securities.

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Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst [9]

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Most of my questions were answered just right there. But just curious with the issue, the export sale on spot market late in Q4. Just with MCSA producing more and more copper as we go forward. Is that going to be a reoccurring theme or do you view that as sort of a onetime issue that happened?

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

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So Stefan, yes, it's a onetime issue with regards to [growing pains]. One of the situations that we have with working with Paranapanema is, at the beginning of the year, they have to work out their mass balance for the year. They would like to take all of our material. And what happened in this last year is, obviously, we set up the plan with them, with a delivery schedule. Our own success in terms of bringing the mine into production 3 months ahead of time, obviously, moved us outside of that. And they -- unfortunately, at that particular time -- they have been in the past been able to accommodate, but at this particular time, because of the amount of material that we were going to be delivering, they weren't able to accommodate it. And what -- they could accommodate some but not all.

And our view with regards to that is rather than having material sitting in inventory, because we have to sell material on certain lots with regards to export, we'd rather sell a bigger lot export-wise in the fourth quarter, and that's what we did. So if you look at 2019, our team has already met with Paranapanema. The schedule in general has been set. There's opportunities here and there to be able to both provide more material to them during the year. But if we have any significant increase in production, we have to work with them to see whether they can accommodate that.

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Operator [11]

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(Operator Instructions) Our next question comes from Phil Ker with PI Financial.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [12]

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Just related to NX Gold. Could you clarify any capital that you plan to deploy there? And then just touch on the exploration upside, just knowing that I think there's only about 40,000 ounces in current reserves?

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David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [13]

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I'm going to let Makko answer some of this, Phil, if you don't mind?

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Makko DeFilippo, Ero Copper Corp. - VP of Corporate Development [14]

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Phil. Yes, look, there is some capital outlay at NX Gold, but as we've been pretty clear about, I think, in our disclosure that -- and including on the call today, that capital outlay is fully self-funded by the production from NX Gold. So it's not included -- that capital outlay is not included in our guidance for that reason alone. It's basically -- it's generating cash, funding its own exploration needs. But I would say in terms of the exploration profile there, as Dave alluded to, we'll get an update on how that's going here in our next quarterly exploration update in April. And then we'll -- similarly, along the same timelines as MCSA, we'll be providing a new updated 43-101 mine plan for the midyear to be released during the third quarter.

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Philip Ker, PI Financial Corp., Research Division - Precious Metals Analyst [15]

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Okay, so it's fair to assume that since the decision is made to not sell the asset that given the current reserve and resource base there is obviously some potential to extend -- or expand on the resources and extend the mine life there?

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Christopher Noel Dunn, Ero Copper Corp. - Executive Chairman of the Board [16]

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Yes, it's -- that's the right conclusion. There's significant upside. It's got a huge land position. We like it. It's got a very interesting vein system. It's a very interesting exploration opportunity.

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

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We [will] be adding 2 more rigs, Phil.

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Operator [18]

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

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

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Thank you, operator. Again, thanks everybody for joining us on the call today. As always, please do not hesitate to contact anyone of us should you have any questions or comments. We are always available. And we look forward to seeing some of you hopefully on our investor tour in April. And for those that we don't, hopefully, we'll get to see you during the quarter. And if not, we'll talk to you all again at the next quarter's results. Thanks, everyone. Bye-bye.

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Operator [20]

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