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Edited Transcript of ERO.TO earnings conference call or presentation 9-Nov-18 4:30pm GMT

Q3 2018 Ero Copper Corp Earnings Call

Dec 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Ero Copper Corp earnings conference call or presentation Friday, November 9, 2018 at 4:30:00pm 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

* Michal Romanowski

Ero Copper Corp. - VP of Evaluations & Planning

* 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

* Orest Wowkodaw

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

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

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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 Third Quarter 2018 Conference Call for Ero Copper Corp. (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. I'd like to welcome everyone to Ero's Third Quarter 2018 Results Call. As you know, we've reported a good quarter building on our work to date in the (inaudible). The news release announcing Ero's third quarter results is available on our website and on SEDAR as our interim financial statements and the MD&A for the 3 and 9 months ended September 30, 2018. I'd like to remind everyone that comments made on this conference call contain forward-looking statements that involve risks and uncertainties concerning the business, operations and financial performance of the company. For discussion of the risks, uncertainties and factors, which may lead to the actual financial and operating performance being different from the projections contained in the forward-looking statements, please refer to our 2017 annual information form.

With me in the room today are David Strang, Ero's Co-Founder, Chief Executive and President; Wayne Drier, Chief Financial Officer; and Michal Romanowski, Vice President, Operations and Planning. I'm now going to 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. Unless otherwise noted, all amounts discussed in this call are in U.S. dollars. 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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Thanks, Noel. Good morning, everyone. I'm delighted to report the results of our strongest operational quarter to date, as we continue to ramp up our operations into the second half of the year as had been guided previously. As we now look into the second half of the year on the back of these results, our continued ramp up in operations, combined with the acceleration -- accelerated completion of the Vermelhos mine gives us comfort in raising our full year production guidance by approximately 2,000 tonnes of copper to our revised guidance range of 28,000 tonnes to 29,000 tonnes of copper production and reducing our full year C1 cash cost guidance by $0.20 to our revised guidance range of $1.10 to $1.20 per pound of copper produced. Our capital expenditure guidance for the year will remain unchanged.

As it relates to third quarter operational performance, copper production during the period totaled 7,792 tonnes of copper in concentrate, a 37% increase over the second quarter, a result of strong performance from each of our operating mines.

At the Pilar underground mine, we saw a 36% quarter-on-quarter increase in tonnes mined, which totaled 392,100 tonnes at an average grade of 1.59% copper. While quarter-on-quarter grades of Pilar declined during the period, this was largely expected as we focused on the development of several high-grade stopes that will be mined during the fourth quarter. Open-pit production from the Surubim continued to perform well during the third quarter with 213,000 tonnes of total ore mined, grading 0.66% copper, a slight increase in tonnes mined when compared to the second quarter. While grades at the Surubim mine declined quarter-on-quarter, a completion of a lower-grade pushback occurred during the period, which will allow operations at Surubim to be extended through the end of the year at higher grades. Vermelhos, our newly constructed underground mine, was completed on budget and approximately 4 months ahead of schedule. This result is a real testament to the quality of our operating and mine development teams in Brazil, and we'd like to applaud them on this call. As a result of the acceleration, we saw the first contribution from the mine occurred this quarter with total production of 63,200 tonnes grading 2.62% copper from development and from our mining. The development has continued to advance into new production areas, including the main high-grade Vermelhos ore bodies, which we expect to start mining during the fourth quarter. At our mill, we processed 663,400 tonnes of ore during the period at an average grade of 1.38% copper with metallurgical recoveries of approximately 84.9%. Milled tonnage during the period reflects our focus on normalizing mill feed and more effectively using the operating leverage of our operating phase. For the quarter, C1 operating costs were $0.99 per pound of copper produced, a 34% reduction compared to the second quarter as a result of the strong operating performance of the company, cost-reduction initiatives and a weakening of the Brazilian real. With respect to local currency operating costs, we were pleased to see the continued benefit of the capital investments we committed to make in at the Belém underground mine, where underground mining cost decreased by 20% quarter-on-quarter to BRL 101.58 per tonne mined. Other metrics for the quarter were BRL 18.26 per tonne mined open-pit; BRL 29.57 per tonne processed; and indirect costs of BRL 11.09 per tonne processed.

Other key operational highlights during the quarter included continued advancement of development into high-grade development areas of the Pilar mine as well as an additional improvements to underground infrastructure and ventilation. These investments continue to enhance the company's productivity and overall production flexibility as well as, in the process, create additional underground drill stations from which to conduct near-mine exploration, including the West Limb and further extensions of the deepening zone.

With respect to exploration, our resource inflow and upgraded drill programs conducted in 2017 and the first half of 2018 in preparation of our mid-year National Instrument 43-101 update resulted in a positive outcome for the company with over 100% increase in both mineral resources and mineral reserves.

During the period, we also completed our regional airborne electromagnetic and gravity survey and are now in the process of data interpretation and priority targeting, with initial regional drilling now underway. At the same time, we continue to prioritize advancing all of our near-mine discoveries, including the West Limb and deepening extensions at Pilar, our new East Limb Vermelhos discovery as well as near-mine anomalies that we highlighted during the course of the regional geophysical survey. Pilar mine, 10 drills are currently operating, 8 underground and 2 at the surface. Exploration activities continue to focus on targets that are within or adjacent to the existing Pilar mine infrastructure, including newly identified near-mine electromagnetic anomalies highlighted in our airborne survey and downhole electromagnetic surveys.

At the Vermelhos mine, 5 drill rigs are currently operating on the surface. Exploration activities are focused on further drill testing of the recently announced East Limb discovery, including further evaluation of the geologic relationships between the main Vermelhos deposit and some of the high-grade portions of the Vermelhos West deposit, located approximately 1.1 kilometers away from the Vermelhos mine.

We also continue to test extensions of the high-grade Vermelhos ore bodies and similarly are following up on several promising electromagnetic anomalies highlighted during the airborne survey. 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 a time line consistent with prior quarterly exploration releases, approximately 1 month after our financial results.

I will now 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, everyone. From a financial perspective, Q3 reflects the very strong operational performance of the company with quarter-on-quarter operational and financial improvement, despite a significantly lower prevailing copper price relative to the prior quarters. During the quarter, the company sold 6,542 tonnes of copper in concentrate. While this figure is consistent with prior quarter sales volumes, it is worth noting that sales volumes and reported revenues during the period do not include approximately 1,250 tonnes of copper from the development and trial mining and processing of ore from the newly constructed Vermelhos mine.

Sales and earnings would have been significantly higher had these been run through the P&L statement. As it was, sales for the quarter from operations resulted in revenues of $37 million. Company's financial results were highlighted by $22.6 million generated in cash flow from operations. Adjusted earnings before interest, tax, depreciation and amortization was $24.8 million for the period and adjusted net income was $8.3 million or $0.09 per share. GAAP net income was $9.8 million or $0.11 per share on a fully diluted basis. As David mentioned, C1 cash costs were $0.99 per pound for the quarter, a significant quarter-on-quarter improvement. This trend is expected to continue into Q4 and 2019.

Cash used in investing activities was $12.2 million, a significant decrease from Q2. This reflects the fact that the bulk of the initial capital spend on Vermelhos has been spent, but it is also worth noting that capitalized additions to property, plants and equipment was offset by a benefit of $4 million, resulting from the sale of the preproduction tonnes from Vermelhos, net of operating cost related to its production during the period. Despite an improved cash position at quarter-end of $22.7 million, the company's working capital position was weaker than the previous quarter. However, it's worth noting, again, that over $23 million of our current liabilities relate to the short-term portion of our loans and borrowings, some of which have accelerated as a result of the Vermelhos reaching commercial production. We are quite comfortable with the working capital position now that Vermelhos is ramping up to full production. And we continue to assess opportunities to optimize the balance sheet. On that note, I'll hand the call back to Noel.

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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, we think it's important that we recognize the excellent work undertaken by our team in Brazil and in Vancouver. Our team at (inaudible) have been wonderful to work with and are huge intangible assets of Ero Copper Corp. When we acquired our assets in Brazil, we set ourselves 3 objectives. Number one, extend the mine life through exploration. The successes at Pilar and Vermelhos are testaments of execution on this, and we will continue to work hard in this area. Two, increase throughput to our underused large processing facilities to grow production. The opening of the Vermelhos mine is a key landmark in achieving this. And three, reduce our cost to world-class levels and increase our margins to world-class levels, as demonstrated by our Q3 operating costs. As you've all heard, we are delivering on these objectives, and we continue to see opportunity all around us. As Wayne mentioned, we will continue to evaluate our capital structure and look at ways of improving our financial flexibility and efficiency in the future. Thank you all for joining the call. We will turn it back to the operator to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Justin Chan with Numis Securities.

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

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I'm very much looking forward to seeing you guys on site next week. My first question is just on NX Gold. I've noticed you had a good performance there, or -- so it looks from the noncontinuing ops. I was just wondering what your guidance is for that? Or how we should think about that, I guess, going forward? And what the plans are there?

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

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Thanks, Justin. With regards to NX, NX has continued to perform extremely well. And as such, we feel that the company requires its own life and as we are working towards strategies that will allow us to affect us. And I think it's best for us to say at this stage to watch this space, but we are seeking ways to find shareholder value with regards to NX.

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

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Okay. I think I'll probably -- I'll try to save most of the operational questions for site. But just on Vermelhos, I guess, do you have any guidance on timing for the ramp up to commercial production? And what we should expect this quarter?

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

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Well, with regards to commercial production, we are essentially there now. We internally declared commercial production to beginning of October. With regards to full production, we're operating as that in terms of our next year's guidance, I think, we are meant to be producing right about 550,000 tonnes, 600,000 tonnes next year. I think, in October, we did close to 45,000 tonnes. So that's getting us pretty close to where we need to be with regards to full production from the mine.

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Operator [6]

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The next question is from Orest Wowkodaw with Scotiabank.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [7]

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David, I was hoping you could maybe give us a bit of color on where the greenfield exploration sits right now with respect to some of the targets from the VTEM survey? And when we could perhaps anticipate the release of the first couple of holes?

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

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Orest, what we're doing right now is we're in the targeting phase of that. Funny enough, we'll be working through that with everybody next week and giving you sort of the rundown of how we go about doing that and looking at things with respect to that. So I don't have a timing number right now with regards to drilling. It's not a full program as of yet with regards to drilling. What we are doing with the drill program -- with the drill rig that's operating right now is we're doing some preliminary test work on some of the target areas. But as you'll see next week, there is a significant amount of work that is ongoing right now with respect to enhancing the targeting. And that work right now has been primarily completed up around the Vermelhos area, and we are starting to work our way down from there into the Surubim and then Pilar areas. But the best thing I can leave with you right now is, wait for Tuesday night and we'll give you a much better rundown there.

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Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [9]

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Okay. Fair enough. And then just separately, can you give us a sense on how the mining dilution has been -- I mean, how's it tracking relative to your expectation, say, in the first 9 months of the year at Pilar?

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

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We still continue to see a positive reconciliation with regards to our grade estimates when we are mining versus what is actually -- tonnes mined versus what was actually in the stopes. I think over the course of the last -- the 2 years that we have essentially been managing the mine, I think we have only seen 3 stopes at Pilar of the total that have been mined that were less -- that had negative reconciliation versus positive reconciliation. So with regards to dilution, our dilution continues to remain low. I don't have the exact number right now. Michal, do you have anything that you can add to that?

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Michal Romanowski, Ero Copper Corp. - VP of Evaluations & Planning [11]

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I'll just say, Orest, since we started, the dilution has started to come down as a result of some improvements we made to our short-term drilling program. But we can get into the details next week with you on site.

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Operator [12]

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(Operator Instructions) The next question is from Stefan Ioannou of Cormark Securities.

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Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [13]

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I was just curious to as though -- with regards to the regional drilling and when we might see that? But certainly just a housekeeping question. So just to be clear, you guys were saying that all of Q4 Vermelhos production will be run as commercial than through the financial, is that right?

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

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Correct.

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Operator [15]

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This concludes today's question-and-answer session. I'd like to turn the call back over to management for closing remarks.

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David Maxwell Strang, Ero Copper Corp. - CEO, President & Director [16]

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Thank you, operator. And thanks everybody for attending the call. We look forward to those analysts who will be joining us next week for the site visit and to give more up-to-date view of the operations, particularly, with Vermelhos. If anybody has any questions, we'll more than happy to answer them. And please give us a call and we'll get back to you. Thank you, operator. Thanks everybody.

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Operator [17]

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This concludes today's conference call. Thank you for participating, and have a pleasant day.