Ero Copper Corp. (NYSE:ERO) Q4 2023 Earnings Call Transcript
Ero Copper Corp. (NYSE:ERO) Q4 2023 Earnings Call Transcript March 8, 2024
Ero Copper Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ero Gold -- sorry, Ero Copper Fourth Quarter and Full Year 2023 Operating and Financial Results Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Please go ahead.
Courtney Lynn: Thank you, operator. Good morning, and welcome to Ero Copper's Fourth Quarter and Full Year 2023 Earnings Call. Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements and MD&A for the 3 and 12 months ended December 31, 2023. On the call with me today are: David Strang, Ero's Co-founder and Chief Executive Officer; Makko DeFilippo, President and Chief Operating Officer; and Wayne Drier, Chief Financial Officer. We will be making forward-looking statements that involve risks and uncertainties from which actual results may differ materially. We would refer you to our most recent annual information form available on our website, SEDAR and EDGAR for a discussion of the risk factors of our business and their potential impact on future performance. As a reminder, unless otherwise noted, all amounts are in U.S. dollars. I will now pass the call over to David Strang.
David Strang: Thank you, Courtney, and thank you all for joining us today. 2023 was a cornerstone year for our company, highlighted by significant accomplishments across our organic growth initiatives. In addition to making significant strides towards doubling copper production to approximately 100,000 tonnes in 2025, we achieved targeted gold production levels of nearly 60,000 ounces, following the successful completion of Xavantina's NX 60 initiative. I'm pleased to share an update on our Tucuma project, which Makko will elaborate on, where we've surpassed 90% physical completion while maintaining our forecast capital expenditure guidance of $310 million. I'm also happy to report that commissioning is advancing smoothly. We completed dry commissioning of the crushing circuit in February, beating our timeline by 1 month, and expect to put first ore through the mill in April.
We also made significant progress on the Pilar 3.0 initiative at our Caraiba operations. This included completion of the mill expansion project, where we achieved design capacity prior to year end, and the initiation of main shaft sinking at the new external shaft in December, following the completion of supporting surface infrastructure. While these growth initiatives or growth investments drove elevated capital expenditures in 2023. They have also started to reflect positively in our cash flows from operations. More specifically, record gold production drove a meaningful expansion of operating margins at the Xavantina operations that contributed to a $20 million year-on-year increase in consolidated Ero Group cash flow from operations, which totaled $163 million.
Our 2023 financial performance also reflects the opportunistic implementation of risk mitigation measures throughout the year, including an expanded foreign exchange hedge program that yielded realized gains of over $11 million and helped to soften the impact of a stronger Brazilian Real against the U.S. dollar. We took an additional proactive measure during the fourth quarter amid a challenging macroeconomic landscape that drove short term copper price uncertainty, and both stood our balance sheet with a bought-deal equity financing. This offering generated net proceeds totaling approximately $104 million and contributed to our year-end liquidity position of $262 million. Since the offering in early November, the copper market outlook has improved, with supply/demand fundamentals now signaling supply deficits in 2024 and 2025.
The shift reflected in the copper price as well as copper concentrate treatment and refining charges, which have dropped to their lowest levels since 2013. Seizing this opportunity, we are proactively securing smelting terms for the majority of our concentrate production through the end of 2025. These developments come at a favorable time as we approach initial production at Tucuma. With capital expenditures on this project winding down through the first half of this year, we're approaching an exciting inflection point in our consolidated copper production and cash flow profile. We also look forward to finalizing a definitive Earn-in Agreement with Vale Base Metals on the Furnas Copper project. With the necessary paperwork progressing smoothly, we expect to embark on the first phase of drilling later this year.
Before turning the call over to Makko for a deeper dive into our project execution, I will briefly touch on our operating performance. At the Caraiba operations, we processed 3.2 million tonnes of ore during the year. While this represented an impressive increase of approximately 13% compared to 2022, fourth quarter and full year mill throughput volumes slightly missed out targets due to approximately 1 week of additional unplanned downtime related to the completion of the mill expansion project. However, processed copper grades and metallurgical recoveries were in line with our expectations, averaging 1.49% and 91.4% respectively, and resulting in full year copper production of 43,857 tonnes of coppering concentrate, including 11,760 tonnes of coppering concentrate in the fourth quarter.
Regarding our C1 cash costs at Caraiba, we reported $1.75 for the fourth quarter and a $1.80 for the full year. These figures reflect our new C1 cash cost calculation methodology that was updated in light of changes to Caraiba's copper concentrate sales channels. While Wayne will provide more insights on this methodology change, I want to note that the impact on our C1 reported -- on our reported C1 cash costs is counterbalanced by an equivalent increase in reported realized copper prices. As we quickly approach the end of the first quarter, the cadence of production and cash costs is aligned with our expectations. More specifically, Caraiba's production is expected to be lowest in the first quarter, with processed copper grades projected to be the lowest for the year and processed tonnenage expected to increase between 5% and 10% compared to the fourth quarter.
Consequently, we expect C1 cash costs to be the highest in the first quarter of this year. Turning to our Xavantina operations, we reported another stellar quarter, capping a year of record gold production and record operating margins, thanks to contributions from the new Matinha vein. Processed gold grades continued to exceed our expectations during the fourth quarter, averaging over 17 grams per tonne and resulting in production of 16,867 ounces at C1 cash costs and all-in sustaining costs of $413 and $991 per ounce, respectively. For the full year, production was up 39% compared to 2022, driven by a nearly 100% increase in processed gold grades. This resulted in full year production of 59,222 ounces and C1 cash costs and all in sustaining costs of $422 and $957 per ounce, respectively.
As we progress through the first quarter, we continue to absorb -- observe positive grade reconciliations with mined gold grades at Xavantina trending above 15 grams per tonne. Consequently, our expectations around the cadence of full year production remains consistent with our previously issued guidance, with the first quarter anticipated to deliver the highest quarterly production levels in 2024. I'll now hand the call over to Makko to provide more comprehensive detail on our project execution, after which Wayne will touch on our financial results.
Makko DeFilippo: Thank you, David, and good morning, everyone. Highlighting what was said earlier, we have continued to make outstanding progress across the entirety of our project portfolio. Starting at Tucuma, where we continue to make huge strides across all work streams throughout the project, our most notable achievement to-date is reaching 4 million hours without lost time incident. Our primary goal at Tucuma is to deliver the project safely, and our performance to-date demonstrates the commitment of our site teams and construction partners in achieving this goal. As David mentioned, we completed the construction and commissioning of our crushing circuit as well as our screening and conveyance systems in order to place first crushed ore on the reclaimed stockpile approximately 1 month ahead of schedule.
On the Milling and Flotation side, mechanical equipment is installed and completion testing is well underway. The last piece of milling equipment, our high intensity grinding mill, is currently en route to site from Salvador and its delivery on-site remains fully aligned with our project execution schedule. We are currently focused on completing piping, cabling, instrumentation and ancillary installations around the mill and flotation areas and are preparing to run first ore through the mill in April. During the month of May, we expect to complete the commissioning of the flotation circuit as well as the high-intensity grinding mill to initiate integrated commissioning across the whole project in June. On the Mining side, we continue to progress well ahead of schedule.
The continued outperformance by our mining contractor has allowed us to close February with approximately 25,000 tonnes of ore in the run-of-mine stockpile and an additional 70,000 tonnes of stripped ore in the mine ready to be blasted. We currently expect to have over 300,000 tonnes of ore available on the run-of-mine stockpile by the end of the first quarter. If I take a step back from the details for a moment and think about the major component parts required for a successful ramp up of any project, we are extremely well positioned. On site, we have completed all power infrastructure, our water reservoir is full, we have an ore stockpile ready to be processed, our equipment installations are on track, we are ahead of our commissioning schedule, and in addition we have hired all of our site operational leadership and currently have more than 60% of our operational workforce contracted through our existing partnership with SENAI.
In short, we feel we are in a strong and enviable position to have a successful ramp up. We anticipate reaching commercial production, which we define as 80% of nameplate capacity by the end of the third quarter, and this ramp up curve is aligned with our guidance for the year. As we announced in our January update, our total direct project capital estimate for completion of the Tucuma project was updated to approximately $310 million from $305 million to reflect the impact of a stronger BRL in the fourth quarter, and this remains unchanged. At our Caraiba operations, the execution of our Pilar 3.0 initiative delivered 2 important milestone's during the fourth quarter, as David touched on. At the Caraiba mill, we completed the integration of the expansion circuit in December and achieved design capacity of over 12,600 tonnes per day, or approximately 4.2 million tonnes per year, just prior to year end.
At the shaft project of the Pilar mine, we initiated the vein sink phase of the project just prior to year-end as planned, following completion and commissioning of the head frame, personnel and stage winders as well as supporting surface infrastructure. We are currently reaming the second and longest raised bore leg of the shaft, which we expect to complete by the end of the second quarter. Civil works are currently underway to set up the third and deepest raised bore leg of the shaft, which we expect to complete during the second half of this year. All underground development and infrastructure installations for the ore handling system of the new shaft are progressing on schedule. At our expected average daily development rate, we anticipate reaching a depth of over 600 meters by year-end, and the project remains on track for shaft handover to operations in Q4 of 2026.
Lastly, touching briefly on our partnership with Vale Base Metals on the Furnas project, in parallel with finalizing definitive Earn-in Agreements, we have already initiated baseline studies and have commenced a QA/QC program on the historic drill database. Barring any requirement for twin-hole drilling, we expect to be in a position to issue the first NI 43-101 resource estimate during the second half of this year. I will now turn the call to Wayne to discuss our financial results.
Wayne Drier: Thank you Makko. As Dave highlighted, our financial results for both the fourth quarter and full year positively reflected the execution of our growth strategy, particularly at the Xavantina operations. At the same time, we navigated persistent macroeconomic challenges, including copper price volatility and a BRL that was stronger than we projected at the beginning of 2023. In line with our prudent financial approach, we took decisive steps to protect our cash flows with an expansion of our foreign exchange hedge program, beginning in the third quarter. This resulted in realized gains of $4.2 million in the fourth quarter and $11.4 million for the full year, and contributed to fourth quarter and full year cash flow from operations of $49.4 million and $163.1 million, respectively.
Adjusted net income attributable to the owners of the company for the quarter and year were $20.7 million and $82.8 million, respectively, or $0.21 and $0.87 per share on a diluted basis. It's worth noting that during the quarter we recorded approximately $3 million of writedowns related to obsolete inventory and fixed assets. This negatively impacted our earnings by approximately $0.03. As we closed the year, the total notional value of our foreign exchange derivative position, including both zero cost collars and forward contracts, exceeded $375 million. These hedges, which cover nearly all of our Brazilian Real denominated operating expenses and the majority of our major capital expenditures in 2024, have a weighted average floor and ceiling of BRL 4.99 and BRL 5.36, respectively.
Of the total hedge program approximately $115 million allocated for major capital project expenditures with a weighted average floor and ceiling of BRL 5.13 and BRL 5.22 respectively. With respect to major project, the Tucuma project is a case in point where we are observing a decline in monthly capital expenditures, as we near the end of construction. Although we anticipate our total capital expenditures year to be weighted towards the first half, our strong financial position, including available balance sheet liquidity of approximately $262 million at year end, and cash flow from operations during the first half of this year that are projected to be consistent with the second half of 2023, ensures we are fully equipped to support these investments.
I'll now pass the call back to David to share some closing thoughts.
David Strang: Thank you Wayne, and thank you, everyone, who joined the call today. Before we proceed to the question-and-answer session, I want to extend my deepest gratitude to our teams in Brazil and here in Canada for their continued commitment and hard work in executing on both our operating plan and our organic growth strategies. With that, I will now hand the call back to the operator to open the line for questions.
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