Ero Copper Corp. (NYSE:ERO) Q3 2023 Earnings Call Transcript
Ero Copper Corp. (NYSE:ERO) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Third Quarter 2023 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Courtney Lynn, Senior Vice President, Corporate Development and Investor Relations for opening remarks. Please go ahead.
Courtney Lynn: Thank you, operator. Good morning, and welcome to Ero Copper's Third Quarter 2023 Earnings Call. Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements and the MD&A for the three and nine months ended September 30, 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, and unless otherwise noted, all amounts are in US dollars. I will now pass the call over to David Strang.
David Strang: Thank you, Courtney, and thank you, everyone, for joining us today. We are speaking to you today from our offices in Sao Paulo, Brazil at the end of a weeklong tour with our Board, during which we visited each of our operations. I'm happy to share that everyone is buoyed from the visit, especially seeing the great progress our team is -- in Brazil has made in each of our major growth initiatives. Our third quarter financial results reflect our team's exceptional strategic execution and operating performance amid challenging market conditions. Despite the macroeconomic headwinds that led to weaker metal prices and a stronger Brazilian reais against the US dollar, we remained focused on executing and broadening our growth strategy, positioning Ero for long-term value creation as the global energy transition gains momentum.
During the quarter, our near-term growth projects achieved several critical milestones. The Tucuma project, as announced last month, reached over 70% physical completion. Furthermore, a significant achievement was realized at the Xavantina operations, where we successfully initiated production from the Matinha vein, resulting in record gold production and operating margins. Meanwhile, at our Caraiba operations, we continue to advance our Pilar 3.0 initiative as we near completion of the mill expansion project and prepare to commence main sinking at the new external shaft. In parallel, we continue to bolster our medium and longer-term growth pipeline through ongoing regional copper and nickel exploration programs at the Caraiba operations, as well as through the execution of a binding term sheet a to earn a 60% interest in Vale Base Metals Furnas copper project, which we announced earlier this week.
Before I hand over the call to Makko to provide more detail on the execution of our growth projects, I will summarize our third quarter operating and financial performance. At the Caraiba operations, copper production was in line with our forecast at 10,766 tonnes of copper in concentrate. While our C1 cash costs for the quarter were also in line with our forecast in BRL terms when converted to US dollars at the average third quarter exchange rate of BRL4.88 BRL per US dollar, our copper C1 cash costs in US dollar terms remained elevated at $1.82 per pound of copper produced. Copper production is expected to be strongest in the fourth quarter due to higher anticipated mined and processed copper grades. As a result, we are reaffirming our 2023 copper production guidance of 44,000 to 47,000 tonnes.
Due to higher expected copper grades and with the current quarter-to-date exchange rate averaging over BRL5.05 per US dollar, we also expect to deliver lower C1 cash costs in the fourth quarter. For the full year, our copper C1 cash cost guidance range based on the original assumed foreign exchange rate of BRL5.30 per US dollar remains $1.40 and $1.60 per pound of copper produced. Yet, given the continued strength of the BRL against the US dollar, we are also providing a sensitivity range of $1.50 to $1.70 per pound of copper produced should the BRL to US dollar exchange rate remain at current levels for the remainder of the year. At our Xavantina operations, as I mentioned earlier, we successfully initiated production from the Matinha vein during the quarter, which contributed to a quarter-on-quarter increase of over 40% in both processed gold grades and gold production.
As a result, we produced a record 17,579 ounces of gold at C1 cash costs of $371 per ounce. Due to our strong year-to-date operating performance at the Xavantina operations, we are increasing our 2023 gold production guidance range from 50,000 to 53,000 ounces to 55,000 to 59,000 ounces. We are also reducing our full year C1 cash cost guidance from $475 to $575 to $375 to $475 per ounce of gold produced and lowering our all-in sustaining cost guidance range from $1,000 to $1,100 to $900 to $1,000 per ounce of gold produced. Our financial results for the period reflect a combination of our strong continued operating performance as well as the metal price weakness in BRL strength that I mentioned earlier. As a result, adjusted EBITDA for the third quarter was $42.9 million and adjusted net income attributable to the owners of the company was $17.3 million or $0.18 per share on diluted basis.
As planned, our capital expenditures remained elevated at just over $120 million during the third quarter, largely due to the strong progress being made at our Tucuma project. In an effort to maintain the momentum we have carried forward from the second and third quarters, we have elected to accelerate select work streams originally slated for the first quarter of 2024 to the fourth quarter of this year. As a result, we have adjusted 2023 capital expenditure guidance for the Tucuma project to include estimated increase of approximately $15 million to $20 million due to the expected shift in timing of associated payments. We have also provided foreign exchange rate sensitivities across our capital expenditures to guidance ranges to reflect the potential impact of the BRL to US dollar exchange rate remaining at current levels through the end of the year.
I will now pass the call to Makko to discuss the highlights around our third quarter project execution after which Wayne will discuss our financial results for the quarter.
Makko DeFilippo: Thank you, Dave, and good morning, everyone. With respect to progress on our strategic initiatives, I am incredibly proud of our operational teams and we're able to continue execution through the third quarter after an excellent first half of the year. Before discussing each of our projects in detail, I would like to congratulate all of our employees and contractors at the Tucuma project currently totaling over 1,700 people on site on achieving over 2 million hours without a lost time injury. In terms of the progress at Tucuma, we achieved a major construction milestone of over 70% physical completion, as you would have seen in our project update from October. Noteworthy achievements on site include the completion of earthworks, completion of all major civil concrete pours, major advancements in steel fabrication and erection as well as installation of several key pieces of process equipment, including our primary crusher, ball mill and tertiary crushers.
As evidenced in our updated site photos, we are making excellent progress in flotation cell installation and site-wide plate work and piping. In parallel, our main substation and power line installations are both tracking ahead of schedule and we expect to tie into the national grid at the end of this month. As a result, mechanical completion testing and the first commissioning phases of installed equipment are expected to commence prior to year-end. With the progress made on procurement, manufacturing, equipment deliveries and construction to date, our primary focus on the project has transitioned to piping, cabling instrumentation installations as well as our operational readiness planning, all of which is progressing on schedule. As Dave mentioned, given the excellent performance and momentum we have been able to achieve this year, in particular, on the pre-stripping and electrical power installation front, we expect to accelerate select work streams related to both mining and plant commissioning from the first quarter of 2024 to the fourth quarter of this year, which has been reflected in our updated guidance.
While our expected project delivery date remains unchanged, we believe the acceleration of these work streams will continue to de-risk our overall commissioning and ramp-up schedule. Our total direct project capital estimate for the completion of the Tucuma project remains unchanged at approximately $305 million. It is worth noting that a Q2 redesign of our haulage route combined with decreased emotion costs, below budget earthworks tailings, and waste on construction costs and reductions in duties on imported equipment versus our budget have largely offset the impacts of a stronger-than-anticipated foreign exchange rate and increases in forecast electromechanical erection costs through project completion. At our Caraiba operations, we continue to advance the new external shaft of the Pilar mine and the expansion of our Caraiba mill, both part of our Pilar 3.0 initiative.
During the third quarter, we finalized the installation of the head frame for the new external shaft, concluded installations and are currently commissioning both the stage and personnel winders. We remain fully on track to commence main sinking activities prior to year-end. With respect to supporting infrastructure underground at the Pilar mine, we are in the final commissioning stages on our underground batch plant, are reaming the waste and ore silos for our ore flow system and are preparing for the second phase excavation of our crusher chamber. I'm pleased to report that all of our underground development requirements remain on schedule for shaft handover to operations in Q4 of 2026. Back on surface at the Caraiba mill. Installation of our new ball mill, Jameson cell and associated electrical installations were nearly completed during the third quarter.
We anticipate an on-schedule physical completion of the expansion project prior to year-end. Last, but certainly not least, at Xavantina, we successfully developed into and commenced mining of the Matinha vein during the quarter, a fundamental component of our NX60 initiative. During the quarter, we mined ore from three different production levels within the Matinha vein. Our record production results this quarter and revised full year guidance ranges for the Xavantina operations speak to the positive impact from this initiative. As Dave noted, we are expecting a strong fourth quarter at each of our operations and continued execution across our project portfolio. I will now turn the call over to Wayne to discuss our financial results.
Wayne Drier: Thank you, Makko. As Dave mentioned earlier, our third quarter financial performance reflected record gold production and operating margins, which partially offset a decrease in copper production as well as continued copper price weakness and a stronger BRL, which averaged BRL4.88 against the US dollar for the period. This drove operating cash flows of $41.9 million that helped to fund capital expenditures of $121.4 million, which were primarily directed towards the ongoing execution of our organic growth initiatives. We ended the quarter with a strong liquidity position of approximately $238 million. This includes cash and cash equivalents of $45 million, short-term investments of $43 million and $150 million of undrawn availability under our senior secured revolving credit facility.
Regarding our BRL to US dollar exchange rate hedge program, we reported realized gains of $3.5 million for the quarter. Consistent with our conservative strategy and in response to a favorable move in exchange rates towards the end of the quarter that extended into October, we opportunistically expanded our foreign exchange rate hedge program to cover the majority of projected operating costs and capital expenditures through the end of 2024. These hedges have a weighted average floor and ceiling of BRL5.04 and BRL5. 43 per US dollar, and includes approximately $145 million designated for major project capital expenditures with a weighted average floor and ceiling of BRL5.10 and BRL5.23 per US dollar, respectively. It's also worth noting that we remain hedged on approximately 75% of our copper production for the remainder of the year through the zero cost collar hedge program we initiated in January.
The copper hedge contracts provide a floor price of $3.50 per pound on 3,000 tonnes of copper per month through the end of December 2023. With that, I'll now hand the call back to David to share some final remarks.
David Strang: Thank you, Wayne, and thank you again to everybody who's been on the call. I think the theme for the quarter has been us operating extremely well, as a team, both operationally and on the capital projects in a dynamic macro environment, dealing with exchange rate and metal price volatility on the copper side of things. I cannot thank our team enough both in Vancouver and here in Brazil for the strong efforts they have done in terms of continuing to move our projects forward and continue to operate our operations. And while we don't want to single out any particular operation versus others, the exceptional performance of our team at the Xavantina operations. And with that, operator, I will turn it over to you for a question period.
See also 11 Best Uranium Stocks To Buy and 12 Best Large Cap Stocks To Buy Now.
To continue reading the Q&A session, please click here.
