Ero Copper Corp. Q3 FY2024 Earnings Call

Thank you for your patience. Welcome to the Ero Copper Third Quarter 2024 Operating and Financial Results Conference Call. Please note that everyone is in listen-only mode, and this call is being recorded. After the presentation, you will have the chance to ask questions. I will now hand the call over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations, and Sustainability. Please proceed.

Thank you, operator. Good morning and welcome to Ero Copper's third quarter 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 three and nine months ended September 30, 2024. 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.

Thank you, Courtney. We appreciate that this is a busy week, especially with the news surrounding the US Presidential Election. So thank you all for taking the time to join us today. Before diving into our third quarter results, I want to take a moment to discuss the leadership succession announcement we made yesterday. This transition is something we've been thoughtfully planning over the last two years, beginning with Noel’s decision to step down as Executive Chairman in January of 2023. Noel’s contributions have been instrumental in shaping Ero Copper from its early stages into the successful high-growth copper producer we are today, and I am immensely grateful to have taken this unimagined journey with him over the past eight years. As I step into the role of Executive Chairman, I'm excited about what lies ahead for Ero. I remain fully committed to our long-term success and look forward to continuing to support our growth in this new capacity. With Makko assuming day-to-day leadership as Ero’s President and CEO, we are in incredibly capable hands. Makko has demonstrated exceptional leadership as our Chief Operating Officer, championing safety and advancing our strategic growth initiatives, including the successful construction of Tucumã and strengthening our culture of accountability. I have absolute confidence in his ability to lead Ero into this next chapter. I am also pleased that Makko will have the full support of Gelson Batista, who joined us in September in anticipation of this transition. Gelson brings a wealth of experience from his 25 years in the mining industry, most recently serving as Chief Operating Officer of ArcelorMittal's mining division. His expertise will be invaluable as we continue to strengthen our operations and execute on our growth strategy. With that, let's move to our third quarter operating and financial results. This past quarter brought both notable successes to celebrate as well as new challenges for our team to navigate. Among the successes was the completion of construction at the Tucumã operation, culminating in our first production of sellable copper concentrate in July 2024. Reaching this milestone just over three years after the publication of Tucumã's optimized feasibility study in September 2021 is a testament to our team's extraordinary dedication and hard work. What makes me most proud, however, is that we achieved this milestone without a single lost time injury. Another important milestone in the quarter was the execution of a definitive earning agreement on the Furnas Copper-Gold Project with a subsidiary of Vale Base Metals in July. Consistent with the terms outlined in the binding term sheet announced in October 2023, we are delighted to partner with Vale Base Metals on this opportunity and look forward to advancing the project towards a final investment decision over the next few years. Totally after executing the agreement, we applied for the drilling permits required to commence the Phase 1 drill program, which we received in September. Then in early October, we published an initial NI 43-101 compliant mineral resource estimate based on a contemplated high-grade underground mine scenario. In mid-October, the first drill rig arrived at the site and we kicked off the 28,000-meter Phase 1 drill program, which will focus on infill drilling and extending high-grade zones within the broader deposit to depth. As of the end of October, we have two drill rigs on-site with an additional two rigs expected to arrive by the end of this month. Our plan includes drilling approximately 4,500 meters in the fourth quarter, with the remainder scheduled for 2025. Alongside these achievements and the strong progress we made in executing our growth strategy, we encountered operational challenges at both Caraíba and Tucumã. On a positive note, we achieved an 11.9% increase in copper production at Caraíba during the quarter, producing 9,920 tonnes of copper in concentrate, driven by higher mine grades for both Vermelhos and Pilar. This improvement reflects progress in developing high-grade stopes at Pilar during the quarter. However, underground development rates at Pilar have not advanced at the pace we had anticipated, primarily due to underperformance by the third-party contractor we engaged for this work. To address this, we are bringing on a second contracted before year-end. In the meantime, lower mining rates at Pilar are expected to extend into the fourth quarter. As a result, we are adjusting our full-year production guidance at Caraíba to 35,000 to 37,000 tonnes of copper in concentrate production. Despite production headwinds at Caraíba, our C1 cash costs for the quarter decreased 24.5% to $1.63 per pound of copper produced. In addition to higher copper grades, several positive factors contributed to this impressive performance. As mentioned in our previous conference call, the tightness of the copper concentrate market enabled us to secure some of the most favorable treatment and refining terms we have ever seen, which kicked in as of May 2024 for both Caraíba and Tucumã. Another important driver of our C1 cash cost performance has been a more favorable U.S. dollar to Brazilian reals exchange rate, which averaged approximately BRL5.6 per U.S. dollar in the third quarter. Along with this, we also experienced higher gold byproduct credits regarding improving gold prices. This reduction in unit operating costs supported improved operating margins at Caraíba. At Tucumã, we began the quarter on a strong note, completing our first 24-hour shift of continuous mill operation and producing our first saleable concentrate in July. This positive momentum continued through most of August as we gradually ramped up mill throughput. However, as we approached higher throughput levels in late August, we encountered intermittent voltage fluctuations on the regional third-party power grid, which limited our ability to sustain higher throughput levels continuously. Initially, we were informed that the voltage fluctuations were due to regional wildfires, which led power utilities to reduce voltage throughout the transmission lines. Following a decrease in wildfire activity in the area, however, it was struck by a severe windstorm causing a 10-day power outage that impacted industrial power consumers, including our Tucumã operation. After power was restored, we safely restarted mill operations on October 16th. However, as we ramped up mill throughput once more, we have observed the recurrence of voltage oscillations initially attributed to wildfires. While the root cause remains under investigation, we've promptly deployed an engineering team to implement a mill power management solution that allows for continuous plant operations despite minor voltage fluctuations. Since implementing this solution last week, the plant has maintained continuous operations and is increasing throughput daily, advancing toward full capacity. Due to the implemented power disruptions, total mill throughput and consequently, copper production for the third quarter was below plan, with throughput totaling 110,788 tonnes and copper production coming in at 839 tonnes of copper in concentrate. The power issues encountered from late August through most of October have also extended our ramp up to commercial production. As a result, we are revising our full-year copper production guidance for Tucumã to a range of 8,000 to 11,000 tonnes in concentrate. In light of the anticipated delay in achieving commercial production, we are narrowing our C1 copper cash cost guidance to include only Caraíba, where we are maintaining cost guidance at $1.80 to $2 per pound for the reasons I outlined earlier. Before discussing Xavantina's performance, I'd like to briefly address our expectations for copper production in 2025. While we are still finalizing our production numbers for next year's budget, we anticipate that Caraíba will initially underperform relative to previous guidance as a second development contract ramps up in the first half of the year. However, we expect Tucumã's production to trend towards the higher end of previous guidance due to positive grade reconciliation. Overall, at this stage, our preliminary production profile for 2025 suggests production will generally be in line with our previous guidance. Turning now to our Xavantina operations, we delivered another quarter of strong performance with gold production totaling 13,485 ounces. As mentioned on our second-quarter conference call, gold grades were expected to be lower in the second half of the year, leading to decreased production and higher unit costs in the third and fourth quarters. Consistent with these expectations, our third-quarter C1 cash costs and all-in sustaining costs for the quarter came in at $539 and $1,034, respectively, per ounce of gold produced. For the full year, we are reaffirming our increased gold production guidance range of 60,000 to 65,000 ounces and maintaining our reduced cost guidance range of $450 to $550 per ounce for C1 cash costs and $900 to $1,000 per ounce for all-in sustaining costs. Before I hand the call over to Makko and Wayne, I'll briefly cover our quarterly financial results. Our financial performance for the quarter reflects an expansion of operating margins, driven by a significant reduction in unit costs at our Caraíba operations and higher realized gold prices at Xavantina. This margin growth led to quarterly operating cash flows of $52.7 million and adjusted EBITDA of $62.2 million. Our liquidity position also remains strong with total balance sheet liquidity of $125.2 million at quarter end. As we continue ramping up production at Tucumã, we believe we reached the cash flow inflection point in October and anticipate building additional liquidity throughout the end of the year. I'll now pass the call to Makko to discuss our operating results in more detail. After which, Wayne will provide more detail on our financial results.

Thank you, Dave, and good morning, everyone. Before commenting on our third-quarter operating performance, I want to start by saying that I'm truly honored to have been appointed the next CEO of Ero Copper. Having been with Ero since before our IPO, I take immense pride in what we've been able to achieve together over the past eight years. We have a strong underlying asset base, an outstanding portfolio of growth projects in Brazil, a proven mine-building team, and an extremely dedicated global workforce. I'm excited and deeply committed to continuing to serve our shareholders and to lead the sustainable execution of Ero's next stage of growth. Switching gears back to our operations and starting at Tucumã, as David mentioned, we navigated a highly dynamic ramp-up environment over the past few months due to intermittent voltage variability that was compounded by a major windstorm-related disruption in early October. While these obstacles created some setbacks in the pace of overall ramp-up progress following a very successful July and August, I'm proud of the resilience of our engineering, project, and operational teams on site, who in a joint effort with other major industrial users in the region were able to safely restore power to the site in just 10 days. In parallel, over the past few weeks, we worked closely with our automation partners and our broader engineering group to adjust our mill drive to accommodate this voltage variability. I'm optimistic about the progress we are seeing and the achievements we've been able to sustain at higher throughput levels at Tucumã since the implementation of this solution. It is worth mentioning that our recoveries and concentrate grades have continued to remain at or above design levels. During the second half of October, following restoration of power to the site, we produced more copper from Tucumã than all of Q3, averaging recoveries of around 90% and concentrate grades above our design target of 25%. With the capital spend of Tucumã behind us and copper sales increasing, we're confident that Tucumã is going to be a fantastic operation. At Caraíba, we saw a notable improvement in production and operating margins relative to the second quarter, driven largely by increased grades from the Pilar and Vermelhos mines. However, as Dave mentioned, our ability to execute on the plans we developed for the third quarter was impacted by the underperformance of a third-party development contractor in the Pilar mine. The lower achieved development rates have now been reflected in our revised guidance range for Caraíba. To improve access to high-grade stopes and increase operational flexibility, we are mobilizing a second third-party contractor to the site by year-end to support our development efforts in 2025. At Furnas, I am pleased to report that the Phase 1 work program has begun in earnest, with drill rigs mobilized to the site in October and the first drill core of our program now coming to the surface. Our primary focus for the remainder of this year and through 2025 will be to complete the 28,000-meter Phase 1 drill program and complete the scoping study as contemplated in the earning agreement. I will now turn the call to Wayne to discuss our financial results.

Thank you, Makko. As Dave highlighted, our third quarter financial results benefited from an expansion in operating margins driven by a significant decrease in unit costs at Caraíba and higher realized gold prices at Xavantina. This resulted in higher adjusted earnings before interest, tax, depreciation, and amortization of $62.2 million and adjusted net income attributable to owners of the company of $27.6 million, or $0.27 per share on a fully diluted basis. During the quarter, we took advantage of the rally in gold prices by opportunistically entering into zero-cost collars on 2,500 ounces of gold per month from January 2025 to December 2025. These contracts establish a floor price of $2,200 per ounce and a ceiling price of $3,425 per ounce, allowing us to participate in gold price increases up to a level that is over 20% above the all-time high reached in October 2024. The total hedge volume of 30,000 ounces represents just over 50% of our projected 2025 gold production at our Xavantina operation. With respect to our foreign exchange hedge program, we reported an unrealized gain of $9.8 million and a realized loss of $3.4 million for the quarter. The total notional value of our foreign exchange derivative position through quarter end was approximately $327 million, consisting primarily of $315 million in zero-cost collars with a weighted average floor and ceiling of BRL 523 and BRL 608 per U.S. dollar, respectively, extending through the end of 2025. Our liquidity position at the end of the quarter remained strong at approximately $125 million. As Dave mentioned earlier, we believe we have passed a cash flow inflection point in October and expect our liquidity position to meaningfully increase as production and concentrate sales at Tucumã ramp up. I'll now pass the call back to David to share some closing thoughts.

Thank you, Wayne, and thank you, everybody, for joining us today. Before I move into the Q&A session, I want to take a moment to express my gratitude to the entire Ero team. As I continue to be part of Ero's growth journey, I am more excited than ever about what lies ahead for us. I want to extend my best wishes to Makko and Gelson as they step into their new roles. I have full confidence they will exceed all expectations. I'd also like to thank Noel for his dedication and partnership over the past eight years. I'm incredibly proud of what we have achieved together, and I wish him the best in his next chapter. Now I'll hand the call back to the operator to open the line for questions.

We will now begin the question-and-answer session. Our first question comes from Ralph Profiti with Eight Capital.

Thanks, operator. First off, David, Makko and Gelson, I offer my congratulations on the appointments, and Noel, congratulations on his retirement. Firstly, on Caraíba, if I may. It sounds like the contractor issues are going to have sort of a knock-on effect on dilution versus plan and reconciliation versus plan. I'm wondering if that's kind of what you meant by, sort of, the underperformance in the mine plan, not only in Q4, but sort of the first part of 2025. And if you can help me understand kind of what degree versus plan are we impacting dilution and reconciliation?

Yes. Thanks. Good question. And just to clarify, the issue with third-party development doesn't have to do with dilution or any modifying factors for the stopes. It more has to do with our ability to increase operational flexibility and access additional high-grade stopes that we had hoped would be in the plan for the second half of this year. Those are being shifted out into the first half of next year. And obviously, there's a knock-on effect to the entire plan with the underperformance of those development rates. So just to be clear, there's no impact on dilution, reconciliations, or anything with respect to the stopes that are in the plan. It more has to do with the access and timing of getting to those stopes and mining that safely and successfully.

Okay. Got you. Yes. Thank you for that clarification. And just coming to Tucumã and Power. In the prepared comments, it sounded like the trips and these oscillations were happening at higher throughput. And I was just wondering, was Tucumã at the entire allotment of its 25 megawatts on the grid at the time of this disruption? And the reason I'm asking is whether or not these are sort of structural and systemic issues that perhaps require capital, and as part of your investigation happening with the public utility, could there be some capital needed to ensure long-term reliability of the system?

It's a really, really good question. With respect to the power grid and what is being done, it's a little bit more complicated in terms of how the whole power grid works up in Pará because there are three separate power providers. Our power provided ties into another network that on which this oscillation issue occurs. Frankly, we became aware of it through our partners at Vale Base Metals once the Onça Puma mine came back from maintenance and started drawing power back from increased power from the grid. The good news is that this is a situation that Vale had been dealing with historically. They have been able to put in systems in their own operations to deal with this issue. We have worked with our contractor, ABB, to develop a solution around this. For us, it really only affects our mill. It does not affect the rest of the operations. And so with regards to the mill, we have worked with them on software updates regarding that, but we're not going to rest on that. Similar to Onça Puma and some of the Vale operations, we are looking at putting another solution in place. The capital cost on these things is not excessive; it's a small amount of money, approximately $1 million, regarding putting one of these systems in. I can leave it to Makko to talk more broadly with regards to what that system looks like and how it performs. Yes. It's a good question. I think the main thing to take away from it is that the timing of the voltage oscillations that we experienced were coincident, although we're still working with our increased ramp-up to understand that. The solution itself, as Dave mentioned, two things were done. We immediately started engineering a contingency plan for a longer-term installation of a series transformer that allows us to accommodate that voltage volatility at our substation. But in parallel, working with ABB Engineering groups, we implemented the solution at our mill to accommodate the variability there. So I'd say the engineering for the long-term solution has been in progress. At this stage, we view that as a contingency plan, not required based on what we've seen over the last week. But obviously, we're going to continue to monitor that and evaluate the implementation of that solution. The main message to take away from this call is that the permanent fix, if required, is not a significant investment. It's around $1 million.

Got you. Okay. Yes. Helpful answers. Thanks very much.

And then the next question comes from Guilherme Rosito with Bank of America. Please go ahead.

Hi. Thank you. Good morning, everyone. First, I'd like to also congratulate Dave on your journey and wish you the best of luck in your new challenges. And also, Makko, I wish you the best of success in your new role. So my first question is on Caraíba. Just wondering if you could provide a bit more detail of what you guys are seeing in this new guidance. The top range is where you're targeting then have some room to maybe still have some underperformance and still meet guidance? Or are you targeting the mid of the guidance, and is there upside risk to the top? Then into 2025, when you talk about underperforming in the first half, should we expect something on the lines of the top end of the guidance? And just to understand, what is the structure of what's going on there? And what is circumstantial in terms of the contractor delays that we can look to the coming years before the shop season?

Yes. So great question. I'll take the first part of that, and there were a few component parts of the question. So if I miss anything, feel free to jump back in and let me know. I think the primary question was on what's systemic versus structural or temporary in nature. I think truly, the development delays that we're seeing we see as a moment in time in terms of our ability to have enough flexibility in the Pilar mine to continue to access high-grade stopes. So we see that impacting, as Dave mentioned in the prepared remarks, we see that impacting, let's say, the first half of 2025. It's going to be a few quarters to get things back on track there. But overall, we're not seeing a major structural change in terms of the production volumes that we have over the next few years from the Caraíba complex. Together, as I said, it's impacting this year because of that underperformance relative to our expectations. We see that impacting in the next few quarters. But by the second half of 2025, I think it's fair to say that we expect to be back in a good position with respect to operating flexibility around these high-grade stopes. That will be aided by the efforts of a second third-party contractor that we're bringing on board. I think that was probably covered a few of the different questions that were asked. But maybe before we get into capital allocation, maybe just pause there and see if there are any questions on the operating side that weren't answered.

No, I think that was great, Makko. And just one thing to make it clear. When you guys look at the guidance this year, is the top end where you guys are targeting and then have some room now? Or are you targeting the middle of the range and then have some upside in reaching the top end?

It's a great question. We have a few months left in the year, and we've allowed some flexibility in our production at Caraíba. However, I prefer not to comment on whether we are aiming for the top or bottom end of the range, as it is currently quite narrow.

Let me just add that we've just finished October. According to the revised plan, the team performed slightly better than expected. Makko is cautious because we want to avoid any overreaching. Regarding the plan that Gelson implemented since his arrival, we are on track to achieve our goals. October exceeded our expectations. We will look at how November turns out. The focus is on getting the team to stay on course, improve each month, and make progress. We've included conservative estimates in this plan. As senior leaders, we would prefer the team to exceed expectations. October was a positive beginning.

Capital allocation.

Sure. Regarding capital allocation, our top priority will be to pay back the outstanding revolver. Once we are confident that Tucumã has reached commercial production and is operating well in 2025, we can begin discussing the best ways to manage the excess cash flow we anticipate generating. This is an ongoing and active discussion at our Board. I believe that next year we will be able to start developing some plans for returning cash to shareholders.

Great. Thank you very much, guys.

And the next question comes from Connor Mackay with Ventum Financial. Please go ahead.

Thanks, operator, and I echo the comments of congratulations to Dave, Makko, and the rest of the team on your new appointments. Just wondering at Pilar, what are the cost implications you guys are anticipating of adding the second mining contractor? Is that going to impact long-term sustaining capital or operating costs going forward?

It's a great question, Connor. I think it's important to note with respect to third-party contractors that bringing someone on board in 2025 was always part of the plan. We obviously accelerated that into the second half of this year in response to some of the challenges we had in the first quarter. So it's really just a pull forward of that plan. So when looking at our longer-term outlook and plans for the company, we always had a development contractor in place starting in 2025 to increase the rate of development. We've had a third-party development contractor, in fact, the same third-party development contractor operating successfully throughout our operations for the last several years. So this isn't something new to us. And as I said, it was always part of the operating plan. The idea with the second third-party contractor isn't so much to increase the rate of development versus what we have planned. It's more to distribute the load as a risk mitigation measure more than anything else.

Got it. Thank you. Tucumã, so I assume with the comments surrounding targeting the upper end of 2025 guidance, production guidance out of Tucumã, you're fairly confident that commercial production is within reach in the near future, probably late this year or early next year if I'm reading that correctly?

Yes. So let's be clear. Where we are right now, and we had to make sure everybody understood with regards to what we said, our preliminary work that we're doing right now is showing exactly what we said with regards to general guidance for next year. At the moment, you are correct. We are working. The mill is now in continuous operation, and we are not seeing any voltage shutdowns of the mill. Makko and the team are now slowly ramping up that mill to commercial production levels. As I anticipated, I hope that we will be at commercial production within the next couple of months. It may slip into early 2025; our hope is it's not. That's why we are using terminology like 'preliminary' in general at this stage. Once we are better suited, once we've got through the next month with continuous operations and, as we said, continuing to ramp up through commercial production levels, then we'll be in a much better position to have a fruitful conversation with everybody regarding that. And that will dictate our guidance that we will release in January of next year. But as it stands right now, based on the runway we see going forward, what we see is there's no reason to change our general guidance for next year.

Got it. Appreciate the clarity there. Thank you. That’s all for me.

And the next question comes from Roald Ross with Clarksons Securities. Please go ahead.

Yes. Good morning, guys. Congrats on the quarter and congrats on progress with ramping up. So my first question is on Caraíba. I'm just curious if you can provide some color on the cash cost into the next year after having reached this low level.

Yes. Look, I think from a cash cost perspective, there are a couple of things that are creating some good tailwinds for us. Again, I mentioned this last quarter, although it didn't come up this quarter. In early last year, we started what we call our full potential program. We've seen the benefits of that quarter-on-quarter. So we're continuing to get supplier costs down. I would say, specific to Q3, we started to see the full benefit of improved treatment refining charges, specifically related to the overall treatment and refining charges coming down, as David mentioned. It's important to note that the strength of the gold price continued to benefit us significantly in Q3. And we also saw a weakening of the BRL during the quarter, which, if you follow the Brazilian reals here over the last 24 to 48 hours, has continued to be in a great spot for us in terms of improving margins relative to our expectations early in the year when we put our budget together. So I'd say, major tailwinds that we're continuing to experience include the TCRCs, strength of the gold price, and the weakening of the BRL, overall tailwinds we expect to continue for the next couple of months.

Great. Thank you. And also on the realized copper price, it seems like for this quarter that the discount looking at the three-month LME is a bit bigger compared to last quarters. Is that something to comment on? Or is it just a coincidence? Or should we sort of think that this discount could also be this wide going forward?

No. Look, I mean, we had lots of commentary on previous calls about this. Really, if you look at Q3, the copper price did slide in Q3, and so all of that is driven around when we ship concentrate. We're not a huge producer in terms of volume compared to some of our peers. So a lot of it is driven by the timing of shipments. And simply, when you can't take a simple mathematic average, when our shipments and the timing of our shipments drive that. Last quarter, it was a little higher than it was the quarter before. Obviously, the quarter before, we saw a very significant strengthening copper price in Q2. I would suspect that most copper of our peers had a very tight range on their realized product, but that’s all it is. Nothing significant.

Yes. If you look at Q2, the LME average price was 4.42, and Q3, the average LME price was 4.17, so that's why you would see that change in the realized price, which is related directly to the underlying metal price, offset a small amount by changes in the gold price over the same period of time.

Okay. Great. Makes sense. And lastly for Tucumã, could you give us some color on the sustaining CapEx going forward as you reach nameplate capacity and everything is going as expected?

I don't think it's appropriate to comment on that yet. We are currently working on our plans for next year regarding capital. We don't anticipate a significant change from our previous projections for capital. Costs have risen compared to when we conducted the feasibility study, which is a general trend in the sector. I will hold off on further comments until we release our formal guidance in January. Our current focus is on ramping up production and achieving commercial production levels. I recommend we revisit this topic in January when we provide our full-year guidance for '25, as we will have more clarity on what sustaining capital expenditures will look like. I expect it to be relatively low in the first year of production because we are dealing with a brand-new plant, and it may increase slightly over time.

Okay. Great. Appreciate that. Thank you.

And the next question comes from Dalton Baretto with Canaccord. Please go ahead.

Thanks, operator. Good morning, guys. I'm a little surprised to see all these operating challenges in Q3, given that we were just on site in the second week of September. I appreciate all the color that's been given on the call so far. But it's still a little bit unclear to me at Caraíba what the root cause of the productivity issue with the contractor is. I mean is this a new contractor? Was there something temporary that happened? Or is this more of a structural thing? And so I'm just wondering if you can comment on that. And then maybe as you're caught up with the second contractor mid-2025, whether you think it's sustainable on a go-forward basis at that point in time? Thanks.

Yes, that's a great question, Dalton. When we discuss underperformance, it relates to our expectations and the performance outlined in the contract we signed. Looking at the weekly increase curve, the mobilization of equipment and training of personnel were all delayed. Recently, the development rates achieved by the contractor are aligning with full mobilization, but that process took longer than expected due to equipment and resource availability in Brazil. This issue seems to be prevalent across the sector, which affected our contractor’s ability to improve development rates. However, in the last couple of weeks, they have increased their productivity and rates, so I don't view this as a systemic problem in the operation. It primarily relates to timing and their capacity to reach higher development rates.

Okay. Thanks for that, Makko. And then maybe switching gears to Tucumã as well. I think Dave said that you've only just installed that power management system last week. And I'm just wondering, I mean, have you tested it at full capacity and with your sort of regional neighbors running at full capacity yet? How comfortable are you that this is a permanent solution?

Yes. Look, it's a great question, Dalton. We took a couple of weeks to implement the solution. The first phase was to really measure the volatility and variability that we saw. To put it into context, the power arriving on-site the 138-kilovolt line, we see millisecond frequencies, voltage dropping to the 120 range. It took a couple of weeks to measure that data fully so that we could engineer the appropriate solution. As Dave mentioned, we put that in last week. We’ve seen the same levels of variability, that 120 range, and the mill hasn't stopped turning. I would say that we're really encouraged, although it's only been a week. If you look at the operating performance since we implemented that solution, we've been able to address the root cause of the issue at our mill. As I mentioned, there's a second solution more expensive around $1 million that we could implement, and we started the engineering of that solution in parallel a few weeks ago. But we're really encouraged by the results we've seen with just the bill adjustment that we've done to-date.

Dalton, I know I'll see you tomorrow, but Makko pointed out something we need to clarify. These voltage interruptions are generally 0.7% of a millisecond. They are very brief fluctuations, not lasting for minutes or hours. When we first discussed this with the power provider, they indicated there was no issue on the line because their equipment couldn't detect that level of volatility. The problem was related to the software managing our mill motor, which had built-in safety features for voltage changes down to that millisecond. Essentially, if we experienced an interruption of about 0.7 million seconds, the mill would enter standby mode, requiring a physical restart. However, the restart process for the entire system could take another 15 minutes to half an hour. When this happened repeatedly throughout the day, it significantly affected our ability to operate efficiently. We managed to run between these interruptions at capacity thanks to the safety equipment. However, on average, our operations were impacted because the mill entered safe mode. The ABB solution we implemented extends the safety margin concerning fluctuations. Now, the mill motor won't enter safe mode during a voltage drop. It still provides protection, but minor changes in voltage, which we cannot see, are simply fluctuations over milliseconds. Essentially, we've adjusted the software to lessen its sensitivity, allowing the mill to operate without going into safe mode when a voltage drop occurs.

That's great color, Dave. Thank you. That sounds like more of a growing pain type issue as opposed to a more structural issue. I appreciate that.

Correct.

That’s all for me.

Correct.

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

Thanks, operator. Again, thank you, everybody. This is the last time I will be leading one of these. The next quarterly call will be Makko's lead. I thank you all for those who have been following us over the last eight years, for the length of time you've put up with me, and for those new people who are following us in the newer times, I look forward to meeting some of you if I haven't met you before, but certainly supporting Makko in his role of running these quarterly earnings calls in the future. So thanks very much. Enjoy your day. Bye-bye.

This brings an end to today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.