Ero Copper Corp. Q4 FY2024 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Fourth Quarter 2024 Operating and Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. I would now like to turn the conference over to Courtney Lynn, Executive Vice President, External Affairs and Strategy. Please go ahead.

Thank you, operator. Good morning, and welcome to Ero Copper's Fourth Quarter and Full Year 2024 Earnings Call. Our operating and financial results were released yesterday afternoon and are available on our website along with our financial statements and MD&A for the three and 12 months ended December 31, 2024. A corresponding earnings presentation can be downloaded directly from the webcast and is also available in the Presentations section of our website. Joining me on the call today are Makko DeFilippo, President and Chief Executive Officer; Wayne Drier, Executive Vice President and Chief Financial Officer; and Gelson Batista, Executive Vice President and Chief Operating Officer. Before we begin, I'd like to remind everyone that today's discussion will include forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. For a detailed discussion of these risks and their potential impact on our business, please refer to our most recent annual information form available on our website. Unless otherwise noted, all figures discussed today are in U.S. dollars. With that, I'll now turn the call over to Makko DeFilippo.

Thank you, Courtney, and thank you, everyone, for taking the time to join us today. As we previously released operating results in February, I thought I would take a moment here to outline our strategy, reflect on some of Ero's achievements in 2024 and set expectations on cadence for 2025. First and foremost, Ero is an incredible business. We have a committed leadership team, a passionate workforce, a diverse portfolio of operating assets, and an enviable long-term growth project in Furnas. It is an honor to be stepping into this role at such a pivotal time for the company. There are several moving pieces in our portfolio over the next few quarters, which we will have ample time to address on this call, but our near-term strategy is simple and can be summarized by four steps. Step one, achieve commercial production at Tucuma; two, deleverage our balance sheet; three, aggressively advance the long-term growth initiatives we have in our portfolio, including our partnership on Furnas; and four, initiate returns to shareholders. So with that said, let's start with Tucuma. And before diving into the challenges we've worked through, I want to highlight some key positives. Since completing the project on schedule last year with a local workforce and doing it without a single lost time injury, our mining operations have continued to track ahead of schedule. The grades from our infill drill program have been higher than we expected, and of particular note, our process plant has consistently achieved at or above design net recoveries and concentrate grades for months now. I am deeply proud of these achievements. At the same time, I acknowledge we've had several challenges that impacted production, both outside and inside our mine gate. External to our operation at Tucuma, we faced a multi-week power outage due to an extreme weather event, as well as extended periods of low power quality, which required intervention. Since resolving these factors, we encountered conventional teething pains as we ramped up throughput volumes. These teething pains can broadly be described as material flow constraints, which range from minor equipment issues such as valve dimensioning, small component and pipe weld failures, as well as more substantial constraints, including damage sustained to one of our three tailings filters, which impacted operating flexibility in that portion of the circuit. While the dollar quantum for these fixes and adjustments is small on the order of $2 million, each one of these adjustments required dedicated engineering, manufacturing, delivery to our site in Para and installation during a scheduled maintenance period. This is a long-winded way of saying they all required time. Working closely with our operational teams and third-party providers at the end of last year, we developed a plan to implement these changes during two extended periods of planned downtime in January and February. These shutdowns were completed, and I'm pleased to report that we are already seeing substantial improvement with performance strengthening from late February into March. The final repair to our third tailings filter remains on track for completion by the end of Q1. With these improvements, either completed or on track for completion this month, we are already seeing and expect to continue to see increased plant reliability and throughput volumes and consequently, increasing production beginning in the second quarter. I want to stress this production cadence is aligned with our reaffirmed full-year guidance. Switching gears slightly to production cadence at Caraiba and Xavantina for different reasons, we expect Q1 to be the softest of the year as we work to set these operations for long-term success. At Caraiba, as I outlined on our Q3 conference call, we only expect to see the benefit from additional development we are doing at Pilar to emerge over the next several quarters. Mobilization of a second development contractor is well underway. And if you have any specific questions on how that work is progressing, Gelson can provide details during our Q&A. At Xavantina, we are working to transition the mine to a fully mechanized operation to increase productivity, reduce costs and most importantly, reduce exposure to our workforce, which is our top priority. We have a capital investment cycle occurring at Xavantina this year, which includes the purchase of equipment to complete the mechanization of the mine, ventilation and cooling upgrades, as well as an asset integrity program to ensure that we can operate through the duration of our now extended reserve life. Again, it is worth noting that our full year guidance, including elevated all-in sustaining cost guide for 2025 reflects these investments. We are excited about the future prospects for the Xavantina operations and see considerable potential for further growth. For both of these assets, we expect softness to be isolated to the first half of the year as these changes are implemented and expect the impact to be the most evident during the first quarter. Again, our guidance ranges reflect this. With that backdrop, let's discuss the second step of our strategy, deleveraging the balance sheet. There are two key points to highlight here. Firstly, we see a clear pathway to an inflection as Tucuma production ramps up, and we expect a fairly significant deleveraging to occur with the achievement of commercial production. Near to medium term, we are targeting a normalized net debt leverage ratio of 1.5 times. And while the pace of achieving this milestone will be influenced by copper price, we are confident that the quality of our assets and consolidated operating margins will support our ability to meet this objective. Second, regarding overall liquidity, we remain well positioned as Tucuma rounds the corner and the recent expansion of our revolving credit facility, which Wayne will touch on. The next two steps of our strategy, advancing long-term growth and shareholder returns will emerge over the coming quarters. While long-term growth remains a priority, we intend to pursue shareholder returns more proactively once we make meaningful progress on deleveraging our balance sheet. Touching on Furnas quickly. We have five drill rigs on site right now and expect to complete the 28,000-meter Phase 1 drill program by midyear and the majority of the 17,000-meter Phase 2 drill program by year-end. In parallel, we are advancing key technical work streams, including a geotechnical program, hydrogeology studies, as well as additional metallurgical test work on the high-grade zones we are drilling. We are also progressing initial mine and infrastructure layout designs to support a preliminary economic assessment, which we expect to complete in the first half of 2026. We have a great partner on this project in Vale Base Metals, and we are very encouraged by the results we are seeing thus far. To ensure we have sufficient time for Q&A, I will leave it there and pass the call to Wayne, who will provide more detail on our financial results.

Thank you, Makko. Our financial results reflect record copper production in the fourth quarter, as well as improved metal prices and stronger operating margins for the full year. These factors contributed to cash flow from operations of $60.8 million for the quarter and $145.4 million for the full year. Adjusted EBITDA for the quarter and year were equally strong at $59.1 million and $216.2 million, respectively. During the fourth quarter, we experienced increased foreign exchange volatility, particularly around the U.S. presidential election. This included significant fluctuations in the U.S. dollar to Brazilian real exchange rate, and the real ended the year at over 6 to the dollar. As a result, we reported realized losses of $5.9 million for the quarter and $8.2 million for the year on foreign exchange hedges we implemented in late 2023 to mitigate the risk of the real strengthening against the U.S. dollar during Tucuma’s construction and ramp-up. At quarter-end, our total notional foreign exchange derivative position stood at $390 million, consisting of zero cost collars with a weighted average floor and ceiling of BRL5.43 and BRL6.49 per dollar, respectively, extending through the end of 2025. These realized foreign exchange losses impacted adjusted net income by approximately $0.06 per share for the quarter and $0.08 per share for the year. As a result, adjusted net income attributable to the owners of the company was $17.4 million in the fourth quarter or $0.17 per diluted share and $80.4 million for the full year or $0.78 per diluted share. Our liquidity position remains strong at approximately $90 million at year-end. As noted, in our financials, we further enhanced our financial flexibility shortly after year-end by amending our existing credit facility to support our expanded operating footprint. This amendment increased total commitments from $150 million to $200 million, extended the maturity date from December 2026 to December 2028 and secured a 25 basis point reduction in the applicable margin on drawn funds at certain leverage ratios. As a result, our pro forma available liquidity at year-end was $140.4 million. I'll now pass the call back to Makko to share some concluding remarks.

Thank you, Wayne. Before we move into the Q&A session, I'll just quickly thank our global management team for all the hard work we have put in over the past several months. We have reorganized our business, made substantial operational improvements across our portfolio, and are well positioned as ever to execute on our vision for Ero. I look forward to delivering continued progress in the quarters ahead. Now, I'll turn the call back to the operator to open the line for questions.

Thank you. The first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Hi. Good morning. A couple of follow-up questions on the ramp-up at Tucuma. I guess the first one, are you still experiencing intermittent power outages that are impacting the mill? Or is that now pretty much settled out?

Yes, thanks, Orest. In our last quarterly conference call, we mentioned that we are still working on implementing a long-term solution, so we continue to see some fluctuations in power quality. I should point out that the adjustments we made at the end of last year have greatly improved our plant's ability to handle that volatility. Last year, when we faced power quality interruptions, we experienced between 15 and 20 mill power trips per day, which was quite challenging. Since making the changes late last year, we've reduced that to only a few a month. We are still aiming for a long-term solution, which we are actively working on and expect to complete soon. As mentioned in our last quarterly call, the investment required is relatively small. We have completed the engineering work and are coordinating with our third-party provider to implement it. This installation will take place off-site, and we do not anticipate any interruptions to our operations moving forward. However, it's the right long-term investment to make.

So should we expect that the off-site solution will be completed by the end of Q2?

Yes, we haven't observed any impact on our progress in ramping up power quality as we emerge from the January-February shutdowns, thanks to the changes we implemented in the fourth quarter.

Okay. And you mentioned the tailings filtration issue, I think expected to be resolved by the end of the quarter. Anything else that's notable at this point that we should be thinking about that could impede the ramp-up beyond sort of your normal teething pains?

Orest, that's a great question. There's nothing significant that we see currently. Like with all ramp-ups, there's some uncertainty in the pace once we navigate the challenges ahead, which we have put considerable effort into addressing in Q3 and Q4. So, I can confidently say there’s nothing of note in our path right now. However, we were careful in setting our guidance range for Tucuma to account for some uncertainties in resolving these issues. Overall, things are going well, and we are satisfied with the progress following the shutdowns in January and February, with no new significant concerns at this time.

Okay. And just one more quick question. If we start to see some volatility in the copper price and there are some initial challenges with the ramp-up, could you remind us what the order of operations would be regarding financial measures to protect liquidity? I assume that might involve cutting exploration and other activities, but I'm curious about the priority you would establish if necessary.

Yes. Look, I mean, I think I said in the call, we're pretty confident where we're at. Obviously, copper price uncertainty remains topical. I think the reality is where we're at now with the expanded credit facility, we feel comfortable that we can execute on our strategy, particularly with Tucuma running the corner here. As you mentioned, we have some levers in our portfolio, particularly around the work we're doing at Furnas, as outlined, we have 40,000 meters of drilling planned this year. Our criteria and under the earn-in agreement we are only required to do 28,000 meters of drilling. So we've got quite a bit of flexibility on those work programs. There are some other areas that I think we're investing for the long term that are really important that we'd like to continue, which is infill drilling and deepening, obviously, working hard to get the shaft completed at Pilar. Those are all some of the levers we have on the investment side. Again, we'd like to keep those programs going. They're reflected in our guidance ranges for the year, but certainly some flexibility on that side. We also have, as I outlined, a pretty large investment cycle at Xavantina this year. We continue to be frustrated by the value that we get for that asset in our portfolio, and we have a great partner there. So we could potentially look to isolate that from our CapEx spend for the year. Again, all these longer-term solutions or all these levers, I think, are about dislocations of value and we feel pretty comfortable with where we're at right now.

Thank you. Appreciate the color.

The next question comes from Guilherme Rosito with Bank of America. Please go ahead.

Hi. Good morning. Thank you for taking my questions. So I have two questions. First is on the C1 guidance. I just wanted to go over and understand what's driving the large C1 increase this year, especially as we consider at $570, $575. And you should have some volume improvement throughout the year, especially in the second half. So just trying to understand what's driving? How should we expect C1 throughout the year? And then my second question is on Xavantina. I just wanted to understand regard the large increase in costs this quarter. The C1 increase, but the increase is quite substantial. So I'm just trying to go through that as well. Thank you.

Yes. Thank you. So let's start with Caraiba and C1. Great question. Thanks for raising it. So C1 guidance for the year, I would say, that if you look back at history, partly because of the depreciation of the Brazilian real against the U.S. dollar. We've been consistently, I'd say, fairly conservative with FX when we put together our guidance for the year. Obviously, with the BRL on the path that it is on now, we expect that to benefit our C1 cash cost relative to our guidance range, which was done in a lower BRL, but given the volatility in diesel prices and kind of where we see our business, we felt comfortable with the range we put forward. And certainly, the FX. The macro environment is highly uncertain right now, and we are pretty thoughtful about putting our C1 cash cost guidance together for both assets. But I would say the biggest drivers are going to be FX, as you mentioned, being substantially more conservative than spot pricing on the BRL. We're also mining our contribution from the deeper part of the mines increased year-on-year. So that's driving additional costs in our business. And then grades as well. So a bit lower grades across the portfolio. A combination of factors there, Surubim and Vermelhos, obviously being top of mind on driving a bit lower consolidated grade. And that all has an impact on our operating margins at Caraiba. Again, I think we've been pretty thoughtful about putting the range there and some of the levers that we have in our portfolio that we're working on. I think I've talked last couple of years about the full potential program that we initiated across the company. We've continued to work on that. And I expect to continue to see cost reductions, particularly coming out of this reorganization that we did here in the first quarter. So stay tuned. We're pretty thoughtful about our guidance range there at Caraiba. On Xavantina all-in sustaining costs, a couple of things there. It's really just a relatively small operation, so high grade, small tonnage. And when you get fluctuations in grade or volume because of just because of the denominator being small, it tends to magnify the impact on all-in sustaining costs in C1. And those are the main drivers there. So I'd say it's volume related, nothing intrinsic to the asset. When you look ahead to our 2025 guidance, as I mentioned, the biggest step-up in all-in sustaining costs year-on-year is all the investments that we're making in asset integrity, mine improvement, and that's fully reflected in our guidance and in our all-in sustaining cost.

Great. That’s very clear. Thank you guys.

The next question comes from Craig Hutchison with TD Cowen. Please go ahead.

Hi. Good morning, guys. I just wanted to circle back on the power situation at Tucuma. Can you just give us an explanation with regards to what the off-site power solution is? And is there any further work you guys are doing on the on-site power solution, like is there a potential for some standby power point in the future?

Thank you, Craig, for the questions. Let's begin with the straightforward one before diving into the technical details regarding the electrical system. Currently, we are not considering on-site energy alternatives such as generators. We believe the current situation does not necessitate such measures. While future implementation is possible, we do not see an immediate need for it. I want to recall the windstorm from last year, which not only disrupted our operations but also left 230,000 people in the region without power. This was a significant infrastructure failure, and we view it as an isolated incident that is unlikely to recur. Regarding power quality, I'll explain this as clearly as I can. If you have further questions later, I'm more than willing to discuss the engineering details. Essentially, we are evaluating two solutions to determine which is the most cost-effective based on our power monitoring work. Both options involve a system of capacitors or batteries that manage energy flow: they absorb energy during overvoltage situations and release it during undervoltage episodes, ensuring stable power quality downstream, despite potential fluctuations entering the equipment. This is a very basic explanation of a complex electrical engineering issue. Feel free to reach out to me afterwards if you'd like a more detailed discussion.

I appreciate that. And maybe just one follow-up question for me. Just on Xavantina, you mentioned I think Q1 is going to be the biggest quarter. Is Q1 going to look a lot like Q4 with respect to the grades and throughput? Or should we expect maybe slightly lower grade, very higher throughput?

Yes, I expect it to be down quarter-on-quarter. Over we're in early March here. The team is working still on achieving a good plan. I think there's a number of factors there that are contributing. Just as a reminder, Xavantina had significant grade outperformance for I think the better part of two years relative to plan, and we obviously see that grade coming down just based on the levels that we're operating. And then some of the, again, renewed focus on asset integrity and some operational changes that we made on procedures and protocols and preparation for mechanized mining. We pushed out some of the pillar recovery that we had in Q1 and that we did in Q4. Those are very high-grade areas. We have a plan that we invested in, that process involves putting paste it and then recovering those hybrid pillars. And we've been very successful at doing over the years, but the timing of that pillar recovery has tended to influence the consolidated grade quarter-on-quarter. The area that we've outlined it was Q1 is really about setting up some of those areas to make sure that we can do it safely and effectively. And so I would expect a drop in tonnage as we set that mine for mechanization and do some additional development, change the interlevel spacing and then a bit on grade just because of the timing of that pillar recovery program and some of the additional work that we're doing there.

Thanks, guys.

The next question comes from Marcio Farid with Goldman Sachs. Please go ahead.

Hi. Good afternoon. Thanks for the time. I don't feel like you're going to have a lot of focuses on Tucuma's commercial declaration, Caraiba spotlight as well, the leverage improvement. I'm just wondering, I mean, do you need to see all those four strategic pillars or capital allocation drivers can be solved before we take into next steps, either M&A or further partnerships as well. Can you feel that new levels happening before you actually take the next steps, please. Thank you.

Thank you for your questions. I didn't catch everything clearly, but I noted a few points to address. I may have missed some details, so please let me know if there's anything I overlook. You mentioned prioritizing certain steps and potential M&A opportunities related to our ongoing growth. Our executive team's primary focus is on the four steps we've outlined. Achieving commercial production for Tucuma is essential; it's the key to advancing the next three steps of our strategy. Right now, that is our main priority. We are continually assessing opportunities through our corporate development team, who are here with me. Our stakeholders and shareholders expect us to explore opportunities, especially those that are nearby. However, we are clear on our priorities, and M&A is not our immediate focus. That said, we do keep an eye on opportunities to see if they align with our strategy. We believe we have a remarkable development asset in Furnas, which is currently not producing but holds significant promise. As our technical and operational teams delve deeper into this project, our excitement about its potential continues to grow. We have a strong partnership with Vale Base Metals regarding this project, and we’ll keep communicating our progress in the upcoming quarters. Again, our focus remains on the four steps we've laid out. Unless there’s a substantial value shift, which seems unlikely given our current priorities. To address another point, M&A will not occur before Tucuma reaches production. I don't foresee us realizing value from that happening. So, to be clear, it won't happen.

Perfect. Thank you.

The next question comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

Thanks, guys. Makko, congrats on your first call as CEO. A couple of questions from me. I want to start on Caraiba. The second contractor or it sounds like they're mobilized. It sounds like they're going to be done by the end of Q1. What sort of steps are you putting in place to ensure that once they are done and you're back to one contractor that you don't sort of fall behind again?

Yes, that's a great question, Dalton. I appreciate any constructive feedback you might have after the call. Regarding the contractor situation, I’ll begin and then Gelson can provide more details on mobilization. Historically, third-party contractors have been a key part of our operating strategy and fleet, and this has been true even up until 2021. Looking ahead, we anticipate that around one third of our development will continue to involve third-party contractors. Over the long term, we are committed to ensuring that we maintain and even increase our development rates. We have been intensifying our efforts over the years, particularly in areas where we have expanded development. For reassurance, I can confirm that we monitor development sufficiency on a monthly basis, and this is a priority for us this year, especially with the addition of the second contractor. This approach is integral to our strategy and is reflected in our guidance, which I expect will continue to show this focus. Now, I'll pass it over to Gelson for an update on mobilization.

Thanks, Makko. So just to clarify on the second contractor, they're finishing what we call, on-the-job training. It's like a 45-day process, is actually that we do regularly on site. They are in the process of finishing that. We hope to finish that by the end of this month. We're talking about like 290 people, right, and a large fleet. This is a very good contractor has been benchmarking the equipment check. Looking at what you asked about how we're going to make sure that the performance of this contractor will be aligned with our expectation. I think there will be work in separate areas. We've been operating in various areas where we're improving conditions on the infrastructure side, which, of course, impacts the contractor also checking very carefully about the conditions of the equipment that they bring on site, the previous contract that we have in there, they actually did a pretty good job in February so far from what we're waiting for them, mostly related to equipment availability and quality of the equipment, and also the people. So we'll be working very closely with all the operations and the contractor putting this together moving forward. So I expect that, yes, there will be a transition period there, but we expect this development rates to increase further.

Great. Thank you for that, Gelson. And then maybe I can switch gears to Tucuma. Makko, I know you said that you're almost there or pretty much there on the recovery front. On the throughput side, I know you're taking sort of multiple scheduled shutdowns. But when the mill is up and running, can you give us a sense for how it's doing and what sort of the cadence or shutdown is over the next few weeks and months?

Thank you, Dalton. Since we started operating the plant, we have consistently achieved recoveries and concentrate grades that exceed our design targets. In Q4, we approached an impressive 89% recovery with concentrate grades around 2.2%. There are a few factors at play. While we can't account for the shutdowns in January and February, we're working on increasing production volumes at the front of the plant. Notably, even in Q4, the 2.2% copper throughput was about two and a half to three times above the life of mine average feed. Our concentrate filter, which recently exited a shutdown, is performing well and operating close to its design specifications, contributing to strong recovery and concentrate grades. The performance at the front of the plant is perhaps less significant to the overall contained copper, where we are seeing excellent results. We are increasing our performance daily, but I would temper expectations regarding the life of mine average grade remaining at 2.2% copper. In the coming weeks and months, we will focus on slightly reducing the grade while increasing throughput volumes. We expect overall copper production to remain relatively stable. We are still in the early stages following our recent shutdown in late February, and the performance has been encouraging. I am optimistic about what we are observing.

Great. Thanks for that Makko. And then maybe if I can ask one last one. It was interesting to hear you talk about starting to initiate capital returns, particularly given the great profile at Tucuma. I'm just wondering if you could give any thoughts on what form that would take. Are you leaning more towards buybacks, maybe a small dividend, but supplementary depending on performance? Just any thoughts there?

Yes, thanks, Dalton. I think it's a bit too early to discuss payouts. Our focus is on getting Tucuma operational and improving the balance sheet. We are having discussions with shareholders about what that might look like, but let's complete the first two steps of our four-step plan before we have that conversation.

This concludes the question-and-answer session. I would like to turn the conference back over to Makko DeFilippo for any closing remarks. Please go ahead.

Yes. Thanks, everyone. I really appreciate you joining this morning. If you've got any questions, our team is always available, and we look forward to catching up in just a couple of months here. Thanks, everyone.

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