Earnings Call Transcript - ERO Q1 2021

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper First Quarter 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 Noel Dunn, Executive Chairman of Ero Copper for opening remarks. Please go ahead.

Noel Dunn, Executive Chairman

Thank you and good morning everyone. The news release announcing Ero's first quarter 2021 financial results is available on our website. As usual, we will be making forward-looking statements on this call that involve risks and uncertainties concerning the businesses, operations and financial performance of the Company. Joining me today are David Strang, Ero's Co-Founder and Chief Executive Officer; Wayne Drier, Chief Financial Officer; Mike Richard, Chief Geological Officer; Makko DeFilippo, Ero's President and Courtney Lynn, Vice President, Corporate Development and Investor Relations. Before diving into our operating and financial results, I'd like to recognize the board and team at Ero, especially our colleagues in Brazil, who have helped us to deliver a remarkable first quarter, in what continues to be a challenging operating environment. Our team has shown resilience in maintaining focus on our operations and continue to advance growth objectives whilst offering critical support to our local communities. We are optimistic over the near-term with respect to COVID-19. As we are seeing both moderating COVID cases in Brazil and benefiting from global vaccination programs as they roll out. Our strategy has and continues to center upon investing in our own assets to increase production whilst maintaining first quarter operating costs. This quarter is a great example of this, while these efforts continue to focus primarily within the Cortisol valley, where we still see tremendous growth opportunities in front of us. In parallel, we are looking at unlocking value at both the NX gold mine and the Boa Esperanza project, which we expect to provide updates on in the coming months. It is worth noting that in 2017, a feasibility study outlined a fantastic project before any optimization studies, with an after-tax IRR of 32.7% at $3 copper and a BRL exchange rate of 3.80. Copper price aside, we continue to believe the Boa Esperanza project represents a high quality actionable project that is aligned with our return on invested capital focus. With respect to our Q1 results, we reported several record quarterly figures, including copper production of 12,638 tons, C1 cash cost of $0.49 per pound Copper produced, adjusted EBITDA of $86.7 million and an operating cash-flow of $62.1 million. As a result of this performance, our balance sheet has never been stronger with $84.6 million of cash and equivalents and a leading net debt leverage ratio of 0.3 times on a trailing 12 months EBITDA. With that, I will pass the call over to David to provide a brief review and update of our operations.

David Strang, CEO

Thank you, Noel. Our first quarter results were released last night and reflect excellent performance at the MCSA mining complex, driven by higher than planned grades at our Pilar and Vermelhos underground mines and continued improvements in metallurgical recoveries. We processed nearly 600,000 tons of ore at an average grade of 2.3% copper and achieved record metallurgical recoveries during the quarter averaging 92%. I'm pleased to see the overall metallurgical recoveries and concentrate grades continue to improve in parallel with increasing mill throughputs largely due to successful integration of our new signals, which completed commissioning in late 2020 and is performing better than expected. Strong operating performance across the MCSC mining complex contributed to record quarterly copper production of 12,638 tons and record quarterly C1 cash costs of $0.49 per pound of copper produced, a $0.20 per pound improvement compared to the fourth quarter of 2020. Entering the second quarter, we have continued pre-operational activities relating to the restart of the Surubim open pit, which we forecast will commence mining operations during the second half of this year. As we advance the plant for an expanded operational footprint and actively make the first steps in preparing our operations to run at higher mill throughputs, we will undertake consecutive planned ball mill maintenance at the end of the second quarter and beginning of the third quarter. This maintenance is reflected in our full year copper production guidance range of 40,000 tons to 45,000 tons of copper produced, which we expect to be equally weighted between the first and second half of the year. While early in our production cycle for the year, we see opportunities to moderate the second and third quarter impacts of this mill maintenance with higher than planned grades at the Pilar mine, as we saw during the first quarter. These opportunities remain under analysis. Currently, our C1 cash cost guidance range remains unchanged at $0.75 to $0.85 per pound of copper produced. The Panics gold mine also delivered a strong quarter producing 9,451 ounces of gold and C1 cash cost of $487 per ounce, and all-in sustaining costs of $643 per ounce of gold produced. Lower tonnage quarter-over-quarter was partially offset by higher head grades compared to the fourth quarter, along with continued strong metallurgical performance. With respect to full year guidance, we are reaffirming our range of 34,500 ounces to 37,500 ounces of gold produced at all-in sustaining costs of between $875 and $975 per ounce. As Noel mentioned, we continue to actively advance our optimization study for the Boa Esperanza project. We started as a bottom-up analysis last year. The 2017 feasibility study outlined a 7.5 year mine life averaging approximately 21,000 tons of payable copper production per year. With the early results of our team's work, we believe we can significantly improve upon this. In tandem with the optimization studies on the geology and mining side, we are reviewing a redesign of the processing plant strategy and the use of all-sorting technology and several other levers that have not been previously explored. We expect to provide an update on this ongoing work during the third quarter. Lastly, I would like to quickly touch upon our exploration results that were released last week. I believe that last week's announcement illustrates our disciplined exploration strategy continues to demonstrate the Cortisol valley's potential and inherent optionality. We have one of the largest ongoing exploration programs globally, and we are committed to unlocking this value for our shareholders. Our exploration program at our NX gold mine, with drill rigs currently operating, is progressing according to plan, and we expect to provide more color on these results during our next quarterly update as third-party SC labs in Brazil reopened, hopefully clearing a backlog of our pending metallic screen results. With that, I'll now pass it over to Mike to provide some additional context and color to our quarterly exploration news release.

Mike Richard, Chief Geological Officer

Thank you, David. Our exploration program has had a great start to the year, and I am pleased with the results we are seeing come together throughout Cortisol valley. The announcement of the identification of two mineralized systems, Tera diesel and C4, are examples of the systematic work we have completed over the past two years to identify new greenfields mineral districts. So far, we have identified extensive copper mineralization extending up to 2.2 kilometers in the case of C4. Our experience in the Cortisol valley tells us that higher-grade pods occur within broad zones of lower grade mineralization. Context is important, and it is worth reminding everyone that the discovery of the high-grade Vermelhos mine started with the discovery of lower grade mineralization, some two kilometers to the north. Likewise, the first hole we drilled into the new C4 system intercepted approximately 700 meters of multiple mineralized lenses ranging in grade from 0.2% to 0.4% copper. The hole ended in mineralization and the drill results released last week from C4 discovery reflect our first pass review of the system. We will continue to explore these systems and refine drill targets within them using systematic data-driven analysis and the combined use of ground geophysics and borehole electromagnetics. This work is being conducted in parallel with other identified systems and targets in the belt, and drill targets throughout the belt are continuously being prioritized. While the regional exploration program is targeting medium to longer term opportunities, we're also focusing on several near-term opportunities within our portfolio highlighted by the discovery of the Nova zone at Vermelhos and our re-evaluation of the past producing open-pit mines of the company. The Vermelhos, the Nova zone discovery has identified a new high-grade lens of massive sulfide mineralization in an untested area approximately 200 meters below the existing mine infrastructure, extending the grade profile of an overall mine life of Vermelhos. This is a key objective of this year's program, and I am pleased to see a new zone developing. Our past producing mine re-evaluation efforts, which commenced late last year, integrating a number of new regional datasets, is already generating excellent results highlighted by an exciting high-grade zone of over 3% copper identified just beneath the bottom of the Lago da Mina open pit. While this zone existed previously, it was lost within the totality of a much lower grade inferred resource, and continuity of the high grade has never been evaluated, which we are doing now. Within the deepening extensions zone of the Pilar mine, exploration efforts continue to focus on extending mineralization at depth and upgrading the inferred mineral resource within this zone. Through the use of directional drilling technology, which offers greater drill placement accuracy than traditional drilling technology, we've achieved better than expected results, which we look forward to sharing with you next quarter. When viewed in the context of year-round drilling, a strong in-country geology team, and our available excess mill capacity, our programs continue to show the variety of potential resources for future mill feed over a full complement of development timelines.

Wayne Drier, CFO

Thanks, Mike. And good morning everyone, I want to echo Noel and David's comments about the first quarter being an outstanding start to the year. Copper sales volumes were up over 20% quarter-on-quarter while gold sales moderated compared to the fourth quarter. Combined with higher realized metal prices, we achieved record quarterly revenues of $122.5 million, an improvement of 34% over the prior period. Higher copper grade, mined and processed, as well as sustained weakness of the Brazilian real against the U.S. dollar, drove record low C1 cash costs at MCSA during the quarter. It should be no surprise that record quarterly revenue together with these operating costs resulted in record quarterly adjusted EBITDA and cash flow from operations of $86.7 million and $62.1 million respectively. Due to the worsening of the COVID-19 pandemic in Brazil during the first quarter, the Brazilian real weakened relative to the United States dollar after year-end. As such, we recognized realized and unrealized losses on our foreign exchange derivative contracts of $5.7 million and $17 million respectively, and the non-cash $7.8 million loss related to the translation of our U.S. dollar denominated debt held in Brazil. The benefits of sustained weakness of the Brazilian real relative to the U.S. dollar continue to more than offset the impact of our foreign exchange derivative losses as evidenced by this quarter's record financial performance. Our headline net income for the first quarter was $32.1 million or $0.34 per fully diluted share. After adjusting for non-cash items, including the unrealized foreign exchange losses, our adjusted net income was $56.3 million or $0.61 per fully diluted share. In addition to amending our corporate credit facility to extend our debt maturities and lower our ongoing interest expense, we repaid approximately $7 million in short-term credit lines during the quarter. These Brazilian lines have now been fully settled and retired. Our balance sheet is the strongest it has been since we appeared in 2017, with cash and equivalents of $84.6 million and a very impressive net debt leverage ratio of 0.3 times on trailing 12-month EBITDA. I'll now hand the call back to Noel to share some final comments.

Noel Dunn, Executive Chairman

Thank you, Wayne and everyone who joined the call today. Before we open up to questions, I'd like to again thank the team for their efforts in executing on our strategy and vision for this company. With headway being made globally in the fight against COVID-19 and tailwinds building around the green decarbonized world that relies heavily on copper, the future is looking very bright. We have a strong balance sheet, an incredible growth strategy, and a very attractive asset portfolio that we are confident will continue to deliver many more record metrics in the near future. Thanks for joining the call. We will now turn it back to the operator to open up the line for questions.

Operator, Operator

Thank you. We will now begin the question and answer session. The first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw, Analyst

Hi, good morning. I was wondering if we could get some more color on the Boa project. I realize you're working on a study but I'm just curious. I mean, given that the current reserves only represent about 30% of the MNI resources, should we be anticipating a much bigger scale? The project that was envisioned a couple of years ago?

David Strang, CEO

Hey Orest, thanks for the question. Yeah, I think obviously from the perspective of where we stand, we've got to be careful with what we can and cannot say. As I highlighted in my comments, the work that has been completed to date as we progress towards the end game, we've got to study in the way we've looked at resources, the way we've looked at reserves and preliminary production schedules. There appears to be a disconnect or a significant disconnect between the current reserves and resources. I think we're starting to see that differential decline passively. We're very happy, as I said in my notes, with regards to the progress of the study.

Orest Wowkodaw, Analyst

And you indicated that come out in the third quarter, should we take that to mean that would likely come out with your Q2 results kind of an early augment store or actually earlier?

David Strang, CEO

I think it will be after the Q2 results, which will be released at the beginning of August, so we’re going to be a little bit later than that, but certainly in the third quarter.

Orest Wowkodaw, Analyst

Okay. And then just finally assuming the economics look attractive and given that my understanding is the project is permitted, should we be anticipating that this could move into development fairly quickly and potentially as early as the beginning of next year? Or how should we think about this?

David Strang, CEO

I don't think your thinking is too far off from where our thinking is right now. We would certainly like to move the project forward assuming the economics are what we believe they will be, and we are trying to move that project forward as quickly as we can.

Orest Wowkodaw, Analyst

Is there anything standing in the way of development right now? Like are there any social issues or anything that need to get resolved, or could you start building tomorrow if you so chose?

David Strang, CEO

We have constraints. We've always said we've had our construction permit sit with the government agencies. We've been held off in the past because in Brazil, once you initiate a construction permit, you have to build within a two-year period. I’ve revisited that with the relevant authorities in the state, and that process is now moving forward with clearing our construction permits so we can proceed with construction.

Operator, Operator

The next question comes from Alex ClinCheck with CIPC. Please go ahead.

Alex ClinCheck, Analyst

Hi, everyone. And congrats on a great first quarter. I wanted to ask on the grades. So obviously, they're better than we expected in Q1. Would that then align with the mine plan or was that a positive surprise? And how should we think about grades for the rest of the year at MCSA?

David Strang, CEO

Alex, that’s a great question. We are pleasantly surprised with the grades that we're seeing, particularly in the Pilar mining areas that we're currently extracting from. They have been better than we expected. Current forecasts suggest it will continue, but like anything else, we're going to take a cautious approach, but so far, the preliminary work indicates that the grades we're mining for the remainder of the year should remain high or even improve.

Alex ClinCheck, Analyst

Okay, perfect. Thank you for that. In your exploration update, you mentioned a new area at HIG Mill that also had higher grades and was pretty close to infrastructure. When might that make it to the mill? Is that something that could benefit the grade profile this year or is that next year?

David Strang, CEO

I don't think that is in the plans for this year, Mike and the team have to drill that zone off. That will be a focus in the second half of the year. If you were to look at it from a planning perspective, we would anticipate that you would see us moving east zone material further down in the mine's life while looking to replace that with material mined from Novo, as well as the self-corridor. I expect this to happen in about 18 months from now.

Alex ClinCheck, Analyst

Great. Thank you. One more on the exploration side. With the new discovery C4 and Tera Diesel, what should we expect in terms of next steps? Will you move those quickly towards resource or keep testing regionally first? How should we think about that going forward?

David Strang, CEO

I think as you can see in the exploration update, we have teams on the ground conducting extensive work, including electromagnetic surveys. The aim is to start drilling again in the second half of the year, potentially in the third quarter. We currently have rigs at C4 and are drilling there. It's a combination of continuing to work on these identified mineralized systems while also searching for new ones. We hope to aggressively advance our exploration programs while maximizing the conversion of discoveries into resources.

Alex ClinCheck, Analyst

Okay. That's great. Thank you. Congrats again on a great quarter.

Operator, Operator

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

David Strang, CEO

Thanks, operator. We really appreciate everybody's time and consideration in following our company and story. Thanks to all the analysts for the continued coverage. I’d like to reiterate thanks again to our team in Brazil for their outstanding job on another great quarter. We look forward to talking to you in between quarters and at the next quarterly update in August. Thanks very much, operator.

Operator, Operator

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