Q3 2021 Earnings Call
Thank you for standing by this is the conference operator, welcome to the ERO copper third quarter financial and operating 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 to join the question queue. You May Press Star then one on your telephone keypad.
Should you need assistance during the conference call you May signal, an operator by pressing star Zero I would now like to turn the conference over to Noel Dunn Executive Chairman of Aero copper for opening remarks. Please go ahead.
Thank you operator, and good morning, everyone.
The news release announcing <unk> third quarter financial results is available on our website.
As are our financial statements and MD&A for three months and nine months ended September 30th 2021.
We will be making forward looking statements on this call and involve risks and uncertainties concerning the businesses operations and financial performance of the company.
We would refer you to our most recent Aif available on our website SEDAR and Edgar.
For a discussion of the risk factors of our business and the potential impact on future performance.
Unless otherwise noted all amounts discussed on this call are in U S dollars.
Joining me today are David.
David <unk> co founder and Chief Executive Officer, Michael <unk>, President weighing dry, our Chief Financial Officer, and Colombian land, Vice President corporate development and Investor Relations.
Our third quarter it was about the execution of milestones and objectives.
Which are key to our growth strategy.
As a result of our updated bow Esperanza project highlights of this past quarter. We remained focused on creating long term shareholder value by maintaining quality margins and continued to execute upon high return low capital intensity projects.
This formula has been the basis for industry, leading returns on invested capital, which we have generated and as the basis for our approach to future growth as well.
As mentioned the bow Esperanza project serves as a Great example of this formula in addition to doubling life of mine copper production compared to the 2017 study.
We increased annual production volumes.
Increased mine life and.
And have identified additional upside opportunities within the current design that we are well advanced in pursuing.
Importantly, this project is also one of the lowest capital intensity copper development projects globally.
During the quarter, we delivered on three additional milestones integral to our strategy. These include.
Okay.
[laughter] safe conclusion of the two mills shallow replacement at our MCC mining complex and preparation for expanded operations.
The successful commissioning of the phase one cooling plant the first of its kind of the pillar mine.
Three closing the previously announced Gulfstream is royal gold.
And all our team has made significant progress this quarter in positioning our company and the balance sheet for a successful phase of investment and meaningful growth that we expect to spend the next several years.
Looking back at when we acquired our asset portfolio. The goal was to get the MSA mining complex and the Nx Gold mine on a solid footing.
We would say that we would accomplish that goal over the last four years, including the nearly two year backdrop of COVID-19 with more than double production volumes and reserve life at <unk>.
We have developed a robust and low cost operation at Nx gold.
We significantly reduced our unit operating costs across our portfolio.
We've built out one of the largest exploration programs in the world.
We've made meaningful investments to modernize and optimize our processing operations.
We've reinforced and expanded upon our commitments to support our local communities.
And achieved multiple records in the history of our assets with respect to safety performance and significantly reduced our lost time incident rates over the years.
Yeah.
As we turn our attention to the execution of our two main projects over the coming years.
The new external shocks of the pillar mine and the construction of the bow Esperanza project.
Our balance sheet has never been stronger in addition to the strong operating cash flows generated by our mines.
Our balance sheet was bolstered during the quarter due to the $100 million of upfront proceeds received in connection with the Nx Gulfstream.
Gulfstream.
Progress in Brazil on COVID-19 front.
During the quarter has also gone a long way in building our operational resilience.
The case counts have improved throughout the country with a rollout of vaccination campaigns at the federal state and municipal levels. Our colleagues in Brazil have made significant progress in protecting themselves their families and communities in which we operate with over 95% of our mine site employees vaccinated with at least one dose and over 50% of our workforce now fully back.
Natus.
I will now pass the call over to David to provide an overview of our operational performance and then over to Wayne who will cover the third quarter financial performance.
As always.
Our team will be available for questions immediately following this call.
Thank you.
I'd like to Echo <unk> sentiments about how far we have come as an organization and also talk about how far we plan to go over the coming years.
We have built a culture of innovation and optimization and a strong team that will continue to allow us to convert our strategy into reality and shareholder returns.
But the Mcse mining complex, we have a strong and stable foundation that serves as a cornerstone in our vision of building an expanded hub and spoke operating model.
With the ramp up of soybean open pit operations, we are increasing the number of all sources to the mill from two to three.
We also continued to make a meaningful investment in exploration across the cortisol valley with the expectation that the success. We are seeing on the drill bit will translate to additional sources of mill feed overtime.
At the plug in mind, we are finalizing our review of the 2020 shelf design. So the deepening extension project.
While the improved shelf design and larger diameter will require a higher upfront capital investment.
We believe the decision is more than justified by the expected improvements in operating efficiencies and the inherent potential afforded to significantly increase production volumes from pillar of the medium to long term.
Yeah.
Previously mentioned, we successfully completed the second and last phase of mill maintenance at the M. CSA mining complex during the quarter and prepare operation for continued growth of our operation.
Our third quarter results reflect the planned downtime associated with this work and total mill throughput totaled approximately 570000 tonnes grading one 9% copper.
The stability of our increased metallurgical recovery rates across grade profiles was evident again this quarter. Thanks to the recent egg mill installation, which continues to benefit our operations.
Strong copper production of just over 10000 tons was achieved through a combination of favorable grade reconciliations in active areas within the pillar mine and ongoing planning efforts to produce supplementary high grade tonnes from within the upper levels of the mine.
With the completion of mill maintenance during the third quarter, we expect higher mill throughput.
<unk> to drive higher copper production in the fourth quarter, despite lower expected process grades related to the ramp up of processing of ore from the sort of beam open pit.
As a result, we continue to guide towards the high end of our full year production guidance of 42 to 45000 tons of copper.
Our operating costs and Kpis during the third quarter were reflective of lower copper production as a result of reduced mill throughput and inflationary pressures impacting many of our key input consumables.
Well these inflationary pressures have continued into the fourth quarter, we expect our unit cost of M. CSA. This quarter to also benefit from higher mill throughput and copper production rates.
And year to date seaborne cash cost M. CSA that remained below the low end of our guidance range and the expectation that we will deliver strong cost performance in the fourth quarter, we continue and maintain our guidance to the lower end of our full year seaborne cash.
Cash cost guidance range of 75 to 85 per pound of copper produced.
Capital expenditure guidance for the full year has been updated to reflect the acceleration of phase two of our cooling project for the Pilar mine.
Placement of long lead order items for our new external shaft, which we now expect to encouraging the fourth quarter.
And the impact of inflation, and specifically higher consumable pricing on our capitalized development.
The increases in forecasted capital expenditures for the full year at the pillar mine and deepening extension project has been partially offset by Capex reductions in the fourth quarter, it's a mess and soybean as we have prioritized higher return projects.
At our Nx gold operations.
We produced just over 9400 ounces of gold during the quarter and are tracking towards the high end of our full year production guidance for the mine.
Cash costs, all in sustaining costs and operating cost Kpis Nx gold was similarly impacted by inflationary pressures. However.
However, we re prioritize some of our capex activities during the year and shifts shifted some of the sustaining capital to 2022.
As a result, we're lowering our full year all in sustaining cost guidance range to 650 to 725.
Dollars per ounce of gold produced.
Oh Esperanza, we have increased our capital guidance for the full year as we advanced road construction detailed engineering and exploration activities in preparation for a construction decision during the first half of 2022.
For full details of our reaffirmed production guidance cash cost guidance and updated capital guidance can be found.
In our news release and MD&A.
Before I hand, the call over to Wayne I want to recognize the incredible work that we're doing as an organization to support our communities, which is still recovering from the financial toll of the pandemic.
So far this year, we have donated approximately 10000 food baskets to families in need within the area of influence of our operations.
And we expect to continue this program throughout the end of the year.
During the third quarter. We also broke ground on the multiyear 4 million dollar hospital clinic renovation that we expect will greatly improve the access to.
And quality of medical care for all of the stakeholders and the curse of Ali.
Just on a side note.
As this is remembrance day and just.
Like to pass on and remember those who make the ultimate sacrifice.
Over to you.
Yeah.
Thank you, Dave and good morning, everyone.
Our solid operating performance during the third quarter combined with continued metal price strength and higher quarter on quarter copper sales volumes due to a reduction in finished goods inventory drove adjusted EBITDA to $72 $9 million.
Bringing year to date, adjusted EBITDA to approximately $245 million.
We also reported record quarterly cash flows from operations of $157 million, driven primarily by the 100 million.
<unk> cash received upon the closing of the Nx gold stream with Royal Gold.
As a result, we have generated nearly $300 million in cash flows from operations year to date.
I think it is worth noting the accounting treatment for the stream agreement.
The $100 million in upfront cash consideration was recorded on our balance sheet with offsetting current and non current deferred revenue liabilities.
As we deliver the ounces under the stream as we did during the third quarter on a prorated basis to reflect the may 1st effective date.
Revenues for the stream sales will be comprised of two components. The cash revenues based on a percentage of spot gold prices and noncash revenues or the amortization of deferred revenue liabilities related to the $100 million of upfront stream proceeds.
Additional detail on our realized pricing both up for the Nx gold stream. So they know M DNA.
With respect to our foreign exchange derivative contracts, we reported realized settlements during the quarter.
$4 $4 million.
Representing a decrease of approximately $1 $5 million compared to the second quarter, when we opportunistically accelerated to the settlement of a portion of these contracts.
Advantage of temporary strengthen the Brazilian real.
As I've shared on our prior earnings calls.
We continue to expect foreign exchange settlements should amount to somewhere between $4 million and $6 million per quarter provided the Brazilian real stays relatively range bound at these levels.
I would also like to add that these foreign exchange derivative settlements are reflected in our adjusted EPS numbers, but not reflected in adjusted EBITDA as we view the foreign exchange hedging as an ongoing corporate level activity, but not part of our underlying operating business.
Our headline net income for the third quarter was $26 4 million of which $26 1 million or 28 cents per fully diluted share was attributable to ERO copper shareholders off.
After adjusting for noncash components, including unrealized foreign exchange gains our adjusted net income was $45 $7 million or <unk> 49 per fully diluted share.
As previously mentioned our balance sheet strengthened considerably during the third quarter due to the receipt of $100 million upon the closing of the Nx gold stream.
With these proceeds we repaid $100 million of principal on our $150 million revolving credit facility.
<unk> and available liquidity at quarter end.
$220 million, which is comprised of approximately $120 million in cash and short term investments and $100 million in revolver availability.
I'm also happy to report that for the first time since our IPO.
Alice sheet is in a net cash position of a proxy approximately $64 million.
With that I'll hand, the call now back to know he will share some final comments.
Thank you Wang and everyone, who joined the call today before we open up the call for Q&A I'd like to recognize and thank the ERO team and especially our colleagues in Brazil for the hard work. They do every day.
To deliver both strong operating performance and also achieved the milestones critical to the advancement of our growth strategy.
As we embark on a multiyear phase of growth and investment.
Our company and our team have never been stronger and I'm excited to see this demonstrated in the execution of our strategy and the value we are creating for our shareholders.
I will now turn the call back to the operator to open the line for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
We will pause for a moment his colleagues join the queue.
Our first question comes from Rs <unk> of Scotiabank. Please go ahead.
Hi, Good day everybody.
I was hoping we could get a little bit of color on where your current thinking is on the new <unk> shaft.
I realize it sounds like you want to make it bigger and obviously it will be more expensive because it's bigger and it sounds like there's some inflation.
But obviously you still get the upside of the bigger shaft on the production profile.
Can you share any color on sort of how you see all this coming together and then when the market could get some visibility on what some of these details may look like.
Sure.
So with the continued success with the exploration.
Deeper into the mine.
Uh huh.
Deeper deeper resources, which remain open to depth.
There was an opportunity for us to look at deepening the shaft.
And in doing so and deepening the shaft that allowed us to then look at what other areas of efficiency, if we could get.
So the current plan for the shaft I believe has another two to 300 meters of depth.
Along with that by widening the shaft, we're going to see efficiency in three main areas number one a reduction and to potentially limiting all.
Taking the waste out of the deeper part of the mine through the ramp.
Using trucks for that we will now be able to use the shaft to do that which increases our.
Our efficiencies and lower our cost.
Number two is our increased and quicker turnaround in shift time between shifts there in terms of the movement of men are up and down that shaft and the third thing is and while less one we feel it's quite important.
Bringing up the ramp now with regards to also use in the shaft to move consumables.
Up and down from the deeper levels of that and what that ultimately will allow us to do and evaluate is by having greater opportunities to use the ramp, particularly in the shallower parts of the mine there is longer term potential to look at greater efficiencies and longer term opportunities to increase production.
In the upper areas of the mine as well.
With respect to how that plays out obviously, we the technical report that we have out right now as of last year is not being updated we don't see a material change to the business to warrant a change in the.
43 101 report.
And we are now moving to a five year guidance methodology and so while the shaft will be constructed during that period of time. Unfortunately within that we you won't see all of the reflected upside potential one set shaft is completed but as we move forward in the year on year basis, you will see that.
Come through in terms of.
Greater production coming from the depths of the deeps and that's the other area I forgot to mention we believe we will be able to mine more material from the deeps youll.
You'll see greater efficiencies in operation with regards to reduction of cost as well and Thats why we feel this is a great time to do that now and do a robust construction of the shaft.
Just as a follow up to that when do you see the projected timeline for the shaft completion entering operation.
Do we see that see that somewhere in late 2024.
Okay. Okay.
Okay, and then you mentioned.
Moving to our five year guidance I presume that means January for that although I could be wrong, there, but what will that include both our production profile cost and capex for or just strictly yet.
All three okay excellent.
Okay. Thank you very much ill, let somebody else join the queue.
Thanks.
Yeah.
Our next question comes from Jackie <unk> of BMO capital markets. Please go ahead.
Thanks, very much I guess I wanted to ask about.
It doesn't the AR in the report that.
It's still pending.
Pending approval I guess from your board.
I was wondering what the what the timing on that as well.
The board needs to see to make that decision and and what that changes in terms of how how you move forward with spending or plan.
Good questions Jacky.
With regard the board has reviewed this feasibility study what we wanted to do and while we feel that the board could make a decision on this feasibility study we felt it more prudent from our perspective that we include some of the more detailed engineering work.
Along with some of the drilling work there is gonna be included from the gap zone.
To have that and that project be.
<unk> reviewed by the board and so it's not.
The board and management do not see any fatal flaws with regards to the project is merely that we would prefer the board to make a final decision.
On the project with the best information prior to construction and so that is what we have management decision in conjunction with the board has decided to do however.
As you will see we are we have spent some and we'll be spending some money in the fourth quarter of this year with regards to some development at the project, particularly in some civil works around on roads.
They will be additional capital spent ahead of formal.
Our board approval.
Towards the latter part of the first quarter with regards to some additional work that we need to get done.
It's not material expenditures in terms of cost, but work that needs to be done in order to keep approved project moving forward on the basis of the timeline that we'd like to keep in place and that is a construction decision I mean, beginning construction civil works around about the April may timeframe.
Yes that exactly was.
Asking the question, you're totally right and I guess I mean, if you go back to what worries us on guidance.
I'm, assuming that for 2022 and the five year guidance you would be working under the assumption that is going to be approved until would be included in that and then again in <unk>.
It's just that it wasn't for whatever reason you you'd probably revise guidance at that point is that is that the right way to think about it.
What we will do with regards to that is we will have a budget that the board will approve that will feed into into obviously guidance for 2022 and onwards.
And therefore, there will be some capital associated with that that will go into the general.
Capital budget or.
Sort of number and then we will do a line item below that highlighting the boa costs during the each year thereafter, so it will make it easy for you guys to be able to differentiate between the two and win numbers get triggered.
Perfect. Thanks.
Yep.
That's perfect. Thanks.
Once again, if you have a question. Please press Star then one on.
Our next question comes from Stephen Yano of Cormack Securities. Please go ahead.
Yeah. Thanks, very much guys. Just just curious if theres any further updates or maybe not just on the ore sorting progresses and your thoughts on that in terms of that.
Thank you.
With regards to ore sorting like anything else that we're doing in the district, we are constantly evaluating and that's the beauty of this company is our ability to evaluate opportunity sets.
And when and what makes the highest return for our shareholders with regards to that as you know <unk> and <unk>.
Ah the deposits near of EMEA us in the open pits. There there construction is contingent with regards to us implementing ore sorting.
Right now we see other opportunities.
In the near term for other sources of ore that are giving us a higher return.
Then then those projects and so ore sorting is very much tied in terms of implementation of that with regards to <unk> and nine and we see other opportunities in the portfolio right now whereby we can get higher returns while maintaining our copper production over the next few years to suggest that we can make.
Defer some of that are construction and implementation.
Got it got it because I think you can.
<unk> talked about before certain other deposits like <unk> for example, I don't necessarily see themselves as well to ore sorting.
Yeah, well, it's it's it's not necessarily that it's when you have a portfolio like we have and and the flexibility to adjust we have this optimization project that we're doing within the pillar mine specifically areas that we've seen and you will see there's a significant difference between the reserves and resources.
Highlighted the four pillar, we see opportunity, there and where we're starting to see opportunities within that that mine that allow us to mine higher grade material and evaluate higher grade material that was a that gives a mined at a lower cost and obviously less capital Rick.
Climates verse since these projects and give us and give us the same amount of copper production. So naturally what you would do is you would do that before you build those.
Got it got it okay. Thanks, very much guys.
Our next question is a follow up from Morris <unk> with Scotiabank. Please go ahead.
Okay.
Our S July Irish life.
Sorry about that.
I, just indicating short queue today. Thanks.
Thanks for allowing me to the follow up.
You've talked about inflation in a couple of times in the release and in the update today.
Just curious with boy itself I mean, you've recently updated the capital number there I think it's $294 million is that is that still a fairly valid number I just don't or can you give us some color absolutely.
So that's that.
Current input costs.
Actually and it reflects input costs as it related to midyear.
And as you as you well know there are two components.
Difficult components of that kind of capital number related to steel and cement costs.
What we have seen actually subsequent to the capital estimate is obviously steel costs have mitigated.
Over the course of this the third quarter.
And we've seen that reflected also in some of our costs that we've been incurring at the other mines, where we've seen steel prices come down.
So I would say right now that our capital cost per Boe or a fully loaded for the.
The cost.
That were estimated at midyear this year.
Okay, that's excellent and what can you remind me what contingency percentage is built into that.
So roundabout between Phi I don't hold me between five and 8%.
Okay, which is reflected.
Seven.
Which is reflective of the level of detailed engineering that's been completed today.
Okay.
In terms of the development plan for both what do you plan to do their own plan to build it themselves or do you plan to sort of outsource that tyranny P. C. M. Just wondering what the approach will be.
Yeah, we will be we will be working and doing an EPC M or EPC contract with regards to the construction of it.
Okay.
Great. Thank.
Thank you that's all I had.
Thanks, Laura.
This concludes the question and answer session I would like to turn the conference back over to management for any closing remarks.
Thank you operator, just thank everybody again coming out today on Remembrance day with regards to participating in the call.
And again just to reiterate what Noel said, great. Thank you to our team continuing to work diligently to make our company a success and thank you to everybody for their efforts and following us and our shareholders for supporting us.
With that operator, we'll end the call. Thank you.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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