Q4 2021 Ero Copper Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the Arrow copper fourth quarter and full year of 2021 financial and operating results conference call.
As a reminder, all participants are in a listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions.
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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 and good morning, everyone.
News release announcing eras fourth quarter and full year 2021 financial results is available on our website.
Our financial statements and MD&A for three months.
And 12 months ended December 31 2021.
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.
We would refer you to our most recent Aif available on our website.
And also on SEDAR and Edgar for a discussion of the risk factors of our business and the potential impact on future performance.
As usual unless otherwise noted all amounts are in U S dollars.
Joining me on the call today.
As market they fill up the president Wayne drier Chief Financial Officer, and Courtney Lynn Vice President corporate development and Investor Relations.
Unfortunately, David Strang, <unk> co founder and Chief Executive Officer is unable to join US today due to an urgent family Master acquiring has.
Attention and travel overseas.
Before we discuss arrow's operating and financial performance during the fourth quarter and full year of 2021.
I'd like to touch on important strategic momentum, we have built up over the last 18 months and highlight.
The clear and fully funded pathway now in front of us.
To double our copper production to approximately 100000 tonnes per annum and achieve sustainable Gulf wind production levels of approximately 60000 ounces per annum.
Our strategy.
Value from our portfolio has remained consistent over the years and includes.
One maintaining high operating margins to organically fund production growth.
To deliver year on year increases to our underlying resource base across our asset portfolio through ongoing exploration programs.
Three optimizing newly identified an existing quality growth projects within the portfolio.
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Low capital intensity high and high returns highlighted most recently by the teams work at the Boa Esperanza project as well as the pillar 3.0, and X 60 initiatives and lastly.
Turning our balance sheet capable of supporting our growth initiatives across a range of metal price scenarios.
Just last month, our board formally approved about Esperanza project, which we expect to commence construction during the second quarter of this year.
Production from the mine is expected during the second half of 2024 with the first full year of production, obviously being in 2025.
Bond completion consolidated copper production of the company is expected to reach nearly 800000 tons.
First quartile operating costs.
And our operating assets, our new strategic initiatives are well underway, including the pillar III pointed out.
In the annex 60 initiatives, which are expected to continue to generate high returns on invested capital for the company.
The pillar mine exploration successes and optimization efforts in the shallow of portions of the mine pad with the construction of a new external shopped.
It is expected to increase combined production from the mine to approximately 3 million tons per annum compared to the $1 3 million tonnes of oil produced in 2021.
At Nx gold production from the Santo Antonio vein combined with the planned production from the Martini a vein beginning in 2024 is expected to result in sustained gold production of approximately 60060 thousand ounces sorry per annum.
Excess mill capacity at both assets continues to support our focus on value creation through exploration.
To support our growth strategy over the coming years, we bolstered our balance sheet earlier this year with a 400 million offering of eight year senior unsecured notes.
We priced the notes prior to the recent increase in market volatility and as a result, we're happy to lock in a coupon of six 5%.
Our liquidity position is now strong at approximately $550 million on a pro forma basis.
Including approximately 475 in cash and 75 million in revolver availability.
While its recent geopolitical tensions present, a new set of challenges to the businesses businesses globally. They've also highlighted a tangible sense of urgency.
So both governments and consumers to transition to renewable energy sources.
The derivative benefit to you or a copper has been positive with couple of prices rising to all time highs more than offsetting the impacts of higher consumable pricing and the influences of a recently strengthening BRL on operating costs.
As a result, the margins of our business and cash flows are expected to remain strong further supporting the execution of our strategy in 2022.
I will now pass the call over to match its Filippo to provide an overview of our operational performance and then over to Wayne who will cover eras fourth quarter and record full year financial performance.
As always our team will be available for questions immediately following the call.
Thank you know full year production results were previously released along with 2022 guidance and our five year operating outlook earlier in the year.
Operating highlights for 2021 included record production of over 45500 tonnes of copper and production of nearly 38000 ounces of gold surpassing the high end of our full year production guidance ranges.
Copper production at the M. CSA mining complex during the fourth quarter was approximately 11900 tonnes, representing a 19% increase relative to the third quarter. The increase in copper production was driven primarily by higher mill throughput, which improved during Q4 relative to prior periods due to the successful completion of planned mill maintenance and.
Activities during Q2 and Q3.
In addition, higher mined copper grades during the fourth quarter for our underground operations, particularly at the <unk> mine combined with higher metallurgical recoveries contributed to increased quarter on quarter production.
So you wanted cash costs at the M. Saturday mining complex during the fourth quarter were <unk> 96 per pound of copper produced.
<unk> and full year. So you wont cash cost of 77 cents per pound falling at the low end of our annual guidance range.
Increased cone cash costs during the second half of 2021 , including during the fourth quarter reflect a combination of industry wide inflationary pressures on consumables combined with increases in the relative proportion of export versus domestic concentrate sales during the fourth quarter.
Production at the Nx Gold mine during the fourth quarter was over 8500 ounces of gold while tonnes mined and processed increased by approximately 10% over the third quarter increases in mine production were offset by lower grades from within the Santo Antonio vein relative to prior periods.
As a result see one cash costs and all in sustaining cost per ounce of gold produced increased modestly relative to prior periods to 582 and $910 per ounce, respectively for the full year C. One cash costs and all in sustaining costs at the Nx Gold mine, where 525 and $732 per.
Ounce respectively.
As noted previously we are reaffirming our production cost and capital expenditure guidance for 2022 with respect to setting expectations for production cadence on the year at the M. CSA mining complex copper production is expected to be equally weighted between the first and second halves of the year.
While we expect strong mill throughput rates throughout 2022 copper production is expected to be lower during Q1 due to planned stope sequencing of our underground operations and the relative increases in contributions from our Serbian open pit operations.
The Nx Gold mine, we expect production to be weighted slightly to the second half of the year first quarter gold production is expected to be in line with that of Q4, as we move development and production activities from the current areas of the mine into higher grade levels of the Santo Antonio vein, which we will access beginning in the second quarter.
Capital expenditures are expected to be weighted to the second half of the year largely due to ramp up of construction activities at both Esperanza, whereas no mentioned, we anticipate mobilization to occur during the second quarter.
At M. C. S. A our mill expansion project remains on track with long lead items ordered long lead item orders placed including the third ball mill for our concentrate or.
The construction of the new external shop to the poor mine, which commenced in Q3 last year and our cooling project. Both part of the pillar three point O initiatives all remain on budget and on schedule.
An integral component of our overall strategy as a company remains our focus on organic growth through exploration.
We are pleased to be hosting an exploration technical session tomorrow at noon eastern time via webcast, a new format for us our goal with this session is to provide additional context on our exploration strategy further detail our plans for 2022 and outlined some of the organic growth opportunities we are pursuing across our portfolio.
Webinar details can be found in our March eight press release, which has been posted to our website. The session will be available for replay for approximately 90 days.
With that I will turn the call over to Wayne to review, our fourth quarter and full year financial results.
Thank you Mac and good morning, everyone.
The fourth quarter capped a record year of financial results for you or a cutback.
And primarily by record full year copper production and higher copper prices compared to 2020.
Increased copper concentrate sales during the fourth quarter drove an increase in revenues by over $23 million or more than 20% compared to the third quarter to approximately $135 million.
Full year revenues increased by over 50% compared to 2020 to a record $490 million driven by higher year on year copper prices as well as increased sales of copper concentrate and gold.
Other record 2021 financial results included.
Adjusted EBITDA of approximately $332 million cash.
Cash flow from operations of approximately $365 million and adjusted net income per diluted share of $2.37.
As a result of our strong operating and financial performance. We ended the year with over $230 million in available liquidity, including over $130 million in cash and cash equivalents and $100 million of Undrawn availability under our senior secured credit facility.
This represents a quarter on quarter increase of $11 million in a year on year increase of $156 million.
A portion of the year on year increase is attributable to the upfront payment of $100 million received in the third quarter in connection with the Nx gold stream.
As we explained on our third quarter call. This upfront payment is that amortize as deferred revenue as ounces are delivered under the street.
In 2022, we expect amortization of deferred revenue to total between 13 and $15 million.
With respect to our foreign exchange derivative contracts, we reported realized settlements during the fourth quarter of $6 2 million.
<unk>, an increase of $1 8 million compared to the third quarter.
This increase was related to the opportunistic early settlement of a portion of our foreign exchange derivative contracts to take advantage of the strengthening Bureau that happened during the fourth quarter.
We expect foreign exchange settlements to continue to amount to between 4 million and $6 million per quarter for the first half of this year and then decreased substantially in the second half of the year as out contracts positions expire.
As Noel mentioned subsequent to year end, we completed an offering of U S $400 million of senior unsecured notes due 2030.
And concurrently reduced the size of our senior secured credit facility from 150 million to $75 million.
We used approximately $50 million from the notes offering to repay the outstanding balance under our senior secured credit facility.
That result is a pro forma year end available liquidity position of approximately $550 million, representing an increase of roughly $320 million over what was reported at year end.
Based on the six 5% coupon on the notes accrued interest on a quarterly basis is expected to be around $6 $5 million.
With accrued interest in the first quarter of this year expected to be slightly lower at just over $4 million due to the issuance happening in February .
Cash interest payments on our bonds of $13 million will be paid semiannually every August and February .
With metal prices going from strength to strength, we have the potential to deliver another year of exceptional financial results in 2022.
With that I'll hand, the call back to know to share some final comments.
Thank you Wayne and everyone, who joined the call today before we open up the call to Q&A I'd like to recognize and congratulate my colleagues on an excellent 2021.
As we embark on a multi year phase of growth of the company.
The team the balance sheet as you, presumably recognizing this call has never been stronger.
I'm excited to see this demonstrate the execution of our strategy and the value we create for our shareholders I will now turn the call back to the operator, and we will open up the line for questions.
Yeah.
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.
Youre 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 as callers join the queue.
The first question comes from Karl Blunden with Goldman Sachs.
Please go ahead.
Good morning, Thanks, very much for the time.
Obviously, a lot of volatility in the commodity landscape and some of it's benefiting your from from.
A price realization standpoint, I just wanted to focus briefly on your expected project cost for the build out at Boa.
And I wanted to get your take please on any.
Any exposures you have there that that may influence the total cost of the project, whether its energy costs or other raw materials like steel just wanted to get a sense of your comfort for our for the budget there.
Yes.
Yeah look when we put together a we did the feasibility study we we update of the cost of that project last summer at a time when steel and concrete cost in Brazil was super highly inflated and they've come down since then.
So it's a bit of a game of swings and Roundabouts C. Obviously it'd be naive there for us to sit here and say that we see no inflation in costs all prospective cost around boa.
Some things will cost more obviously, but there are other things, which I've I've turned out to be less than we expected. So it is a bit of swings and roundabouts, but early to say where it will come out.
But let's take a step back what is Bo of Boa is a super low capital intensity very high return project.
And I think that is really was the reason why we chose this project has a 42% return on an IRR and has only a $300 million buildup.
So in the context of our overall business is relatively small.
It's not that we're drinking a $3 billion hole in the ground, we're super vulnerable to price inflation.
Okay.
That's very helpful.
During the quarter, you had announced some safety incidents I was curious it's been a couple of weeks now what what any changes that have been made at the company.
Since then if that was necessary and just employee response to any initiatives.
Yeah.
So that's a very fair question and it was obviously a.
And a significant tragedy for the company.
As a core tenant of our business that people should be able to go to work and return home to their families safely every single day of the year and so we are always take these events that.
That happens rarely, but we take very seriously and.
In each case.
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In line with all the authorities and regulatory agencies within Brazil, We will review the facts and circumstances of each event.
And we are then audits.
Our 1% procedures to see if there's any changes necessary or if we missed anything is there a better way of doing things. That's just par for the course.
I think what we do when we have these events.
Is that we focus very clearly on two things one the family of that of the poor person involved.
That's our first priority and secondly, as communication with our employees. That's also an equal first priority. These are the two things are the most important.
Everybody is aware of what's happened and what's going on.
And so that's that's how we communicated workforce. They knew immediately we put out are we.
We put out information to them very very quickly.
On the occurrence of that type of event.
Now, it's been a month or so since it happened.
We have not had it not been any I would say.
This is an ongoing type of discussions you have to be quite sensitive to these things but.
Our initial analysis and there's really no changes in our own operating procedures around these matters.
We have a very strong operating procedures.
Unfortunately, sometimes events happen, but theres been no change in that front.
And also no changes in the way, we communicate with our own people, but as you said, it's unfortunate and remains a.
A key priority of our business to try and make sure. These things do not happen.
Okay I appreciate the update thank you.
Yeah.
The next question comes from Jackie principal Lawsky with BMO capital markets. Please.
Please go ahead.
Thank you very much I'm not used to be and second on the list like maybe my first question I'll ask is.
About your mill I know you mentioned in the release that you're working on the mill expansion.
And CSA, but can you talk about what work you might be doing or what what you might be thinking about in terms of subsequent mill expansions or I know David you mentioned in the past maybe a potential to build a second mill is there any is there any work that is actually being done on those next steps yet or is that all still pretty early days.
Yeah.
Yeah, Hey, Jackie this is Mark look I think you know obviously, we've outlined our five year guidance the expansion of our mill to a $4 2 million tonnes, a year and that is happening is as we articulated here today, we've placed the long lead items related to.
That that next phase.
Thank you know, taking a step back and thinking about what we're trying to do.
We're always looking at ways to continue to grow our our business to grow production to continue delivering high returns and so there's a whole suite of projects that we're evaluating on an ongoing basis.
As to specifically, how it relates to either a further mill expansion.
Or discussions around a potential new mill I'd say those are part of a wide variety of portfolio of projects that we are continuing to evaluate in the context of you know.
At prevailing market conditions also what we're seeing on the exploration side.
And I think it's fair to say that over the past five years and certainly into the future. Our goal is to continue to strategically execute on the highest return projects.
As we've done it I think demonstrating here and so far in 2022.
Yeah.
Thanks, Michael and then second question, maybe if I can I know you guys have sort of touched on this already so I apologize if it sounds like I'm repeating but.
We're getting more questions about cost inflation and whether it's.
Or at the project level or an operating costs, maybe I'll ask more on the operating cost side. Because I think you were just talking about them on the project side. So on the operating cost side.
How much cost inflation are you seeing in terms of labor or fuel or other.
Sources of inflation, maybe on the FX side.
And is there anything that you guys can really do about that and I guess.
What we're looking in the context of the guidance that you came out with in January how comfortable are you I guess still about what that range. Thank you.
Yeah, great questions. Jackie are obviously ones are at the conference that were you know quite topical last week at the BMO Conference and we continue to get questions look I think again from from our perspective, we have seen throughout 2021.
Inflation in Brazil, both in terms of labor and key input commodities as an older too you know steel cement are both up significantly here that was paired with a significant weakening.
In the second half of 2021 in the B R. L a which from a U S dollar operating cost perspective soften that impact.
Labor adjustments are annual in Brazil, So that'll be you know that's obviously.
Being carried forward through our guidance period.
I think you know taking a kind of looking more on a forward looking basis for this year.
What can we do to impact or you know those potential impacts on inflation.
Yeah. If you look at the key drivers of our operating costs are obviously labor and as I mentioned that adjustment happened in Q4 of last year and then on the other ancillary impacts like diesel diesel related products we have.
Been getting a lot of questions on diesel prices those represent roughly 10% of our variable operating cost.
And you know diesel is as you know is subsidized in Brazil.
So we I think the the largest swing factor of single swing factor in our U S. Dollar denominated operating costs is the BRL and we obviously have seen strengthening in the bureau are here in the first quarter of 2022.
Yeah. So like I said before that's not went up naive you're going to have some inflationary factors but.
The reason why we operate a high margin business is for precisely this reason.
We are going to see some inflation in costs, but at the same time, we're seeing offset by a significant increase in the value is in the copper price.
And we have one of them to have the highest margins couple of businesses in the world. Therefore, yeah, we will have a negative impact but relative to every other everybody else, it's going to be rather minimal for us.
Yeah. That's that's great. That's super helpful. Thanks, Michael and congrats on a great quarter.
Thank you.
The next question comes from Oren <unk> with Scotiabank. Please.
Please go ahead.
Hi, Good morning, I just building on Jackie's question, there around cost inflation I realize it's a topical subject here, but you're starting two big projects, both the boiler project and the new underground shaft.
<unk> I'm just wondering if you could give us a sense of have you been able to lock in a certain percentage of those cost for equipment and whether youre considering locking in the FX rate at all or do you plan to go fully exposed there with respect to those projects the capex related to those projects.
Yeah, maybe I'll touch on the on the capital side, and then Wayne can touch on the FX, where no compression and so on the on the capital side already for our major projects. We've purchased as we announced I think it was in Q4, we announced some acceleration of long lead items related to the shafts. So some of those some of those items have been fixed as of Q4 some of the law.
Largest items in that in that capital largest single items are not capital profile and that as as I mentioned, we just put down the or just confirm the long lead items order for the for the mill. So those are you know.
M CSA some of the Chunkier components of Capex have been have been fixed at.
<unk>, we're in the process right now we've just submitted.
In the last few weeks all of our RF.
Request for proposals in request for quotations.
And we've been getting those box slower here, so as Noel said, it's a bit too early to comment specifically on Boa.
In terms of.
Fixing those but that will happen here in the coming weeks.
Yes.
Duane here just to pick up on the on the FX piece of that I mean, I think the approach we're taking it at borrowers we're not citing a single EPC contract. There. It's a it'll be a series of work packages. So.
Kind of think of it as sort of a hybrid EPC model and obviously some of those work packages may be you know denominated in V. R. L, particularly around let's say earthmoving, the earthmoving and site clearing I think once we in a position where we've got visibility on that we may consider hedging the exposure on that that <unk>.
Contract per se, but I don't think there's any desire to go out and hedge the you know the entire project or anything like that I mean, I think the reason we went and did the bond offering a few weeks ago was to provide ourselves the flexibility to basically were there any inflationary or FX.
Short term FX movements in the in the next year to 18 months, Yeah. Like we said look it's a low capital intensity project, it's a super fast build.
To get into production in two years I mean.
When you put Boe in that context, and I was sitting here what 470 copper.
And we owe that liquid we put too much liquidity in our balance sheet and a strict sort of business school accounting kind of thinking by doing the bond deal.
For precisely the reason that we live in a volatile environment and so whether it was couple of prices being volatile.
Prices being volatile.
The reason why we did the bond deal. So we could happily get through these two years, but the capital intensity of borrowers. So small its very easy for us to do that so in a sense. Yeah. You can you can say well Gee I guess that costs are going to go up but you have to put that in the context of what's going on with the copper price and the coal prices dramatically.
Increasing faster than put it this way the copper price benefits to us significantly outweigh any inflation that we perceive in some of the costs and as I said, it swings and roundabouts because the team is sourcing.
Products for both from different sources, and so we're waiting on some and you lose in others Thats why its a bit hard today to say Oh, it's going to be much more expensive, it's not it's not going to be much more expensive because the guys are working on different solutions. So I think.
It's a little early to say and similarly with the energy prices. If you could tell me that the oil price is going to be $125 for the rest of the year. Okay that we can do that into our numbers, but the issue on oil prices and issue on those inputs is how long are they going to remain where they are today and that's very difficult to predict.
Thanks for the color just on the call. It the diesel cost and I think Michael mentioned, it's about 10% of variable opex.
Can you can you remind us what was assumed in the guidance. This year with respect to the oil price like what was the base case that the guidance cost guidance was driven on.
Yeah, we use the average for last year, where it's leading up into our guidance period across across input costs.
I think I mentioned basically correct, yeah average of 2021 and I would I would additionally, note and just to clarify it's 10% of our total cost structure.
He is diesel and diesel related products.
So that includes reagents emotion.
The whole lot.
Hmm.
Okay. Thank you very much.
And spud these on oil prices you see on your screen and Bloomberg did not they correlate but not terribly well to what happens in Brazil.
You can also see on Bloomberg if you look at out so.
So the diesel prices lag significantly what's going on in the spot market.
And if you think about the politics of Brazil, that's likely to continue.
Great.
Okay.
Once again, if you have a question. Please press Star then one.
The next question comes from Dalton Barreto with Canaccord Genuity.
Go ahead.
Good morning, guys I realize this may be front running tomorrow session, but where are we at in terms of drilling has the gaps out and bringing some of that into the mine plan at Boa.
That is front running tomorrow session and we've there where we have the guys have done a really good job on it and they'll reveal some won't use that tomorrow, but we're very happy with the results that.
That we have on the gap zone it's.
It's been very productive shall I say without stealing their thunder.
Yeah look great built in just.
Yeah, just to extend that you know I think across our portfolio.
Whether it's whether youre looking at Golar.
For me as an ex Boa.
You know the theme here has been continuing to unlock value and I think Bo has a is another strong example in in that sequence.
And we're really excited with the results that we see.
Not just in BOE, but also palaver mass and Nx gold as well.
And we'll talk about them more tomorrow.
Yes.
Okay, Great and then maybe switching gears, but staying with boa.
You guys have talked in the past about barbell kind of being the regional hub given a lot of earlier stage opportunities in the eastern cars out there.
I'm just wondering how active acquisition program do you have on or is that more of a back burner.
No look I mean first of all we are in the western counter has.
We've already.
Or in the process of thinking.
An acquisition of a nearby prop.
Property, which.
I think once you've built the Boa ml and you worked your way through the bow of property and in fact.
It is an underground component to Boa that we will probably talk about too because we keep finding more interesting things at boa itself, but it was essentially a hill. So that's the reason why it's got such high economic.
Our returns just because youre mining into a hill.
But there is a feature of Boa.
Underground as well, but at the same time.
You know playing on the same logic, we have in our in the Chris Our Bali.
Once you build that mill you can create a hub.
Type of operation and there are other properties in the Hood that we've we've looked at and we're talking to people about thinking ahead down the road.
Two continuing the life of all of our.
<unk> facility in that area on a wider basis look the courthouse is an interesting places.
It's still a relatively unexplored certainly on the west and there's plenty of opportunities there and so I think you would expect us over the next five years.
To be seeking to build a much bigger.
Yeah.
Leg to our business in that part in that part of Brazil, I don't think you should think about as being one isolated little operation that we build and let me close up and go away. That's just not the way we're thinking about it we're thinking about it as being a meaningful additional leg to the business.
That's great. Thanks, that's all for me.
This concludes the question answer session.
I'd like to turn the conference back over to management for any closing remarks.
Again, thank you to everyone for attending our call today and for your questions.
We look forward to speaking to you again in just a few weeks to discuss our first quarter 2022 results and as ever if he's got any more questions or queries. Please contact us directly and we're happy to talk about things. Thank you very much.
Yes.
This concludes today's conference call you may disconnect your lines.
Thank you for participating and have a pleasant day.
Okay.
Yes.
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