Q1 2022 Ero Copper Corp Earnings Call

Thank you for standing by this is the conference operator, welcome to the Arrow copper first quarter 2022 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'll be an opportunity to ask questions too.

And 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 and zero I would now like to turn the conference over to Noel Dunn Executive Chairman of ERO copper for the opening remarks. Please go ahead.

Thank you and good morning, everyone.

The news release announcing here is first quarter 2022, operating and financial results is available on our website.

As are our financial statements and MD&A for the three months ended March 31 2022.

We will be making forward looking statements on this call that involves risks and uncertainties concerning the businesses operations and financial performance of the company.

We'd refer you to our most recent yeah, yes available at our website SEDAR and Edgar for.

A discussion of the risk factors of our business and the potential impact of future performance.

As usual unless otherwise noted all amounts are in U S dollars.

Joining me on the joining me on the call today are David Strang, <unk> co founder and Chief Executive Officer.

I said to Philip <unk> President.

Wayne drier Chief Financial Officer and.

And Courtney Lynn Vice President corporate development and Investor Relations.

I would like to start off today by talking about the important milestones our team achieved during the first quarter.

The advancement of our growth strategy is progressing.

We kicked off the year by announcing plans to increase our annual copper production to approximately 100000 tons over the next few years.

And achieve sustained annual gold production levels of approximately 60000 ounces.

Yes.

In early February we successfully issued 400 million senior unsecured notes with an eight year maturity and a 6% coupon.

Well, we had worked on this transaction for months with the goal of ensuing ensuring a fortress balance sheet timing.

Timing with hindsight it was pretty good.

Following the completion of key technical milestones in mid February our board formally approved the construction of the Esperanza project.

Our project teams have been busy onsite completing our early works program undertaking detailed engineering entering into critical path contracts.

I'm happy to report that just last week, we achieved another milestone when we kicked off site clearing.

In parallel we continue to advance our pillar 3.0 growth.

The initiative at the end of the same mining complex during the quarter key activities, including securing several long lead items critical till I'm really expansion and continued construction of the new U S tunnel shaft.

Additionally, just after the end of the quarter, the second and final phase of our cooling project was completed and handed over to the operations on time and on budget.

Whilst the macroeconomic picture is being clouded recently by geopolitical issues.

The direction of Decarbonization initiatives globally remains clear we continue to expect this will lead to unprecedented demand for copper in the years ahead at a time when the prospects for delivering new copper development projects not already well advanced appears increasingly challenging.

These factors position euro well relative to the broader industry, given our fully funded low carbon intensive well advanced nature of our growth plans.

I will now pass the call over to David to provide an overview of operational performance and then on to Wayne who will cover our first quarter financial performance.

As always we will be available for questions immediately following the call.

Thank you.

Our first quarter results were released after yesterday's market close and reflect strong margins and operating cash flows. Despite the backdrop of a challenging macro environment during the period.

A key additional challenge during the quarter was a temporary but significant increase in absenteeism across our operations due to the impact of the omnicom Covid variant coinciding with the seasonal flu outbreak.

As a result, we produced approximately 9700 tons of copper and the Mcs mining complex and 8800 ounces of gold at the Nx Gold mine.

Following a return to normal staffing levels in March I'm very pleased to report that our second quarter is off to a very strong start and the M. CSA mining complex, which we achieved a record months of copper production in April .

Copper production during the second quarter is also expected to benefit from mining in the upper levels of the pillar mine, including the first stope from a project Honeypot initiative.

This engineering initiative, which commenced last year continues to demonstrate high potential to adding meaningful near and long term value to our M. CSA copper production plant.

Our engineering teams in partnership with our exploration operations group.

Focused on identifying and recovering high grade zones left behind.

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Due to the under capitalized nature of operations at that time.

With the inclusion of this first project Honeypot stope as well as incremental challenge changes.

The mine sequence through the rest of the year, we're now guiding to the high end of our full year copper production range of 43 to 46000 tonnes of copper and.

And we expect production to be roughly equally weighted between the first and second halves of the year.

At our Nx Gold mine we.

We are expecting a similar cadence to quarterly production with higher gold production dissipated through the balance of the year.

Due to planned mine sequencing as we gain access to high grade.

Great development levels over the center Antonio vein.

As such we are reaffirming our 2020 to.

Gold production guidance of 39 to 42000 ounces of gold.

First quarter seaborne cash costs at MTS mining complex of $1.31 per pound of copper produced and seaborne cash costs and all in sustaining costs at the Nx Gold mine of 638 and $1092 per ounce respectively were influenced by.

The recent strengthening of the Brazilian reais against the U S dollar as well as the influence of inflationary pressures being experienced across all industries.

Well, we expect unit cost performance at our operations to benefit from higher production levels through the balance of the year.

Given the impact of inflation and exchange rate volatility during the first quarter. We are currently taking a cautious approach and guiding to the high end of our 2022 operating cost guidance ranges.

As for our key projects I am pleased with the progress during the quarter.

I M CSA, our pillar three point O initiative remains on schedule and on budget with site works and surface installations for the new external shock progressing well.

During Q1 activities included excavation for the headframe and Winder foundations as well as the purchase of long lead and critical path Winder.

With respect to a mill expansion, we concluded the purchase of a third ball mill and ancillary equipment to ensure on time and on budget commissioning of a processing facility expansion, which will take our capacity from 3 million to $4 2 million tons per year commencing the second half of next.

Year.

At a BOE Esperanza project, we successfully completed the $10 million early works package for the project on time and on budget subs.

Subsequent to the end of the period.

This package, which commenced last year included Preconstruction drill programs in Europe around access road upgrades.

Construction of new onsite access roads began during the first quarter and there's no mentioned site clearing commenced last week.

Development and excavation of the mine and process facilities will be structured through a series of work packages that are either currently out to tender or under negotiation and I am pleased to say that the terms of these contracts continue to align with our project budget.

As we continue to build momentum on these projects and work packages for both.

We expect capital investment programs to ramp up over the course of the year and be weighted to the second half of 2022.

Before I turn the call over to Brian I'd like to mention that we launched a company wide rebranding initiative during the first quarter in an effort to bring greater cultural and identity alignment throughout our company and operations.

We expect to rollout a new corporate website during the second quarter and on future, earning calls we will be referring to our M. CSA mining complex zero calorie Eva for the cutting you about operations.

Our Nx gold mine will be known as Arrow is javan Tina.

Or the <unk> operations and a bow Esperanza project will be referred to as era took them off or took them out of operations.

With that I will now turn the call over to Wayne to review, our first quarter financial results.

Thank you David and good morning, everyone.

As David noted our first quarter results reflect a continuation of strong margins and operating cash flows contributed to record quarter end debate available liquidity of $545 million.

This included approximately $365 million in cash and cash equivalents $100 million in short term investments and $75 million and undrawn availability under our senior secured credit facility.

This quarter on quarter increase in available liquidity of over $310 million reflects 392 million of net proceeds from our recent bond issuance during the quarter.

The repayment of $50 million in outstanding borrowings under our senior secured credit facility.

Reduction in the size of this facility from 150 million to $75 million.

Revenues for the quarter were $108 9 million, representing a decrease of $26 million or approximately 19% compared to the fourth quarter of 2021.

A decrease in revenues was primarily driven by the lower copper production and concentrate sales at M. C. S. A as well as an increase in finished goods inventory at the Nx Gold mine.

As David mentioned unit operating costs at both M. CSA at Nx gold during the quarter were adversely impacted by the strengthening of the Brazilian real.

As well as inflationary headwinds that have impacted all industries.

However, I think it's also important to note that copper and gold prices both hit record highs in the quarter.

And as a result, we generated strong operating cash flows of approximately $44 million in the first quarter.

With respect to our foreign exchange derivative contracts.

Excuse me, we reported realized losses during the first quarter of $4 $6 million and an unrealized gain of nearly $25 million due to the strengthening of the real.

The real strengthened from approximately 5652 per U S. Dollar at the beginning of the year to approximately $4 75 per U S. Dollar by the end of the first quarter.

We have and expect to continue to Opportunistically add colors locking via our outflows at these levels to protect operating margins, while retaining significant upside should the bureau weekend substantially against the U S dollar in the future.

With that I'll hand, the call back to Noel to share some final comments.

Yeah.

Thank you Wayne and everyone, who joined the call today before we open up the call for Q&A I would like to recognize and thank all colleagues in Brazil for the significant progress made in our growth strategy during the first quarter.

We have several really good quarters ahead of us and I'm looking forward to sharing more details around the progress of our key projects next quarter.

I'll now turn the call back to the operator, and we'll open up the line for questions. Thank you.

Thank you.

I'll now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request.

You are using a speakerphone please pick up your handset before pressing any keys.

To withdraw your question. Please press Star then two to.

To join the question queue. Please press Star then one now.

Our first question comes from Stefan <unk> of Cormack Securities. Please go ahead.

Oh, great. Thanks, very much guys again, it was great to have the Uninflated did a couple of weeks ago, and so that was a pretty fulsome update back then as well, but I'm just curious on the honeypot stuff as it as it's progressing further I'm just curious on the sort of the cadence of honeypot going forward I know you're getting into the first one this quarter and do you get your you anticipate you're going to kind of be doing one at a time or at some point will you have.

Ah ones going at the same time, it but maybe the timeframe to get there.

Thanks, Stefan a great question.

Honeypot AR and the opportunities with regards to honeypot is kind of come in as a quite a tidal wave over the course of the last six months in terms of the opportunities that the guys and the team have uncovered.

So with respect to that in the near term.

Difficult for us to give you any strong direction now.

With respect to how honeypot plays out we're working on that over the course of the next six months and I think by the end of the year, we'll have a much better understanding as well as be able to provide the marketplace with a more fruitful view with regards to how honeypot.

What we called Honeypot, one and honeypot to will play into our future production.

I think there may be opportunities to include some of it over the course of the next couple of years, but I think the full impact with respect to honey pot will be realized.

Closer to the time that we are coming closer to mining the deepening.

And that will allow us to look at some additional expansions to operations within the Pilar mine.

And other initiatives that we're doing I know, it's a bit smoke and mirrors with regards to what I'm, saying right now.

What I can tell you is leave it with us give us the next six months to really work it through getting into our mine plan and we anticipate putting out a new technical report.

Towards the end of the year. So obviously, if we're looking at doing a technical report that means it's going to be a material change and so they don't leave it with us at the moment and we'll get back to you.

And give greater guidance later in the year okay.

Okay now that's great. Thanks, very much guys.

Once again, if you have a question. Please press Star then one.

Our next question comes from Craig Hutchison of TD Securities. Please go ahead.

Hey, good morning, guys.

David You mentioned at the outset of your comments that you've got a series of work contracts out for tender at power and that you were I think you said you were pleased with.

How it costs are kind of coming in line with expectations.

Can you give just any sense in terms of what percentage of your all budget you put out to tender at this point.

The vast majority is gone out to tender I think we're at 60% to 70%.

Of the power project and end of the deepening project.

Our out either have been agreed.

Agreed or out to tender right now.

And so I guess just to go back to your comments earlier, you're happy with what you're seeing so far in terms of your overall guide, yes, yeah like anybody else in the industry right now where we are cautiously optimistic with regards to what we're seeing in terms of the initial where either the contracts that we have.

Signed which we're obviously very happy with with regards to the ones out to tender or the ones that we have visibility in terms of.

A discussion and as I said that 60% to 70% of everything.

We're reasonably happy with regards to where it's within what we would term out capital budget and contingency right now.

Okay, that's where that takes you to 7% caused by Golar three point of the whole thing the upgrades to the mill as well or is it more just a deepening in the shop component.

Well the as we meant as we if we stayed at the pillar three point the expansion the major lead items in terms of the expansion of the mill.

Which is the mill and the the Jefferson cell and some of the other ancillary products that soybean priced those or those contracts are already out.

So those are signed sealed and delivered so don't think about it from the expansion with regards to plus three point O.

That primarily right now as the shaft and we're very very far far advanced is as you know we mentioned we've already purchased a winder, which is a key component of that and that was well within budget MTA and the team have been well advanced with regards to negotiations with regards to the show.

Thinking with your mess and she's just come back after a visit with them in South Africa, She's happy with regards to the progress there with regards to those contracts. They are within our guidance with regards to the capital if that.

With regards to Boa.

We are we are waiting and currently waiting for the major contract on but with respect to the mill.

That is imminent we are getting that in the next week.

So far what happens here and the team have seen they're comfortable with with regards to that and what they see but obviously when you're in these things you're obviously negotiating on a on an ongoing basis, but we don't see anything within any of the rfps are any of the RF skews that would give us concern with respect to our capital blow out with.

Nothing like that with regards to our project.

Projects, Great Awesome, that's great to hear guys I appreciate it.

Yeah.

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

Thank you all for being on the call today. Thank you for the questions and we look forward to speaking to you again next quarter.

Thank you goodbye.

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

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