Q3 2022 Ero Copper Corp Earnings Call
Thank you for standing by this is the conference operator, welcome to the Arrow Coppers third 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.
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 then zero I would now like to turn the conference over to Noel Dunn Executive Chairman of ERO copper for opening remarks. Please go ahead.
Thank you and good morning, everyone.
The news release announcing its third quarter 'twenty, two operating and financial results is available on our website.
As our financial statements.
And DNA for the three months and nine months ended September 32022.
As usual, we are making forward looking statements on this call today, a whole 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 also on SEDAR and Edgar.
For a discussion of the risk factors of our business and the potential impact on future performance.
Again, that's pretty usual unless otherwise noted all amounts are in U S dollars.
Yeah.
Joining me on the call today.
Well, David Strang, <unk> co founder and Chief Executive Officer market President.
Main driver Chief Financial Officer, and Courtney Lynn, Vice President corporate development and Investor Relations.
Before discussing our third quarter results I'd like to touch on the recent presidential election in Brazil.
While coverage of the election.
North American media you now view is largely centered on the differences between the two presidential candidates and the divided nature of the country's puppyish.
From our perspective irrespective of politics, Brazil has and continues to be on a path towards greater prosperity.
More economic opportunities for its citizens.
It remains one of the leading global exporters of meat products oil and gas SAR.
Iron ore and therefore it can.
Financial statistics are significantly improving path.
Turning to our third quarter results.
David is best highlighted by one strong production at Al Carey you haven't seen her operations too.
Strong progress across our strategic growth option initiatives I'm three exciting developments on the exploration front.
Putting our recently announced discovery of a nickel sulphide system and the Curacao Bali.
While our team delivered strong production performance and project execution during the quarter.
We're obviously experiencing challenging macroeconomic conditions and he's continued to impact operating costs and margins across the mining industry.
Despite seeing moderation in many of our input costs during the quarter some of our largest consumables.
Including diesel so 19 steel remained well above historic levels as compared to the copper price.
Lower metal prices during the periods combined with approximately $10 $3 million out of period revenue adjustments that Wayne will discuss in greater detail.
Did impact our financial results during the third quarter.
So while we continue to navigate an extended dynamic market.
Pleased to report we are.
We were able to make excellent progress on our strategic growth initiatives during the quarter.
I've got to come a project, we completed critical road upgrades in drainage infrastructure that will allow us to maintain momentum throughout the upcoming upcoming rainy season.
Our mining contractor also mobilized to site during the quarter and commence pre stripping activities. We are currently advancing ahead of schedule.
Can you repeat that ahead of schedule.
The various projects that comprise our pillar 3.30 growth initiatives are also progressing well with.
What's your plan on discussing in greater detail next week during our annual operational projects exploration update on November <unk>.
As we look ahead to 2023, we expect broader macroeconomic uncertainty and volatility to persist.
Whilst the effects of this uncertainty I'll likely experienced differently across various markets and supply chains.
Believe it or high quality operations and favorable cost structure embedded optionality across our assets and balance sheet leave us well positioned to deliver on our growth strategy.
Our strategy aligns with the projected period of unprecedented copper demand growth.
I will now pass the call over to David to provide an overview of our operating performance and then always the Wang who will cover arrows third quarter financial performance.
As always our team will be available for questions immediately following the call.
Thank you.
We achieved solid operating results across our assets this quarter that positions us well to achieve full year production at both of our operations.
And the carry by operations, we processed over 720000 tonnes of ore during the quarter at an average grade of 168% copper, resulting in copper production of nearly 11200 tons off the metallurgical recoveries of 92, 2%.
A couple of great continues to trend above the original cup of great guidance of $1 six zero.
Supported by mining of the first project Honeypot stope.
Processed tonnage was lower compared to the second quarter due to planned maintenance on the pillar mines material handling and transportation system approach.
A portion of which is scheduled to be completed this month as.
As a result fourth quarter couple of production expected to be similar to third quarter levels.
And it was 17 operations, we saw a step up in mind grades as planned to 855 grams per ton gold compared to an average of $6 two eight grams per ton gold in the first half of the year.
This increase in grade offset lower planned tonnes processed during the quarter.
And the 43000 tons.
<unk> gold production of approximately 11000 ounces after metallurgical recoveries of 93, 3%.
Similar production levels are expected in the fourth quarter with higher gold grades expected to continue.
There's no mentioned our operating cost during the quarter continued to be impacted by the influence of inflation on the cost of key variables.
While we saw some moderation relative to peak pricing in the second quarter, our largest consumables, including diesel remained well above historic and forecasted levels.
And I carry operations. These cost impacts were further exacerbated by transitory items during the quarter that included increased trucking of ore and waste to surface of the bloodline due to maintenance of the material handling and transportation system.
Cost of carry but also continued to be impacted by a higher allocation of concentrate sales to the international market.
Nick David some of the tax benefits, we received when we sell to a domestic customer.
Notwithstanding the immediate tax benefit on domestic sales it is worth noting that we do recognize other tax benefits.
On international sales are captured in the revenue life.
I'll see you in cash costs for the quarter were $1 46 per pound of copper produced bringing.
Bringing year to date seaborne cash costs $2 34 per pound of copper produced.
Well, we are reaffirming our revised full year copper seaborne cash cost guidance of $1 20 to $1 35 per pound.
When I expect to track towards the higher end of the range.
And that was you havent seen operations the impact of continued cost pressures related to key consumables were more than offset by higher mine to process gold grades during the quarter.
As a result, she want cash costs were down over $100, an ounce from $643 per ounce of gold produced in the second quarter to $537 per ounce of gold produced in the third quarter.
On a year to date basis 17 to see one cash cost of $604 per ounce of gold produced are trending towards the low end of our revised full year guidance range of 600 to $700 per ounce.
While like our peers, we continue to navigate challenging near term market conditions.
Resulted in compressed operating margins, we remain focused on advancing our growth strategy in anticipation of untested and then pitch the outlook for copper in the coming years.
And I took them off project total project engineering construction of approximately 40% and.
And 88% complete respectively.
Track with the feasibility study schedule.
With respect to budget, we now have approximately 30% planned capital expenditures under contract another 50% of planned capital expenditures in various stages of tendering or negotiation.
Giving us visibility to roughly 80% of feasibility study capital expenditures.
But based upon prevailing foreign exchange rate labor costs and diesel prices. These expenditures are currently forecast to be within 12% or pre contingency feasibility study estimates.
While this estimate is still subject to final contract negotiations.
I'm very pleased with where we are tracking and commend our team's here.
Here in Canada, and in Brazil, and our contractors around the world.
Their tireless efforts in driving this capital discipline.
I'm equally pleased with progress I am seeing without pillar three point O initiative and in particular, the integration of project Honeypot Intercut strategic life of mine plan.
Which was completed subsequent to quarter end.
Our investments in exploration as well as mining and milling infrastructure over the last five years have created tremendous operating flexibility that has been further enhanced with the success of project Carnegie Corp.
By creating a two mile system at the pillow mine.
Voted by the addition of higher grade material from project Honeypot, we see significant increases in mine life of a carry but our operations, where we expect to effectively increase the number of operating mines from three to four.
Compared to just one operating mine and it put us up early when we IPO Ed in 2017.
As a result, our team has been able to evaluate numerous numerous production plants with various great cost and capital profiles. During this year's strategic life of mine planning efforts.
Time when market conditions are uncertain, we believe this operational flexibility.
Affords us a significant advantage in managing our business to maximize shareholder value.
There's no mentioned at the start of our call. We look forward to discussing progress related to our growth initiatives, including the updated carry but strategic life of mine plan during our operational project and exploration update on November eight.
During the event, we also plan to discuss it put US a valley nickel sulfide discovery that we announced at the end of September .
This discovery is something that we've been working towards since we first observed Nicole occurrences within the Mayo mine in 2018 and we're excited.
Excited about the potential we have seen to significantly expand the input on this system in the months and years ahead.
With that I will now turn the call over to Wayne to reviewed our third quarter financial results.
Thank you David and good morning, everybody.
As you know and David noted, our third quarter financial results reflected solid operating and project execution mixed with the impact of a challenging macroeconomic environment.
Adjusted EBITDA and net income of 32.1, and $4 million, respectively were lower compared to the second quarter due to operating margin compression that was primarily top line driven.
Sure.
Third quarter revenues of $85 9 million were down approximately $29 million due to the combination of lower average copper and gold prices lower quarter on quarter production and a higher allocation of copper concentrate sales to international customers as well as a $10 3 million and out of it.
Adjustments related to the final settlements are provisionally priced copper concentrate shipments from the first half of 2022.
Well the high allocation of copper concentrate sales to international customers is expected to continue through the end of the year adjustments related to copper price volatility in the first half of the year have now been effectively settled.
With respect to foreign exchange derivative contracts, we reported realized losses during the third quarter of $5 million.
Relating to legacy hedges that have now been closed out.
We also recorded an unrealized gain of $6 8 million.
Afresh hedge book, which has an average floor of 5.06 BRL per U S dollar and a ceiling of 626 BRL per U S. Dollar at the end of the quarter.
A significant portion of our BRL exposure hedged over the next 15 months, we have mitigated much of the FX risk related to our future operating margins.
In line with our growth initiatives capital expenditures increased to over $90 million in the third quarter and were partially offset by strong cash flows from operations of $43 million.
As we approach the end of the year, our balance sheet remains in great shape as our growth initiatives continue to accelerate.
With that we ended the period with $435 million in total liquidity.
With that I'll hand, the call back to Noel to share some final comments.
Yeah.
[laughter].
Alright, it appears that no matter what that is.
Nine.
No sorry, I was I was on mute. Thank you Wayne and everyone who joined the call today.
Before we open the call to questions and answers I'd like to thank our team in Brazil for the strong operating performance.
Project execution, they achieved during the third quarter.
I will now turn the call back to the operator.
To open the lineup 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.
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Once again to join the question queue. Please press Star then one now.
Our first question comes from Stefan you Ano of Cormack Securities. Please go ahead.
Okay, great. Thanks, very much guys I'm, just curious and maybe this question is a bit premature given the the update we're going to see early next week, but just thinking about the growth. It's obviously very compelling just given sort of maybe the diminished cashflow. We saw this quarter can we anticipate maybe a change to the schedule to get some of these big growth projects down in terms of just you know.
Modest deferrals over time, just to make sure the balance sheet remains strong through that process.
Thanks for that question Stefan and a good one life.
Many companies are dealing with a margin restriction, we obviously look to everything that we're doing to be able to see where.
And when and what we can do with regards to cash.
Yeah maintenance I guess is the right word to.
To use with respect to that.
As I mentioned in my my talk in my portion of the presentation and please excuse us.
Fire engine going by the building.
Uh huh.
Honeypot provide.
<unk> provides us with a lot of flexibility as we continue to develop our assets and that put us up on it.
We will be able to shift some of that with you. When we talked to you, but certainly I think like every company. We review everything we feel that we're in a good position to maintain our guidance as we've seen it over the and whereas we put it out last year and potentially to improve upon that with the.
Addition of Honeypot.
The reworking as we're moving forward off the production plan at Butler. So we feel we're in a fairly comfortable position right now with regards to how we're managing our cash and how we're managing our capital programs and projects.
Okay, Great. That's very helpful. Thanks, 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, maybe a bit of a follow on question from Stephan just with respect to I guess the capital spend to date, you guys are tracking quite a bit below.
Guidance can we assume that most of that will get caught up in Q4 I guess.
Okay as a follow on to the Stephens question, maybe there's a possibility of some that actually does get deferred into next year.
Yeah, Craig some of it will be deferred into next year.
As a matter of the closing of contracts and timing of payments more than anything else.
And so when we look at it yeah at the beginning of the year, we have a crystal ball, we're trying to project as best we can with regards to when capital is going to go out the door.
Obviously, you don't reality never follows the crystal ball in terms of projections.
Particularly as we are moving forward without projects what I can tell you is our projects are on time and on schedule and what we said in the presentation today reflects that.
It's merely a.
Where we're seeing things right now.
On Boeing is related to the effect of timing of payments on it.
Certain capital items.
With regards to as we continued to develop the pillar three point O.
There's opportunities that we're seeing with respect to development of that project in light of Honeypot that allows us to potentially reallocate capital in a more advantageous way.
Well just leave it at that great.
And so what the life of mine plan that comes out next week, well that I guess it would make some things more clear in terms of capital will that include some updated.
Capital and cost or is it more just around you know grades and tonnes from the different projects you have guys. Yeah, it's going to be more it's going to be more grades and tonnes with regards to that we will be coming out with updated guidance.
The new year.
As as everybody else does but it'll be it'll be a production profile.
And.
Yeah, we'll come out with new guidance in the new year.
Okay, Great and maybe just one last question just with respect to labor cost I mean have you guys settled all your union.
Contracts already at this point and kind of what are you seeing in terms of cost inflation on the labor side.
Yeah, we haven't completed everything.
Just normal course of business with us with a well union.
Sure.
Difficult to say, where we're in negotiations come out, but we anticipate them to be lower than what we've seen in the past.
Okay, great. Thanks for taking my questions.
Our next question comes from Jackie <unk> of BMO capital markets. Please go ahead.
Oh, thanks, very much for taking my questions I I think the personal life is on board are you you mentioned in your release.
What are the critical path earthworks and site drainage are complete going into the.
The rainy season can you can you talk a little bit about what the.
The construction plan is during the rainy season, and where you might see any risks to right to construction timelines. If there is excessive rain. Thank you.
Thanks Jackie.
We the critical path items for everybody, who doesn't know the Tacoma project is up and put a state, which that's a very intense rainy season.
As such it was critical for us to have certain parts of the project that probably would be done later and a lot of other projects done earlier.
And we're happy to say that those those came in on time and on budget.
We've also had a significant rain event.
We got a two and a half I think it was two and off inches or something of rain in a 15 minute period that put a good stress test on the project and we're happy to say it came through in flying colors.
As we continue to move forward right now the Pos that we're working on right now Jackie are related to completion of the waste dump.
Linus and in construction that we anticipate starting to put down some of the first material on the waste them over the course of the next month or so.
The pre stripping.
The deposit has begun.
Obviously, putting some of that waste on the waste them and then we are in the process of doing site clearance and earthworks related to the plant infrastructure.
All of that is ongoing right now and is progressing on time, and we're very very comfortable with that.
With respect to long lead time items I E. As we mentioned last quarter. The big critical path items on long lead time are related to the mills happy to say that a ball.
Ball mill is on the ship already on its way to Brazil.
To say that we've completed our contracts with Augusta hip mills.
And so you know where we stand right now MTA and the team in Thiago well, Oh, great leader down in Brazil, and this project I've done an outstanding job considering what we've seen in other companies around the world with discuss two critical path items et cetera to get us into a situation where we are today.
So we are incredibly comfortable.
The biggest single risk factor to the project that hurdle has been cleared.
And where we're looking good right now.
Yeah, absolutely congratulations to Andy and the whole team I think the.
Yeah.
Spending that you guys report it as a it's a very positive surprise given the inflationary pressures we're seeing.
Can it gives you an update on our.
Cost inflation, maybe but can I ask for an update on the the domestic smelter that you would normally be shipping to is I know I probably asked this in the life quicker and I think you said it.
It's basically.
For this year is that still the case do you expect you'll be able to ship domestic concentrate and in bigger volumes again early next year or do you have any thoughts on that.
Yeah Jackie.
You know they've they've they've worked through their issues and they are coming back on schedule and on steam.
From our perspective, we'd like to just see them get a little bit further down the road with regards to there working capital et cetera.
Where to start being more comfortable shifting back to them, we are doing a little bit of shipments to them right now weighing.
Wayne and and Eduardo I have been working really hard with.
Them in another company to come up with some ideas with regards to how we can start to move back to them and and do things that don't put you know our cash flows or revenues from them at risk and you know I think its watch this space over the course of the next quarter.
To see how that starts to play out, but we obviously PMA is an important customer of ours.
Where we're super excited with respect to how they've come through a very challenging period.
For themselves and we really wanted to look forward to and support them going into next year with regards to our greatest sales to them. If we can.
That sounds very encouraging thank David and congrats thanks.
Our next question comes from Bryce Adams of CIBC capital markets. Please go ahead.
Yes, Hi, al I wanted to ask on potential copper hedges.
Given the multi year build do you internally Scott copper hedges.
I understand the financing was stretched to 325 copper.
So given where spot is today.
How much consideration did you give to copper hedges over the next 12 to 18 months.
That's a good question Bryce like everything else, we are constantly working with the finance team to evaluate.
Where our cash is warehouse cash outlays are going where our profitability is.
Frankly, I think you'd be naive.
In the current world market, and where the copper price system, where cost inflation is to not consider all alternatives to yourselves with regards to that so yeah, we have discussions with Augusta copper hedging.
Have we considered it either way no at this stage could reach it could that change yes.
But we're not gonna be naive to say no we don't consider it.
We have.
Okay. Thanks for that.
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, thank you offered.
But when you got enough.
Well, thank you all for joining.
Cool.
Yeah, we want to remind you that the team is available for any follow up questions as we always are.
And we're happy to discuss any aspects of our business. Thank.
Thank you all and have a good day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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