Q2 2023 Ero Copper Corp Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Arrow copper second quarter, 2023 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.
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I would now like to turn the conference over to Courtney Lynn Vice President corporate development and Investor Relations for opening remarks. Please go ahead.
Thank you operator, good morning, and welcome to Arrow Coppers second quarter 2023 earnings call.
Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements and M. DNA for the three and six months ended June 30th 2023.
On the call with me today are David Strang, <unk> co founder and Chief Executive Officer.
So do you Filippo President and Chief operating Officer, and Wayne Drier Chief Financial Officer.
We will be making forward looking statements that involve risks and uncertainties actual results may differ materially we would refer you to our most recent annual information form available on our website SEDAR and Edgar for a discussion of the risk factors of our business and their potential impact on our future performance.
Yes.
As a reminder, unless otherwise noted all amounts are in U S dollars I will now pass the call over to David Strang.
Thank you Courtney.
Thank you everybody for joining us today.
During the second quarter, we continued to navigate a dynamic macro economic environment as we observed strengthening fundamentals in global copper demand while at the same time experiencing softer copper prices driven by global economic concerns.
The transition to clean energy has intensified the need by governments in downstream industries to secure critical minerals supply is there.
Evidenced by impressive investments from non traditional investors across the corporate sector.
Despite this positive backdrop, we saw lower copper prices during the period as well as a stronger Brazilian real.
All of it where we're able to offset the impact of these changes and the copper price and exchange rate through the strong execution of our full year operating plan.
This resulted in a noteworthy increase in copper production nearly 30% compared to the first quarter.
Additionally, <unk> operations performed well.
Tributes to adjusted EBITDA of $49 $1 million and adjusted net income attributable to the owners of the company of $22 3 million.
Or <unk> 24 per share on a fully diluted basis.
We also made meaningful progress on our key growth initiatives.
Including the Tacoma project and the cut or you bought operations new external shaft.
I am pleased to report that we are approaching 50% physical completion is it took them a project.
Leaving the precinct phase of development for the country operations, New external shaft was successfully completed and we are gearing up for the main shaft thinking later this year.
Importantly, we have achieved over 95% visibility on planned capital expenditures and took them off and approximately 80% visibility and sharp capital with total forecasted capital for both projects remaining within 5% of the original estimates.
Before I hand over the call to macro to provide more detail on the progress around our key growth projects let.
Let me give you an overview of our second quarter operating performance and the expected cadence of production during the second half of the year.
And our carry but operations, we produced 12004 tonnes of copper in concentrate and see one cash cost of $1 52 per pound of copper produced.
The higher mine tonnage and copper grades at all three of our mines were driven by planned stope sequencing, resulting in increased production and lower unit cost compared to the first quarter.
While we continued to sell copper concentrate to our domestic smelter during the quarter on a limited and prepaid basis. The associated reduction concentrate sales costs was offset by continued strengthening of the BRL.
As for the cadence of production in the second half of the year.
Copper production to be slightly lower in the third quarter compared to the second quarter due to slightly lower planned mill throughput volumes and copper grades resulting from stope sequencing.
However, we expect mill throughput volumes to increase in the fourth quarter.
We anticipate the commissioning of the new ball mill and drive quarterly production to its highest level of the year.
Putting aside any fluctuations in the BRL exchange rate. We expect these variations in production to be reflected in kind of your best see one cost.
With slightly higher cash costs expected in the third quarter and the lowest cone cash costs expected in the fourth quarter.
As a result, we are reaffirming our full year copper production guidance of 44 to 47000 tons.
Copper produced at seaborne cash costs of between $1 40 to $1 60 per pound of copper produced.
Turning tells you haven't seen the operations, we continued to benefit from strong mined and processed gold grades above the 13 grams per ton during the quarter.
This represents an increase in grade of over 11% quarter on quarter and 100% year on year.
Affectively offsetting lower metallurgical recoveries that were impacted by elevated mill inventory at quarter end as well as elevated carbon content and several high grade stopes mined and processed during the period.
Consequently, we produced 12333 ounces of gold and see what are the cash costs.
$492 per ounce of gold produced.
We are reaffirming 17 as 2023 gold production guidance of 50 to 53000 tons I'm, sorry that was announced that I wish it was tons.
Oh God at Sea, one cash cost of 475 to $575 per ounce of gold produced.
With the completion of development to the Martini a vein during the second quarter, we expect higher gold production in the second half of the year as we commenced production from this second or source.
Regarding our 2023 capital expenditure guidance, we have increased our range by $15 million to $20 million to reflect proactive investments. Following a detailed review of major projects and support infrastructure at the carry by operations during the second quarter.
While the shaft project remains within 5% of budget, we have elected to invest in various upgrades.
In the second half of the year, which Mack will discuss more to support our expanded life of mine operating plants.
It is worth noting that the non cutting EBA components of our capital expenditure guidance as well as a C. One cash cost guidance remain unchanged.
Nevertheless, we are closely monitoring the BRL to U S dollar exchange rate, which averaged approximately $4 eight in July .
The BRL is since we can following the.
The unexpected 50 basis point rate cut by Brazilian Central Bank.
And component.
Sorry.
Central Bank rate combined with a more dovish tone expressed by the country's policymakers.
It's a BRL remains at current levels or strengthens again, we may consider adjusting the five.
So I'll, let five reais.
So any exchange rate assumed in calculating our full year operating cost and capital expenditure guidance ranges.
I will now pass the call tomorrow to discuss the highlights around our year to date project execution, after which Wayne will discuss our financial results for the quarter.
Thank you David and good morning, everyone. During the second quarter, we continued to make excellent progress across our portfolio of growth projects Advair.
Advancement of critical path work streams are both too Kumar and our shaft project at car you buy is evident in the updated project photos. We have included in our second quarter news release.
It took them all as David mentioned, we are approaching 50% physical completion and are on track to achieve first production during the second half of next year.
Contractor mobilization hiring of key operational positions and a continuation of our training programs, which are focused on hiring locally all progressed significantly during the period and we now have a workforce of over 1100 people on site.
Notable achievements. This quarter include the completion of all critical path earthwork activities.
And completion of all large volume civil work.
In addition, we commenced assembly and erection of structural steel for the primary crusher, the ball mill and flotation areas as planned.
During the third quarter, we expect to complete the construction of a water reservoir.
To advance steel and electromechanical assembly throughout the process area.
Install a primary crusher and ball mill, which are both on site.
And install our main substation, which is completing final testing and should arrive on site in the coming weeks.
In summary, physical progress and procurement at <unk> remains on track and with over 95% visibility on planned capital expenditures for project completion, we are reaffirming our $305 billion capital cost estimate.
We expect capital spending to come ought to be second half weighted this year due to the ramp up on steelworks, electromechanical assembly and piping as well as the number of final equipment deliveries expected during the second half of the year.
At our Colorado operations.
We are focused on executing our operational plans and advancing our pillar 3.0 initiative, which includes the construction of a new external shop for the pillar mine and an expansion of our mill capacity.
The new external shaft project for the poor mine is progressing according to schedule and was approximately 25% complete as at quarter end.
As David mentioned, we completed the precinct phase of the shaft during the period.
Subsequent to quarter end, we successfully lowered the sinking stage into the shaft collar and commenced hoisting of the pre assembled headframe into its permanent configuration.
Our mill expansion project, which includes the installation of a third ball mill and a new flotation upgrade is on track to start commissioning and ramp up during the fourth quarter.
Looking ahead at <unk>.
We remain fully on track to complete our mill expansion project and initiate the main sink on the new shaft by year at.
Underground at par, we remain on schedule with development and permanent underground infrastructure installations for shaft handover to operations by the end of 2026.
It is worth noting that during the quarter, we completed a detailed assessment of support infrastructure at our Colorado operations. This thorough review identified new capital investments and upgrades totaling approximately $15 million to $20 million.
These investments are specifically focused on bolstering the support infrastructure for the deepening project of the pillar mine, our underground paste fill distribution system and overall tailings capacity. The primary objective behind these strategic investments to enhance the operating resiliency of the car you about operations and support.
It's extended mine life in the months and years ahead, we will continue to look at stage strategic investments in infrastructure and new technologies to improve operational performance insurer operating resiliency and protect our frontline workforce.
I will now turn the call to Wayne to discuss our financial results.
Thank you Micah.
As David mentioned earlier, our second quarter financial performance reflected a notable increase in copper production mixed with lower copper prices and a stronger Brazilian real compared to the first quarter.
This drove operating cash flows of $55 $5 million that helped to fund capital expenditures of $126 9 million.
Which were primarily directed towards the ongoing execution of our organic growth initiatives.
We ended the quarter with a robust liquidity position of approximately $330 million.
This included cash and cash equivalents of $124 million short term investments of $56 million and $150 million of Undrawn availability under our senior secured revolving credit facility.
Regarding a Brazilian real to U S. Dollar exchange rate hedges, we reported realized gains of $2 $8 million in unrealized gains of $2 $1 million.
Looking ahead to the second half of the yeah. We are hedged on approximately $15 million per month at an average floor rate of five three at an average cap rate of approximately $6 three.
In reality to U S to U S dollar.
We also remain hedged on approximately 75% of our copper production for the remainder of the year through zero cost collar hedge program initiated in January .
Hedge contracts provide a floor price of $3 50 per pound on 3000 tons of copper per month through December 2023.
It's worth noting that our realized metal prices for each quarter reflect settlement adjustments and other miscellaneous items not captured and see you on cash costs. Furthermore, average realized prices are influenced by the timing of the metal sales, which do fluctuate within a given quarter.
With that I'll now hand, the call back to David for some final remarks.
Thank you Wayne and everyone, who joined the call today.
Before we proceed to the Q&A session I want to take a moment to express my sincere appreciation to our dedicated colleagues in Canada and Brazil.
Commitment and hard work have been instrumental in not only executing our operating plans also driving progress on our organic growth projects.
Additionally, I am pleased to announce the publication of our 2022 sustainability report earlier this week.
This report outlines our strategy and performance across key environmental social and governance topics.
As a global decarbonization movement gains momentum and stakeholder interests converge. We are proud of our strong ESG profile, which we firmly believe will translate into positive financial outcomes and we're excited about the opportunities to expand our contributions to the green economy as we execute.
I'll now growth strategy.
On a personal note.
A lot of you know caught me very well I'd like to extend our congratulations to Courtney who was.
Promoted to senior Vice President of the Corporation for corporate development, Investor Relations and sustainability and.
And this is a true testament to the strength and what she has to a team that we were pleased to be able to provided with this promotion. So congratulations courtney from us and the rest of the team.
And with that operator, we'll now open the lines for questions.
Thank you we will now begin the question answer session.
Joining the question queue you May Press Star then one on your telephone keypad.
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We will pause for a moment of callers join the queue.
The first question comes from Dalton Barreto with Canaccord Genuity.
I had.
Thank you good morning, guys and congrats Courtney.
I wanted to start by asking about the realized price I understand Wayne just touched on it but maybe just a little bit more context over the last few quarters I mean, you've been realizing you know somewhere between 10 and 15% discount to the <unk>, Let me I'm just trying to understand you know.
Really what's in there and whether that's kind of a go forward assumption to make.
Yes, Dalton I think we obviously have a number of adjustments that flow through that.
Obviously, theres there settlement adjustments as well as I mentioned so when.
When you think about the final deliveries, they're all weight adjustments.
Assay adjustments and and so I think when we when you look at what we realized versus just the headline price I think that's a fair assumption to make.
Four.
Okay, great. Thanks, and then maybe I can just ask you another one.
On the BRL implications if the BRL does stay around 4849 and I understand they are.
Florida on some of your hedges at around 5.3, if the Bureau does stay around 4.9, okay. Well what are the are the applications on your SKU on costs as you all of a sudden your capex estimates for what the two projects.
Yeah, Hey, Darren this is mark I'll pick that one up you know when you look at our business and I think we've talked about this in the past, particularly in the operating cost level.
Our.
Operating costs are about 95% denominated in Brazilian reais.
It excludes things like diesel, which do have a dollar linked component.
So that's.
Nine five to one ratio on the BRL and point 95 to one ratio and a bureau on our capital projects it depends on which one you're talking about the took them. All when you look at the remaining spend is about 90% to 95% BRL when youre looking at the shaft project it is less.
It's probably about 60% B R L.
And on the mill expansion would be the same 95%, it's predominately labor at this stage.
Great. Thanks, guys I'll jump back in queue.
Okay.
The next question comes from Oren <unk> with Scotiabank. Please go ahead.
Hi, Good morning, David can you. Please give us an update on the nickel exploration and I'm still and I'm curious whether.
We should still be anticipating I think you'd previously mentioned October as a target for more of a fulsome nickel update.
Is that still the case.
Thanks, Thanks, Sara I'm surprised dumped and didn't didn't beat me to the punch on that one.
[laughter] with Augusta nickel, we continued to advance the projects.
And moving them forward.
I think where we are standing right. Now is we're hopeful to be able to have a more fulsome conversation with the market probably more likely in November .
But I.
I don't want to get too into the reads with regards to everything that's going on in and around.
The projects are as we're working on them, but we wanted to be able to give the most comprehensive update we can with regards to how how that so coming together and it looks like the best guidance I can give you right now is.
Possibly in November with regards to doing that there's a couple of items that we're working through with regards to land packages and as they come to fruition then we hope hopeful they still come to fruition in the near term so we will be.
Able to have a more fulsome discussion so I think right now as the best indicators I can give you is some sometime in November is likely when we would like to be able to have a more fulsome discussion with the marketplace about it.
Okay. Thank you and just as a follow up to that should we be anticipating a potential maiden resource on the nickel or is that is that way too premature.
I think it's a little premature that Rs I mean.
What we're trying to understand with regards to the various areas that we have is why is the quantum of opportunity we have with regards to.
Various nicole targets that we're dealing with I think our resources right. Now I think is premature I think what we're trying to understand is what is the quantum of the opportunity throughout the current cell valley in terms of the number of these that we can look at.
And we can start working on and the comprehensive fashion over the course of the next few years.
Okay, perfect and just one follow up to adult use question.
Wayne about they realized nickel prices.
Sorry, copper price I realize at this quarter was pretty volatile with respect to copper price.
I mean going forward in a flat copper price environment, which that eliminates the provisional pricing impact what kind of run rate discount should we be anticipating to let me.
And that kind of environment, because I feel like the discount this quarter was exaggerated the downside.
Yeah. So I think this quarter, we did have one shipment, which was a we had an anomalous settlement on an assay and and and so where we decided to it's still out for Empire, but we decided to book that through so that had a an oversized impact on this number I think going forward it'll be much.
More in line with.
What you've seen in the past, which is sort of.
5% to 10%.
And is.
That reflects that reflects that reflects just to add there. It takes a lot of there are a lot of adjustments that come through that are really specific to the different contracts, we signed with the with the various off takers. As you know we were not under long term contracts. We do short term contracts and every short term contract has different nuances as to that.
The adjustments and a set of terms and conditions outside of treatment and refining charges.
Okay. Because this is I would say this isn't unusual let's see it this way in terms of it being reported I mean potentially could are these not shouldn't that be reflected in costs and cheap one cost rather than a guest.
Yes counted out let me price.
Look we are we have a certain approach that we take and.
We're comfortable that these reflect discounts to the.
The metal price and we've been very consistent with this approach.
Over the last few years, so we haven't changed our approach to that.
And I think that's reflected in if you look back.
And our and private prior reporting.
Okay. Thank you very much.
And the next question comes from Gordon Lawson with paradigm capital.
Go ahead.
Hey, good morning, and thank you for taking my question.
Can you please provide a little more color on that.
45% completion, Mark will come on in <unk>.
The status of delivery of long lead items.
Yeah, Hey, Gordon this is mako so when you look at our long lead items.
Effectively all of the purchases have been placed as I said, the longest lead items, which we've been on a bomb.
Ball mill and primary crusher those have arrived on site when I go through the manufacturing punch list across the remaining long lead items. Those are in near completion stage at most of ours are providers offer those pieces of equipment and we expect deliveries to occur throughout the balance of the year on all along.
<unk> that we purchased are put deposits on in Alaska.
12 to 14 months.
Okay, great. Thank you.
And so looking at the pre strip and I'm seeing how far Oh, it's on schedule are there any plans to mine stockpiles.
No completion.
Yeah. If you look at the schedule Gordon It's a great question, we're about $2 7 million cubic meters advanced or approximately 5 million tons on the pre strip.
We anticipate reaching first sulfide ore in November of this year.
So sometime during Q4, and we will accumulate a stockpile of ore in.
In advance of commissioning, which we anticipate occurring in 2024 as you know.
I'll, even add on to that Gordon.
While I'm pretty impressed with the group.
Is the detailed they've gone into even with the stockpile.
We obviously everybody knows that we.
We're gonna be mining very very high grades and the early part of the mine life and the team essentially put together a plan whereby we're going to have both the high grade and lower grade stockpile. So that as we go through wet commissioning and we are starting to work and make sure everything works that we're not wasting a high.
Great material running it through.
As we are testing, but rather using lower grade material for that test work.
I've got to commend mapco in the team with regards to the thinking with regards to doing that.
The granular granular reality that the team is working towards even with regards to to that new ones.
Yeah.
Okay that sounds great. Thank you very much I appreciate it.
Once again, if you have a question. Please press Star then one.
The next question comes from Stefan <unk> with <unk> Securities.
Please go ahead.
Yeah, Thanks, very much guys and congratulations Courtney.
And in past calls you sort of you mentioned you know seeing.
<unk> district potential beyond two can I I know, it's always hard to comment on these things, but is there anything more you can update us on that front in terms of what you're seeing in that area maybe next.
Nothing right now.
With regards to that Stefan well, we are working we have mentioned that we're working on a project called Soma.
I think it's a little early to get into that.
Too much detail with regards to what we're seeing there.
The team is also widening its.
Viewpoints with regards to a more regional.
And in terms of the general area around it took them a project.
So nothing new to report there.
With regards to that okay. Okay, great. Thanks very much.
The next question comes from Jackie praised by Lawsky with BMO capital markets. Please go ahead.
Thanks for taking my question and I'll add my congratulations to you Courtney as well well deserved.
I was wondering on the AR on the changes to your Capex guidance that you've given for 2023 can you talk a little bit about which projects you brought forward or added to the list for this year for the second half.
Yeah for sure Jackie This is mark is so when you go through I think it's important to note that it's a various number of line items. No single line item is about two and a half a million dollars. These are a series of small investments.
Operational improvements.
The areas related to some of the permanent infrastructure for the deepening project, which frankly, we won't have the opportunity to go back into a once the shaft is in operation and we're advancing some of the installation.
<unk> our permanent infrastructure.
As well as as well as in tailings in the underground distribution system for the paste fill why are those are the main the main buckets as I said, it's a series of investments.
In light items that accumulate that up to about $15 million to $20 million.
Can I ask just as a follow up sorry.
Well what prompted the those projects can be brought forward I know you mentioned.
Hum.
Needing with with the shops, but is this is this related to the size of your balance sheet in better shape than you had anticipated or or just.
That's moving forward more quickly than you had expected.
I'm going to take this one.
In terms of macro taken over the role as COO.
Aside to do a comprehensive review.
And he felt that certain projects needed to be moved up in terms of the overall profile of some of the items with regards to efficiencies.
In the in the business.
Along with some projects that he felt needed to be spent sooner rather than later.
That makes a lot of sense, thanks very much.
This concludes the question answer session I would like to turn the conference back over to David Strang for any closing remarks.
I'd just like to thank everybody again for coming on the call.
I hope everybody is having a great summer.
And as always we are available for questions and please feel free to reach out to Courtney myself macro Wayne if you have any further you'd like to get a clarity on thanks, again, operator, and thanks to everybody Bye bye.
This concludes today's conference call you may disconnect your lines.
For participating and have a pleasant day.
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Yeah.
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