ERO Q1 2021 Earnings Call
Operator: Thank you for standing by. This is the conference operator. Welcome to the Ero Copper First Quarter Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Noel Dunn, Executive Chairman of Ero Copper for opening remarks. Please go ahead.
Christopher Dunn: Thank you and good morning everyone. The news release announcing Ero's first quarter 2021 financial results is available on our website and on SEDAR, as are our financial statements and MD&A for the three months ended March 31, 2021. As usual, 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, also available on SEDAR, for a discussion of the risk factors of our business and their potential impact on our future performance. Unless otherwise noted on this call all amounts are in U.S. dollars. Joining me today are David Strang, Ero's Co-Founder and Chief Executive Officer; Wayne Drier, Chief Financial Officer; Mike Richard, Chief Geological Officer; Makko DeFilippo, Ero's President and Courtney Lynn, Vice President, Corporate Development and Investor Relations. Before diving into our operating and financial results, I'd like to recognize the Board of team at Ero, especially our colleagues in Brazil, who have helped us to deliver a remarkable first quarter, in what continues to be a challenging operating environment. Our team has shown resilience in maintaining focus on our operations and continue to advance old growth objectives whilst offering critical support to our local communities. We are optimistic over the near-term with respect to COVID-19. As we're seeing both moderating COVID cases in Brazil and benefiting from the global vaccination programs as they roll out. Our strategy has and continues to center upon investing in our own assets to increase production whilst maintaining first quarter operating costs. This quarter is a great example of this, while these efforts continue to focus primarily within the Cortisol valley, where we still see tremendous growth opportunities in front of us. In parallel, we are looking at unlocking value at both the NX gold mine and a Boa Esperanza project, which will provide -- which we expect to provide updates on in the coming months. As we continue to advance the optimization studies on Boa Esperanza, it is worth noting that in 2017 feasibility study already outlined a fantastic project before any optimization studies, with an after-tax IRR of 32.7%, a $3 copper and BRL exchange rate of 380. Copper price aside, we continue to believe the Boa Esperanza project represents a high quality actionable project that is aligned with our return on invested capital focus. With respect to our Q1 results, we reported several record quarterly figures, including copper production of 12,638 tons C1 cash cost of $0.49 per pound Copper produced. Adjusted EBITDA of $86.7 million and an operating cash-flow of $62.1 million. As a result of this performance, our balance sheet has never been stronger with $84.6 million of cash and equivalents and appear leading net debt leverage ratio of 0.3 times on a trading 12 months EBITDA. With that, I will not pass the call over to David to provide a brief review and update of our operations. As our excavation update was released at the, in the end of last week, Mike will provide additional color on that and Wayne will provide a review of the Company's financial performance. We will all be available for questions immediately following the call.
David Strang: Thank you, Noel. Our first quarter results were released last night and reflect excellent performance at the MCSA mining complex, driven by higher than plan grades at our Pilar and Vermelhos underground mines and continued improvements in metallurgical recoveries. We processed nearly 600,000 tons of ore at an average grade of 2.3% copper and achieved record metallurgical recoveries during the quarter averaging 92%. I'm pleased to see the overall metallurgical recoveries and concentrate grades continue to improve in parallel with increasing mill throughputs largely due to successful integration of our new signal, which completed commissioning in late 2020 and is performing better than expected. Strong operating performance across the MCSC mining complex contributed to record quarterly copper production of 12,638 tons and record quarterly C1 cash costs of $0.49. A pound of copper produced a $0.20 per pound improvement as compared to the fourth quarter of 2020. Entering the second quarter, we have continued pre-operational activities relating to the restart of the Surubim open pit, which we forecast will commence mining operations during the second half of this year. As we bought the plant for an expanded operational footprint and actively make the first steps in preparing our operations to run at higher middle throughputs, we will undertake consecutive planned ball mill maintenance at the end of the second quarter and beginning of the third quarter. This maintenance is reflected in our full year copper production guidance range of 40,000 tons to the 45,000 tons of copper produced, which we expect to be equally weighted between the first and second half of the year. While early in our production cycle for the year, we see opportunities to moderate the second and third quarter impacts of this mill maintenance with higher than plant grades at the Pilar mine, as we sold during the first quarter. These opportunities remain under analysis. At the moment, a C1 cash cost guidance range remains unchanged at $0.75 to $0.85 per pound of copper produced. Panics gold mine also delivered a strong quarter producing 9,451 ounces of gold and C1 cash cost of $487 per ounce. And all-in sustaining costs of $643 per ounce of gold produced. Lower tons mills quarter-over-quarter was partially offset by higher head grades compared to the fourth quarter, along with continued strong metallurgical performance. With respect to full year guidance, we are reaffirming our range of 34,500 ounces to 37,500 ounces of gold produced at all in-sustaining costs of between $875 and $975 per ounce. As Noel mentioned, we continue to actively advance our optimization study for the Boa Esperanza project. We started as a bottom-up analysis last year, the 2017 feasibility study outlined to 7.5 year mine life averaging approximately 21,000 tons of payable copper production per year. And with the early results of our team's work, we believe we can significantly improve upon this. In tandem with the optimization studies on the geology and mining side, we are reviewing a redesign of the processing plant strategy, the use of all sorting technology and several other leavers that have not been previously explored. We expect to provide an update on this ongoing work during the third quarter. Lastly, I would like to quickly touch upon our exploration results that were released last week. And then the turn, the call over to Mike to provide more detail. I believe that last week's announcement illustrates our disciplined and systematic exploration strategy continues to demonstrate the Cortisol valley's potential and inherent optionality. We have one of the largest ongoing exploration programs globally, and we are committed to unlocking this value for our shareholders, our exploration program at our NX gold mine with drill rigs are currently operating, is progressing according to plan and we expect to provide more color on these results during our next quarterly update as third-party SC labs in Brazil reopened, and hopefully clear a backlog of our pending metallic screen results with that, I'll now pass it over to Mike to provide some additional context and color to our quarterly exploration news release.
Mike Richard: Thank you, David. Our exploration program has had a great start to the year and I am pleased with the results we are seeing come together throughout Cortisol valley, the announcement of the identification of two mineralized systems, Tera diesel and C4 are examples of the systematic work we have completed over the past two years to identify new greenfields mineral districts. So far, we have identified extensive copper mineralization extending up to 2.2 kilometers in the case of C4. Our experience in the course of valley tells us that higher grade pods occur within broad zones of lower grade mineralization. Context is important and is worth reminding everyone that the discovery of the high-grade Vermelhos mine started with the discovery of lower grade mineralization, some two kilometers to the north. Likewise, the first hole we drilled into the new C4 system, intercepted approximately 700 meters of multiple mineralized lenses ranging in grade from 0.2% to 0.4% copper. [ph] Hole ended in mineralization and the drill results released last week from C4 discovery reflect our first pass review of the system. We will continue to explore these systems and refine drill targets within them using systematic data-driven analysis and the combined use of ground [indiscernible] physics and borehole EMT. This work is being conducted in parallel with other identified systems and targets in the belt drill targets throughout the belt are continuously being prioritized. While the regional exploration program is targeting medium to longer term opportunities, we're also focusing on several near term opportunities within our portfolio highlighted by the discovery of the Nova zone at Vermelhos and our re-evaluation of the past producing open pit mines of the company. Vermelhos, the Novo's own discovery has identified a new high-grade lens of massive sulfide mineralization in an untested area, approximately 200 meters below the existing where mine infrastructure extending the great profile of an overall mine life of Vermelhos is a key objective of this year's program. And I am pleased to see a new zone developing out of the gate, our past producing mine re-evaluation efforts, which commenced late last year, integrating a number of new regional datasets is already generating excellent results highlighted by an exciting high-grade zone of Plus 3% copper identified just beneath the bottom of the Lago da Mina open pit. While this zone existed previously, it was lost within the totality of a much lower grade inferred resource and continuity of the high grade has never been evaluated, which we are doing now. Within the deepening extensions zone of the Pilar mine, exploration efforts continue to focus on extending mineralization at depth and upgrade the inferred mineral resource within this zone. Through the use of directional drilling technology, which offers greater drill placement, accuracy and traditional than traditional drilling technology, we've achieved better than expected results that we look forward to sharing with you next quarter. When viewed in the context of year-round drilling, a strong in-country geology team and our available excess mill capacity, our programs continue to show the variety of potential or sources for future mill feed over a full compliment of development timelines.
Wayne Drier: Thanks Mike. And good morning everyone, It's Wayne here. I want to echo Noel and David's comments about the first quarter of being an outstanding start to the year. Copper sales volumes were up over 20% quarter-on-quarter while gold sales moderated compared to the fourth quarter and combined with higher realized metal prices, we achieved a record quarterly revenues of $122.5 million and improvement of 34% over the prior period. Higher copper grade, mined and processed as well as sustained weakness of the Brazilian rail against the us dollar drove record, low C1 cash costs at MCSA during the quarter, should be no surprise that record quarterly revenue together with these operating costs resulted in record quarterly adjusted EBITDA and cash flow from operations of $86.7 million and $62.1 million respectively. due to the worsening of the COVID 19 pandemic in Brazil during the first quarter, the Brazilian rail weaken relative to the United States dollar after year end. As such, we recognized, realized, and unrealized losses on our foreign exchange derivative contracts of $5.7 million and $17 million respectively, and the non-cash $7.8 million loss related to the translation of our us dollar denominated debt held in Brazil. The benefits of sustained weakness of the Brazilian relative to the U.S. dollar, continue to more than offset the impact of our foreign exchange derivative losses as perhaps evidenced by this quarter's record financial performance. Our headline net income for the first quarter was $32.1 million or $0.34 per fully diluted share. After adjusting for non-cash items, including the unrealized foreign exchange losses. our adjusted net income was $56.3 million or $0.61 per fully diluted share. In addition to amending corporate credit facility to extend our debt maturities and lower our ongoing interest expense, we repaid approximately $7 million in short-term credit lines during the quarter. These Brazilian lines have now been fully settled and retired. Our balance sheet is the strongest it's been since we appeared in 2017 with cash and equivalents of $84.6 million and a very impressive net debt leverage ratio of 0.3 times on trailing 12 month EBITDA. I'll now hand the call back to Noel to share some final comments.
Christopher Dunn: Thank you, Wayne and everyone who joined the call today before we opened up to questions, I'd like to, again, thank the your team for the team to execute on our strategy and vision for this company. If headway being made globally in the fight against COVID 19 and tailwinds building around the green decarbonized world that is heavily reliant on copper, the future is looking very bright. We have a strong balance sheet and incredible growth strategy and a very attractive asset portfolio that we are confident will continue to deliver many more record metrics in the near future. Thanks for joining the call. We will turn it back to the operator to open up the line for questions.
Operator: Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Orest Wowkodaw with Scotiabank. Please go ahead.
Orest Wowkodaw: Hi, good morning. I was wondering if we could get some more color on the Boa project. I realize you're working on a study but I'm just curious. I mean, given that the current reserves only represent about 30% of the MNI resources, should we be anticipating a much bigger scale? The project that was envisioned I guess a couple of years ago?
David Strang: Hey Orest, thanks for the question. Yeah, I think obviously from the perspective of where we stand, we've got to be careful with what we can and cannot say. As I, as I think I highlighted in my comments that the work that has been completed to date as we progress towards the end game which we got to study in the way we've looked at resources, the way we've looked at reserves and preliminary production schedules. I think you could see that there is a little bit of a disconnect or a significant disconnect between the current reserves and resources. And I, I think we're starting to see that we're seeing that differential decline a passive word significantly. I think that's the best we can do right now with August giving you that kind of guidance. We're very, very happy, as I said to my notes with regards to the progress of the study.
Orest Wowkodaw: And you indicated that come out in the third quarter, should we take that to mean that would likely come out with your Q2 results kind of an early augment store or actually earlier?
David Strang: I think it will be after the Q2 results, will be released the beginning of August. I think we're going to be a little bit later than that, but certainly in the third quarter.
Orest Wowkodaw: Okay. And then just finally assuming the economics look attractive and given that my understanding is the project permitted, should we be anticipating that this could move into development fairly quickly and potentially as early as beginning of next year? Or how should we think about this?
David Strang: I, don't think your thinking is too far off where our thinking is right now. We'd certainly like to move the project forward assuming the economics are what we believe they will be. We'd like to move that project forward as quickly as we can. We certainly, from an internal perspective doing our planning as though we're trying to move that as quickly as we can.
Orest Wowkodaw: Okay. And then just finally, Is there anything standing in the way of development right now? Like, are there any perhaps social issues or anything that need to get resolved or could you start building tomorrow if you so chose so?
David Strang: Well, we have constraints. We've always said we've had our construction permit sitting with the government agencies we've been held off in the past, because as you, as you may or may not know in Brazil, once you initiate a construction permit you have to build within the two year period. We, I have re visited that with the relative authorities in state and that process is now moving forward with regards to clearing us our construction permits so we can move forward with construction of [indiscernible].
Operator: The next question comes from Alex [ph]ClinCheck with CIPC. Please go ahead.
Alex ClinCheck: Hi, everyone. And Congrats on a great first quarter. I wanted to ask on the, on the grades. So obviously, they're better than we expected in, in Q1. Would that then align with the mine plan or was that a positive price? And then, you know, how should we think about grades for the rest of the year at, at MCSA
David Strang: Alex Just a great question. We are pleasantly surprised with the grades that we're seeing, particularly in polar right now in the mining areas that we're mining from. They certainly have been better than we expected in that area. Current forecasts, just that it will continue but well, we're going to like anything else that we do, we're going to take a cautious approach, but so far, the preliminary work that's looked at the grades that we'll be mining for the remaining part of the year and that areas that we'll be mining in Pilar. We certainly see opportunity that the grade could stay high or Higher.
Alex ClinCheck: Okay, perfect. Thank you for that. And then you know, in expiration update, you'll have that it's sort of a new area at [ph]HIG Mill. That was, that was also higher grade and it was pretty close to infrastructure. So, so when might that make it to the mill? Is that something that could benefit the great profile of this year or is that next year?
David Strang: I don't think that is in the plans this year, Mike and the team have to drill that zone off. That will be a focus on the second half of the year in terms of not only drilling that, but the self-image corridor. So if you were to look at it from a planning perspective on your modeling or reviewing the work that we've done in the past, in terms of our life of my planet for mayors, we would anticipate that you would see us moving the east zone. I've amazed further down in the mines life and looking to replace that with material mind from Novo, as well as the self from as corridor. I don't know when exactly we're meant to be doing that. I think it's in the 18 months from now. So we would expect the, those areas to start entering the mind plan in that kind of timeframe. Okay,
Alex ClinCheck: Great. Thank you. And then maybe just, just one more on the exploration side. So with those new discovery C4 and Tera diesel itself you know, what, what should we expect in terms of next steps? Like, are you going to move those quickly towards the resource or, or do you want to kind of keep testing regionally before you sort of prioritize where you put the lion's share of the effort? Or how do we think about that going forward?
David Strang: Well, I think as, as you can see in the exploration update I told the cell right now, where we've got the teams on the ground doing a lot of work with regards to EM et cetera, and that particular project the hope would be that we'll start drilling again there in the second half of the year, maybe the third quarter. We do have rigs right now at C4 and we are drilling there. We are drilling in another area and that, that general facility vicinity as well, in terms of another target zone, maybe we've been able to talk about that the next exploration update. I'm not sure. So it's a combination of continuing to work and these mineralized systems that we've identified to as, as Mike said in these in this piece start narrowing in on massive sulfide mineralization in the higher grades and what we've seen. But also we do continue to look and we do have part of our program continues to look for new mineralized systems as well. So it's a combination of both like anything else that we've done as a, as a company, we have been generally quite aggressive with our exploration programs, with regards to converting discovery into resource. But I think at this particular stage with the work that Mike's doing, a lot of the regional work that we we're doing right now is targeting and looking to move in from these disseminated lower grade mineralized zones into the higher grade, massive sulfide zones as illustrators, what we've done in the past with regards to or what was done in the past in terms of the mouse and that whole region up there.
Alex ClinCheck: Okay. Oh, that's great. Okay. Thanks. That's it for me? Congrats again, on, on a great quarter.
Operator: s his concludes the question answer session. I would like to turn the conference back over to management for any closing remarks.
David Strang: Thanks operator, and appreciate every, like we've said in the past, we really appreciate everybody's time and consideration in terms of following our company, following our story. Thanks to all the analysts for the consideration, with regards to the coverage of that. I'd like to just reiterate thanks again to our team in Brazil who have done an outstanding job again on another great quarter. And we look forward to talking to you in between quarter and at the next ex quarterly update financial results in August. Thanks very much operator.
Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.