Ero Copper Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Aerocopper First 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 will be an opportunity to ask questions.

Operator

Conference Call. 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.

Speaker 1

Thank you, operator. Good morning, and welcome to the Arrow Copper's First 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 MD and A for the 3 months ended March 31, 2023. On the call today are David Strang, Arrow's Co Founder and Chief Executive Officer Maco DeFilippo, President and Chief Operating Officer and Wayne Dreyer, Chief Financial Officer. We will be making forward looking statements that involve risks and uncertainties from which actual results may differ materially.

Speaker 1

Hours. I will now pass the call over to CEO, David Strang.

Speaker 2

Thank you, Courtney, and thank you, everyone, for joining us today. I'm pleased to report that we've had a strong start to 2023 at Arrow. Despite ongoing global economic uncertainty, Both copper and gold prices remained at favorable levels during the period, and we expect global policies aimed at reducing carbon emissions will continue to support copper prices for the foreseeable future. During the Q1, favorable metal price dynamics combined with strong operating performance, including record quarterly gold production, drove solid first quarter financial results, including adjusted EBITDA of $48,200,000 and adjusted net income attributable to the owners of the company of 22,500,000 or $0.24 per share on a diluted basis. As important, we continue to progress our strategic growth initiatives with the Tucama project and our new external shaft at Cariba reaching approximately 30% 20% Physical Completion, respectively, as of quarter end.

Speaker 2

We executed several important contracts for each project during the period, bringing visibility on capital expenditures to approximately 90% at Tucumã and 70% on the shaft. Forecast total cost to completion for both projects remain within 5% of the original project debt. Before I turn the call to Mako to provide more detail on these projects, I will run through our Q1 operating performance and provide color on the expected cadence of production through the rest of 2023. At our Caribo operations, we produced 9,327 tons of copper and concentrate at C1 cash cost of $1.70 per pound of copper produced. Lower mine copper grades from the Pilar and Vermeus mines Driven by plant stope sequencing resulted in lower processed copper grades and production compared to the Q4 of 2022.

Speaker 2

As expected, this resulted in 1st quarter C1 cash cost above the high end of our full year guidance range. While we resumed shipment to our domestic smelter during the quarter on a limited and prepaid basis, The associated reduction in concentrate sales costs was offset by a stronger foreign exchange rate. With respect to full year production cadence, we expected 1st quarter copper production to be the lowest of the year and anticipate full year copper production to be second half weighted due to higher anticipated mill throughput volumes Dream ramp up and commissioning of the new ball mill during the Q4. We are reaffirming our full year copper production guidance of 44,000 to 47,000 tons of copper at C1 cash costs of between $1.40 1.0 Turning to our Argentina operations. We achieved record quarterly gold production of 12,443 ounces due to an increase in grade of over 16% quarter on quarter and Approximately 100 percent year on year.

Speaker 2

As a result, the Jean Coutin C1 cash costs for the quarter $4.36 per ounce of gold produced. Gold production at Jantina is also expected to be second half weighted. We remain on track to commence production from the Matinia vein later this year, which should contribute to higher mill throughput volumes during the second half of the year. We are reaffirming Javan Tina's 2023 gold production guidance of 50,000 to 53,000 ounces at C1 cash costs of between 4.75 and $5.75 per ounce of gold produced. With each quarter that passes, operational execution and the development of our growth projects is bringing us closer to our objective of achieving over 100,000 tons of copper production by 2025 and sustained annual gold production of between 5,500,000 and 60000 ounces beginning in 2024.

Speaker 2

With that, I will now pass the call to Mako to discuss the highlights around our year to date project execution, after which Wayne will discuss our financial results for the quarter.

Speaker 3

Thank you, David, and good morning, everyone. As David mentioned, we've made strong progress on the execution of our execution of our growth projects since the beginning of the year and are extremely well positioned to continue to execute. At our Tucumã project, We concluded critical path of earthworks around our process plant infrastructure and put 1st concrete in February on schedule. Overall civil wars are progressing well and we expect completion of the primary crusher foundation later this month and the foundation for the ball mill to be completed in June. Electromechanical erection for both areas is scheduled to commence in July.

Speaker 3

I am pleased to report that equipment deliveries also commenced this quarter, most notably with the arrival of our ball mill on-site. On the mining side, pre stripping activities remain firmly ahead of schedule with approximately 20% of total pre strip volume completed as of Fluoride. With With all major outstanding contracts concluded during the period, capital expenditures under contract increased from 55% at year end to approximately 85% at the end of March. With an additional 5% of capital expenditures currently in the final stages of negotiation. Our overall visibility on total project spend is over 90%.

Speaker 3

Our capital estimate for project completion remains unchanged at approximately $305,000,000,000 which is within 4% of the feasibility study estimate. With a significant workforce mobilization currently underway at Tucumã, we have ramped up local labor training programs in partnership with the National Service For Industrial Training, a well known non profit organization focused on technical and vocational education in Brazil. In part due to the success of this program, Approximately 60% of our 700 member workforce currently at the Tucumã project are from the surrounding communities. Switching gears to our Carib operations. We continue to advance surface infrastructure installation for the new external shaft as can be seen in the photos included in yesterday afternoon's press release.

Speaker 3

Main activities underway on surface include final civil, erection of steel work for the headgear, center tower as well as installations of the stage and personal winders. In parallel, we are making excellent progress on underground infrastructure related to the shaft. Subsequent to quarter end, Our shaft sinking contractor, UMS Group, mobilized the site and conducted the first blast of our precinct, an important milestone for the project. Looking ahead, we remain fully on track to complete remaining surface infrastructure installation, conclude the pre sync phase and initiate our main sync by year end. Plant capital expenditures for the new external shaft under contract or in the final stages of negotiation increased from approximately 35% at year end to over 70% at the end of March.

Speaker 3

With additional equipment orders expected to be placed this quarter, total visibility on project capital is approaching 75%. Like the Tucumã project, I'm pleased to share that our projected capital spend on the shaft remains within 5% of the project. I will now turn the call to Wayne to discuss our financial results for the quarter.

Speaker 4

Thank you, Mecha. As Dave mentioned earlier, Our Q1 financial results reflected solid operating performance, including record quarterly gold production, bolstered by a favorable copper and gold price environment. This contributed to a stronger than budgeted liquidity position at quarter end of approximately $387,000,000 which includes approximately $210,000,000 of cash and cash equivalents, dollars 27,000,000 in short term investments and $150,000,000 of undrawn capacity under our senior secured revolving credit facility.

Speaker 2

The change in

Speaker 4

our liquidity position compared to year end of approximately $81,000,000 was driven primarily by elevated capital expenditures related to the execution of our peer leading organic growth strategy as well as approximately $28,000,000 of working capital changes. We continue to manage our exchange rate exposure through opportunistic hedging of the BRL using 0 cost collars. During the Q1, This resulted in realized and unrealized gains on our foreign exchange derivative contracts of $900,000 $3,200,000 respectively. While the real has continued to strengthen into the 2nd quarter, we are hedged on approximately $30,000,000 worth of monthly real exposure for this quarter this upcoming quarter and approximately $15,000,000 per month for the second half of the year at an average full of around R5.16 at an average cap rate of R6.34 per U. S.

Speaker 4

Dollar. We also remain hedged on approximately 75% of our copper production for the remainder of the year through a zero cost collar hedge program we put in place in January. Hedge contracts provide a full price of $3.50 per pound on 3,000 tons of copper per month through December 2023, Protecting a meaningful portion of our revenues and cash flows during the construction of Tucumã. With that, I'll hand the call back to David to share some final comments.

Speaker 2

Thank you, Wayne, and thanks to everybody who joined the call today. Before we open the call up to Q and A, I'd like to thank our colleagues here in Canada and Brazil who continue to execute on our operating plans while also advancing our organic growth projects. I would also like to congratulate Mako on this expansion in his role from President to President and Chief Operating Officer. I would like to note that Mako has been an integral member of the executive team since the founding of the company. And on the primary appointment As President in January 2021, he assumed oversight for the implementation of the company's strategic plan, including day to day operations and major projects.

Speaker 2

I'd also like to thank Anthea for her contributions to the organization and along with the rest of my colleagues on the executive team, wish you all the best for the future. I will now turn the call back to the operator to open the line for questions.

Operator

The first question comes from Gordon Lawson with Paradigm Capital. Please go ahead.

Speaker 5

Hi, good morning, everyone. Congratulations on another great quarter. Can you please elaborate on the Any thought deposit in terms of some of the challenges and respective operating costs associated with mining this area?

Speaker 2

That's a good question and it's going to take a long answer. But essentially, Honeypot is not a new deposit. It's part of the original upper levels of the ore body that had been left behind early in mine's life when it went underground and it was at that time trying to use pace fill back in the 1980s. So Honey Pie is an understood well understood area and it's just being integrated into our plan with respect to how Interoperating Plan. Issues that we deal with with regards to Honeypot is there's a lot of development drives that had been done back in the 1980s that need to be rehabilitated.

Speaker 2

And so as we continue to work, we have taken on all of our assumptions and our Capital and operating costs have all assumed that we have to in terms of rehabilitate those drives, Assume that those drives essentially have to be re drilled, re mined. So we've taken a very conservative approach with regards to Honeypot. The initial responses in terms of operating the Honeypot have been great in terms of grade, and we continue to look forward to Integrating it and continue to integrate it over the next 4 to 5 years as we get deeper into it and as we start to also

Speaker 5

That's fantastic. Thank you. Reported at around 45% in the 2022 AIF. Are there any plans to boost mining rates or does this

Speaker 2

Sorry Gordon, you went very muffled there. So we are Struggling to hear you. Could you just repeat that again?

Speaker 5

Sure. So in terms of the excess mill capacity has not been Yes. It was not straightforward at around 45%. So are there plans to boost the mining rates? Or do you prefer the setup as it

Speaker 2

and our operating plans and if you look at our life of mine plan and coincidentally, the new technical report That will take the capacity of the mill up from its current 55% of utilization up to 75%. So we will have some areas of excess capacity. As we look down the road, We really feel that taking that plant from the 75% capacity to 100% is really involving some of the new exploration work on some lateral projects that we're working on. We hope to be able to talk to the marketplace later in the year with regards to the work that we're doing there. And hopefully at that particular time, it starts to show a road map towards how we can move to full utilization of the mill.

Speaker 5

Okay, fantastic. Thanks very much.

Operator

The next question comes from Stefan Ioannou with Cormark Securities. Please go ahead.

Speaker 5

Okay. Thanks very much guys. Again, great to see the quarter. Just curious on the exploration front, could you maybe just give us an update on where things are at Kaureva and specifically with regards to nickel?

Speaker 2

Thanks, Stefan. Things continue to Progress well on nickel. I think as a team, we'd like to try and give the marketplace an update Over the course of next couple of months with the work that we're doing in the Umbarama District, along with some preliminary metallurgical test results. But I think a more fundamental or more comprehensive update of exactly what we're working with here will be later in the year. We are looking at timing that sometime in October.

Speaker 2

And so we ask for patience and bearing with us. What we are working on is, in our minds, quite significant. We want to get it right Q4 of this year, I think we'll be in a position to really have a comprehensive discussion with investors and shareholders to exactly what we are starting to uncover with respect to nickel And the unfolding of the nickel district at Carriba.

Speaker 5

Okay, great. That's very helpful. Thanks guys.

Operator

The next question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Speaker 5

Hi, good morning. On the Tucumab project, it looks like you've got a pretty good handle on the CapEx. Where do you see the biggest risk going forward

Speaker 3

Great question. As you said, high degree of confidence in the capital numbers where we're seeing them. I think from the operational perspective that we have now, especially with equipment starting to arrive on-site and the conclusion of the rainy season. Everything right now remains on track. Obviously, in the Carajas, We're lucky to talk that next year's rainy season is critical path for us.

Speaker 3

So getting ahead on civils and electromechanical production, which are all well underway. We currently have strong visibility on the schedule, on the CapEx and everything is progressing according to plan.

Speaker 5

Does that the CapEx that you've got the visibility on, does that still depend on productivity? I realize like you've got a fixed price for mining equipment, but you ultimately still How to succeed in terms of meeting the productivity goals that are embedded in that?

Speaker 3

Yes, for sure. I mean, if you look at the schedule that we've built out and The work that we've done to make sure that we're in a great position to execute on the schedule we've outlined. As we looked at several projects throughout Brazil and in fact over the world and we've indexed our productivity factors based on and relevant peers in the region to account for the rainy season. So when you look at our scheduling and loading factors and our construction schedule, They're in line with what's been achieved in projects in the region, and I think that's an important benchmark for us. We went through, As with all projects in our portfolio, a series of independent peer reviews and we're confident that the loading factors that are assumed Are in line with the industry.

Speaker 3

Obviously, achieving the $305,000,000 and the overall project

Operator

The next question comes from Alexandra Simoneau with William Blair. Please go ahead. Hi. Thanks for taking my question. Can you please elaborate a bit on the lower grading taiga?

Operator

Was it due to regular maintenance, perhaps below 3 or an incident occurred during the quarter?

Speaker 2

No, thanks for the question. The Pilar, in particular, mine It's not a homogeneous ore body. It's quite heterogeneous. As such, we're always trying to do our best to select stopes and areas to mine that we're trying to have as smooth a grade as possible over an annualized basis. But our history in terms of working here over the last 6 years tells us that we do have quarters where grade is lower than other quarters.

Speaker 2

It's just the nature of the ore bodies and the spilts that we are able to mine. I certainly try and put a lot of pressure on the team to try and smooth that out. But unfortunately, we don't have it on a smooth basis. So the first quarter Was lower grade due to the stope selections that we have within the mine plan. I can tell you right now on the dailies that Our grades are significantly higher right now due to the fact that we have now accessed another stope In another part of the mine that is significantly higher grade.

Speaker 2

It's just the rhythm of how the mine works, unfortunately.

Operator

The question and answer session. I would like to turn the conference back over to David Strang for any closing remarks.

Speaker 2

Thank you, operator, and thanks to everybody again for attending our Q1 results. We look forward to Presenting to you again our 2nd quarter results. But during the quarter, we will be excited to share some of you will be sharing time with us on our visit to operations, and we look forward to seeing a lot of you in person. So with that, thank you, operator, and thanks again, everybody, for attending.

Speaker 3

Bye bye.

Operator

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

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Earnings Conference Call
Ero Copper Q1 2023
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