Ero Copper Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 10 speakers on the call.

Operator

Welcome to the Aerocopper 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 will be an opportunity to ask questions. Hall. I would now like to turn the conference over to Courtney Lynn, Vice President, Corporate Development and Investor Relations for opening remarks.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Arrow Copper's Q2 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 6 Months Ended June 30, 2023. On the call with me today are David Strang, Aero'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

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 future performance. As a reminder, and unless otherwise noted, all amounts are in U. S. Dollars. I will now pass the call over to David Strang.

Speaker 2

Thank you, Courtney, and thank you everybody for joining us today. During the Q2, we continued to navigate a dynamic macroeconomic environment as we observed strengthening fundamentals in global copper demand, The transition to clean energy has intensified the need by governments and downstream industries to secure critical minerals supply. As evidenced by unprecedented investments from non traditional investors across the copper sector. Despite this positive back drop. We saw lower copper prices during the period as well as a stronger Brazilian real.

Speaker 2

However, we We're able to offset the impact of these changes in 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 of nearly 30% compared to the Q1. Additionally, our JAVENTINA operations performed well, contributing to adjusted EBITDA of $49,100,000 and adjusted net income attributable to the owners of the company of $22,300,000 or $0.24 per share on a fully diluted basis. We also made meaningful progress on our key growth initiatives, including the Tucumac project and the Karoiba operations new external shaft. I am pleased to report that we are approaching 50% physical completion at the Tucumab project.

Speaker 2

Similarly, the pre sync phase of development for the Carribe operations new external shaft was successfully completed, and we are gearing up for the main shaft sinking later this year. Importantly, we have achieved over 95% visibility on planned capital expenditures at Tucumã, an approximately 80% visibility on shaft capital with total forecasted capital for both projects remaining within 5% of the original estimates. Before I hand over the call to Mako to provide more detail on the progress around our key growth projects. Let me give you an overview of our 2nd quarter operating performance and the expected cadence of production during the second half of the year. At our Carahiba operations, we produced 12,004 tons of copper in concentrate C1 cash costs of $1.52 per pound of copper produced.

Speaker 2

The higher mine tonnage and copper grades at all 3 of our mines were driven by planned stope sequencing, resulting in increased production and lower unit costs compared to the Q1. While we continued to sell copper concentrate to our domestic smelter during the quarter on a limited and prepaid basis, The associated reduction in concentrate sales costs was offset by continued strengthening of the BRL. As for the cadence of production in the second half of the year, we expect copper production to be slightly lower in the Q3 compared to the 2nd 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 4th quarter with the anticipated 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 Caribouba's C1 costs, with slightly higher C1 cash costs expected in the 3rd quarter and lowest C1 cash costs expected in

Speaker 3

the Q4.

Speaker 2

As a result, we are reaffirming our full year copper production guidance of 44,000 to 47,000 tons of copper produced at C1 cash costs of between $1.40 to $1.60 per pound of copper produced. Turning to our Argentina operations, we continue to benefit from strong mined and processed gold grades of over 13 grams per ton during the quarter. This represents an increasing grade of over 11% quarter on quarter and 100% year on year effectively offsetting lower metallurgical recoveries that were impacted by elevated mill inventory at quarter end as well as elevated carbon content in several high grade stopes mined and processed during the period. Consequently, we produced 12,333 ounces of gold at C1 cash costs of $4.92 per ounce of gold produced. We are reaffirming Geoventina's 2023 gold production guidance of 50,000 to 53,000 tons sorry, 1,000 ounces, I wish it was done, of gold at C1 cash costs of $4.75 to 5.75 dollars per ounce of gold produced.

Speaker 2

With the completion of development to the Matinia vein during the Q2, We expect higher gold production in the second half of the year as we commence production from the second ore source. Regarding our 2023 capital expenditure guidance, we have increased our range by $15,000,000 to $20,000,000 to reflect proactive investments following a detailed review of major projects and support infrastructure at the Karahiba operations during the Q2. While the shale project remains within 5% of budget, we have elected to invest in various upgrades in the second half of the year, which Macca will discuss more to support our expanded life of mine operating plans. It is worth noting that the non Cartiva components of our capital expenditure guidance as well as our C1 cash cost guidance remain unchanged. Nevertheless, we are closely monitoring the BRL to U.

Speaker 2

S. Dollar exchange rate, which averaged approximately 4.8 in July. The BRL has since weakened following a higher than expected 50 basis point rate cut by Brazil's Central Bank and Central Bank rate combined with a more dovish tone expressed by the country's policymakers. If the BRL remains at current levels or strengthens again, we may consider adjusting the 5 30 exchange rate assumed in calculating our full year operating cost and capital expenditure guidance ranges. I will now pass the call to Michael to discuss the highlights around our year to date project execution, after which Wayne will discuss our financial results for the quarter.

Speaker 4

Thank you, David, and good morning, everyone. During the Q2, we continued to make excellent progress across our portfolio of growth projects. Advancement of critical path work streams at both Tucumã and our shaft project at Carriva is evident in the updated project photos we have included in our 2nd quarter news release. At Tucama, 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.

Speaker 4

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 Q3, we expect to complete the construction of our water reservoir, continue to advance steel and electromechanical assembly throughout the process area, install our 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 Tucumã remains on track.

Speaker 4

And with over 95% visibility on planned capital expenditures for project completion, we are reaffirming our 305 $1,000,000,000 Capital Cost Estimate. We expect capital spend at Tucama to be second half weighted this year At our Cariva operations, we are focused on executing our operational plans and advancing our Pilar 3.0 initiative, which includes the construction of a new external shaft for the Pilar mine and an expansion of our mill capacity. The new external shaft project for the Palore mine is progressing according to schedule and was approximately 25% complete as at quarter end. As David mentioned, we completed the pre sync 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 preassembled headframe into its permanent configuration.

Speaker 4

Our mill expansion project, which includes installation of a 3rd ball mill and a new flotation upgrade, is on track to start commissioning and ramp up during the Q4. Looking ahead at Cariba, we remain fully on track to complete our mill expansion project and initiate the main sink on the new shaft by year end. Underground at Pilar, we remain on schedule with development and permanent underground infrastructure installations operations 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 Carribe operations. This thorough review identified new capital investments and upgrades totaling approximately $15,000,000 to $20,000,000 These investments are specifically focused on bolstering the support infrastructure for the deepening project of the Pilar mine, our underground pace fill distribution system and overall tailings capacity.

Speaker 4

The primary objective behind these strategic investments Ensure operating resiliency and protect our frontline workforce. I will now turn the call to Wayne to discuss our financial results.

Speaker 3

Thank you, Macca. As David mentioned earlier, our 2nd quarter financial performance reflected a notable increase in copper production mixed with lower copper prices and a stronger Brazilian real compared to the Q1. This drove operating cash flows of $55,500,000 that helped to fund capital expenditures of $126,900,000 which were primarily directed towards the ongoing execution of our organic growth initiatives. We ended the quarter with a robust liquidity position of approximately 3 $30,000,000 This included cash and cash equivalents of $124,000,000 short term investments of $56,000,000 and $150,000,000 of undrawn availability under our senior secured revolving credit facility. Regarding our Brazilian real to U.

Speaker 3

S. Dollar exchange rate hedges, we reported realized gains of $2,800,000 and unrealized gains of $2,100,000 Looking ahead to the second half of the year, we are hedged on approximately $15,000,000 per month at at an average flow rate of 5.3 and an average cap rate of approximately 6.3 for the Liran real to U. S. 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 initiated in January.

Speaker 3

Hedge contracts provide a floor price of $3.50 per pound on 3,000 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 in C1 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 to share some final remarks.

Speaker 2

Thank you, Wayne, and everyone who joined the call today. Before we proceed to the Q and A session, I want to take a moment to express my sincere appreciation to our dedicated colleagues in Canada and Brazil. The commitment and hard work have been instrumental in not only executing our operating plans, but 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.

Speaker 2

As the 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 are excited about the opportunities to expand our contributions to the green economy as we execute on our growth strategy. On a personal note, a lot of you know Courtney very well. I'd like to also extend our congratulations Courtney, who was promoted to Senior Vice President of the Corporation for Corporate Development, Investor Relations and Sustainability, And this is a true testament to her strength and what she adds to our team that we were pleased to be able to provide her with this promotion. So congratulations, Courtney, from us and the rest of the team.

Speaker 2

And with that operator, we'll now open the lines for questions.

Operator

Thank you. We will now begin the question and answer session. Please pick up your handset before pressing any The first question comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

Speaker 5

Thank you. Good morning, guys, and congrats, Courtney. I wanted to start by asking about the realized price, and 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 somewhere between a 10% and 15% discount to the LME. I'm just trying to understand Really what's in there and whether that's kind of a go forward assumption to make.

Speaker 5

Thanks.

Speaker 3

Yes, Dalton, I think we obviously have a number of adjustments that flow through that. Obviously, there's settlement adjustments as well as I mentioned. So When you think about the final deliveries, there are weight adjustments and assay adjustments. And so I think When you look at what we realized versus the headline price, I think that's a fair assumption to make going forward.

Speaker 5

Okay, great. Thanks, Wade. And then maybe I can just ask you another one. On the BRL implications, if The BRL does stay around 4.8%, 4.9%, and I understand the floor on some of your hedges around 5.3%. If the BRL does stay around 4.9 What are the implications on your C1 costs as well as on your CapEx estimates for the 2 projects?

Speaker 5

Thanks.

Speaker 4

Yes. Hey, Dalton, this is Mako. I'll pick that one up. 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.

Speaker 4

That excludes things like diesel, which do have a dollar link component. So that's a 9.5:one ratio on the BRL and our 0.95:one ratio on the BRL. On our capital projects, it depends on which one you're talking about. The Tucumã, when you look at the remaining spend is about 90% to 95% BRL. When you're looking at the shaft project, it's less.

Speaker 4

It's probably about 60% BRL and on the mill expansion would be the same 95%. It's predominantly labor at this stage.

Speaker 5

Great. Thanks, guys. I'll jump back in queue.

Operator

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

Speaker 6

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 previously mentioned October as a target for more of a fulsome nickel update. Is that still the case?

Speaker 2

Thanks, Horace. I'm surprised Dalton didn't speak to the punch on that one. With regards to nickel, we continue 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 don't want to get too Into the REED's with regards to everything that's going on in and around the projects as we're working on them. We want to be able to give the most comprehensive update we can with regards to how that's all coming together.

Speaker 2

And it looks like the best guidance I can give you right now is possibly 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 and we hope hopefully still come to fruition in the near term, so we'll be So I think right now, the best indicators I can give you is sometime in November It's likely when we would like to be able to have a more fulsome discussion with the marketplace about it.

Speaker 6

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 way too premature?

Speaker 2

I think it's a little premature that, Orest, I mean, what we're trying to understand with regards to the various areas That we have is what is the quantum of opportunity we have with regards to various nickel targets that we're dealing with. I think 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 Curacao Valley in terms of the number of these that We can look at and we can start working on in a comprehensive fashion over the course of the next few years.

Speaker 6

Okay, perfect. And just one follow-up to Dalton's question for Wayne about the realized nickel price sorry, copper price. I realized this quarter was Pretty volatile with respect to copper price. In a flat I mean going forward in a flat copper price environment, which then eliminates the provisional pricing impact,

Speaker 7

What kind of

Speaker 6

run rate discount should we be anticipating to LME in that kind of environment? I feel like the discount this quarter was exaggerated to the downside.

Speaker 3

Yes, Orest, I think this quarter we did 1 shipment, which was we had an anomalous settlement on assay and so we decided to it's Still out for Umpire, but we decided to book that through. So that had an oversized impact on this number. I think going forward, it will be much more in line What you've seen in the past, which is sort of 5% to 10%. And that reflects There are a lot of adjustments that come through that are really specific to the different contracts we signed with the various off takers. As you know, we We're not under long term contracts, we do short term contracts and every short term contract has different nuances as to The adjustments and sort of terms and conditions outside of treatment and refining charges.

Speaker 3

Okay. Because this is I'd say this is

Speaker 6

an unusual to see it this way in terms of it being reported. I mean potentially could are these not Should not be reflected in costs, in C1 costs rather than a discounted LME price?

Speaker 3

Look, we have a certain approach that we take and We're comfortable that these reflect discounts to 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 in our in prior reporting.

Speaker 6

Okay. Thank you very much.

Operator

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

Speaker 4

Hey, good morning and thank you

Speaker 8

for taking my question. Can you please provide a little more color on the 45% completion at Tucama. In terms of the status of delivery of Lumley items?

Speaker 4

Yes. Hey, Gordon, this is Mako. So when you look at our long lien items, effectively all the purchases have been As I said, the longest lien items, which would have been on our 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 our providers for those pieces of equipment and we expect deliveries to occur throughout the balance of the year on all long lead items that we purchased or put deposits on in the last 12 months to 14

Speaker 3

months. Okay, great. Thank you.

Speaker 8

And looking at the pre strip and seeing how far it's ahead of schedule, are there any plans to mine and stockpile the saltwater

Speaker 4

Yes. If you look at the schedule, Gordon, it's a great question. We're about 2,700,000 cubic meters Advanced or approximately 5,000,000 tons on the pre strip. We anticipate reaching 1st sulfide ore in November of this year, So sometime during Q4, and we will accumulate a stockpile of ore in advance of commissioning, which we anticipate occurring in 2024, as you know.

Speaker 2

I'll even add on to that, Gordon. What I'm pretty impressed with the group Is the detail they've gone into even with the stockpile. We obviously everybody knows that we're going to be mining very, very high grades in and the team has actually put together a plan whereby we're going to have both a high grade and a 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 high grade material running it through as we're testing, but rather using lower grade material for that test work. And Yes, I've got to commend Mako and the team with regards to the thinking with regards to doing that and the granularity

Speaker 8

Okay, that sounds great. Thank you very much. I appreciate it.

Operator

Fen 1. The next question comes from Stefano with Cormark Securities. Please go ahead.

Speaker 7

Thanks very much guys and congratulations, Courtney. Just curious, in past calls you sort of mentioned Seeing potential district potential beyond Tucum. 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.

Speaker 2

Nothing right now with regards to that, Stefan. 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 too much detail with regards to what we're seeing there. The team is also widening its viewpoints with regards to a more regional review in terms of the general area around the Tucumab project.

Speaker 2

So nothing new to report there with regards to that.

Speaker 7

Okay, great. Thanks very much.

Operator

The next question comes from Jackie Przybylowski with BMO Capital Markets. Please go ahead.

Speaker 9

Thanks for taking my question and I'll add my congratulations to Courtney as well, well deserved. I was wondering 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. Thanks.

Speaker 4

Yes, for For sure, Jackie, this is Mako. 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 above 2.5 $1,000,000 These are a series of small investments, operational improvements in 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 once The shaft is in operation and we're advancing some of the installation on our permanent infrastructure As well as in tailings and the underground distribution system for the Paceville line. Those are the main buckets. As I said, it's a series of investments and line items that accumulate add up to about $15,000,000 to $20,000,000

Speaker 9

Can I ask just as a follow-up, sorry? What prompted those projects to be brought forward? I know you mentioned coordinating With the shafts, is this related to the fact that your balance sheet is in better shape than you had anticipated or just The shafts moving forward more quickly than you'd expected.

Speaker 2

I'm going to take this one. In terms of Mako taking over the role of COO, he decided 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 business, Along with some projects that he felt needed to be spent sooner rather than later.

Speaker 9

That makes a lot of sense. Thanks very much.

Operator

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

Speaker 2

I'd just like to thank everybody again for coming on 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, Mako, Wayne, if you have anything further you'd like to get clarity on. Thanks again, operator, and thanks to everybody. 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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Ero Copper Q2 2023
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