Ero Copper Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 8, 2024

There are 8 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Arrow Copper 4th Quarter and Full Year 2023 Operating and Financial 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

I would now like to turn the conference over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to ARO Copper's 4th quarter and full year 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 12 months ended December 31, 2023. On the call with me today are David Strang, Arrow's Co Founder and Chief Executive Officer Maco Cifilippo, 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, 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 all for joining us today. 2023 was the cornerstone year for our company, highlighted by significant accomplishments across our organic growth initiatives. In addition to making significant strides towards doubling copper production to approximately 100,000 tons in 2025, we achieved targeted gold production levels of nearly 60,000 ounces following the successful completion of JAVANTINA's NX-sixty initiative. I'm pleased to share an update on our Tucama project, which Mako will elaborate on, where we've surpassed 90% physical completion, while maintaining our forecast capital expenditure guidance of $310,000,000 I'm also happy to report that commissioning is advancing smoothly. We completed dry commissioning of the crushing circuit in February, beating our time line by 1 month and expect to put first ore through the mill in April.

Speaker 2

We also made significant progress on the Palazz 3.0 initiative at our Cariba operations. This included completion of the mill expansion project, where we achieved design capacity prior to year end, and the initiation of main shaft sinking at the new external shaft in December, following the completion of supporting surface infrastructure. While these growth initiatives or growth investments drove elevated capital expenditures in 2023, they have also started to reflect positively in our cash flows from operations. More specifically, record gold production drove a meaningful expansion of operating margins at the Javan Tina operations that contributed to a 20,000,000 dollars year on year increase in consolidated Eurogroup cash flow from operations, which totaled $163,000,000 Our 2023 financial performance also reflects the opportunistic implementation of risk mitigation measures throughout the year, including an expanded foreign exchange hedge program that yielded realized gains of over $11,000,000 and helped to soften the impact of the stronger Brazilian real against the U. S.

Speaker 2

Dollar. We took an additional proactive measure during the Q4 amid a challenging macroeconomic landscape that drove short term copper price uncertainty and bolstered our balance sheet with a board deal equity financing. This offering generated net proceeds totaling $104,000,000 and contributed to our year end liquidity position of $262,000,000 Since the offering in early November, the copper market outlook has improved, with supply demand fundamentals now signaling supply deficits in 2024 2025. The shift reflected in the copper price as well as copper concentrate treatment and refining charges, which have dropped to their lowest level since proactively securing smelting terms for the majority of our concentrate production through the end of 2025. These developments come at a favorable time as we approach initial production at Tucumã.

Speaker 2

With capital expenditures on this project winding down through the first half of this year, we're approaching an exciting inflection point in our consolidated copper production and cash flow profile. We also look forward to finalizing a definitive earning agreement with Vale based Metals on the Furnas Copper project. With the necessary paperwork progressing smoothly, we expect to embark on the first phase of drilling later this year. Before turning the call over to Marco for a deeper dive into our project execution, I will briefly touch on our operating performance. At the Caribouba operations, we processed 3,200,000 tons of ore during the year.

Speaker 2

While this represented an impressive increase of approximately 13% compared to 2022, 4th quarter and full year mill throughput volumes slightly missed our targets due to approximately 1 week of additional unplanned downtime related to the completion of the mill expansion project. However, processed copper grades and metallurgical recoveries were in line with our expectations, averaging 1.49% 91.4% respectively, and resulting in full year copper production of 43,857 tons of copper in concentrate, including 11,760 tons of copper in concentrate in the Q4. Regarding our C1 cash costs at Cariba, we reported $1.75 for the Q4 and $1.80 for the full year. These figures reflect our new C1 cash cost calculation methodology that was updated in light of changes to Carderibo's copper concentrate sales channels. While Wayne will provide more insights on this methodology change, I want to note that the impact on our reported C1 cash cost is counterbalanced by an equivalent increase in reported realized copper prices.

Speaker 2

As we quickly approach the end of the Q1, the cadence of production and cash costs is aligned with our expectations. More specifically, Carahiba's production is expected to be lowest in the Q1 with processed copper grades projected to be the lowest for the year and processed tonnage expected to increase between 5% 10% compared to the Q4. Consequently, we expect C1 cash cost to be the highest in the Q1 of this year. Turning to our Argentina operations, we reported another stellar quarter, capping a year of record gold production and record operating margins, thanks to contributions from the new Matinia vein. Process gold grades continued to exceed our expectations during the Q4, averaging over 17 grams per ton and resulting in production of 16,867 ounces at C1 cash costs and all in sustaining costs of $4.13 $9.91 per ounce, respectively.

Speaker 2

For the full year, production was up 39% compared to 2022, driven by nearly 100% increase in processed gold grades. This resulted in full year production of 59,222 ounces at C1 cash costs and all in sustaining costs of $4.22 $9.57 per ounce, respectively. As we progress through the Q1, we continue to observe positive grade reconciliations with mined gold grades at Chavantina trending above 15 grams per ton. Consequently, our expectations around the cadence of full year production remains consistent with our previously issued guidance with the Q1 anticipated to deliver the highest quality production levels in 2024. I'll now hand the call over to Mako to provide more comprehensive detail on our project execution, after which Wayne will touch on our financial results.

Speaker 3

Thank you, David, and good morning, everyone. Highlighting what was said earlier, we have continued to make outstanding progress across the entirety of our project portfolio. Starting at Tucumã, where we continue to make huge strides across all work streams throughout the project, Our most notable achievement to date is reaching 4,000,000 hours without lost time incident. Our primary goal at Tucumã is to deliver the project safely, and our performance to date demonstrates the commitment of our site teams and construction partners in achieving this goal. As David mentioned, we completed the construction and commissioning of our crushing circuit as well as our screening and conveyance systems in order to place 1st crushed ore on the reclaimed stockpile approximately 1 month ahead of schedule.

Speaker 3

On the milling and flotation side, mechanical equipment is installed and completion testing is well underway. The last piece of milling equipment, our high intensity grinding mill, is currently en route to site from Salvador and its delivery on-site remains fully aligned with our project execution schedule. We are currently focused on completing piping, cabling, instrumentation and ancillary installations around the mill flotation areas and preparing to run 1st ore through the mill in April. During the month of May, we expect to complete the commissioning of the flotation circuit as well as the high intensity grinding mill to initiate integrated commissioning across the whole project in June. On the mining side, we continue to progress well ahead of schedule.

Speaker 3

The continued outperformance by our mining contractor has allowed us to close February with approximately 25,000 tons of ore in the run of mine stockpile and an additional 70,000 tons of stripped ore in the mine ready to be blasted. We currently expect to have over 300,000 tons of ore available on the run of mine stockpile by the end of the Q1. If I take a step back from the details for a moment and think about the major component parts required for a successful ramp up of any project, we are extremely well positioned. On-site, we have completed all power infrastructure, our water reservoir is full, We have an ore stockpile ready to be processed. Our equipment installations are on track.

Speaker 3

We are ahead of our commissioning schedule. We have hired all of our site operational leadership and currently have more than 60% of our operational workforce contracted through our existing partnership with Senay. In short, we feel we are in a strong and enviable position to have a successful ramp up. We anticipate reaching commercial production, which we define as 80% of nameplate capacity by the end of the Q3 and this ramp up curve is aligned with our guidance for the year. As we announced in our January update, our total direct project capital estimate for completion of the Tucumã project was updated to approximately $310,000,000 from 305 dollars to reflect the impact of a stronger BRL in the Q4 and this remains unchanged.

Speaker 3

At our Carriba operations, the execution of our Pilar 3.0 initiative delivered 2 important milestones during the Q4, as David touched on. At the Carribe Mill, we completed the integration of the expansion in December and achieved design capacity of over 12,600 tons per day or approximately 4,200,000 tonnes per year just prior to year end. At the shaft project of the Palorm mine, we initiated the main sink phase of the project just prior to year end as planned, following completion and commissioning of the headframe, personnel and stage winders as well as supporting surface infrastructure. We are currently reaming the 2nd and longest raised bore leg of the shaft, which we expect to complete by the end of the second quarter. Civil works are currently underway to set up the 3rd and deepest raised bore leg of the shaft, which we expect to complete during the second half of the year.

Speaker 3

And infrastructure installations for the ore handling system of the new shaft are progressing on schedule. At our expected average daily development rate, we anticipate reaching a depth of over 600 meters by year end, and the project remains on track for shaft handover to operations in Q4 of 2026. Lastly, touching briefly on our partnership with Vale Base Metals on the Furnace project. In parallel with finalizing definitive earning agreements, we have already initiated baseline studies and have commenced a Q8 QC program on the historic drill database. Barring any requirement for twin hole drilling, we expect to be in a position to issue the 1st NI 40three-1 101 resource estimate during the second half of this year.

Speaker 3

I will now turn the call to Wayne to discuss our financial results.

Speaker 4

Thank you, Mako. As Dave highlighted, our financial results for both the Q4 and full year positively reflected the execution of our growth strategy, particularly at the Chamantina operations. At the same time, we navigated persistent macroeconomic challenges, including copper price volatility and a BRL that was stronger than we projected at the beginning of 2023. In line with our prudent financial approach, we took decisive steps to protect our cash flows with an expansion of our foreign exchange hedge program beginning in the Q3. This resulted in realized gains of $4,200,000 in the 4th quarter and $11,400,000 for the full year and contributed to 4th quarter and full year cash flow from operations of $49,400,000 $163,100,000 respectively.

Speaker 4

Adjusted net income attributable to the owners of the company for the quarter year were $20,700,000 $82,800,000 respectively, or $0.21 $0.87 per share on a diluted basis. It's worth noting that during the quarter, we recorded approximately $3,000,000 of write downs related to obsolete inventory and fixed assets. This negatively impacted our earnings by approximately $0.03 As we close the year, the total notional value of our foreign exchange derivative position, including both 0 cost collars and forward contracts, exceeded $375,000,000 These hedges, which cover nearly all of our Brazilian real denominated operating expenses and the majority of our major capital expenditures in 2024 have a weighted average floor and ceiling of 499 and 536 reais respectively. Of the total hedge program, approximately $115,000,000 allocated for major capital project expenditures, the weighted average floor and ceiling of 513 and 522 respectively. Project is a case in point where we are observing a decline in monthly capital expenditures as we near the end of construction.

Speaker 4

Although we anticipate our total capital expenditures for the year to be weighted towards the cash flow from operations during the first half of this year that are projected to be consistent with the second half of twenty twenty three ensures we're fully equipped to support these investments. I'll now pass the call back to David to share some closing thoughts.

Speaker 2

Thank you, Wayne, and thank you, everyone, who joined the call today. Before we proceed to the question and answer session, I want to extend my deepest gratitude to our teams in Brazil and here in Canada for their continued commitment and hard work in executing on both our operating plan and our organic growth strategies. With that, I will now hand the call back to the operator to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Ralph Profiti with 8 Capital. Please go ahead.

Speaker 5

Thanks for taking my questions. Mako, you talked about this 60% number with respect to labor hiring. And just wondering for clarification, As we think about labor costs, the labor component of those operating costs.

Speaker 3

Yes, thanks for the question. I missed the first part about the 60 It's important to note that on the mining side, we are using contract mining. So our component of the workforce is really related to the plant, the administration and the operational support areas such as the lab, security, warehousing, etcetera. So it's a smaller component of the total workforce. The 60% that we contracted to date is in partnership with the National Labor Development Authority, Senai, and they're facilitating the training for the operation of the project.

Speaker 3

We'll continue to increase that number as we ramp up here. I think the main objective for us was and focus at this stage was really on the operational leadership, which would be our managers, our coordinators, and fulfilled. In terms of inflation and labor, I think it continues to be a topical, I think across the whole industry. We've obviously reflected what the current labor rates are in our guidance for the second half of the year at the Tucumab project and don't anticipate any variation this year. Obviously, as we look ahead, it depends on the overall picture, not only in but throughout the broader mining industry.

Speaker 2

I'm just going to David Strang just add a little bit more to that to make sure everybody understands who we're talking about with regards to Senay. So as Mako rightly pointed out, the most significant focus in the short term has been on hiring our leadership team, which is now well in place. When we talk about Cenae, Cenae is this wonderful organization in Brazil, which is a parastatal organization that is involved in the training of local people to be able to do increased skills and provide them with the skills to be able to operate and do functions on mining operations in Brazil, farming activities, other industrial applications. We are drawing our workforce primarily from the town of Tucumã and the local communities, where there is excess of available labor pool. It's our focus to make sure that our labor pool is drawn from the local communities as much as possible.

Speaker 2

And Fagundes, our mining contractor, has given us a very strong pathway and how they have done it in working with Sinai in terms of hiring the workforce that is running our trucks, our excavators and other equipment in the mine for the last almost 2 years. So, we are very confident with regards to the work that Senay is doing in terms of working with us in partnership to identify our local workforce and to hire up that team to be ready for us executing on commercial production in the Q3.

Speaker 5

Thanks. That's excellent for clarity, David and Mako. I do have a follow-up. Just coming back and switching gears to the furnace exploration budget of $6,000,000 Just wondering is that for the full Phase 1 28,000 meters? And I think just for clarification, Phase 1, right, because we have not yet signed the deal.

Speaker 3

A definitive agreement. Our objective for this year is to start drilling in the second half of the year. So it won't cover the full first phase of the program. What that covers is the work that we're doing now. In parallel with working to sign the definitive agreement, which is progressing well, we've with our partners at Valley Based Metals, have mobilized the team to site to start several work streams, as I mentioned, including the baseline environmental studies and in parallel starting our QA QC program.

Speaker 3

So, what you see in the budget for this year is the execution of the initial legwork, I would say, in the project to make sure that we're in a good position to start drilling in the second half. And mostly the second half drilling for the project this year.

Speaker 5

Thanks very much. Thanks very much for your answers.

Speaker 1

The next,

Operator

Aradon Capital. Please go ahead.

Speaker 2

Thank you for taking my question.

Speaker 6

Can you please elaborate on the development work at Savencina in terms of ongoing and expected production from the Matina, Santo Antonio veins through 2024? Just trying to get a clear picture on H1 versus H2 waves and such?

Speaker 3

Question, I'd say that in our what we did for this year's guidance is we've continued to assume that the grades mined revert to our long term block model grades, which has been reflected in our guidance. I'd say that we continue to see here in the Q1 or the 1st few months favorable grade reconciliations, most notably in the Matinia vein.

Speaker 4

But now

Speaker 3

first half, second half. Again, we are seeing a positive reconciliation of the next couple of months. So we'll continue to, I guess, hope for that, but haven't planned for it through the balance of the year.

Speaker 2

Yes. Let me elaborate a little bit on that. In terms of the drilling activity we did when we discovered the Matinia vein and brought that into a resource that was ready to be mined, Following standard work that you do with regards to gold, we had a couple of intercepts that intersected this high grade area. And due to the extreme high grade nature of it, we top cut those intercepts. As such, and Macca has pointed out, we are not going to change our guidance, nor are we going to adjust our resource estimate to reflect this high grade zone.

Speaker 2

We continue to encounter it through the middle of the vein structure. We do not know how long it will continue to go. Obviously, everybody always hopes it's going to be longer greater for longer, but we are not going to be adjusting our resource for that. So guidance is, as we said, based upon our 9 to 10 gram estimate for the year, but we are, during the Q1 so far this year, continuing to see grades well in excess of

Speaker 6

time. And over to Carribe, if you can just help me clarify the math on the new numbers, the restatement of treatment charges. Going back to 2022, it looks like a doubling on how you're reporting that now. Can you just help me help explain how to get there?

Speaker 4

Gordon, it's Wayne. I don't have the 'twenty two numbers in front of me, but I think really that the only difference we've had is that we effective Q4 'twenty three, we're now including the freight, the sea freight that was charged by our customers as part of treatment, refining and other costs. And this was previously presented as a reduction in our realized copper price, which is in line with the GAAP reporting. So in terms of 'twenty two, what you'd have to go back and just look at the change in the realized price there as well. I see.

Speaker 4

Okay. So I mean that

Speaker 6

all ties together. And is the exclusion of the ForEx hedging also a

Speaker 2

part of it?

Speaker 4

The hedging, yes, we don't have we show both methodologies. I think we show without the hedging and then with the hedging, obviously, the headline number is without hedging that we are reporting.

Speaker 6

Okay. Just want to make sure I understood that. Thanks very much.

Operator

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

Speaker 7

Yes, thanks very much guys. Gordon got my question on the Zaventina, so that's great to hear about the grade may continue for longer. That would be nice. Just while I got you, any comments on where the nickel exploration is at these days?

Speaker 2

Yes, Stefan. And thanks for asking about that. We continue to work with regards to accumulating land positions on the trend that we have identified, we continue to wait for the government to initiate the auction process. Our latest guidance from the government was that process was going to start during March. But in a conversation I had with the head of the A and M, which is the government agency that runs it, suggests that that may be delayed by up to 30 days.

Speaker 2

So, with respect to our nickel exploration, our work continues to be very much dedicated in terms of identifying the to in excess of 100 kilometers in strike length, on which we are seeing nickel mineralization expressed at surface in Goshen type structures. Our drilling work though, we are doing more work to, in my mind, to get a better return on the drill bit. And what I mean by that with regards to that is, I think it's fair to say that we can drill 0.5% nickel material here till the cows come home. The question about it from our mind is, are we able to better identify pre drilling those areas that are more prospective for higher grade? As you know, we have encountered nickel grades up to 7% in massive sulfide structures, and we'd like and if we continue to work and grow nickel exploration is to figure out that sort of equation.

Speaker 2

So I think the best we can tell you now is we continue to evaluate it. It continues to grow. We think we may be on to something that may be generational in terms of size and that we will hopefully be able to and I know it's been a bit of a broken record because of the delays of government, be able to talk about this in much greater detail in the second half of the year. That's the best guidance I can give you right now.

Operator

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

Speaker 2

Thank you, operator, and thanks again everybody for coming on this call. This is now I think our 6th year end for Eurocopa, and it has been a fantastic year from the standpoint of investing in our future. And we really look forward to this year as we transformed our company into a multi mine copper producer and one that continues to look to grow our business in Brazil into the future. As always, we are always available for additional questions you may have that you did not necessarily want to have on the call. And please feel free to contact Courtney, myself, Wayne or Mako and Bruno at your earliest convenience.

Speaker 2

And with that, we'd like to thank you again for joining. Thank you. Bye bye.

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