Ero Copper Corp

Thank you for standing by. This is the conference operator. Welcome to the Arrow Copper Second Quarter 2023 Financial and Operating Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press a star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may say no on operator by pressing star, then 0. I would now like to turn the conference over to Courtney Lin, Vice President, Corporate Development and Investor Relations for opening remarks. Please go ahead.

Thank you, operator. Good morning and welcome to Arrow Copper's Second Quarter 2023 Earnings Call. Our operating and financial results were released yesterday afternoon and are available on our website, as are our financial statements and MD&A for the three and six months ended June 30, 2023. On the call with me today are David Strang, Arrow's co-founder and Chief Executive Officer, Marco DiFilippo, 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. We would refer you to our most recent annual information form available on our website, Cedar 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.

Thank you, Courtney, and thank you everybody for joining us today. During the second quarter, we continued to navigate a dynamic macroeconomic environment as we observed strengthening fundamentals in global copper demand, while at the same time experiencing softer copper prices driven by global economic concerns. The transition to clean energy has intensified the need by governments and downstream industries to secure critical mineral supply, as evidenced by unprecedented investments from non-traditional investors across the copper sector. Despite this positive backdrop, we saw lower copper prices during the period as well as a stronger Brazilian re-out. However, we were 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 first quarter. Additionally, our Javentina operations performed well, contributing to adjusted EBITDA of $49.1 million and adjusted net income attributable to the owners of the company of $22.3 million, 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 Cate Iba operations new external shaft. I am pleased to report that we are approaching 50% physical completion of the Tucumac project. Similarly, the precinct phase of development for the Cate Iba 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 Tucumac and 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 MACO to provide more detail on the progress around our key growth projects, let me give you an overview of our second quarter operating performance and the expected cadence of production during the second half of the year. At our Cate Iba operations, we produced 12,004 tons of copper in concentrate at C1 cash costs of $1.52 per pound of copper produced. The higher mine tonnage and copper grades at all three of our mines were driven by planned stope sequencing, resulting in increased production and lower unit costs compared to the first quarter. While we continued to sell copper concentrate to our domestic smelter during the quarter on a limited and prepaid basis, the associated reduction 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 third quarter compared to the second quarter due to slightly lower planned mill throughput volumes and copper grades resulting from stope sequencing. However, we expect mill throughput volumes to increase in the fourth quarter 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 Cate Iba's C1 costs. With slightly higher C1 cash costs expected in the third quarter and lower C1 cash costs expected in the fourth quarter. As a result, we are reaffirming our full year copper production guidance of 44 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 Javentina 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 stoves mined and processed during the period. Consequently, we produce 12,333 ounces of gold at C1 cash costs of $492 per ounce of gold produced. We are reaffirming Javentina's 2023 gold production guidance of 50 to 53,000 tons, of gold at C1 cash costs of $475 to $575 per ounce of gold produced. With the completion of development to the Matinio vein during the second quarter, 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 to $20 million to reflect proactive investments following a detailed review of major projects and support infrastructure at the Kereebar operations during the second quarter. While the SHAP project remains within 5% of budget, we have elected to invest in various upgrades in the second half of the year which MACO will discuss more to support our expanded Life of Mine operating plans. It is worth noting that the non-Kereebar components of our capital expenditure guidance as well as our C1 cash cost guidance remain unchanged. Nevertheless, we are closely monitoring the BRL to US 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 policy makers. 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 MACO to discuss the highlights around our -to-date project execution after which Wayne will discuss our financial results for the quarter.

Thank you, David, and good morning everyone. During the second quarter, we continued to make excellent progress across our portfolio of growth projects. Advancement of critical path workstreams at both Tucumah and our SHAP project at Kereebar is evident in the updated project photos we have included in our second quarter news release. At Tucumah, as David mentioned, we are approaching 50% physical completion and are on track to achieve first production during the second half of next year. Contractor mobilization, hiring of key operational positions, and a continuation of our training programs, which are focused on hiring locally, all progressed significantly during the period. And we now have a workforce of over 1,100 people on site. Notable achievements this quarter include the completion of all critical path earthwork activities and completion of all large-volume civil work. In addition, we commenced assembly and erection of structural steel for the primary crusher, the ball mill and flotation areas, as planned. During the third quarter, we expect to complete the construction of 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 Tucumah remains on track. And with over 95% visibility on planned capital expenditures for project completion, we are reaffirming our $305 million capital cost estimate. We expect capital spend at Tucumah to be second half weighted this year due to the ramp up on steelworks, electromechanical assembly, and piping, as well as a number of final equipment deliveries expected during the second half of the year. At our CAR-EVA 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 Pilar mine is progressing according to schedule and was approximately 25% complete as at quarter end. As David mentioned, we completed the precinct phase of the shaft during the period. Subsequent to quarter end, we successfully lowered the sinking stage into the shaft collar and commenced hoisting of the pre-assembled head frame into its permanent configuration. Our mill expansion project, which includes installation of a third ball mill and a new flotation upgrade, is on track to start commissioning and ramp up during the fourth quarter. Looking ahead at CAR-EVA, 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 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 CAR-EVA operations. This thorough review identified new capital investments and upgrades, totaling approximately $15 to $20 million. These investments are specifically focused on bolstering the support infrastructure for the deepening project of the Pilar mine, our underground paste-fill distribution system, and overall tailings capacity. The primary objective behind these strategic investments is to enhance operating resiliency of the CAR-EVA operations and support its extended mine life. In the months and years ahead, we will continue to look at stage strategic investments in infrastructure and new technologies to improve operational performance, ensure operating resiliency, and protect our frontline workforce. I will now turn the call to Wayne to discuss our financial results. Thank you, Maka.

As David mentioned earlier, our second quarter financial performance reflected a notable increase in copper production mixed with lower copper prices and a stronger Brazilian real compared to the first quarter. This drove operating cash flows of $55.5 million and helped to fund capital expenditures of $126.9 million, which were primarily directed towards the ongoing execution of our organic growth initiatives. We ended the quarter with a robust liquidity position of approximately $330 million. This included cash and cash equivalents of $124 million, short-term investments of $56 million. And $150 million of undrawn availability under our senior secured revolving credit facility. Regarding our Brazilian real to US dollar exchange rate hedges, we reported realized gains of $2.8 million and unrealized gains of $2.1 million. Looking ahead to the second half of the year, we are hedged on approximately $15 million per month at an average flow rate of 5.3 and an average cap rate of approximately 6.3 with the Brazilian real to US 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. 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 hear some final remarks.

Thank you, Wayne, and everyone who joined the call today. Before we proceed to the Q&A session, I want to take a moment to express my sincere appreciation to our dedicated colleagues in Canada and Brazil. Their 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. 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 to Courtney, who was promoted to Senior Vice President of the Corporation for Corporate Development, Investor Relations, and Sustainability. And it's a true testament to her strength and what she has 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. And with that, operator, we'll now open the lines for questions.

Thank you. We will now begin the question-answer session. To join the question queue, you may press a star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Dalton Baretto with Canaccord Genuity. Please go ahead.

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, 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.

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

Okay, great. Thanks, Wayne. 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 is around 5.3, if the BRL does stay around 4.9, what are the implications on your C1 cost as well as on your capex estimates for the two projects?

Thanks. Yeah, hey, Dalton, this is Marko. 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 RE-IGE. That excludes things like diesel, which do have a dollar-link component. So that's a 9.5 to 1 ratio on the BRL, or 0.95 to 1 ratio on the BRL. On our capital projects, it depends on which one you're talking about. The Tucumal, when you look at the remaining spend, is about 90 to 95% BRL. When you're looking at the Shaft project, it's less. It's probably about 60% BRL. And on the mill expansion, it would be the same 95%. It's predominantly labor at this stage.

Great.

Thanks, guys.

I'll jump back in queue.

The next question comes from Oris Guacado with Scotiabank. Please go ahead.

Hi, good morning. David, can you please give us an update on the nickel exploration? 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?

Thanks, Oris. I'm surprised Dalton didn't beat you to the punch on that one. With regards to nickel, we continue to advance the projects and moving them forward. I think where we're 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 reeds with regards to everything that's going on in and around the projects as we're working on them. But we want to be able to give the most comprehensive update we can with regards to how that's all coming together. And it looks like the best guidance I can give you right now is possibly in November with regards to doing that. There's a couple of items that we're working through with regards to land packages. And as they come to fruition, and we hope hopefully they still come to fruition in the near term, so we'll be able to have a more fulsome discussion. So I think right now is the best indicators I can give you is sometime in November is likely when we would like to be able to have a more fulsome discussion with the marketplace about it.

Okay, thank you. And just as a follow-up to that, should we be anticipating a potential made-in resource on the nickel or is that way too premature?

I think it's a little premature that, Oris, 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.

Okay, perfect. And just one follow-up to Dalton's question for Wayne about 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, what

kind of

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

Yeah, Oris, I think this quarter we did have one 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. So I think going forward, it'll be much more in line with what you've seen in the past which is sort of 5 to 10%. And that reflects a lot of adjustments that come through that are really specific to the different contracts we sign with the various off-takers. As you know, 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.

Okay, because this is,

I'd say this is an unusual to see it this way in terms of it being reported. I mean potentially could, are these not, should not these be reflected in cost, in C1 cost rather than discounted LME price?

Look, we have a certain approach that we take and you know, 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 prior reporting. Okay,

thank

you very

much.

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

Hey, good morning and thank you for taking the question. Can you please provide a little more color on the 45% completion at DECAMA in terms of the status of delivery of long-lead items?

Yeah, hey Gordon, this is Marco. So when you look at our long-lead items, effectively all the purchases have been placed, as I said, the longest-lead items which we've been on, are 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 as 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 to 14 months.

Okay, great. Thank you. And looking at the pre-stripping, seeing how far it's at at schedule, are there any plans to mine and stockpile the sulfide ore prior to the mill completion?

Yeah, if you look at the schedule, Gordon, it's a great question. We're about 2.7 million cubic meters advanced or approximately 5 million tons on the pre-strip. We anticipate reaching first sulfide ore in November of this year, so sometime during Q4, and we will accumulate a stockpile of ore in advance of commissioning, which we anticipate occurring in 2024, as you know.

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. Obviously, everybody knows that we're going to be mining very, very high grades in the early part of the mine's life. 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 I've got to commend Mako and the team with regards to the thinking, with regards to doing that, and the granularity that the team is working towards, even with regards to that nuance.

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

Once again, if you have a question, please press star, then one. The next question comes from Stefan Ioannou with Cormark Securities. Please go ahead. Thanks very much, guys, and

congratulations, Courtney. Just here, in the past, you mentioned, you know, 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?

Nothing right now with regards to that, Stefan. We are working, we had 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. So nothing new to report there with regards

to

that.

Okay, great. Thanks very much.

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

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 cap expense that you've given for 2023, can you talk a little bit about which projects you've brought forward or added to the list for this year, for the second half? Thanks.

Yeah, for sure, Jackie. This is Marco. 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 million. 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 insights that we've been able to provide. So we've been working very hard on 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, the series of investments and line items that cumulate that up to about $15 million to $20 million.

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

I'm going to take this one. In terms of Macco taking over the role as 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.

That makes a lot of sense. Thanks very much.

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

I'd just like to thank everybody again for coming on the call. I hope everybody's having a great summer. And as always, we are available for questions and please feel free to reach out to Courtney, myself, Macco, Wayne, if you have anything further you'd like to get clarity on. Thanks again, Operator, and thanks to everybody. Bye-bye.

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