Ero Copper Corp

Thank you for standing by. This is the conference operator. Welcome to the Arrow Gold, sorry, Arrow Copper fourth 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. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star then zero. 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.

Thank you, operator. Good morning, and welcome to Arrow Copper's fourth 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&A for the three and 12 months ended December 31st, 2023. On the call with me today are David Strang, Arrow's co-founder and chief executive officer, Mako Cifalipo, 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 forum 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 all for joining us today. 2023 was a 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 Javentina's NX-60 initiative. I'm pleased to share an update on our Tukma project, which Mako will elaborate on, where we've surpassed 90% physical completion while maintaining our forecast capital expenditure to guidance of $310 million. I'm also happy to report that commissioning is advancing smoothly. We completed dry commissioning of the crushing circuit in February, beating our timeline by one month. and expect to put first ore through the mill in April. We also made significant progress on the Pilar 3.0 initiative at our Kariba 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 Gervantino operations that contributed to a 20 million year-on-year increase in consolidated Eurogroup cash flow from operations. which totaled $163 million. 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 million and helped to soften the impact of a stronger Brazilian REI against the U.S. dollar. We took an additional proactive measure during the fourth quarter 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 approximately $104 million and contributed to our year-end liquidity position of $262 million. Since the offering in early November, the copper market outlook has improved, with supply-demand fundamentals now signaling supply deficits in 2024 and 2025. Shift in the copper price, as well as copper concentrate treatment and refining charges, which have dropped to their lowest levels since 2020, are 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 Tukama. 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 Base 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 Mako for a deeper dive into our project execution, I will briefly touch on our operating performance. At the Kataiba operations, we process 3.2 million tons of ore during the year. While this represented an impressive increase of approximately 13% compared to 2022, Fourth quarter and full-year mill throughput volumes slightly missed our targets due to approximately one 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% and 91.4% respectively, and resulting in full-year copper production of 43,857 tons tons of copper in concentrate, including 11,760 tons of copper in concentrate in the fourth quarter. Regarding our C-1 cash costs at Cariba, we reported $1.75 for the fourth quarter and $1.80 for the full year. These figures reflect our new C-1 cash cost calculation methodology that was updated in light of changes to Cariba'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 costs is counterbalanced by an equivalent increase in reported realized copper prices. As we quickly approach the end of the first quarter, the cadence of production and cash costs is aligned with our expectations. More specifically, Cariiba's production is expected to be lowest in the first quarter with process copper grades projected to be the lowest for the year and process tonnage expected to increase between five and ten percent compared to the fourth quarter consequently we expect c1 cash costs to be the highest in the first quarter of this year turning to our gervantino operations we reported another stellar quarter capping a year of record gold production and record operating margins thanks to contributions from the new martinia vein Processed gold grades continued to exceed our expectations during the fourth quarter, averaging over 17 grams per ton and resulting in production of 16,867 ounces at C1 cash costs and all in sustaining costs of $413 and $991 per ounce, respectively. For the full year, production was up 39% compared to 2022, driven by a nearly 100% increase in processed gold grades. This resulted in four-year production of 59,222 ounces, and C1 cash costs and all-in sustaining costs of $422 and $957 per ounce, respectively. As we progress through the first quarter, we continue to observe positive grade reconciliations, with mined gold grades at $17 trending above 15 grams per tonne. Consequently, our expectations around the cadence of full-year production remains consistent with our previously issued guidance, with the first quarter anticipated to deliver the highest quarterly production levels in 2024. I'll now hand the call over to Marco to provide more comprehensive detail on our project execution, after which Wayne will touch on our financial results.

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 million hours without a 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 first crushed ore on the reclaimed stockpile approximately one month ahead of schedule. 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 in route to site from Salvador and its delivery onsite remains fully aligned with our project execution schedule. We are currently focused on completing piping, cabling, instrumentation and ancillary installations around the mill and flotation areas and are preparing to run first 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. 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 first quarter. 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. 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 SENAI. 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 third quarter 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 Tucumel project was updated to approximately 310 million from 305 to reflect the impact of a stronger BRL in the fourth quarter, and this remains unchanged. At our CARIBA operations, the execution of our PILAR 3.0 initiative delivered two important milestones during the fourth quarter, as David touched on. At the Cariba Mill, we completed the integration of the expansion in December and achieved design capacity of over 12,600 tons per day, or approximately 4.2 million tons per year, just prior to year-end. At the shaft project of the Pilar Mine, we initiated the mainsink 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 second 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 third and deepest raised-bore leg of the shaft, which we expect to complete during the second half of the season, 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 Valley Base Metals on the Furnas project, in parallel with finalizing definitive earning agreements, We have already initiated baseline studies and have commenced a QAQC program on the historic drill database. Barring any requirement for twin-hole drilling, we expect to be in a position to issue the first NI43-101 resource estimate during the second half of this year. I will now turn the call to Wayne to discuss our financial results.

Thank you, Matt Cohn. As Dave highlighted, our financial results for both the fourth quarter and full year positively reflected the execution of our growth strategy, particularly at the Chaventina 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 third quarter. This resulted in realized gains of $4.2 million in the fourth quarter and $11.4 million for the full year and contributed to fourth quarter and full year cash flow from operations of $49.4 million and $163.1 million respectively. Adjusted net income attributable to the owners of the company for the quarter and year were $20.7 million and $82.8 million respectively, or $0.21 and $0.87 per share on a diluted basis. It's worth noting that during the quarter, we recorded approximately $3 million 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 zero-cost collars and Ford contracts, exceeded $375 million. 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 $4.99 and $5.36 respectively. Of the total hedge program, approximately $115 million is allocated for major capital project expenditures, with a weighted average floor and ceiling of 513 and 522, respectively. This project is a case in point where we are observing a decline in monthly capital expenditures as we near the end of construction. Although we anticipate our total capital expenditures this year to be weighted towards the first Cash flow from operations during the first half of this year that are projected to be consistent with the second half of 2023 ensures we're fully equipped to support these investments. I'll pass the call back to David to share some closing thoughts.

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.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. The first question comes from Ralph Profiti with Eight Capital. Please go ahead.

Thanks for taking my questions. Michael, you talked about this 60% number with respect to labor hire. I'm just wondering for clarification for the program.

as we think about labor costs, the labor component of those operating costs?

Yeah, 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, et cetera. So it's a smaller component of the total workforce. The 60% that 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. 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, fulfilled. In terms of inflation and labor, you know, I think it continues to be 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 Tucumot project and don't anticipate any variation this year. Obviously, as we look ahead, It depends on the overall structure, not only in Brazil, but throughout the broader mining industry.

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

Thanks. That's excellent for clarity, David and Michael. I do have a follow-up, just coming back and switching gears to the furnace exploration budget of $6 million. Just wondering, is that for the full Phase 1 28,000 meters? And I think just for clarification, you're talking about Phase 1, right?

Because we have not yet signed the deal.

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

Thanks very much. Thanks very much for your answers.

Next. Terradon Capital. Please go ahead.

Thank you for taking my question. Can you please elaborate on the development work at Chaventina in terms of ongoing and expected production from the Matina and Santo Antonio veins through 2024? Just trying to get a clear picture on H1 versus H2 weights and such.

question i'd say that uh you know in our um what we did for this year's guidance is we've um we've continued to assume that the grades mind 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 first quarter or the first few months um favorable grade reconciliations most notably in the matina vein uh split first half, second half. Again, we are seeing a positive rate of reconciliation in the next few months. So we'll continue to, I guess, hope for that, but haven't planned for it through the balance of the year.

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 Augusta 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 Makos 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. 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 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 first quarter so far this year, continuing to see grades well in excess of 50% of the time.

That's great. Thanks very much. And over to Karina, 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?

Gordon, it's Wayne. I don't have the 22 numbers in front of me, but I think really that the only difference we've had is that we, effective Q4 23, we're now including the freight, the sea freight that is 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 gap reporting. So, you know, in terms of 22, what you'd have to go back and look at the change in the realized price there as well.

I see. Okay. So, I mean, that all ties together. And is the exclusion of the 4x hedging also a part of this?

4x hedging?

The hedging, yeah. 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're reporting.

Okay, just wanted to make sure I understood that. Thanks very much.

Once again, if you have a question, please press star, then 1. The next question is from Stefan Iono from Cormac Securities. Please go ahead.

Yeah, thanks very much, guys. Gordon got my question on the 17, 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?

Yeah, 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&M, which is the government agency that runs it, suggests that that may be delayed by up to 30 days. 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 Gossen-type structures. 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. 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.

That's very helpful and it's still exciting. still very exciting, so thanks for that. Appreciate it.

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

Thank you, Operator, and thanks again, everybody, for coming on this call. This is now, I think, our sixth year, year-end for Eurocopper, and it has been a 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 Marco and Bruna at your earliest convenience. And with that, we'd like to thank you again for joining. Thank you. Bye-bye.

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