Ero Copper Corp

Thank you for standing by. This is the conference operator. Welcome to the Eric Hopper Fourth Quarter 2024 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 1 on your telephone keypad. If you need assistance during the conference call, you may signal an operator by pressing star 10-0. I would now like to turn the conference over to Courtney Lynn, Executive Vice President, External Affairs and Strategy. Please go ahead.

Thank you, Operator. Good morning and welcome to AeroCopper's fourth quarter and full year 2024 earnings call. Our operating and financial results were released yesterday afternoon and are available on our website along with our financial statements and MD&A for the three and 12 months ended December 31st, 2024. A corresponding earnings presentation can be downloaded directly from the webcast and is also available in the presentations section of our website. Joining me on the call today are Marco DiFilippo, President and Chief Executive Officer Wayne Dreyer, Executive Vice President and Chief Financial Officer, and Jelson Batista, Executive Vice President and Chief Operating Officer. Before we begin, I'd like to remind everyone that today's discussion will include forward-looking statements, which involve risks and uncertainties that may cause actual results to differ materially. For a detailed discussion of these risks and their potential impact on our business, please refer to our most recent annual information form, available on our website, as well as on CDAR and EDGAR. Unless otherwise noted, all figures discussed today are in U.S. dollars. With that, I'll now turn the call over to Marco DiFilippo.

Thank you, Courtney, and thank you, everyone, for taking the time to join us today. As we previously released operating results in February, I thought I would take a moment here to outline our strategy, reflect on some of Aero's achievements in 2024, and set expectations on cadence for 2025. First and foremost, Arrow is an incredible business. We have a committed leadership team, a passionate workforce, a diverse portfolio of operating assets, and an enviable long-term growth project in Furnas. It is an honor to be stepping into this role at such a pivotal time for the company. There are several moving pieces in our portfolio over the next few quarters, which we will have ample time to address on this call. But our near-term strategy is simple. and can be summarized by four steps. Step one, achieve commercial production at Tukama. Two, deleverage our balance sheet. Three, aggressively advance the long-term growth initiatives we have in our portfolio, including our partnership on Pernas. And four, initiate returns to shareholders. So with that said, let's start with Tukama. And before diving into the challenges we've worked through, I want to highlight some key positives. Since completing the project on schedule last year with a local workforce and doing it without a single lost time injury, our mining operations have continued to track ahead of schedule. The grades from our infill drill program have been higher than we expected, and of particular note, our process plant has consistently achieved at or above design met recoveries and concentrate grades for months now. I am deeply proud of these achievements. At the same time, I acknowledge we've had several challenges that impacted production, both outside and inside our mine gate. External to our operation at Tucumana, we faced a multi-week power outage due to an extreme weather event, as well as extended periods of low power quality, which required intervention. Since resolving these factors, we encountered conventional teething pains as we ramped up throughput volumes. These teething pains can broadly be described as material flow constraints which ranged from minor equipment issues, such as valve dimensioning, small component and pipe weld failures, as well as more substantial constraints, including damage sustained to one of our three tailings filters, which impacted operating flexibility in that portion of the circuit. While the dollar quantum for these fixes and adjustments is small, on the order of $2 million, each one of these adjustments required dedicated engineering, manufacturing, delivery to our site in Perah, and installation during a scheduled maintenance period. This is a long-winded way of saying they all required time. Working closely with our operational teams and third-party providers at the end of last year, we developed a plan to implement these changes during two extended periods of planned downtime in January and February. These shutdowns were completed, and I'm pleased to report that we are already seeing substantial improvement with performance strengthening from late February into March. The final repair to our third tailings filter remains on track for completion by the end of Q1. With these improvements either completed or on track for completion this month, we are already seeing and expect to continue to see increased plant reliability and throughput volumes and consequently increasing production beginning in the second quarter. I want to stress this production cadence is aligned with our reaffirmed full year guidance. Switching gears slightly to production cadence at Cariba and Giavancina, for different reasons, we expect Q1 to be the softest of the year as we work to set these operations for long-term success. At Cariba, as I outlined in our Q3 conference call, we only expect to see the benefit from additional development we are doing at Polar to emerge over the next several quarters. Mobilization of a second development contractor is well underway. And if you have any specific questions on how that work is progressing, Jelson can provide details during our Q&A. At Javanchina, we are working to transition the mine to a fully mechanized operation to increase productivity, reduce costs, and most importantly, reduce exposure to our workforce, which is our top priority. We have a capital investment cycle occurring at Javanchina this year, which includes the purchase of equipment to complete the mechanization of the mine, ventilation and cooling upgrades, as well as an asset integrity program to ensure that we can operate through the duration of our now-extended reserve life. Again, it is worth noting that our full-year guidance, including elevated all and sustaining cost guide for 2025, reflects these investments. We are excited about the future prospects for the Givenchy operations and see considerable potential for further growth. For both of these assets, We expect softness to be isolated to the first half of the year as these changes are implemented and expect the impact to be the most evident during the first quarter. Again, our guidance ranges reflect this. With that backdrop, let's discuss the second step of our strategy, deleveraging the balance sheet. There are two key points to highlight here. Firstly, we see a clear pathway to an inflection as Tucumaw production ramps up, and we expect a fairly significant deleveraging to occur with the achievement of commercial production. Near to medium term, we are targeting a normalized net debt leverage ratio of 1.5 times, and while the pace of achieving this milestone will be influenced by copper price, we are confident that the quality of our assets and consolidated operating margins will support our ability to meet this objective. Second, regarding overall liquidity, we remain well positioned as Tukama rounds the corner and the recent expansion of our evolving credit facility, which Wayne will touch on. The next two steps of our strategy, advancing long-term growth and shareholder returns, will emerge over the coming quarters. While long-term growth remains a priority, we intend to pursue shareholder returns more proactively once we make meaningful progress on deleveraging our balance sheet. Touching up for an ask quickly, We have five drill rigs on site right now and expect to complete the 28,000-meter Phase I drill program by mid-year and the majority of the 17,000-meter Phase II drill program by year-end. In parallel, we are advancing key technical work streams, including a geotechnical program, hydrogeology studies, as well as additional metallurgical test work on the high-grade zones we are drilling. We are also progressing initial mine and infrastructure layout designs to support a preliminary economic assessment, which we expect to complete in the first half of 2026. We have a great partner on this project in Valley-based metals, and we are very encouraged by the results we are seeing thus far. To ensure we have sufficient time for Q&A, I will leave it there and pass the call to Wayne, who will provide more detail on our financial results.

Thank you, Micah. Our financial results reflect record copper production in the fourth quarter, as well as improved metal prices and stronger operating margins for the full year. These factors contributed to cash flow from operations of $60.8 million for the quarter and $145.4 million for the full year. Adjusted EBITDA for the quarter and year were equally strong at $59.1 million and $216.2 million, respectively. During the fourth quarter, we experienced increased foreign exchange volatility, particularly around the U.S. presidential election. This included significant fluctuations in the U.S. dollar to Brazilian real exchange rate, and the real ended the year at over six to the dollar. As a result, we reported realized losses of $5.9 million for the quarter and $8.2 million for the year on foreign exchange hedges we implemented in late 2023 to mitigate the risk of the real strengthening against the U.S. dollar during tucumas construction and ramp-up. At quarter end, our total notional foreign exchange derivative position stood at $390 million, consisting of zero-cost collars with a weighted average floor and ceiling of 5.43 and 6.49 real per dollar, respectively, extending through the end of 2025. These realized foreign exchange losses impacted adjusted net income by approximately six cents per share for the quarter and eight cents per share for the year. As a result, adjusted net income attributable to the owners of the company was $17.4 million in the fourth quarter or 17 cents per diluted share, and $80.4 million for the full year, or 78 cents per diluted share. Our liquidity position remains strong at approximately $90 million at year end. As noted in our financials, we further enhanced our financial flexibility shortly after year end by amending our existing credit facility to support our expanded operating footprint. This amendment increased total commitments from $150 million to $200 million, extended the maturity date from December 2026 to December 2028, and secured a 25 basis point reduction in the applicable margin on drawn funds at certain leverage ratios. As a result, our pro forma available liquidity at year end was $140.4 million. I'll now pass the call back to Marco to share some concluding remarks.

Thank you, Wayne. Before we move into the Q&A session, I'll just quickly thank our global management team for all the hard work we have put in over the past several months. We have reorganized our business, made substantial operational improvements across our portfolio, and are well positioned as ever to execute on our vision for Arrow. I look forward to delivering continued progress in the quarters ahead. Now I'll turn the call back to the operator to open the line for questions.

Thank you. To join the question queue, you may press star, then one on your telephone keypad. You will 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 Oris Rockadel with Scotiabank. Please go ahead.

Hi, good morning. A couple of follow-up questions on the ramp up at Tukama. I guess the first one, Are you still experiencing intermittent power outages that's impacting the mill, or is that now pretty much settled out?

Yeah, thanks, Oris. I guess we outlined our last quarterly conference call. We're still working to implement a longer-term solution, so we're still seeing some oscillations in power quality. I would just note that the adjustments we made at the end of last year have significantly improved our plant's ability to accommodate that volatility. So to put that into context, last year when we were experiencing the interruptions in power quality, we were having between 15 and 20 mil power trips per day, which, as I like to say, was a bit like trying to run a marathon with your shoelaces tied together. Since we made the changes late last year, we've experienced just a handful a month, so significantly reduced. Obviously, we still want to put in the long-term solution, which we've been working on here, and expect to have that done pretty imminently here. I think, as I outlined on our last quarter conference call, the investment there is quite small. We've finalized the engineering work and are working hard with our third-party provider to put that in place. That installation is off-site. We don't anticipate any interruption to operations going forward, but again, For the long term, it's the right investment to make.

Is that expected then, should we think about by end of Q2, that off-site solution is finished?

Yeah. As I said, so far what we're seeing here coming out of the shutdowns in Jan-Feb, we haven't seen any impact to our progress on ramp-up related to power quality because of the changes that we made in Q4.

Okay. And you mentioned the tailings filtration issue, I think, is expected to be resolved by the end of the quarter. Anything else that's notable at this point that we should be thinking about that could impede the ramp-up beyond sort of your normal teething pains?

You know, Oris, this is a great question. Nothing notable that we see now. I mean, I think like all ramp-ups, there's uncertainty in the pace, you know, once we complete the We jump over the hurdles that are in front of us, which, you know, I feel comfortable that we've worked very hard in Q3 and Q4 to identify those constraints. So all I can say is that there's nothing notable that we see in front of us right now. However, I would note that, you know, we were very thoughtful in putting our guidance range together for Tukama to reflect some of the uncertainties in resolving these issues. And I'd say so far things are on track. We're pretty happy with performance coming out of these shutdowns in Jan-Feb. And nothing new or notable that we see right now. Okay.

And just one more quick one, if I could. If we start to see some volatility in the copper price and there's potentially some teething pains on the ramp up, can you just remind us what What are the order of operations on financial levers that you would pull to try to protect liquidity? I assume that means cutting exploration and others, but I'm just curious on what the pecking order is, if required.

I think I said in the call, we're pretty confident where we're at. Obviously, copper price uncertainty remains topical. I think the reality is where we're at now with the expanded credit facility, we feel comfortable that we can execute our strategy, particularly with Tucumah rounding the corner here. As you mentioned, we have some levers in our portfolio, particularly around the work we're doing at Pernas. As outlined, we have 40,000 meters of drilling planned this year. Our criteria and under the earning agreement, we're only required to do 28,000 meters of drilling. So we've got quite a bit of flexibility on those work programs. There's some other areas that I think we're investing for the long term that are really important that we'd like to continue, which is infill drilling and deepening, obviously working hard to get the shaft completed at Pilar. Those are all some of the levers we have on the investment side. Again, we'd like to keep those programs going. They're reflected in our guidance ranges for the year, but certainly some flexibility on that side. We also have, as I outlined, a pretty large investment cycle at Giavancina this year. We're, you know, we continue to be frustrated by the value that we get for that asset in our portfolio and we have a great partner there. So, you know, we could potentially look to isolate that from our CapEx spend for the year. Again, you know, all these longer term solutions or all these levers I think are about dislocations of value and we feel pretty comfortable with where we're at right now. Thank you. Appreciate the call.

The next question comes from Guilherme Rosito with Bank of America. Please go ahead.

Hi. Good morning, everyone. Thank you for taking my questions. So I have two questions. First is on the C1 guidance. I just wanted to go over and understand what's driving the large C1 increase this year, especially as we consider ERO is now at 570, 575. You should have some volume improvement throughout the year, especially in second half. Just trying to understand what's driving and how should we expect C1 throughout the year. And then my second question is on Cervantino. I just wanted to understand what's the larger increase in ice this quarter. The C1 increase with the increase is quite substantial in ice. So just trying to go through that as well. Thank you.

Yeah, thank you. So let's start with Cariba on C1. Great question. Thanks for raising it. So C1 guidance for the year. I would say that if you look back at history, partly because of the Of the last eight years, the Brazilian REI, as you quite well know, has consistently depreciated against the U.S. dollar. We've been consistently, I'd say fairly conservative with FX when we put together our guidance for the year. Obviously, with the BRL on the path that it is on now, we expect that to benefit our C1 cash costs relative to our guidance range, which was done in a lower BRL. But given the volatility in diesel prices and kind of where we see our business, we felt comfortable with the range we put forward and certainly in the FX. The macro environment is highly uncertain right now. And we were pretty thoughtful about putting our C1 cash cost guidance together for both assets. But I would say the biggest drivers are going to be FX, as you mentioned, being substantially more conservative than spot pricing on the BRL. We're also mining. Our contribution from the deeper part of the mine has increased year on year, so that's driving a bit of additional costs in our business, and then grades as well. So a bit lower grades across the portfolio, a combination of factors there, you know, Serbian and Burmese obviously being top of mind on driving a bit lower consolidated grade, and that all has an impact on our operating margins at Cariva. Again, I think we've We've been pretty thoughtful about putting a range there and some of the levers that we have in our portfolio that we're working on. I think I've talked last couple years about the full potential program that we initiated across the company. We've continued to work on that. And I expect to continue to see cost reductions, particularly coming out of this reorganization that we did here in the first quarter. Stay tuned, we were pretty thoughtful about our guidance range there at Carriva. On Javanchino on sustained costs, a couple of things there. It's really just, you know, it's a relatively small operation, so high grade, small tonnage. And when you get fluctuations in grade or volume, because of the, just because of the denominator being small, it tends to magnify the impacts on sustained costs and C1. And those are the main drivers there. So I'd say it's volume related, nothing intrinsic to the asset. When you look ahead to our 2025 guidance, as I mentioned, the biggest step up in all in sustaining costs year on year is all the investments that we're making in asset integrity, mine improvement. And that's fully reflected in our guidance and in our all in sustaining costs.

Great. That's very clear. Thank you, guys.

The next question comes from Craig Hutchinson with TD Cohen. Please go ahead.

Hi, good morning, guys. I just wanted to circle back on the power issue at Takuma. Can you just give us an explanation or give me an explanation in regards to what the off-site power solution is? And is there any further work you guys are doing on the on-site power solution? Like, is there a potential for some standby power at some point in the future?

Yeah, thanks, Craig. Good questions. Let's start with the easy one, and then we'll get into some technical aspects on the electrical side. So on-site, no. The answer is no. We're not considering that at the moment. We don't think that the situation requires alternative on-site energy like generators. Obviously, we could do that in the future, but we don't see a need. I would say that the the windstorm that happened last year, I just want to remind you, not only did it knock out power to our operations, but it took out power to 230,000 people in the region. So you're talking about a major infrastructure outage. It was a unique situation that we certainly don't expect to happen again. On the power quality, I'm going to say this as simplistically as possible. If you've got questions afterwards, I'm happy to get into the into the engineering aspects, but effectively, there's two alternatives. We're looking at both solutions right now to see which one's the most cost effective, given the work that we did on power monitoring. But effectively, it's a series of capacitors or batteries that when there's an overvoltage, they absorb energy. When there's undervoltage, it discharges energy so that everything downstream is experiencing stable power quality, even though what's coming into that piece of equipment has volatility. So that's a very, very, very simplified way of explaining an electrical engineering problem. But if you've got any questions, you can give me a call afterwards, and I'll explain it in more detail.

I appreciate that. And I just want to follow up a question for you. Just on 17, you mentioned I think Q1 is going to be the biggest quarter. Is Q1 going to look a lot like Q4 with respect to grades and throughput, or should we expect maybe slightly lower grades, slightly higher throughputs?

Yeah, I'd expect to be down quarter on quarter. Obviously we're only in, we're in early March here. Team's working still on achieving a good plan. I think there's a number of factors there that are contributing. Just as a reminder, Jevonshina had significant grade out performance for I think the better part of two years relative to plan. We obviously see that grade coming down just based on the levels that we're operating. And then some of the Some of the, again, renewed focus on asset integrity, some operational changes that we made on procedures and protocols and preparation for mechanized mining. We pushed out some of the pillar recovery that we had in Q1 and that we did in Q4. Those are very high-grade areas. We have a Pacewell plant that we invested in. That process involves putting pasted and then recovering those high-grade pillars. We've been very successful at doing that over the years, but the timing of that pillar recovery tends to influence the consolidated grade quarter on quarter. The way that we've outlined it was Q1 is really about setting up some of those areas to make sure that we can do it safely and effectively. So I would expect a drop in tonnage as we move as we set up that mine for mechanization and do some additional development, change the inter-level spacing, and then a bit on grade just because of the timing of that pillar recovery program and some of the additional work that we're doing there.

Thanks, guys. Once again, if you have a question, please press star, then 1. The next question comes from Marcia Freed with Goldman Sachs. Please go ahead.

Thank you. Good afternoon, Marco. Thanks for the time. I do feel like we're going to have a busy year. You mentioned, obviously, the focus on the commercial declaration. I'm just wondering, do you need to see all those four strategic pillars or capital allocation drivers to be solved before you take the next steps, either you know, M&A or for the partnerships as well. Can we see that, you know, new levels are coming before we actually get out of the balance sheet and the and, you know, make sure that we're . Thank you.

Yeah, thank you. The questions didn't come in crystal clear for us on our end. So I heard a couple points that I'm going to address. I probably missed a couple things. Just let me know what I missed, but I heard you talk about, you know, prioritization of those steps and, you know, potential M&A opportunities as it relates to continued growth. I'd say, look, you know, our focus as an executive team as a company is on the four steps we outlined. Obviously, it's critical that we achieve commercial production for Tucumah. It's the gateway to the next three steps of the strategy. And so that's our main focus right now. Obviously, we look at things. We have a corporate development team, some of which are sitting here next to me. I would say that as our stakeholders and shareholders expect us to look at things, particularly when they're in our backyard, but we're crystal clear about our priorities. I'd say that M&A isn't an immediate focus, but again, obviously, we look at things to see if it makes sense. We think we have an incredible development asset in front of us, and so I look at the world through that lens. Obviously, it's a bit longer term and not producing right now, but it's a really high-quality asset. We're doing the work on that project. I think as our technical and operational teams dig in there, I think we get more and more excited about the prospects and what that asset means for our company. We have an incredible partnership with Valley Base Metals on that project, And we expect to continue to talk about what we're doing during the quarters ahead. But I'd say, again, crystal clear focus on the four steps we outlined, unless there's a major value dislocation. But hard to see that right now, given our priorities. So that was one. I'm getting a... My notes passed to me, but it says, would M&A happen before Tukama is delivered? I'd say no. I don't think we get the value for, yeah, no, it won't happen.

Perfect. Thank you.

The next question comes from Dalton Barreto with Kenneco Ingenuity. Please go ahead.

Thanks, guys. Marco, congrats on your first call as CEO. A couple of questions for me. I want to start on Kariba. The second contractor, it sounds like they're mobilized, sounds like they're going to be done by the end of Q1. What sort of steps are you putting in place to ensure that once they're done and you're back to one contractor, that you don't sort of fall behind again?

Yeah, good question, and thanks, Dalton. I welcome any constructive feedback after the call is over. So on a contractor, maybe I'll just start out here and then I'll let Jelson dive in on mobilization and how we're doing there. I think for, you know, when you go back all the way to our long-term production plans, I think it's important to note that we always had, in fact, up until 2021, a third-party contractor being as part of our operating strategy and our fleet was always the case. When I look ahead on our development rates, We continue to expect about a third of our development in the future to be allocated to a third-party contractor. And when I look over the long term, I expect us to continue to focus on making sure that we maintain and increase development. Obviously, the deepening that we have over the years, we've been doing you know, additional development there. And so all I can say, Dalton, for assurance is that on the development is that it's something that we track on a monthly basis, development sufficiency. It's something that we're focused on increasing this year, obviously with the second contractor coming in. And yeah, it's part of our strategy going forward. It's reflected in our guidance, and I continue to expect it to be reflected in our guidance going forward. So maybe I'll just hand the call over to Gelson for an update on mobilization.

Thanks, Marco. So just to clarify on the second contractor, they're finishing what we called on-the-job training. It's more like a 45-day process. It's actually that we do regularly on site. They are in process of finishing that. We hope that we finish that by the end of this month. We're talking about like 290 people. right, and a large fleet. This is a very good contractor. It's been benchmarking the equipment checked. Looking at what you asked about how we're going to make sure that the performance of this contractor will be aligned with our expectation, I think they will be working in separate areas. We've been operating in various areas where we're improving conditions on the infrastructure side. which of course impacts the contractor. Also checking very carefully about the conditions of the equipment. Did they bring it on site? The previous contractor that we have in there, they actually did a pretty good month in February. Still far from what we're waiting for them. Mostly related to equipment availability and quality of the equipment, also the people. So we'll be working very closely with all the operations and the contractor putting this together moving forward. I expect that, yes, there will be a transition period there, but we expect these development rates to increase further.

Great. Thank you for that, Gelson. And then maybe I can switch gears to Tukumot. Marco, I know you said that you're almost there or pretty much there on the recovery front. On the throughput side, I know you're taking sort of multiple scheduled shutdowns, but when the mill is up and running, can you give us a sense for how it's doing and what sort of the cadence for shutdowns is over the next sort of weeks and months?

Yeah, thanks, Dalton. Yeah, as I outlined, again, pretty much from the day that we turned on that plant, you know, we've achieved recoveries and concentrate grades above our design targets. I think you see that pretty well in Q4 with, you know, approaching 89% recovery, obviously pretty high grades as well at 2.2% or close to it. I think there's a couple of things that are happening right now, Belton. Obviously, we came through these shutdowns in Jan-Feb. We're in the process of increasing production volumes on the front of the plant. I'd say one of the realities is that even if you look at Q4, 2.2% copper through the plant, that's about two and a half to three times above the life and line average feed. And so where we're seeing Really strong performance, I would say, is the back end of the plant, particularly our concentrate filter, which is operating near its currently, coming out of these shutdowns, is operating near its design. And obviously, recoveries and concentrate grades are hanging in there. So when I think about the front end of the plant and what throughput volumes we're achieving there, it's probably less relevant to the overall total contained copper in the system. And that's where I feel like the performance is, we're seeing really strong performance. So, you know, day on day, we're increasing. Obviously, we don't expect, well, I would hope, but we're not expecting the life of mine average grade to remain at 2.2% copper. So, you know, what we'll be doing over the next couple of weeks and months is, you know, is ratcheting down the grade and increasing throughput volumes, and we expect overall copper production to maintain somewhat stable from what we're achieving right now. Again, this is relatively early days. We just came out of the shutdown in late February, seeing very strong performance. We hope it continues. Let's see how we go here, but yeah, pretty excited about what we're seeing overall.

Great. Thanks for that, Marco. And then maybe if I can ask one last one. It's interesting to hear you talk about starting to initiate capital returns, particularly given the great profile at Tukma. I'm just wondering if you've given any thought to what form that would take. Are you leading more towards buybacks, maybe a small dividend, but supplementary, depending on performance? Just any thoughts there?

Yeah, thanks, Dalton. I think it's a bit too early to talk about the playoffs. We're focused on getting to come up and running, you know, delivering the balance sheet. I think the, you know, I would say having discussions with shareholders on what form that looks like. But let's get through steps one and two of the four-step program and then have a discussion about what step four looks like. Great. Thanks, guys.

That's awesome, man.

This concludes the question and answer session. I would like to turn the conference back over to Marco DiFilippo for any closing remarks. Please go ahead.

Yeah, thanks, everyone. Really appreciate you joining this morning. If you've got any questions, our team is always available, and we look forward to catching up in just a couple of months here. Thanks, everyone.

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