Ero Copper Corporation in the Copper Mining Market | Company Overview & CEO Profile
Ero Copper Corp. (NYSE:ERO, ERO.TO, E0B.F, E0B.SG, E0B.MU, E0B.BE) is a Canadian mining company engaged primarily in the exploration, production, and sale of copper concentrates. Other activities include the production and sale of gold and silver byproducts. Ero Copper operates in Brazil where it has three assets: the MCSA Mining Complex in the northeast of the country, the Boa Esperanҫa copper project in northern Brazil, and the NX Gold Mining Complex located in the Central-West region of Brazil.
The key asset is the MCSA Mining Complex operated by Mineração Caraíba S.A., in which Ero Copper holds a 99-percent stake. Mineração Caraíba S.A. is a Brazilian mining company with more than 37 years of history in the industry. The Boa Esperanҫa is a second copper project which will be put in operation in the coming years.
Assets Owned by Ero Copper Corporation
The MCSA Mining Complex, which accounts for more than 80% of the company’s total revenue, is situated in the state of Bahia in the Northeast Region of Brazil. This complex consists of processing facilities and mines, including Vermelhos and Pilar underground mines. As a reference, the Vermelhos mine is the fifth-largest copper mine in Brazil. Ore is processed at the Caraíba Mill which is situated nearby the Pilar mine. The complex produces high-grade copper which is then sold to both local and international markets.
The MCSA Mining Complex contains 29.9 million tonnes of proven and probable mineral reserves including 432,000 tonnes of copper. In 2021, the MCSA project produced 45,511 tonnes of copper. This year, the company will spend up to $260 million on the development of the MCSA Mining Complex.
The Boa Esperanҫa copper project, which is situated in the Brazilian northern state of Para, is currently under construction. The project contains 43 million tonnes of total proven and probable mineral reserves including 356,000 tonnes of copper. The initial mine life of the site is 12 years. The construction of the Boa Esperança Mine was approved by the Board of Directors in February of 2022 and scheduled to begin in the second quarter of 2022.
The commercial production at the site is planned to be launched in the second half of 2024. During its first full year of production in 2025, the mine will produce around 50,000 tonnes of copper, doubling the company’s total copper production to almost 100,000 tonnes by 2025. Based on the results of an updated feasibility study, the project will have a 41.8% after-tax internal rate of return. In 2022, Ero Copper plans to spend up to $86 million on this strategic growth project.
The NX Gold Mining Complex is a gold and silver mine situated in the state of Mato Grosso. The site includes fully integrated mining and processing facilities. At present, the majority of mining operations at this site are concentrated on the Santo Antônio vein. The project contains 1.1 million tonnes of total probable reserves, including 306,000 ounces of gold. The NX Gold Mining Complex accounts for around 13% of the company’s total revenue. In 2021, the mine produced 37,798 ounces of gold. In 2022, the company’s expenditure on this project will be between $25 million and $29 million, compared to $86 million and $260 million which will be spent on the Boa Esperanҫa and MCSA projects.
In 2021, RGLD Gold AG, a subsidiary of the U.S.-based Royal Gold, Inc. (RGLD) reached an agreement with Ero Copper. According to the deal, Royal Gold will make an advance payment of $100 million and up to an additional $10 million of further payments in return for 25% of the gold produced from the NX Gold Mine. The American company will pay 20% of the spot gold price for each ounce delivered. Bill Heissenbuttel, CEO of Royal Gold, described the NX Gold Mine as “highly prospective” and “low-cost.” He also said that Ero Copper is a “high-quality and well-funded operator with a proven record of exploration success”.
Ero Copper Corp & Global Copper Mining Market
Copper is the third most consumed metal in the world and the most conductive material among non-precious metals, something that makes it an essential raw material for many industries. Primarily, it is used in the production of wires, cables, transformers, motors, and electromagnets, while the growth of the electric vehicle market has further increased the demand for copper. Copper is also the oldest known metal used in the construction industry.
The world’s largest copper mine, the Escondida mine, is located in Chile and has a capacity of around 1.5 million metric tons. The site is owned jointly by BHP Group Limited (0HN3.L), Rio Tinto Group (RIO), and Japan Escondida owned by the Mitsubishi Corporation (8058.T). Six out of the 20 largest copper mines are located in Chile, four are in Peru, while the others are in Indonesia, Mexico, the USA, Russia, Panama, Zambia, and Congo.
This year, the global copper market is forecast to be in a significant surplus, after a small supply deficit in 2021. The forecast is based on the assumption that the production of refined copper will grow by 3.9% representing the biggest increase in 8 years, with demand for copper rising by 2.4%. Commerzbank's analyst Daniel Briesemann notes that, although demand for copper will grow, this will not be sufficient to absorb the increase in supply. Higher supply will be ensured by an increase in both mine output and secondary production. Global copper mine output is expected to increase due to the scheduled launch of a number of new projects and the expansion of the existing ones.
Over the past two years, copper prices have increased by 125% and this metal is among the commodities that have reached record highs since the start of the coronavirus pandemic. There are several reasons for that. First, over the past 30 years, global copper production has been growing slower than that of other metals. As a result, copper supply has been growing slower, too. That was also complicated by the fact that the copper content of copper ore has decreased over time.
At the same time, analysts note that although copper prices have risen, they have increased less in recent months as compared to many other commodities. The reason is that the copper market has been less affected by the Ukrainian conflict than that of nickel or aluminum. Copper production is not concentrated in problem regions and this metal is not in very short supply. Also, copper production is not as energy-intensive as some other metals, meaning it was less affected by a hike in energy prices. Nevertheless, Fastmarkets mining analyst Andrew Cole claims that in 2022, the global market for refined copper will be in a supply deficit, as it was last year. He also added that the deficit will narrow a little bit this year.
At present, copper trades at around $3.90 per pound or $7,740 per tonne, falling by 20% since the price for this metal reached its peak in March. The price is now at the lowest level since the beginning of 2021. The decline in copper prices was driven by an increase in interest rates and lockdowns in China leading to concerns over the country’s construction sector growth. In the medium term, analysts expect the copper price to rise marginally compared to the previous year. One of the growth drivers will be an increase in renewable power and electric vehicle production.
The world’s largest copper mining company is the private Codelco headquartered in Chile’s Santiago that produces 1.73 million metric tonnes of copper. The second-biggest producer is Switzerland’s Glencore plc (GLEN.L) with an output of 1.26 million metric tons. The U.S.-based Freeport-McMoRan Inc. (FCX) is third with an output of 1.18 million metric tons of copper, followed by Australia’s BHP Group Limited (BHP, 1.11 million metric tons), the U.S.-based Southern Copper Corporation (SCCO, 1 million metric tons), Canada’s First Quantum Minerals Ltd. (FM.TO, 778,000 metric tons), Poland’s KGHM Polska Miedz S.A. (KGH.WA, 710,000 metric tons), three British companies Rio Tinto Group (RIO, 530,000 metric tons), Antofagasta plc (ANTO.L, 470,000 metric tons) and Anglo American plc (AAL.L, 460,000 metric tons).
Vale S.A. (VALE), one of Brazil’s largest companies, is tenth with 297,000 metric tons of copper produced in 2021. It is noteworthy that Vale, which has two copper mines in Brazil, has seen copper production decline by more than 30% over the last five years. Ero Copper, by contrast, has reported an increase in copper output from its Brazilian mine. However, Ero Copper is not among the largest copper mining companies as its annual copper production was 45,511 tonnes or 15% of Vale’s output. That said, Ero Copper is currently building its second copper mine, Boa Esperanҫa. Once operational, the Boa Esperanҫa will double the company’s total copper output and increase its market share.
Analysts from Fitch Ratings agency note that the Boa Esperança mine has the potential to “significantly increase copper production at moderate cash outlays with a favorable operating cost profile”. “Fitch expects capex levels to peak at about $350 million in each of 2022 and 2023 with the development of Boa Esperança before tailing off when the project is completed,” Fitch Ratings report reads. “Guidance for 2022 is $330 million-$375 million, including consolidated exploration spending. Boa Esperança is fully permitted for construction and could move forward in 2Q22 with board approval. Construction is expected to take two years. Given the conventional nature of the mining method and the recent nature of the technical report Fitch views the risk of delay and cost over-run as low/average”.
The Fitch Ratings agency highlights that Ero Copper has a solid track record having more than doubled copper reserves between 2017-2020 and adding 6 years to the life of its gold mine. However, Ero Copper is a less diversified company than many of its competitors. Copper sales account for around 86% of the company’s revenue, meaning it heavily depends on copper prices. Average spot copper prices for copper were $9,188 per tonne in 2021 and $5,849 per tonnes in 2020. Fitch expects copper prices to be around $8,500 per tonne this year, $8,000 per tonne in 2023, and $7,500 per tonne in 2024. These estimates imply that a 10% change in copper prices will impact Ero Copper’s EBITDA for 2022.
As of 2022, Ero Copper is higher leveraged than its Canadian competitor Hudbay Minerals Inc. (HBM) but is lower leveraged than another Canada-based competitor, Taseko Mines Limited (TGB). On the other hand, Ero Copper has higher margins and is a lower cost company. Other disadvantages are that Ero Copper does not pay dividends and has no share repurchase programs.
Financial Performance of Ero Copper
Over the past five years, Ero Copper’s revenues have been steadily rising from $233 million in 2018 to almost $490 million in 2021. Net profit has also been in an upward trend, except for the 2020 financial year. In the 2021 financial year, Ero Copper reported record copper production of 45,511 tonnes and gold production of 37,798 ounces. Revenue grew 37.3% year-over year to almost $489.9 million, while adjusted EBITDA increased 37% year-over year, reaching record highs of $331.9 million. Adjusted net income attributable to owners of the company was $215.4 million, up 45% from the previous year. Gross profit surged by more than 40% year-over-year to $318 million. Cash and cash equivalents increased more than twofold to $130 million.
“During the year, we defined a strategy, which we announced in early 2022, to more than double our copper production and become a 100,000 tonne per year copper and 60,000 ounce per year gold producer by 2025 while maintaining first quartile operating costs and industry-leading returns on invested capital (“ROIC”),” the report reads. “This growth strategy represents the culmination of aggressive exploration drilling over the past several years as well as thoughtful project and mine planning to identify opportunities for value creation within our existing portfolio”.
In the first quarter of 2022, Ero Copper produced 9,784 tonnes of copper and 8,796 ounces of gold. In terms of copper production, this means a 18% decline from the previous quarter and a 26% decline from the same period of last year. Gold production increased by 3% from the fourth quarter of 2021 but dropped 7% as compared to the first quarter of 2021. Revenue was $108 million, representing a 19-percent decline from the previous quarter and a 11% drop year-over-year. Net income fell 12% from the previous quarter but grew 39% year-over-year. Adjusted EBITDA was down by 28% to $62.4 million, while cash flow from operations fell by more than 30%.
David Strang, CEO of Ero Copper, said that the company made several achievements, including significant progress at the MCSA Mining Complex allowing the company to significantly increase throughput in the coming years. However, he noted that despite these positive developments, the company faced some challenges in the first quarter.
“In addition to an underlying strengthening of the Brazilian Real during the first quarter, our operating costs faced the same inflationary headwinds experienced globally across all industries,” David Strang said. “While many of the challenges related to costs are externally driven, we are focused on continuing to improve our operating efficiencies through existing programs and by investing in new technologies applicable across all areas of our business”.
Ero Copper has a market capitalization of 1 billion Canadian dollars. Over the past year, the stock has declined from 28 Canadian dollars in May of 2021 to around 11 Canadian dollars in June of 2022. Analyst consensus for the stock is a “buy”, with a high target price of 35 Canadian dollars and a low target price of 21 Canadian dollars. The median price target of 25 Canadian dollars implies a 56% upside from the current price.
In April, a number of market analysts raised the target price for Ero Copper. The U.S.-based Raymond James financial services company lifted the price target from C$23 to C$24, giving an “outperform” rating on the stock. Scotiabank raised the price target from C$24 to C$27, while National Bankshares updated their target price for Ero Copper from C$20.50 to C$21.50. However, after Ero Copper’s publication of its first-quarter results, some analysts cut their outlook on the company’s shares. Cormark dropped their price target on Ero Copper from C$28.50 to C$25, while setting a “buy” rating, while Barclays cut their target price for the stock from C$23 to C$21. Canadian investment bank TD Securities dropped its price target on Ero Copper from C$25 to C$23 but set a “buy” rating.
Shareholders & Leadership
Fidelity Investments Canada ULC and Fidelity Management & Research Co. LLC are the largest shareholders in Ero Copper with 9.7% and 7.9% of shares, respectively. The third-largest shareholder is the company’s CEO, 51-year-old David Strang, who holds a 6.45% stake or 5.8 million shares in Ero Copper. Christopher Noel Dunn (61 years old), who has been Executive Chairman of Ero Copper since 2016, owns 2.4% of shares. Ero Copper’s Chief Geological Officer Michel Richard holds a 2.3% stake, while Matthew Wubs, an Independent Director of the Board, possesses 1.7% of shares.
David Strang and Christopher Noel Dunn are the co-founders of Ero Copper. The two partners established the company in 2016 and, since then, have been at the helm of the company. David Strang has two decades of experience in corporate finance and asset valuation. Prior to establishing Ero Copper, Strang served as CEO of Lumina Copper which was then acquired by First Quantum Minerals Ltd. (FM.TO) with a market capitalization of 16 billion Canadian dollars. Also, Strang was CEO of Global Copper Corporation acquired by the Canadian mining company Teck Resources Limited (TECK) in 2008. In the early 2000s, he was President of Regalito Copper Corporation and Vice President of Northern Peru Copper Corporation. Strang earned his B.S in Applied Earth Sciences from Stanford University.
In an interview with Mining Journal, CEO David Strang has spoken about the core strengths of the company. “We bought the assets in Brazil in 2016 and the company has gone from strength to strength over the last four - going on five - years. While the company's young, the assets that we bought, prior to us acquiring them, had a 37-year mine life,” he said. “When we acquired the company in Brazil, Boa [Esperanca] had a resource estimate around about 70 million tonnes yet the reserve estimate was only 20Mt and while we put the rest of their house in order, this sat on the sidelines. We were able to dust it off about a year ago and with our exploration expertise, we saw that some things hadn't been recognised in the original resource estimate, which allowed us to put it together in a way that was a lot simpler than previously thought,” Strang noted.
Christopher Noel Dunn (61 years old) is the Executive Chairman of Ero Copper. He has worked in the investment banking industry for around 25 years, including his work with Goldman Sachs, JP Morgan, and Bear Stearns. In the past, Christopher Noel Dunn was a Director of Pan American Silver Corp. (PAAS), one of the world’s top producers of silver, and the gold mining company Pretivm Resources. Mr. Dunn obtained his M.A. degree from the University of Edinburgh and a M.S. degree from the University of Durham.
