Ero Copper Corp (TSX: ERO) is a Canada-based copper producer. Its mining and development operations are in northeastern Brazil within the established mining states of Bahia and Pará. The Company also owns 97.6% of the NX Gold Mine, an operating gold and silver mine located in Mato Grosso, Brazil.

Investment Rationale

• Copper Producer with Lowest Carbon Footprint: The Company is the lowest carbon intensity copper producer mainly due to its upraised copper grades and dependability on renewable energy resources. As the ESG investment theme is rising among the global fund managers, the lowest carbon footprint of Ero Copper would protect its shares from any ESG led selloff.

Source: Company Presentation

• Doubling Copper Production in every 4-Year: The Company has doubled its copper production from 20 thousand tonnes in 2017 to 44 thousand tonnes in 2021 and is expected to double its copper production in 2025 to 96 thousand tonnes. A higher copper production amid elevated copper prices is expected to bolster the group's finances in the coming years.

Source: Corporate Presentation

• Reported Industry Leading Margin in Q2FY21: During the quarter just gone by, the Company’s reported margin was significantly higher when compared to the industry median on the back of higher copper production and relatively stable copper prices above US$ 4/pound.

• Presence of Large Institutional Investors: Among the various parameters that retail investors consider when putting their money in a company, the percentage of shares held by institutional investors is also one among them. Higher the stake held by institutional investors in a company, the better the corporate governance standards. Institutional investors are considered to be the 'smart money in the market, so their presence reduces the chances of any window dressing in the Company's books of account.

Source: Refinitiv, Analysis by Kalkine Group

• Balance Sheet Strength: The Company has a strong balance sheet, with total assets at the end of June 30, 2021, stood at USD 628.5 million compared to total liabilities of USD 273.9 million at the end of June 30, 2021. Further, the Company has significantly reduced its balance sheet risks due to bolstered cash position, as Net Debt lowered to USD 19.2 million compared to USD 130.9 million reported a year before. Also, the Company has robust debt protection metrics with Net Debt is only 0.63 times of its EBITDA as of June 30, 2021, which implies no balance sheet risks.

• Reaffirmed Guidance: The company has reiterated its previously announced 2021 guidance, with annual production guidance for the MCSA Mining Complex of 42,000 to 45,000 tonnes of copper in concentrate at C1 cash cost guidance range of USD 0.75 to USD 0.85 per pound of copper produced and annual production guidance for the NX Gold Mine of 34,500 to 37,500 ounces of gold at C1 cash cost and AISC guidance range of USD 500 to USD 600 and USD 875 to USD 975 per ounce of gold produced

• Outlook-Stable: Ero Copper is well-positioned to capitalize on the increasing copper's industrial demand, higher underlying commodity prices, and it would continue to focus on delivering low-capital and high-margin growth through innovation and operational excellence.

Risk Associated to Investment

• Commodity Price risk: Demand reduction due to resurgence in COVID-19 cases, or any other macro reason would have a significant adverse impact on the copper prices and lead to a negative effect on the Ero Copper as well, as the majority of stock price movement is driven by underlying commodity prices on the London Metal Exchange.
• Exchange Rate risk: Weakness in the U.S dollar against the basket of majors could have a negative impact on the group's financials.
• Others: Supply chain disruption, lockdown at Workplace, Worker's strike, and other macro-economic risks.

Financial Highlights: Q2FY21

Source: Company Filing

• Revenue Up ~70% on YoY basis: Second quarter revenue of fiscal 2021 stood at USD 120.7 million, reflects a jump of ~70.5% against USD 70.8 million reported a year before.
• Solid Segment Performance: In the Q2FY21, the Company's copper operations revenue at MCSA surged by 82.1% on account of higher average realized copper prices over the comparative period. And, revenue from Gold operations at NX Gold surged by 24.1%, primarily on account of increased sales volume over the comparative period.
• Record Operating Cash Flow: During the second quarter of FY21, Ero Copper reported record operating cash flows of USD 85.1 million driven by strong operating performance and elevated copper and gold prices during Q2 2021.
• Improved Earnings on YoY basis: During the quarter under consideration, the Company reported basic and diluted EPS stood at USD 0.95 and USD 0.89, compared to USD 0.09 and USD 0.08, driven by solid topline and bottom-line performance.
• Bolstered Cash Position: As of June 30, 2021, the Company's reported Cash and Cash Equivalent stood at USD 137.7 million compared to USD 51.6 million reported as of June 30, 2020, largely driven by higher operating cash flows on account of increased production and higher copper price realization.
• Significant Reduction in Net Debt Position: At the end of the second quarter of fiscal 2021, the Company's reported Net Debt stood at USD 19.2 million, a significant reduction from USD 130.9 million reported a year before. This reflects the higher free cash flow generation ability of the Company.

Top-10 Shareholders

Valuation Methodology (Illustrative): EV to EBITDA Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the Company's growth drivers, economic moat, competitive advantage, stock's current and historical multiple against peer group average/median and investment risks.

Stock Recommendation

Ero Copper’s exploration programs continued to deliver exceptional results throughout the Curaçá Valley during the second quarter of fiscal 2021 and continue to demonstrate the extensive exploration potential and inherent optionality of the Curaçá Valley.  Further, at the MCSA Mining Complex, the Company achieved record copper production, at the high-end of their annual production guidance, and at record low C1 cash costs during the quarter just gone by.

A strong balance sheet, increased copper production, strong copper and gold commodity prices, and a weak Brazilian Real relative to the US Dollar contributed to the company's record operating cash flow performance in Q2FY21. 

The Company has reaffirmed its 2021 production guidance ranges for both the MCSA Mining Complex and the NX Gold Mine and is well-positioned to achieve the high end of both ranges. The Company's strong exploration focus is driving growth with industry-leading return on Invested capital, reported 65% LTM ROI.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 22.76 on October 07, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as of October 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on October 08, 2021, price as well.

---

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.