Ero Copper Corp. (TSX: ERO) is a base metals mining company, which is focused on the production and sale of copper from the Vale do Curaca Property in Brazil, with gold and silver produced and sold as by-products from the same. 

Key Investment Rationales: 

• Robust FY21 production: The group reported its FY21 production of 45,511 tonnes of copper, which is higher than the company’s forecasted guidance of 42,000 to 45,000 tonnes. On the other hand, gold production stood at 37,798 oz, surpassing its full-year guidance of 34,500 to 37,500 oz of gold. These were supported by strong operational excellence, innovation and periodical extension of its existing mine-life.
• Bullish Long-term guidance: Recently, the company reported its five-year outlook,  wherein the company expects to double its FY25 copper production to 85,000 to 95,000 tonnes, as compared to FY22 production guidance of 43,000 to 46,000 tonnes. Additionally, the company is likely to report its gold production in between 50,000 to 60,000 oz in each year during FY23 to FY26. Notably, in FY22, the company expects its gold production in between 39,000 to 42,000 oz.

Source: Company Reports

• Strong pipeline: The company is also going through the third phase of construction activities in the Pilar mine and reported a new external shaft and associated development at the Deepening Extension Zone. On the completion of the construction, this is expected to deliver additional production volumes of roughly 3.0 million tonnes in 2026 and 2.6 to 3.0 million tonnes from 2027 onwards. ERO is planning to start construction activities at the Boa Esperança mine in Q2FY22, which is subjected to receipt of approval by the Board of Directors of the Company.
• Significant growth potential from the MCSA mining complex: Historically, the group reported robust growth from its copper production across the MCSA mining complex. The mine operates through low-cost synergy and has a phenomenal operating history of more than forty years, driven by periodical mine life extensions and operational improvements. Currently, the company has more than twelve years of mine life, with production averaging ~46,000 tonnes per year from 2022 to 2026.

• Growth in financial metrics: The company reported a higher adjusted EBITDA of USD 245.1 million, significantly higher than USD 138.4 million in pcp, supported by elevated revenue (USD 355 million in 9MFY21 v/s USD 232.8 million in pcp) and disciplined cost management. Cash flow from operations stood higher at USD 297.9 million in 9MFY21, as compared to USD 124.2 million in pcp. This was supported by higher copper sold (33,324 tonnes in 9MFY21 v/s 32,549 tonnes in pcp) coupled with realization prices of gold (USD 1,783/oz in 9MFY21 v/s USD 1,766/oz in pcp).
  

• Issuance of USD 400 million of Senior Notes: Recently, the company announced the issuance of USD 400 million of Senior Notes due in 2030. This fund is likely to be used for the repayment of a senior secured revolving credit facility of ~USD 50 million and for CAPEX purposes related to the construction of the Boa Esperança Project, expected to commence in Q2FY22.
  

• Strong margin profile: In Q3FY21, the company reported a higher gross margin and operating margin of 60.8% and 51.3%, respectively, as compared to the industry median of 50.2% and 27%, respectively. Moreover, the company reported its net margin of 23.6% in Q3FY21, higher than the industry median of 13%. A higher margin illustrates better operational efficiencies when compared to the industry median.
  

• Technical showing a possible upside: On a daily price chart, the stock is trading near the lower band of its 20-days Bollinger band, which indicates a possible uptick in the price levels in the coming days.

One-Year Technical Price Chart (as on February 03, 2022). Analysis by Kalkine Group 

Risks:  

The company’s operations are correlated with the international commodity prices, and price volatility would impact the group’s margins and cash flows. 

  Q3FY21 Financial Highlights:

Q3FY21 Income Statement Highlights (Source: Company Report)

• Elevated Revenue: ERO announces its quarterly results, wherein the company posted a revenue of USD 111.7 million, higher than USD 94.3 million in pcp. The surge was primarily driven by higher realized prices of metals, offset by slightly lower sales volume.

• Increase in gross profit: Gross profit stood at USD 68.0 million, higher than USD 59.6 million in pcp, thanks to higher revenue, partially offset by an increase in the cost of product sold.

• Higher input costs: The quarter was marked by higher general & administrative costs and an increase in share-based compensation. Moreover, the company reported a higher foreign exchange loss of USD 19.6 million versus USD 8.7 million in pcp.
• Lower Bottom-line: Net profit declined to USD 26.3 million, from USD 31.4 million in pcp. The decrease was primarily due to the above-mentioned facts.

 Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 55.76% stake, T. Rowe Price Associates, Inc. and Fidelity 14.98% and 8.93%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Stock Recommendation:

The group drastically lowered its total debt to USD 61.4 million in Q3FY21, from USD 163.1 million in Q2FY21, which indicates prudent capital management. This is impressive, as it enhances the overall financial flexibility of the firm. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Taseko Mines Ltd, Lundin Mining Corp etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ERO at the last traded price of CAD 16.42 on February 03, 2022. 

One-Year Technical Price Chart (as on February 03, 2022). Analysis by Kalkine Group

*Recommendation is valid on February 04, 2022, price as well. 

Technical Analysis Summary:

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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