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 highlights

• The production for FY 2021 outpaced the full year guidance: The company had record FY 2021, production of 45,511 tonnes of copper in concentrate at the MCSA Mining Complex, above the high end of full-year projections of 42,000 to 45,000 tonnes. It also exceeded the high end of the NX Gold Mine's full-year gold output projection of 34,500 to 37,500 ounces with gold production of 37,798 ounces.

• Elevated cash flows from operation: The resilience of the business helped them in generating higher cash flows from operations at USD 364.6 million in FY 2021, compared to USD 162.8 million in the previous corresponding period. This rise in cash flows was primarily due to higher EBITDA and upfront advance for the NX Gold Transaction.

• Healthy operating matrix: Despite the tough period in 2021, the Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA Margin, operating margin and net margin. The Company is continuously working efficiently thus, its presence is increasing along volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

Source: Kalkine, Analysis by Kalkine Group

• Healthy Production Outlook for 2022: For 2022, the company reported copper production outlook in the range of 43,000 to 46,000 tonnes while the gold production ranges between 39,000 to 42,000 ounces. The healthy production guidance for 2022 further enables company to attain its growth plans.

Risks associated with investment

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

Financial overview of FY 2021 (In thousands of US Dollars)

Source: Company Filling

• ERO announces its annual results, wherein it posted revenue of USD 489.9 million, higher than USD 324.0 million in pcp. The surge was primarily driven by higher realized prices and higher production.
• Gross profit stood at USD 318.8 million, higher than USD 188.1 million in pcp, thanks to higher revenue, partially offset by an increase in the cost of product sold.
• The quarter was marked by higher general & administrative costs.
• Net profit increased to USD 202.6 million from USD 52.4 million in pcp, primarily due to higher income before tax, partially offset by higher income tax.
  

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group

Stock recommendation

Ero Copper had another fantastic year of 2021. In addition to delivering record copper and gold production and financial results, the company made significant progress in solidifying transformational organic growth plans, putting it in a strong position to execute on initiatives aimed at producing 100,000 tonnes of copper and 60,000 ounces of gold per year by 2025.

Building on its operational progress, the firm reinforced its balance sheet after year-end with a USD 400 million senior unsecured notes issuance, providing adequate liquidity to sustain its organic development objectives in the next years. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 18.44 as on March 17, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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