Ero Copper Corp. (TSX: ERO) is a base metals mining company. It 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. Ero's operations are segmented between MCSA, NX Gold, and corporate.

Key Highlights:

• Strong outlook: The group gave strong annual production guidance for copper, which is estimated to be between 43,000 tonnes and 46,000 tonnes in FY22. The cash cost of copper is anticipated from USD 1.05/ lb (pound) to USD 1.15/ lb. Also, the annual gold production is expected to range from 39,000 ounces to 42,000 ounces, whereas the second half of the year is expected to witness higher production in FY22. The cash cost of gold is computed to be between USD 500/ oz (ounce) and USD 600/ oz, whereas the AISC (all-in sustaining cost) is expected around USD 925/ oz to USD 1,025/ oz.

• Industry beating profitability margins: During Q1FY22, the company reported lower revenues but managed its cost of production and operations well as compared to its industry peers, which lead to the improved profitability margins as compared to the industry median, which is presented below.

Source: Refinitiv, Analysis by Kalkine Group 

• Industry beating liquidity profile: The company's quick ratio at the end of Q1FY22 was reported at an elevated level of 4.99x, as compared to the industry median of 1.58x. Further, the company’s current ratio at the end of Q1FY22 stood at 5.32x, which is higher than the industry median of 2.66x. The higher quick ratio and current ratio state the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The company is vulnerable to price wars on account of rising competition which could erode its margins. Further, the group is facing other challenges such as constant changes in technology, rising costs, etc.

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• During Q1FY22, the company reported a dip in the total revenues to USD 108.91 million as compared to USD 122.54 million in Q1FY21. The lower production and decreased overall volumes sold were primarily responsible for the group reporting a decline in the total sales in Q1FY22. 

• The gross profits for Q1FY22 stood at USD 60.99 million, which is lower than the gross profit of USD 82.80 million in Q1FY21. The lower revenue which was further led by a higher cost of sales in the reported period pulled down the overall gross profits.

• The company reported an increase in net income to USD 52.48 million during Q1FY22 when measured against the net income of USD 32.05 million in the pcp.
  

Valuation Methodology (Illustrative): Price/ Cash-flow based

Analysis by Kalkine Group

Stock Recommendation:

The group reported increased cash and cash equivalent to USD 365.46 million in Q1FY22, when measured against the cash and cash equivalent of USD 84.57 million in pcp, which is a key positive for the company to meet its strategic growth objectives and business operations. Further, the management estimated the annual production of copper to be between 43,000 tonnes to 46,000 tonnes in FY22 and the gold production is estimated to be in the range of 39,000 oz to 42,000 oz in FY22. Also, the company reported a higher net income of USD 52.48 million in Q1FY22 against the net income of 32.05 million in Q1FY21. On the valuation front, the stock is measured on the Price/ Cash-flow based relative valuation multiple and we have considered Lundin Mining Corp., Freeport-McMoRan Inc., etc as the peer group for the comparison. 

Therefore, based on the above rationale, and valuation, we recommend a “Speculative Buy” rating on the stock of ERO at the last closing price of CAD 12.51 on June 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 of June 17, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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