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 Updates:

• Bullish Long-term guidance: The company posted its five-year outlook,  wherein the company expects to double its FY25 copper production at round 97,000 tonnes, from expected FY22 production 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 at ~41,000 oz. Cash cost is expected to decline marginally in the on a long-term basis.

Five Year Production Outlook 

• Strong pipeline: During the Q1FY22, the company reported impressive drilling activity across its Pilar Mine property, wherein it confirmed an important accumulation of mineralization within a structural trap suggesting continuity of high-grade mineralized zones. The management also confirmed high potential mineralization in the coming days. Moreover, drilling of the Boa Esperança Gap Zone also concluded during the period which demonstrated continuity of mineralization within the Gap Zone. Exploration activities for the rest of FY22 at Boa Esperança suggests extensions of mineralization beyond pit limits and testing potential for high-grade underground extensions of mineralization. These are likely to contribute healthily to the company’s upcoming operations.

• Robust margin profile: In Q1FY22, the company reported a higher gross margin and operating margin of 56% and 55.4%, respectively, as compared to the industry median of 39.8% and 26%, respectively. Moreover, the company reported its net margin of 48.2% in Q1FY22, higher than the industry median of 14.9%. A higher margin illustrates better operational efficiencies when compared to the industry median.
  

Risks associated with the Investment:

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

  Q1FY22 Financial Highlights:

Q1FY22 Financial Highlights (Source: Company Reports)

• ERO announces its quarterly results, wherein the company posted a revenue of USD 9 million, slide from USD 122.5 million in pcp. The decline was primarily due to lower sales volume of both copper and gold segment as compared to the previous corresponding period.

• Gross profit stood at USD 60.9 million, fell from USD 82.8 million in pcp, due to lower revenue, along with an increase in the cost of product sold.

• The quarter was marked by a higher general & administrative cost while a lower share-based compensation partially supported the profitability. Moreover, the company reported a foreign exchange gain of USD 18.7 million versus a loss of USD 28.6 million in pcp. Hence, Income before income taxes surged to USD 61.0 million v/s USD 39.8 million in pcp.

• Net profit stood at USD 52.4 million, grew from USD 32.0 million in pcp, supported by a higher income before taxes as mentioned above, partially offset by an increase in income taxes.

  Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group

Stock Recommendation:

The company reported its quick ratio and current ratio of 4.99x and 5.32x, respectively, as compared to the industry median of 1.56x and 2.61x, respectively. This indicates that the company has ample current assets to meet its current liabilities. We have valued the stock using the price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Capstone Copper Corp, Taseko Mines Ltd etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of ERO at the last closing price of CAD 15.23 on June 03, 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 June 03, 2022). Analysis by Kalkine Group

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

  Technical Analysis Summary

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