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

• Attaining the higher range of FY21 production guidance: The MCSA Mining Complex and the NX Gold Mine are both on track to meet the upper end of respective production projection for FY21. Previously, the business predicted that MCSA Mining Complex would produce 42,000 to 45,000 tonnes of copper and NX Gold Mine would produce 34,500 to 37,500 ounces of gold. The business finished the third phase of preventative mill maintenance at the MCSA Mining Complex in Q3FY21, which is projected to result in greater mill throughput volumes and lower average processed copper grades in Q4FY21.

• Higher Cash flow from operations: In the third quarter of 2021, the firm reported a greater cash flow from operations of USD 150.7 million, up from USD 44.4 million in the third quarter of 2020. A USD 8.4 million rise in gross margins due to higher copper prices, as well as USD 100.0 million in revenues from the NX Gold Transaction, boosted cash flow from operations.

• Attractive long-term prospects from the copper segment: Periodic mine life extensions and operational improvements helped the company post strong growth in copper production from its MCSA mining complex. ERO also sees chances from its BOA Esperança project, which is still in the early stages of development, where the company hopes to turn waste material into mineralization by exploring the Gap Zone. The above would result in a four-fold increase in copper production, which is optimistic and expected to contribute to the company's future growth.

Source: Company Presentation

• 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 50.3% and 27.0%, respectively. Moreover, the company reported its net margin of 23.6% in Q3FY21, higher than the industry median of 13.3%. A higher margin illustrates better operational efficiencies when compared to the industry median.

Financial overview of Q3 2021 (In 000 of USD)

Source: Company Filing 

• ERO announces its quarterly results, wherein it posted revenue of USD 111.7 million, higher than USD 94.3 million in pcp. The surge was primarily driven by higher realized prices, partially offset by slightly lower sales volume.

• 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.

• The quarter was marked by higher general & administrative costs and an increase in share-based compensation. It also reported higher foreign exchange loss.
• Net profit declined to USD 26.3 million from USD 31.4 million in pcp.
  

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. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

During the third quarter of 2021, the company achieved three significant milestones, including the completion of an optimized Feasibility Study on the Boa Esperança Project, the closing of the previously announced USD 110 million NX Gold Stream, and the completion of mill maintenance at the MCSA Mining Complex in preparation for expanded operations. Additionally, the firm reported a greater cash flow from operations of USD 150.7 million, up from USD 44.4 million in the third quarter of 2020 and drastically lowered its total debt to USD 61.4 million in Q3FY21, from USD 163.1 million in Q2FY21, which indicates prudent capital management. Furthermore, on the back of healthy operations the company expects robust numbers to finish FY 2021. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ERO at the last traded price of CAD 18.97 on December 21, 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

One-Year Technical Price Chart (as on December 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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