Ero Copper Corp.

Ero Copper Corp. (TSX: ERO) is a base metals mining company which is focused on the production and sale of copper. The company holds 99.6% interest in Mineraҫão Caraíba S.A., located in Brazil and 100% owner of the Vale do Curaçá Property.

Guidance: The group has maintained its FY20 guidance. The company expects Curaçá Valley operations to produce 41,000 to 43,000 tonnes of copper in concentrate, while cash cost is expected to be in the range of USD 0.70/ lb to USD 0.85/ lb. NX Gold Mine is expected to produce 38,000 to 40,000 ounces of gold at a cash cost of USD 425/oz  to USD 525/oz.

Q1FY20 Financial Highlights: ERO reported a marginally lower top line, while failed to retain the pace in the bottom-line, due to an unprecedented foreign exchange loss, on account of a stiff degradation of Brazilian Reais. Revenue stood at USD 67.74 million, as compared to USD 72.04 million in pcp. The company produced 23,495,098 tonnes of copper, in line with 23,468,419 tonnes in the previous corresponding period. The quarter was marked by a decrease in ore grade and lower average copper prices. A decline in gold production and gold sales further fueled the revenue fall. Gross profit stood at USD 30.65 million, as compared USD 32.59 million in pcp. The quarter witnessed a rise in the general and administrative expenses coupled with an increase in the share-based compensation. Adjusted EBITDA stood lower at USD 33.4 million against USD 39.3 in Q1FY19. Loss before income taxes came in at USD 67.69 million as compared to a profit of USD 18.21 million in Q1FY19. The loss was primarily driven by a significantly higher foreign exchange loss. Net loss stood at USD 52.99 million against a profit of USD 15.48 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: A fall in copper prices would impact the top line and cash flow of the Company. Lower economic activities, coupled with a slowdown in industrial and manufacturing segments, would hinder the demand of the commodities resulting in a comparatively lower realization price.

Valuation Methodology: P/CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~28% so far this year, due to a sharp correction in the international copper prices on account of unprecedented lower manufacturing and industrial activities. However, the stock recovered sharply and appreciated ~54% in the last three months and closed above its 50 days and 100 days simple moving average (SMA) of CAD 15.6 and CAD 14.82, respectively, indicating a medium-term bullish trend. The group has maintained its production guidance for FY20. We expect a gradual recovery in copper demand as industrial activities are resuming as the governments across the globe have started opening the economy in a phased manner. A recovery in copper demand is likely to support the copper price as well. Further, elevated gold prices are likely to provide some support to the group’s topline and cash flow. We have valued the stock using P/CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have used peers like Capstone Mining Corp, Trevali Mining Corp, Hudbay Minerals Inc Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 16.96 on June 22, 2020.

ERO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Lundin Mining Corporation

Lundin Mining Corporation (TSX: LUN) is Canada’s diversified metals and mining company. The company primarily produces copper and derives major revenue from it. Apart from copper production, the company also produces gold, zinc, and nickel across the major locations like the United States, Brazil, Portugal, Sweden, and Chile.

Due to the ongoing COVID 19 restrictions, the group did not face any major hindrance and operated normally. However, due to the pandemic and lower metal prices, the company is taking cost reduction measures and lowered its FY20 capital expenditure. The group expects its FY20 capital expenditure to be around ~CAD 440 million, lower from the previous guidance of ~CAD 620 million. Total sustaining capital is estimated at ~CAD 385 million.

Q1FY20 Financial Highlights: LUN announced its quarterly results and posted revenue of CAD 378.0 million as compared to CAD 416.4 million in pcp. The decline was primarily attributed to lower metal prices, while sales volumes of copper and nickel remained high. Realized prices of Copper and Nickel stood at CAD 1.95 /lb and CAD 3.83 /lb, against CAD 3.11 /lb and CA 8.37 /lb in the previous corresponding quarter, respectively. Higher sales volumes were supported by the addition of Chapada mine. The quarter was marked by higher production costs and a sharp rise in the depreciation, depletion and amortization expenses, which has resulted to a gross loss of CAD 22.7 million, against a gross profit of CAD 141.2 million in pcp. Adjusted EBITDA stood comparatively lower at CAD 90.3 million, against CAD 177.0 million in the previous corresponding period. The company reported a net loss of CAD 113.6 million, as compared to CAD 60.9 million in pcp. Capital expenditures, during the first quarter stood lower at CAD 141.1 million, as compared to CAD 182.0 million in pcp.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Risk: A prolonged lockdown or any other restriction measures are likely to result in reduced industrial activities, which is likely to hamper the demand and price of copper. Lower commodity prices would erode the top line of the company.

Stock Recommendation: The revenue of the Company depends majorly on the commodity prices, and a price correction led to a subsequent fall in revenue and profitability of the company. The Company expects a reduction in the full year cash cost at ~CAD 1.35/lb from CAD 1.45/lb from its Candelaria Mill Optimization Project, which is a key positive. On the liquidity front, the Company has CAD 345.0 million drawn on its credit facility and an additional CAD 90.0 million, through outstanding term loans, which seems sufficient to cater its near-term working capital requirement. We believe prices to recover gradually in the near-term in the wake of resumption of manufacturing activities. Further, China’s economy is slowly reviving, which is good news as China accounts for the majority of the copper demand. We have valued the stock using P/CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have used peers like Capstone Mining Corp, Freeport-McMoRan Inc, ERO Copper Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 6.70 on June 22, 2020.

LUN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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