Ero Copper Corp

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:

• 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% and 27%, 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.

• Attaining the higher range of FY21 production guidance: The Management is confident to reach the higher end of the production guidance (FY21) across both its MCSA Mining Complex and the NX Gold Mine. Earlier, the company provided an outlook of 42,000 to 45,000 tonnes of copper production from MCSA Mining Complex and 34,500 to 37,500 ounces of gold from NX Gold Mine. During Q3FY21, the company completed the final phase of preventative mill maintenance at the MCSA Mining Complex, which is expected to drive higher mill throughput volumes and lower average processed copper grades during Q4FY21.
  

• RSI hovering at an oversold zone: On a daily chart, the 14-days RSI of the GRN stock stood at 26.0895, indicating an oversold position with a possibility of price appreciation from the current level. Moreover, the stock closed near the lower range of the 20-days Bollinger band, which also illustrates a possible up move in the coming trading sessions.

Technical Price Chart (as on December 07, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Attractive long-term prospects from the copper segment: The group reported robust growth from its copper production from its MCSA mining complex driven by periodical mine life extensions and operational improvements. Additionally, ERO expects opportunities from its BOA Esperança project, which is in developing stage, wherein the company would be potentially converting material classified as waste into mineralization through exploration of the Gap Zone. The above would lead to double its copper production in every four years, which is encouraging and is expected to contribute to the company’s upcoming growth.

Estimated Copper production (Source: Company Presentation)

Q3FY21 Financial Highlights:

• ERO announces its quarterly results, wherein the company posted revenue of USD 111.797 million, higher than USD 94.328 million in pcp. The surge was primarily driven by higher realized prices, offset by slightly lower sales volume.

• Gross profit stood at USD 68.027 million, higher than USD 59.605 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.
• Net profit declined to USD 26.384 million from USD 31.443 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: 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): Price to Cash flow based

Stock Recommendation:

Cash from operations surged to USD 297.925 million in 9MFY21, higher than USD 124.214 million in pcp. The above is impressive as it supports the company’s overall liquidity. The group drastically lowered its total debt to USD 61.4 million in Q3FY21, from USD 163.1 million in Q2FY21, which indicates prudent capital management. The above is impressive as it enhances the overall financial flexibility of the firm. We have valued the stock using the Price to CF-based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Lundin Mining Corp, Hudbay Minerals Inc etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ERO at the last traded price of CAD 19.16 on December 07, 2021. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on December 07, 2021). Analysis by Kalkine Group

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

Largo Inc

Largo Inc (TSX: LGO) is a natural resource development and exploration company having operation of mining and exploration properties located in Brazil and Canada. The company primarily explores for vanadium, iron, tungsten, molybdenum, chromite, palladium, and platinum group metals.

Key highlights

• Change in legal name: Recently, on November 8, 2021, the Company changed its legal name from Largo Resources Ltd. to Largo Inc.
  

• Robust financial numbers: Steel and chemical industries have seen strong demand, and the aerospace industry is slowly resuming, which is an encouraging sign for the company. In the reporting quarter, the organization sold 2,685 tonnes of V2O5, up 15.7% from Q3 2020, and earned USD 53.9 million in revenue, up 96% from Q3 2020. The similar positive trend was seen in net income.

Source: Company Presentation

• Vertically integrating into electrical energy storage systems: The company is transitioning to produce vanadium-based electrical energy storage devices, which is a strategic move. The Company believes that vertically integrating its financially strong vanadium operations with its superior vanadium redox flow battery ("VRFB") technology will provide a higher value market opportunity for the Company's vanadium products in the future, as well as it would provide a unique competitive advantage in the rapidly growing long duration energy storage market.

• Improving operational efficiency: The Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the Company has big plans to support future growth. Higher average realized prices of the commodities also played a crucial role in achieving healthy revenues and margin.

Source: REFINITIV, Analysis by Kalkine Group

Financial overview of Q3 2021 (Expressed in 000’s of U.S. dollars)

Source: Company Fillings

• In Q3 2021, the Company sold 2,685 tonnes of V2O5 equivalent and clocked a revenue of USD 53.8 million, increased 96% compared to USD 27.5 million in the previous corresponding period. The revenue increased mainly due to higher demand in all of the Company’s key markets in Q3 2021.
• The company’s total operating expenditures increased to USD 40.4 million against USD 24.1 million in pcp.
• Net income before tax stood at USD 13.5 million compared to USD 3.3 million in pcp.
• The company’s net profit zoomed to USD 9.2 million compared to USD 2.5 million in pcp.
  

Risks associated with investment

Despite improved production results and steady vanadium demand in all regions, the Company experienced logistical challenges which resulted in lower sales for the quarter. Any continuation on this challenge can bring fatal results. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The Company's sales and revenues per pound sold increased 96 percent and 69 percent, respectively, in the third quarter compared to the same quarter in 2020, thanks to strong vanadium prices. Despite reduced sales in Q3 2021, primarily due to worldwide logistical delays, its operating results improved significantly over the previous quarter, owing to greater recoveries and throughput. The company is also transitioning itself to produce vanadium-based electrical energy storage devices, which is a strategic move. We believe this would provide a unique competitive advantage in the rapidly growing long duration energy storage market. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 12.15 on December 7, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on December 7, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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