Formed a few years ago, the company has worked up and transformed some unloved copper and gold assets in Brazil into a C$2 billion company that delivers what it claims is an industry-leading 65% return on invested capital from production of around 45,000 tonnes per year of copper and 38,000 ounces a year of gold. Mining Journal spoke with co-founder and CEO David Strang to find out more.
Its core strength of exploration has been key in unlocking new mineralisation and value at its assets, extending mine life and uncovering growth potential at a time when metal markets have been heating up.
"We bought the assets in Brazil in 2016 and the company has gone from strength to strength over the last four - going on five - years. While the company's young, the assets that we bought, prior to us acquiring them, had a 37-year mine life. We've been in the fortunate situation of acquiring a company with a great management team and not as good at ownership. That's where the opportunity was, being able to help the management team grow the asset to where we are today. We've doubled production since we acquired it," said Strang.
The company is about to embark on its next leg-up having announced a feasibility study on its Boa Esperanca deposit which will allow Ero to double its copper production again over the next four years by adding another 45,000tpy. Boa Esperanca highlights the roar in Ero's engine as the company was able to see what Chile's state copper company Codelco, who discovered the deposit, couldn't.
"When we acquired the company in Brazil, Boa had a resource estimate around about 70 million tonnes yet the reserve estimate was only 20Mt and while we put the rest of their house in order, this sat on the sidelines. We were able to dust it off about a year ago and with our exploration expertise, we saw that some things hadn't been recognised in the original resource estimate, which allowed us to put it together in a way that was a lot simpler than previously thought. From that, we were able to draw a reserve which was more in tune of what you would expect from an open pit potential mine, of recovering 60% to 70% of the resource," said Strang.
At Boa, Ero identified an area it calls the gap zone when it did the resource estimate and saw there was an area to the east and northeast which hadn't been drilled and within the pit was treated as waste. "It was clear to us that it was a zone that was essentially joining the two high-grade zones between surface and depth and we're drilling that and we've had great success pulling that together," said Strang.
Another roar from Ero's engine is its ability to add pounds of copper to reserves and resources through exploration rather than playing with cut-off grades and copper price assumptions, an approach Strang, a 6.6% owner, has good reason to feel very strongly about.
Despite the copper price being at an historically high US$4.50/lb, the company sticks to its reserve price of $2.75/lb, resisting the temptation to increase it to bring in lower grade material. "We take a very conservative approach with our resource estimate and that comes down to how you manage your cut-off grade. It's a controversial topic in the mining industry; many people believe that as metal prices increase, so you should drop your cut-off grade. We don't. We don't aspire to that thinking. Our view is that you originally went to build a mine using the cut-off grade at that particular time, so as metal prices go up, those excess returns you're generating above and beyond the IRR [internal rate of return] you decided to build for should be returned to shareholders. What typically happens when you cut the grade, is that your costs go up so your margins stay the same. You do lengthen the mine life to a certain extent, but we believe in the philosophy that shareholders should benefit from the excess returns," said Strang.
Ero's gold asset, NX gold, is another example of the successful deployment of the company's exploration focus. "The gold mine came with the [copper] transaction. It was really a throwaway add-on by the sellers as at that time it didn't have any reserves. Over the course of the last three years we have been able to take that mine life to six years of reserves and I think when the new work comes out the end of the year, we're going to significantly increase that again," said Strang.
With Boa Esperanza about to move into development, clear exploration expertise and its stock price riding high, Strang is cautious about future growth possibilities at this time, as high copper prices mean potential targets tend to be more fully priced.
"The opportunity to take advantage of what we see as this arbitrage in the market price is very difficult to find, so we really look at the assets that we have in the Curaca Valley, our core area, as there is significant upside potential there in terms of exploration, and we continue to uncover new opportunities. We are quietly acquiring land positions to allow us to leverage our exploration expertise, we feel it's in the best interests of our shareholders to leverage our intellectual capital, as opposed to going out and acquiring," said Strang.
With its September quarter results due next week, Strang hints that a big dent will have been made in the $160 million of debt it had at the end of the June quarter, in what may be a tuning of the balance sheet prior to launching into the Boa Esperanza build.
"Our financials will be coming out next week, and people will be able to see some insights of what we've done with some of our excess cash flow on the debt side of things. As the third largest shareholder, I do like a return on my investment, so I'm looking forward to that at some point in the future. In the interim, we're mindful of what is the best use of our capital in terms of generating a return and at this particular time, continuing to grow our asset base and growing boa, particularly in the marketplace, where the tailwinds are behind copper, is the best use of capital right now," said Strang.
If a 60% return on invested capital and desire to return access profits to shareholders were not attractive enough, Ero is also in the first quartile in terms of its CO2 emissions due to the availability of hydroelectric renewable power sources in Brazil.
"We benefit from the fact that our power all comes from renewable sources, but that doesn't mean that's the end game. We're also very proud that our operations recycle almost 90% of the water that we use and we continue to work on areas to improve on. As a smaller company, we're limited in terms of some of the things we can do on the innovation side of things, but I feel the industry is moving in a positive direction towards becoming more carbon neutral. We have seen certain [investors] that have a focus towards ESG start to acquire some of our shares, because of our low carbon footprint," said Strang.
Shares in Ero Copper are trading at C$23, valuing the company at $2 billion.
