A Member of Pat McKeough’s Inner Circle recently asked for his advice on a mining company that produces both copper and gold from operations in Brazil.
Pat likes the prospects of higher copper prices and the firm appears to be a capable miner. However, he also notes that Brazil is not the most politically stable country. The company’s valuation remains somewhat high even as production costs have risen.
Ero Copper Corp. (Symbol ERO of Toronto; www.erocopper.com), is a Vancouver-based mining company.
The company is focused on copper production from its MCSA Mining Complex in Bahia State, Brazil. Specifically, Ero Copper holds 99.6% of Brazilian copper mining company MCSA, which owns 100% of the Caraíba Operations (formerly known as the MCSA Mining Complex). The operations are located in the Curaçá Valley of Bahia State and include the Pilar and Vermelhos underground mines and the Surubim open pit mine. The copper-focused Tucumã Project (formerly known as Boa Esperança) is another asset and is located in Pará, Brazil.
The company also owns 97.6% of NX Gold S.A. which owns the Xavantina operations (formerly known as the NX Gold Mine). Those operations are comprised of an operating gold and silver mine located in Mato Grosso, Brazil.
Ero Copper first sold shares to the public and began trading on the Toronto exchange in October 2017 at $4.75 a share.
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In the quarter ended June 30, 2024, revenue rose 11.6%, to $117.1 million from $104.9 million a year earlier. (All figures except share price and market cap in U.S. dollars.) Higher realized copper prices drove the increase. Excluding one-time items, the company earned $18.6 million, or $0.18 a share.
During the quarter, Ero Copper produced 8,867 tonnes of copper at a cost of $2.16 per pound. It also produced 16,555 ounces of gold at its Xavantina operations.
The company’s long-term debt of $486.9 million U.S. is a reasonable 22.9% of its market cap; it also held cash of $44.8 million on June 30, 2024.
Inner Circle: Copper prices are volatile but bullish
After dropping to as low as $2.17 U.S. per pound in mid-March 2020, copper rose steadily to a record price of $5.02 on March 6, 2022. Fears of supply chain disruptions and historically low stockpiles amid rising copper demand drove prices higher.
However, the price of copper has since pulled back to $4.25. That’s mostly on concerns that rising interest rates will continue to slow global economies. As well, investors worry about the pace of China’s economic recovery.
Longer term, the outlook for copper looks positive. From a supply standpoint, due to a lack of new mines, long-term copper shortages could result. As economies recover, they will push up demand—and that includes demand from segments such as electric vehicles (EVs) and green-energy related operations.
Copper market fundamentals suggest continued strength going forward. The copper supply/demand imbalance also presents an investment opportunity for those interested in copper-mining stocks.
Ero Copper’s outlook is positive, but the stock trades at a somewhat high 7.5 times the forecast 2024 cash flow of $2.89 U.S. a share. However, cash flow should rise to $5.34 U.S. a share in 2024 as the company continues to expand production; the stock trades at a more reasonable 4.0 times that estimate.
Brazil is currently a mining-friendly jurisdiction, but it has a history of political volatility. The company faces added risk in having all of its properties there. Ero Copper will of course also need copper prices to remain strong.
Recommendation in Pat’s Inner Circle: Ero Copper Corp. is a hold.
