Ero Copper completes IPO, plans production ramp-up

VANCOUVER — Ero Copper (TSX: ERO; US-OTC: ERRPF) is on track to become Canada’s next intermediate copper producer after a $110.6-million initial public offering (IPO) on the Toronto Stock Exchange where it issued 23.3 million shares at $4.75 each.

The company kicked off trading on Oct. 19 with 74.6 million shares outstanding plus 15 million share options and warrants.

The IPO dovetails with renewed strength in copper prices, which have jumped over 20% so far in 2017, and marks one of the first sizeable Canadian-based copper IPOs since Quadra Mining hit the scene with a $145-million IPO back in 2004.

Ero’s flagship asset is the Vale do Curaca (MCSA) complex, 385 km northwest of the state capital of Salvador in northeastern Bahia State, Brazil. The property is in the Curaca Valley magmatic-sulphide mineral district, which hosts a geological setting often compared to the base metal camps of Sudbury, Ontario.

MCSA was mined continuously for nearly 40 years before operators were forced into bankruptcy after a flood in late 2015.

The Northern Miner caught up with Ero executive chairman Christopher Noel Dunn and president and CEO David Strang to discuss the IPO and the company’s direction.

The duo have already worked together within Ross Beaty’s Vancouver-based Lumina Group. Strang served as president and CEO of Lumina Copper, while Dunn sits on the boards of Pan American Silver (TSX: PAAS; NASDAQ: PAAS) and Pretium Resources (TSX: PVG; NYSE: PVG).

“We got a call early last year from a source in Brazil we had met during Lumina’s time looking at the project back in 2008,” Dunn recounts.

“The gentlemen told us the company was in trouble and might be available for an acquisition, so we decided we ought to take a look. We put our team together and hopped on a plane. When we arrived at site they told us the mine was flooded. We probably wouldn’t have gone if we’d known that,” he laughs.

The MCSA complex was developed by the Brazilian government in the late 1970s, and includes: the operating Pilar district underground mine; the Surubim district open-pit mine, located 33 km north; and the in-development Vermelhos district underground project, 31 km north.

The operations jointly produced 25,000 tonnes copper annually between 2011 and 2015, before production declined to just 4,900 tonnes last year on account of the flood. The previous shareholders included two Brazilian entities and Glencore (LON: GLEN).

Ero restarted operations in January after finalizing its ownership agreements, and produced  nearly 15,000 tonnes copper through September at cash costs of US$1.42 per pound.

“We went down to take a look at the core and data room, and said: ‘Wow, there’s a lot of copper here,’” Dunn continues. “We realized we could put the asset back into production, but knew you’d have to be insane to get involved unless you could restructure the overwhelming debt load. So we effectively spent a large part of 2016 engaged in what I’d call an ‘interesting negotiation’ with multiple Brazilian banks.”

Ero acquired an 85% stake in MCSA late last year, and boosted its ownership to 99.5% for US$34 million in June. After the negotiations Ero assumed US$170 million in restructured debt.

The complex hosts global proven and probable reserves of 8.9 million tonnes grading 2.49% copper for 220,500 contained tonnes copper, and measured and indicated resources totalling 20.5 million tonnes at 2.26% copper for 463,000 contained tonnes.

The Surubim and Pilar mines feed ore to the central Caraiba mill, which is integrated with the Pilar site and has an annual capacity of 3.2 million tonnes, or 8,750 tonnes per day.

The mill’s original nameplate was 5 million tonnes annually, however, which hints at Ero’s near-term plan to ramp up copper production. The operation also has an inactive 5,000-tonne-per-year solvent extraction-electrowinning plant that could process any oxide copper discoveries.

“The previous owners were focused on dividends rather than long-term development and mine optimization,” Strang says. “So we have this significant land package running for around 100 km that gives us serious potential to add tonnes to a mill with latent capacity.

“It’s an unusual deposit because we’re looking at a magmatic sulphide that has really elevated copper grades,” he continues. “There is nickel there that wasn’t really historically assayed, but the copper ratio is significantly higher than you’d typically see in these deposits. So we have four mines over trend, and that’s with very limited systematic exploration work to date.”

The company estimates it can increase copper output 179% by 2021 to 53,100 tonnes annually, while cutting cash costs 61% to US51¢ per pound.

It plans to accelerate the Vermelhos underground development towards a late 2018 production target. Ero processed 1.32 million tonnes of ore over the first nine months of 2017 at an average grade of 1.29% copper.

“The first year was very much about recapitalizing the business and getting the mills back on the bus,” Strang says. “We’ve been following the mine plan we inherited and increasing production, but the infrastructure certainly opens up opportunities in terms of near-mine and regional exploration.”

Ero has earmarked US$7.5 million for 49,000 metres of drilling across the mafic-ultramafic complex this year.

The campaign will include: 24,500 metres of underground infill and stepout exploration at Pilar; 21,700 metres of infill and stepout work at Vermelhos, including 7,500 metres targeting near-surface oxides; 5,250 metres of drilling at Surubim; and 1,800 metres “of regional exploration.”

Furthermore, the company is planning a 40 km versatile time-domain electromagnetic survey of the district, which it expects by early 2018.

“We really see three opportunities. First, there’s near-mine exploration aimed at extending current resources at Pilar. We have this area called ‘The Deeps’ that looks extremely promising,” Strang says.

“We also see significant resource expansion opportunities at Vehamos. Finally, the historic work was done without comprehensive geophysics. We’re hopeful that flying the entire district, when combined with gravity, will define new targets.”

On Nov. 9, Eros reported assays from 13 holes of the Vermelhos infill drill program, with highlights including: 20 metres of 12.2% copper from 142 metres deep in hole 163, and 22 metres of 9.6% copper from 132 metres deep in hole 159.

The company said both results “rank among the top-five intercepts, on a grade-metre basis, drilled at the mine to date.”

Vermelhos hosts proven and probable reserves of 2.4 million tonnes grading 4.15% copper.

Ero says it wants to establish between 10 and 15 years of reserves at the MCSA that can support annual production above 60,000 tonnes copper.

“The key could be what we call the ‘super pods,’” Strang says. “You’ll see areas in the district — which we’re starting to understand a bit — where mineralization goes massive. When that happens the copper grades are very high, and these zones tend to have between 1 and 3 million tonnes. The original Pilar open pit was a super pod, and they followed it down and intersected another one. We’re optimistic we can identify more areas of high-grade copper across the property package that can positively impact our production profile.”

In the MCSA deal, Ero also acquired the Boa Esperanca copper deposit, 40 km southwest of Tucuma, Brazil, and the NX Gold underground gold-silver mine in Mato Grosso state.

Boa Esperanca could be developed into an open-pit operation for US$160 million. It hosts measured and indicated resources of 67.2 million tonnes at 0.73% copper for 490,000 contained tonnes.

The company will likely sell the NX Gold asset.

BMO Capital Markets analyst Alex Terentiew initiated coverage on Ero in early November with an “outperform” rating and an $8-per-share price target.

“Ero is a growth story, something rarely found today among copper producers, with strong potential for more discoveries, resource expansion and higher grades,” he noted. “Over the next few years, we see Ero emerging as a growth and cost leader in the copper industry. We expect expanded exploration efforts could result in higher near-term production, but also significant long-term upside and mine life.”

Ero shares have risen from $4.70 to $6.70 per share since the IPO, and closed at $6.22 per share at press time for a $464-million market capitalization.

The company had US$25 million in cash and liquid investments, and total debt of US$163 million at the end of June.

“Finding new copper projects and getting them up and running is definitely not easy, so this asset is a bit of a unicorn,” Strang says. “The cost for us to bring on incremental production is incredibly low on a global scale relative to the average of anyone having to build a new processing plant.”