Stock Research #5: Ero Copper Corp
Date of Research 7/19/24
7/19/24 Close: $19.61
9/26/25 Close: $18.64
Total Return: (4.95%)
CAGR: (4.20%)
Ero Copper Research Sheet
Company Description
Ero Copper Corp. engages in the exploration, development, and production of mining projects in Brazil. The company is involved in the production and sale of copper concentrate from the Caraíba operations located in the Curaçá Valley, northeastern Bahia state, Brazil, as well as gold and silver by-products. It also holds 100% interests in the Tucumã project, a copper development project located within southeastern Pará state; and the Xavantina Operations located in Mato Grosso state.
Debt
Debt is rapidly growing ; net debt reached $434.7m in Q1 of 2024. Net Debt/EBITDA is still at an acceptable level of 2.5x
Investment Thesis
Ero Copper is well-positioned to benefit from rising copper prices, driven by global shortages, clean energy policies, and increased electric vehicle demand. They are a fast growing miner with strong margins and a healthy balance sheet. While FCF has been negative in previous years due to high capital expenditures, the company expects, “the most dramatic shift in our cash flow profile to occur in 2024 as capital expenditures at our Tucumã Project decrease in the first half of the year and production commences in the second half with commissioning of operations.”
In my opinion, Ero Copper is a great company trading at a fair price, with strong past acquisitions like the Xavantina mine in 2016 and significant near-term growth potential. Their expected copper production and leading EBITDA margin in 2025 position them ahead of peers, and the stock should re-rate higher when these factors are realized. Even without re-rating, the stock could perform extremely well with the strong top-line revenue growth expected in 2024 and 2025 of 58% and 52% respectively.
Main Drivers
The pivot to clean energy worldwide relies on copper (production, and EVs)
Looking at EVs and clean energy technologies, copper is a primary material component in nearly all of the growing clean energy processes. (Offshore wind, onshore wind, solar, nuclear, coal, and natural gas)
“Electricity networks need a huge amount of copper and aluminum, with copper being a cornerstone for all electricity-related technologies.” (per the International Energy Agency)
EV adoption is accelerating as well, which could be a major tailwind for the copper industry.
Energy demand is higher, driven by AI data center energy consumption
Companies like Google have seen a sharp increase in their carbon emissions due to AI energy demand. Compared to 2019, Google’s carbon emissions increased by 50%, and the company, “attributed the emissions spike to an increase in data center energy consumption and supply chain emissions driven by rapid advancements in and demand for AI.” (CNBC)
With increasing energy consumption driven by AI, copper producers are strongly positioned to benefit from the surge in clean energy solutions globally.
Ero’s acquisition of their Xavantina mine in 2016 has proven to be a source of consistent gold production; it’s expected to produce over 150,000 ounces of gold in the next 3 years. The mine has 6 years of expected mine life remaining compared to zero on acquisition.
Gold prices are increasing, (+19.2% YTD)
Expected to produce 60,000-65,000 ounces in 2024, as well as 55,000-60,000 in 2025 and 2026
At current prices - 60,000 ounces of gold is worth approximately $150m
Achieved record gold production in 2023 (59,222 ounces)
Catalysts / Re-Rating Potential
Q2 Earnings Results Aug 2, 2024
EV demand increasing – driving copper demand
Global demand for clean energy sources – driving copper demand
Gold prices??????
Costs
Ero Copper is forecasting a $1050-$1150/oz. AISC for gold mining, compared with the industry average of $1345/oz. per S&P Global. More than a 20% difference in costs between Ero Copper and the industry, indicating advantageous cost structures
Valuation
Trades at 9.1x NTM EPS, below mean (20.33x) and median (14.54x) of the peer group despite stronger EBITDA margin of 36.6% compared to peer group mean of 19.7% and median of 23.3%.
Trades in line with peers in terms of NTM EV/EBITDA (5.8x) vs mean of 5.91x and median of 5.6x.
ESG
Positives
Goldman Sachs projects a $12,000/ton price for copper in 2024 with a $15,000/t forecast for 2025
Guiding for lower capex of $300-$350m in 2024 compared to $450m in 2023 with higher production indicating low cost of production with strong pre-existing infrastructure
Company manages interest rate risks by entering into fixed rate loan agreements or using derivatives to fix the ultimate rate paid.
The company’s debt bears a 6.5% interest rate comparable to the largest copper miner in the world, Codelco(6.44%), despite being much smaller.
Flagship copper mine in Caraiba has a mine life extending until 2042, expected to produce 40,000 tons of copper per year for the next 3 years.
Negatives
Slight shareholder dilution in 2023 (~3.2%)
Average shares outstanding went from 92 million to 95 million in 2023 to help fund the Tucuma project
Doesn’t seem like a company that will return excess cash flow to shareholders in the form of dividends or share buybacks:
From the 2023 AR: “The loan agreements also contain covenants that could restrict the ability of the Company and its subsidiaries, MCSA, Ero Gold, and NX Gold, to, among other things, incur additional indebtedness needed to fund its respective operations, pay dividends or make other distributions” (Unlikely the firm will pay a dividend or issue share buybacks despite likely entering into a high FCF period)
Upside Risks
Potential for war to be a driver of copper demand; for example “Take the NATO 155 mm artillery shells as an example. Every shell contains 0.5 kg of copper, and Ukraine is firing up to 7,000 per day, according to the European Defence Agency (EDA).”
A report from Dubai-based defense consultancy Simon Hunt Strategic Services estimated that military use of copper will increase by 14% per year until 2026, which would take it to 4.22 million tonnes”
Downside Risks
Sensitivities to commodity prices, management discusses this and claims to manage said risk with derivatives and hedging
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