Goldman Sachs recently rattled copper investors by lowering its price forecast for the red metal. The investment bank's analysts are reeling in their expectations for a rally in copper (HGZ24), citing softening demand from China, the world's largest consumer of the industrial metal. This bearish outlook stems from concerns about China's property sector woes and a slower-than-anticipated economic recovery post-pandemic.
But some analysts are calling out opportunities to buy the dip. Raymond James just upgraded one copper stock, swimming against the current market pessimism toward industrial metals. The analysts at Raymond James are betting on a "step change" in copper production for this producer, seeing potential where others might be wary.
The stock in question? Ero Copper Corp (ERO). This high-margin, high-growth copper producer has been turning heads with its operations in Brazil. Headquartered in Vancouver, B.C., Ero Copper is known for its low carbon intensity and strong operational performance.
Let’s see what makes ERO a potential gem in the rough to purchase this September.
ERO’s Financial Performance and Cheap Valuation
Valued at just $1.97 billion, Ero Copper (ERO) flies somewhat under the radar in the U.S. market, though its ADRs are quite liquid. The shares have gained about 15.7% this year, though ERO is currently down 24.9% from its 52-week highs, set in May - presenting an opportunity to buy the dip.
Ero Copper's valuation metrics suggest the stock is somewhat undervalued relative to its peers. The shares are priced at a below-median 7.82x forward cash flow and at 6.87x forward EV/EBITDA, highlighting the stock's potential value for investors seeking exposure to copper.
In its second-quarter 2024 earnings report, Ero Copper demonstrated solid operational performance. The company produced 8,867 tons of copper at C1 cash costs of $2.16 per pound, benefiting from the Caraíba mill expansion completed in late 2023. This expansion led to a 12.2% increase in mill throughput quarter-on-quarter and a 17.9% rise compared to Q4 2023, resulting in a 9.6% increase in copper production.
Additionally, Ero Copper produced 16,555 ounces of gold at C1 cash costs of $428 per ounce. Despite reporting a net loss of $53.2 million, or $0.52 per diluted share, the company achieved an adjusted net income of $18.6 million and an adjusted EBITDA of $51.5 million, reflecting strong operational efficiency. The company generated $14.7 million in cash flow from operations, showcasing its ability to maintain financial resilience despite challenging market conditions.
Ero Copper’s Strategic Growth Initiatives
Ero Copper has reached a significant milestone in 2024 with the successful commissioning and ramp-up of the Tucumã Project. By mid-year, the project achieved its first saleable copper concentrate production, exceeding process design concentrate grade targets. This achievement is a crucial step toward reaching commercial production levels by the end of the third quarter. As the Tucumã Project moves closer to full-scale operations, it positions Ero Copper for increased copper output and improved cash flows, reinforcing the company's growth trajectory.
In addition to the progress at Tucumã, Ero Copper has strategically expanded its resource base through a definitive earn-in agreement with Vale Base Metals. This agreement secures a 60% interest in the Furnas Copper Project, located in the mineral-rich Carajás Province of Pará State, Brazil. The partnership with Vale, a major player in the mining industry, is expected to bolster Ero Copper's resource portfolio and provide substantial growth opportunities.
The Carajás region is renowned for its abundant mineral deposits, making it an attractive area for exploration and development. The partnership with Vale not only strengthens Ero Copper's position in a mineral-rich area but also aligns with its strategy to enhance its resource base and ensure long-term growth potential.
Analyst Upgrades and Market Expectations
Raymond James recently upgraded Ero Copper from “Market Perform” to “Outperform,” while raising its price target from C$34 to C$36. This upgrade is driven by expectations for a substantial increase in copper production starting in the third quarter of 2024, which is anticipated to continue through 2025. Analyst Farooq Hamed noted that Ero Copper's current valuation does not fully reflect its growth potential, especially compared to its copper industry peers. This underappreciation of growth prospects is a key reason for the optimistic outlook and subsequent upgrade.
Building on this positive sentiment, Ero Copper's earnings estimates reinforce the company's promising trajectory. The company projects that production levels will reach 80% of design mill capacity and recovery rates by the end of Q3 2024. It has reaffirmed its consolidated copper production guidance of 59,000 to 72,000 tonnes in concentrate, with production expected to be weighted towards the second half of the year due to the ramp-up at the Tucumã Project.
This increased production, coupled with lower concentrate treatment and refining charges and a favorable USD to BRL exchange rate, is expected to reduce consolidated copper C1 cash costs in the latter half of 2024. Additionally, Ero Copper has narrowed its full-year capital expenditure guidance to a range between $303-$348 million, reflecting efficient cost management and strategic planning.
Analysts' ratings for Ero Copper further highlight the market's confidence in the company's future, with the mean target price of $26.16, offering a potential upside of approximately 43.1%. The consensus rating is a "Moderate Buy," with 7 out of 12 analysts recommending a “Strong Buy,” 2 suggesting a “Moderate Buy,” and 3 advising a “Hold.”
Conclusion
Despite Goldman Sachs' downward revision of copper price forecasts, Ero Copper remains a compelling investment idea in the industrial metals space. Anchored by the Tucumã Project and strategic partnerships like the Furnas Copper Project with Vale, Ero Copper is well-positioned for growth. Strong financial performance, a positive analyst consensus, and attractive valuations suggest significant upside. However, investors should be mindful of China's economic challenges, which could continue to impact copper demand and prices in the near term.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
