Ero Copper rating upgraded amidst improved cash flow prospects

Investing.com -- S&P Global Ratings has upgraded the issuer credit rating of Ero Copper (TSX:ERO) Corp, a Vancouver-based copper producer, from ’B’ to ’B+’ due to its improving cash flow prospects. The upgrade also extends to the company’s unsecured notes due in 2030, with the recovery rating on the notes remaining unchanged at ’3’.

Ero Copper is making significant progress in ramping up operations at its new Tucuma copper project, and it is expected to achieve commercial production later this quarter. The company’s consolidated copper production is estimated to almost double in 2025, resulting in positive free operating cash flow (FOCF) and stronger leverage measures.

The Tucuma project is nearing commercial production, following successful completion of construction in mid-2024. The project was developed in line with its capital cost guidance of US$310 million. Ero Copper expects Tucuma to be at full production before the end of 2025.

Along with the contribution from Tucuma and the gradual increase in production at Caraiba, the company’s consolidated copper production is expected to rise to about 175 million pounds in 2025 and further increase to about 200 million pounds in 2026. The company will also continue to produce gold at Xavantina, with an estimated annual output in the mid-50,000 ounce area for the next several years.

Ero Copper is expected to generate stronger cash flow and leverage measures in 2025 due to increased production and favorable copper and gold prices. Its leverage is expected to fall below 2.0x in 2025, compared with 3.5x in 2024, and improve further in 2026 to below 1.5x. The company is also anticipated to transition to positive FOCF generation this year due to higher earnings and a significant decrease in annual capital expenditure following the completion of construction at Tucuma.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.

Despite the forecast for low leverage, potential volatility in the company’s cash flow and leverage metrics is being factored into the financial risk profile assessment. The company’s credit measures are expected to remain highly sensitive to metal price fluctuations.

Ero Copper is primarily a copper producer with an estimated 2025 annual production of about 175 million pounds. The Tucuma project will increase Ero Copper’s scale and reduce its reliance on Caraiba by adding a new producing asset to the company’s portfolio. However, the company is expected to derive 85%-90% of its revenues from Caraiba and Tucuma, both copper operations in Brazil, over the next several years.

The company’s profitability is expected to be above-average based on the expectation that its consolidated copper cash costs will improve about 10% from 2024. The estimated 2025 consolidated cash costs of about US$1.80 per pound for copper are substantially below prevailing prices and price assumptions for the next few years.

The stable outlook reflects the expectation that Ero Copper will transition to positive FOCF this year on continued ramp-up at Tucuma and its credit measures will improve, including S&P Global Ratings-adjusted debt to EBITDA below 2x.

Potential future actions include a downgrade within the next 12 months if the company’s S&P Global Ratings-adjusted debt to EBITDA were to increase and remain above 3x. Conversely, an upgrade could occur within the next 12 months if the company fully ramps up production at Tucuma while achieving cost performance in line with estimates.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads.ERO: is this perennial leader facing new challenges?

With valuations skyrocketing in 2024, many investors are uneasy putting more money into stocks. Sure, there are always opportunities in the stock market – but finding them feels more difficult now than a year ago. Unsure where to invest next? One of the best ways to discover new high-potential opportunities is to look at the top performing portfolios this year. ProPicks AI offers 6 model portfolios from Investing.com which identify the best stocks for investors to buy right now. For example, ProPicks AI found 9 overlooked stocks that jumped over 25% this year alone. The new stocks that made the monthly cut could yield enormous returns in the coming years. Is ERO one of them?

Unlock ProPicks AI to find out