EX-99.18 19 tm2117600d2_ex99-18.htm EXHIBIT 99.18

Exhibit 99.18

 

 

 

CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED

MARCH 31, 2020 AND 2019

 

 

 

Ero Copper Corp.

Condensed Consolidated Statements of Financial Position

(Amounts in thousands of US Dollars)

(Unaudited)

 

      As at   As at 
ASSETS  Notes  March 31, 2020   December 31, 2019 
Current             
Cash and cash equivalents     $44,338   $21,485 
Restricted cash  7(b)   1,125    1,500 
Accounts receivable      4,268    7,680 
Inventories  3   16,490    19,377 
Other current assets  4   18,472    25,523 
       84,693    75,565 
Non-Current             
Mineral, property, plant and equipment  5   279,176    339,516 
Exploration and evaluation assets  6   20,672    25,878 
Deposits      544    1,200 
Deferred income tax assets      23,900    13,099 
Other non-current assets      655    7,416 
       324,947    387,109 
Total Assets     $409,640   $462,674 
              
LIABILITIES             
Current             
Accounts payable and accrued liabilities     $24,799   $43,694 
Current portion of loans and borrowings  7   19,821    18,984 
Current portion of value added, payroll and other taxes payable      10,266    13,994 
Current portion of derivatives  15   39,361    650 
Current portion of lease liabilities      2,829    3,159 
       97,076    80,481 
Non-Current             
Loans and borrowings  7   165,760    140,386 
Provisions      26,210    33,581 
Value added, payroll and other taxes      4,201    5,694 
Derivatives  15   16,648    1,059 
Lease liabilities      201    487 
Other non-current liabilities      1,315    1,928 
       214,335    183,135 
Total Liabilities      311,411    263,616 
              
SHAREHOLDERS’ EQUITY             
Share capital  8   120,921    120,492 
Equity reserves      (72,542)   (24,489)
Retained earnings      49,467    102,220 
Equity attributable to owners of the Company      97,846    198,223 
Non-controlling interests      383    835 
       98,229    199,058 
Total Liabilities and Equity     $409,640   $462,674 

 

Nature of operations (Note 1); Contingencies (Note 17)

 

APPROVED ON BEHALF OF THE BOARD:

 

“David Strang” , CEO & Director      ”Matthew Wubs”      , Director

 

The accompanying notes are an integral part of these condensed consolidated interim financial statementsPage 1

 

 


 

Ero Copper Corp.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

      Three months ended   Three months ended 
   Notes  March 31, 2020   March 31, 2019 
Revenue  9  $67,745   $72,041 
Cost of product sold  10   (35,811)   (38,140)
Sales expenses      (1,282)   (1,307)
Gross profit      30,652    32,594 
              
Expenses             
General and administrative  11   (7,503)   (6,623)
Share-based compensation  8(a) to (c)   (2,049)   (1,843)
Income before the undernoted      21,100    24,128 
              
Other income (expenses)             
Finance income      467    136 
Finance expense  12   (6,651)   (6,810)
Foreign exchange loss  13   (81,922)   (288)
Other income (expenses)      (693)   1,048 
Income (loss) before income taxes      (67,699)   18,214 
              
Income tax recovery (expense)             
Current      (1,091)   (4,218)
Deferred      15,795    1,487 
       14,704    (2,731)
Net income (loss) for the period      (52,995)   15,483 
              
Other comprehensive income (loss)             
Foreign currency translation loss      (49,919)   (1,413)
Comprehensive income (loss)     $(102,914)  $14,070 
              
Net income (loss) attributable to:             
Owners of the Company      (52,753)   15,323 
Non-controlling interests      (242)   160 
      $(52,995)  $15,483 
Comprehensive income (loss) attributable to:             
Owners of the Company      (102,472)   13,916 
Non-controlling interests      (442)   154 
      $(102,914)  $14,070 
Net income (loss) per share attributable to owners of the Company  8(e)          
Net income (loss) per share             
Basic     $(0.62)  $0.18 
Diluted     $(0.62)  $0.17 
              
Weighted average number of common shares outstanding             
Basic      85,759,194    84,804,389 
Diluted      85,759,194    89,917,828 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statementsPage 2

 

 

Ero Copper Corp.

Condensed Consolidated Statement of Changes in Shareholders’ Equity

(Amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

      Share Capital   Equity Reserves                 
      Number of       Contributed   Foreign   Retained       Non-controlling     
   Notes  shares   Amount   surplus   exchange   earnings   Total   interest   Total equity 
Balance, December 31, 2019      85,703,646   $120,492   $9,084   $(33,573)  $102,220   $198,223   $835   $199,058 
Loss for the period      -    -    -    -    (52,753)   (52,753)   (242)   (52,995)
Other comprehensive loss for the period      -    -    -    (49,719)   -    (49,719)   (200)   (49,919)
Total comprehensive loss for the period      -    -    -    (49,719)   (52,753)   (102,472)   (442)   (102,914)
Shares issued for:                                           
Exercise of options      94,998    429    (130)   -    -    299    -    299 
Share-based compensation  8(a) to (c)   -    -    1,796    -    -    1,796    -    1,796 
Dividends to non-controlling interest      -    -    -    -         -    (10)   (10)
Balance, March 31, 2020      85,798,644   $120,921   $10,750   $(83,292)  $49,467   $97,846   $383   $98,229 
Balance, December 31, 2018      84,738,650   $117,944   $3,897   $(28,652)  $10,337   $103,526   $296   $103,822 
Income for the period      -    -    -    -    15,323    15,323    160    15,483 
Other comprehensive loss for the period      -    -    -    (1,407)   -    (1,407)   (6)   (1,413)
Total comprehensive income (loss) for the period      -    -    -    (1,407)   15,323    13,916    154    14,070 
Shares issued for:                                           
Exercise of options and warrants      233,331    682    (139)   -    -    543    -    543 
Share-based compensation      -    -    1,843    -    -    1,843    -    1,843 
Balance, March 31, 2019      84,971,981   $118,626   $5,601   $(30,059)  $25,660   $119,828   $450   $120,278 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statementsPage 3

 

 

Ero Copper Corp.  

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands of US Dollars)

(Unaudited)

  

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Cash Flows from Operating Activities          
Net income (loss) for the period  $(52,995)  $15,483 
Adjustments for:          
Amortization and depreciation   10,481    12,139 
Income tax expense (recovery)   (14,704)   2,731 
Write-off of plant and equipment   -    328 
Provisions   343    160 
Share-based compensation   2,049    1,843 
Finance income   (467)   (136)
Finance expenses   6,651    6,810 
Foreign exchange loss   81,922    288 
           
Changes in:          
Accounts receivable   5,862    (11,901)
Inventories   (1,937)   (6,759)
Other assets   1,441    18 
Accounts payable and accrued liabilities   (1,058)   (4,481)
Deferred revenue   -    4,311 
Value added, payroll and other taxes   2,787    3,626 
    40,375    24,460 
Derivative contract settlements   (2,651)   723 
Provision settlements   (410)   (116)
    37,314    25,067 
Cash Flows used in Investing Activities          
Additions to mineral property, plant and equipment   (28,367)   (21,951)
Additions to exploration and evaluation assets   (54)   (175)
Other investments   518    17 
    (27,903)   (22,109)
           
Cash Flows from / (used in) Financing Activities          
Restricted cash   375    378 
Lease liability payments   (1,171)   (902)
New loans and borrowings, net of finance costs   45,689    4,674 
Loans and borrowings paid   (21,230)   (2,984)
Interest paid on loans and borrowings   (2,448)   (2,820)
Other finance expenses   (766)   (863)
Issuance of share capital, net of issuance costs   299    543 
    20,748    (1,974)
           
Effect of exchange rate changes on cash and cash          
equivalents   (7,306)   (437)
Net increase in cash and cash equivalents   22,853    547 
Cash and cash equivalents - beginning of period   21,485    18,941 
Cash and cash equivalents - end of period  $44,338   $19,488 

 

The accompanying notes are an integral part of these condensed consolidated interim financial statementsPage 4

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

1.Nature of Operations and Going Concern

 

Ero Copper Corp. (“Ero" or the "Company") was incorporated on May 16, 2016 under the Business Corporations Act (British Columbia) and maintains its head office at Suite 1050, 625 Howe Street, Vancouver, BC, V6C 2T6. The Company’s shares are publicly traded on the Toronto Stock Exchange under the symbol “ERO”.

 

The Company’s principal asset is its 99.6% ownership interest in Mineração Caraíba S.A. (“MCSA”). The Company also currently owns, directly and indirectly, a 97.6% ownership interest in NX Gold S.A. (“NX Gold”).

 

MCSA is a Brazilian company which holds a 100% interest in the Vale do Curaçá Property and the Boa Esperança Property (Note 6). MCSA’s predominant activity is the production and sale of copper concentrate from the Vale do Curaçá Property, with gold and silver produced and sold as by-products. The Company currently mines copper ore from the Pilar underground mine (“Pilar UG Mine”) and the Vermelhos underground mine (“Vermelhos UG Mine”). The Boa Esperança Property is located within the municipality of Tucumã in the southeastern part of the state of Pará, Brazil, and consists of a single mineral concession covering an area of 4,034 hectares (“ha”).

 

NX Gold is a Brazilian gold mining company focused on the exploration and commercialization of gold as its main product and silver as its sub-product. NX Gold wholly owns a 31,096 ha property, located approximately 18 kilometers west of the town of Nova Xavantina, southeastern Mato Grosso State, Brazil, consisting of a single mining concession covering an area of 620 ha, where all gold mining and processing activities occur.

 

On March 11, 2020, the COVID-19 outbreak was declared a pandemic by the World Health Organization. Although COVID-19 has not materially impacted the Company’s operations during the three months ended March 31, 2020, the situation is dynamic and the ultimate duration and magnitude of the impact on the economy and our business are not known at this time. These impacts could include an impact on the Company’s ability to obtain debt and equity financing, impairment of investments, impairments in the value of long-lived assets, or potential future decreases in revenue or the profitability of ongoing operations. During the three months ended March 31, 2020, the Company has drawn down $14.0 million and BRL $72.3 million ($13.9 million) under various credit facilities as a proactive measure in light of the uncertainty surrounding the COVID-19 pandemic.

 

2.Basis of Preparation

 

a)Statement of Compliance

 

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting and, except as disclosed in note 2(b) below, follow the same accounting policies and methods of application as the Company’s most recent annual consolidated financial statements for the year ended December 31, 2019. These condensed consolidated interim financial statements do not include all of the information required for full consolidated annual financial statements and should be read in conjunction with the consolidated financial statements of the Company as at and for the year ended December 31, 2019, prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee.

 

These condensed consolidated interim financial statements were authorized for issue by the Board of Directors of the Company (the “Board”) on May 7, 2020.

 

Page 5

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

b)New Accounting Standards and Interpretations Adopted in the Current Period

 

The following new and amended IFRS pronouncements were adopted effective January 1, 2020 and had no impact to the Company’s financial statements:

 

·Amendments to References to the Conceptual Framework in IFRS Standards

 

·Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)

 

c)Use of Judgments and Estimates

 

In preparing these condensed consolidated interim financial statements, management has made judgments, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ. Significant judgments made by management in applying the Company’s accounting policies and key sources of estimation uncertainty were the same as those applied in the most recent annual audited consolidated financial statements for the year ended December 31, 2019, except for those applied for derivatives.

 

The fair value of derivative instruments is determined using either present value techniques or option pricing models that utilize a variety of inputs that are a combination of quoted prices and market-corroborated inputs. The fair value of the Company’s derivative contracts includes an adjustment for credit risk. Derivative instruments are classified within Level 2 of the fair value hierarchy.

 

3. Inventories        
         
   March 31, 2020   December 31, 2019 
Supplies and consumables  $12,580   $13,878 
Stockpile   1,168    2,556 
Work in progress   1,446    2,164 
Finished goods   1,296    779 
   $16,490   $19,377 

 

4. Other Current Assets        
         
   March 31, 2020   December 31, 2019 
Advances to suppliers  $862   $1,046 
Prepaid expenses   3,494    4,779 
Advances to employees (a)   646    2,829 
Value added federal taxes recoverable (b)   13,470    16,869 
   $18,472   $25,523 

 

(a)Advances to employees include short term advances of salary, vacation and other benefits granted to employees of the Company’s subsidiary MCSA.

 

(b)$11.4 million of this balance (December 31, 2019 - $12.2 million) relates to a 2019 favourable legal decision that recognizes MCSA’s right to a tax credit as a result of historical over-payments. MCSA is able to use these tax credits against a variety of taxes, including taxes on future sales.

 

Page 6

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

5.Mineral, Property, Plant and Equipment

 

Additions to mineral, property, plant and equipment totaled $27.8 million during the three months ended March 31, 2020 (three months ended March 31, 2019 - $27.2 million), of which $7.8 million was obtained through financing arrangements with equipment suppliers.

 

Certain equipment is secured by the equipment finance loans (note 7).

 

Included in mineral, property, plant and equipment is $5.7 million (December 31, 2019 - $7.3 million) related to the value of mineral resources beyond proven and probable reserves not currently being amortized. In addition, $46.3 million (December 31, 2019 - $52.7 million) related to projects in progress are not currently being amortized.

 

6.Exploration and Evaluation Assets

 

Exploration and evaluation assets relate to the Boa Esperança Property located in the Municipality of Tucumã, in the state of Pará, Brazil which consists of a single mineral concession. This prospective copper/gold property is in advanced stages of exploration with various geological mineral resource studies and is the subject of a completed feasibility study.

 

7.Loans and Borrowings

 

                    Carrying value, including 
                    accrued interest 
                Principal to   March 31,     December 31, 
Description  Denomination  Security  Time to Maturity  Coupon rate   be repaid   2020   2019 
Bank loan (at acquisition)  BRL R$  Unsecured  82 months   CDI + 0.5%    6,493   4,457    5,941 
Bank loan (MCSA)  USD  Unsecured  9 months   4.43%   1,125   1,128    1,503 
Bank loan (MCSA)  BRL R$  Unsecured  -   CDI + 3.7%    -   -    204 
Line of credit (MCSA)  BRL R$  Unsecured  1 - 12 months   CDI + 9.0%    5,772   5,856    - 
Line of credit (MCSA)  BRL R$  Unsecured  1 - 12 months   14.98%    5,772   5,799    - 
Lines of credit (NX Gold)  BRL R$  Unsecured  1 - 12 months   14.34%-14.98%    2,886   2,921    670 
Equipment finance loan (Plural)  BRL R$  Secured  20 months   CDI + 7.0%    1,924   1,939    2,892 
Equipment finance loans  BRL R$  Secured  1 - 52 months   11.88%-16.49%    6,500   6,674    5,585 
Equipment finance loans  EURO  Secured  28 - 35 months   5.5%-7.0%    3,542   3,615    3,996 
Equipment finance loans  USD  Secured  26 - 42 months   6.50%-7.95%    5,261   5,298    4,125 
Senior non-revolving credit facility  USD  Secured  48 months   LIBOR + 2.50%-4.25%    75,000   73,947    79,091 
Senior revolving credit facility  USD  Secured  48 months   LIBOR + 2.50%-4.25%    75,000   73,947    55,363 
                             
Total                 $189,275  $ 185,581   $159,370 
                             
Current portion:                    $ 19,821   $18,984 
Non-current portion:                    $ 165,760   $140,386 

 

Balance, beginning of year  March 31, 2020   March 31, 2019 
New senior revolving credit facility, net  $159,370   $152,234 
New equipment finance loans   13,680    - 
New bank loans   9,305    6,070 
Principal and interest payments   30,517    - 
Interest accretion   (23,678)   (5,804)
Effect of foreign exchange rate changes   2,732    3,115 
Balance, end of period   (6,345)   (381)
   $185,581   $155,234 

 

Page 7

 

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

(a)Senior credit facility

 

The Company has a $150 million facility from a syndicate of Canadian financial institutions. The facility was comprised of an $75 million (December 31, 2019 - $80 million) senior secured amortizing non-revolving credit facility (“Term Facility”) and a $75 million (December 31, 2019 - $70 million) senior secured revolving term credit facility (“Revolving Credit Facility”) (collectively the “Facilities”).

 

On March 31, 2020, the Company amended the Facilities to reduce its cost of borrowing by 25 to 50 basis points, depending on the consolidated leverage ratio, and to defer the scheduled principal payments for two years.

 

The Term Facility now matures on March 31, 2024 and requires principal repayments on a quarterly basis commencing on March 31, 2022, while the Revolving Credit Facility is now payable in full at maturity on March 31, 2024. The Facilities bear interest on a sliding scale at a rate of LIBOR plus 2.50% to 4.25% depending on the Company’s consolidated leverage ratio at the time. Commitment fees for any undrawn portion of the Revolving Credit Facility are also on a sliding scale between 0.63% to 1.06%. The Company determined that the amendments were a non-substantial modification. During the three months ended March 31, 2020, the Company also drew down the remainder of the amount available under the Facilities totaling $14.0 million ($13.7 million net of transaction costs). The Term Facility previously had a five-year term with equal quarterly principal payments beginning on December 13, 2020, while the Revolving Credit Facility was payable at maturity on December 13, 2022. The Facilities previously bore interest on a sliding scale at a rate of LIBOR plus 2.75% to 4.75% depending on the Company’s consolidated leverage ratio at the time.

 

The Facilities include standard and customary terms and conditions with respect to fees, representations, warranties, and financial covenants that remain unchanged from prior amendments.

 

The Facilities are secured by pledges of shares of MCSA and NX Gold. The Company is required to comply with certain financial covenants. As of the date of these consolidated financial statements, the Company is in compliance with these covenants.

 

In January 2019, the Company entered into an interest rate swap transaction with a Canadian financial institution whereby the floating interest on a notional amount of $65.0 million of the Term Facility was swapped for a fixed interest rate of 2.69%. This interest rate swap transaction is in effect for the majority of term of the Term Facility, with the notional amount reduced as principal payments are made. Interest payments are being made on a quarterly basis.

 

Page 8

 

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

(b)Bank loans and equipment finance loans

 

The bank loans (at acquisition) relate to the Company’s subsidiary, MCSA, and were recognized at the date of acquisition at fair value and have subsequently been recognized at amortized cost, net of settlements. Interest is being recognized using the effective interest rate method at an interest rate of 11.29%.

 

As per the terms of one of MCSA’s bank loans, the Company is required to maintain a separate debt service bank account with sufficient funds to guarantee scheduled principal payments by MCSA. At March 31, 2020, $1.1 million was on deposit (December 31, 2019 - $1.5 million) in the designated debt service account and is presented as restricted cash in the statement of financial position.

 

MCSA is required to comply with certain financial covenants which MCSA is in compliance with at March 31, 2020. The equipment finance loans are secured by the corresponding equipment relating to them and a guarantee by the Company.

 

(c)MCSA and NX Gold lines of credit

 

At March 31, 2020, the Company’s subsidiaries MCSA and NX Gold have the following credit facilities available:

 

MCSA entered into a credit agreement in 2019 for a line of credit of up to BRL $30.0 million at an interest rate of CDI (“Brazilian Interbank Deposit Rate”) + 9% per annum. MCSA may drawdown on this line of credit at any time until November 30, 2020. In addition, in 2019 MCSA also entered into a second credit agreement for a total of up to BRL $30.0 million at an interest rate of 14.98% per annum. MCSA may drawdown on this line of credit at any time until August 27, 2020. The Company and NX Gold provide unsecured guarantees for these credit agreements. At March 31, 2020, BRL $60.0 million ($11.5 million) (December 31, 2019 - $nil) had been drawn from these credit facilities.

 

NX Gold entered into an agreement in 2019 for a line of credit of up to BRL $7.5 million at an interest rate of 14.98% per annum. NX Gold may drawdown on this line of credit at any time until August 27, 2020. As at March 31, 2020, BRL $7.5 million ($1.4 million) (December 31, 2019 - BRL $2.7 million ($0.7 million)) has been drawn from NX Gold’s line of credit.

 

In addition, during the three months ended March 31, 2020, NX Gold entered into a second credit agreement for a line of credit of up to BRL $7.5 million at an interest rate of 14.34% per annum. NX Gold may drawdown on this line of credit at any time until February 22, 2021. NX Gold is using BRL $1.5 million of this line of credit to provide a letter of credit to a supplier until January 31, 2022. The Company provides unsecured guarantees for these credit agreements. At March 31, 2020, BRL $7.5 million ($1.4 million) (December 31, 2019 - $nil) had been drawn from this line of credit.

 

Page 9

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

8.Share Capital

 

As at March 31, 2020, the Company’s authorized share capital consists of an unlimited number of common shares without par value. As at March 31, 2020, 85,798,644 common shares were outstanding.

 

(a)Options

 

As at March 31, 2020, the following stock options were outstanding:

 

              Vested and   Weighted 
              Exercisable   Average 
   Number of   Weighted Average      Number of   Remaining 
Expiry Date  Stock Options   Exercise Price      Stock Options   Life in Years 
May 15, 2022   910,335    1.50 USD     371,999    2.12 
July 10, 2022   100,000    1.50 USD     66,666    2.28 
November 24, 2022   318,000    6.48 CAD     212,000    2.65 
December 7, 2022   1,376,669    6.74 CAD     929,998    2.69 
January 18, 2023   60,000    7.95 CAD     40,000    2.80 
January 23, 2023   83,334    7.76 CAD     41,667    2.82 
June 19, 2023   144,000    10.25 CAD     44,000    3.22 
July 16, 2023   200,000    9.01 CAD     66,666    3.29 
December 31, 2023   1,138,853    9.76 CAD     368,499    3.75 
January 2, 2024   125,000    9.80 CAD     125,000    3.76 
August 15, 2024   40,000    21.09 CAD     23,828    4.38 
December 12, 2024   470,228    20.52 CAD     -    4.70 
January 2, 2025   73,456    23.42 CAD     43,456    4.76 
    5,039,875    5.94 USD     2,333,779    3.12 

 

In determining the weighted average exercise price of all outstanding options in the tables above and below, the CAD prices were converted to USD at the March 31, 2020 exchange rate of 1.4186.

 

   Number of   Weighted Average 
   Stock Options   Exercise Price 
Outstanding stock options, December 31, 2019   5,061,417   $6.23 
Issued   73,456    16.51 
Exercised   (94,998)   3.01 
Outstanding stock options, March 31, 2020   5,039,875   $5.94 

 

The fair value of options granted in the three months ended March 31, 2020 was determined using the Black-Scholes option pricing model. The weighted average inputs used in the measurement of fair values at grant date of the options are the following:

 

Expected term (years)   3.0 
Forfeiture rate   0%
Volatility   50.6%
Dividend yield   0%
Risk-free interest rate   1.63%
Weighted-average fair value per option  $6.46 

 

Page 10

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

For the three months ended March 31, 2020, the Company recorded share-based compensation of $1.2 million (three months ended March 31, 2019 - $1.5 million), with respect to its outstanding stock options.

 

(b)Share Unit Plan

 

As at March 31, 2020, 438,463 share units (December 31, 2019 - 437,463 share units) have been issued to certain officers and employees of the Company pursuant to the Company’s Share Unit Plan and are outstanding. These share units will vest three years from the date they were approved for granting by the Board and the number of share units that will vest may range from 0% to 200% of the number granted, subject to the satisfaction of certain market and non-market performance conditions. Each vested share unit entitles the holder thereof to receive on or about the applicable date of vesting of such share unit (i) one common share; (ii) a cash amount equal to the fair market value of one common share as at the applicable date of vesting; or (iii) a combination of (i) and (ii), as determined by the Board in its sole discretion. The Company currently intends to settle these share units using common shares. Accordingly, they are classified as equity settled instruments.

 

For the share units with non-market performance conditions, the fair value of the share units granted was determined using the share price at the date of grant. For the share units with market performance conditions, the fair value of the share units granted was determined using a Geometric Brownian Motion model. The weighted average inputs used in the measurement of fair values at grant date of the 1,000 Share Units granted during the three months ended March 31, 2020 are as follows:

 

Expected term (years)   3.0 
Forfeiture rate   0%
Volatility   44.9%
Dividend yield   0%
Risk-free interest rate   1.82%
Weighted-average fair value per Share Unit  $18.38 

 

During the three months ended March 31, 2020, the Company recorded share-based compensation of $0.6 million (three months ended March 31, 2019 - $0.3 million), respectively, with respect to the share units.

 

(c)Deferred Share Unit Plan

 

On December 12, 2019, a Deferred Share Unit Plan (“DSU Plan”) was established by the Board as a component of our compensation for independent directors. Only independent directors are eligible to participate and to receive deferred share units (“DSUs”) under the DSU Plan.  DSUs may be awarded by the Board from time to time to provide independent directors with appropriate equity-based compensation for the services they render to the Company and may be subject to terms and conditions with respect to vesting of such DSUs.  In addition, independent directors may elect to receive a portion or all of their respective annual cash remuneration in the form of DSUs, which will be fully vested upon such grant.  The number of DSUs to be awarded to a participant under the DSU Plan is determined by dividing the portion of that participant’s annual cash remuneration by the fair market value of a common share on the last day of the quarter in which such portion of the annual cash remuneration was earned. Pursuant to the DSU Plan, DSUs may only be settled by way of cash payment. A participant is not entitled to payment in respect of the DSUs until his or her death, retirement or removal from the Board.  The settlement amount of each DSU is based on the fair market value of a common share on the DSU redemption date multiplied by the number of DSUs being redeemed.

 

During the three months ended March 31, 2020, 32,327 DSUs (three months ended March 31, 2019 - nil) were issued to independent directors.

 

Page 11

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

As at March 31, 2020, the fair value of the DSU liability was $0.3 million (December 31, 2019 - $nil) which has been recognized in other non-current liabilities with a corresponding $0.3 million recognized in share-based compensation expense.

 

(d)Warrants

 

As at March 31, 2020, 2,866,662 (December 31, 2019 - 2,866,662) common share purchase warrants were outstanding with a weighted average exercise price of $1.20 and a weighted average remaining contractual life of 1.70 years.

 

(e)Net Income (Loss) per Share

 

   Three months   Three months 
   ended March 31,   ended March 31, 
   2020   2019 
Weighted average number of common shares outstanding   85,759,194    84,804,389 
Dilutive effect of warrants   -    2,802,871 
Dilutive effect of stock options   -    2,310,568 
Weighted average number of diluted common shares outstanding   85,759,194    89,917,828 
Net income attributable to owners of the Company  $(52,753)  $15,323 
Basic net income per share attributable to owners of the Company   (0.62)   0.18 
Diluted net income per share attributable to owners of the Company   (0.62)   0.17 

 

For the three months ended March 31, 2020, the potentially dilutive effect of warrants and stock options are excluded from the dilutive net loss per share calculation as the Company incurred a loss for the period and all dilutive instruments would be anti-dilutive.

 

9. Revenue

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Copper concentrate          
- sales within Brazil  $51,221   $48,232 
- export sales   8,843    8,978 
- price adjustments on provisionally priced sales   (3,919)   2,285 
Gold          
- export sales   11,600    12,546 
   $67,745   $72,041 

 

Under the terms of the Company’s contract with its primary customer, sales are provisionally priced on the date of sale based on the previous month’s average copper price.  The final sales price for all shipments in a month is determined at the end of the month in which the sale is recognized.  As at March 31, 2020, there were no sales subject to provisional pricing.  During the three months ended March 31, 2020, the Company recognized $3.9 million (three months ended March 31, 2019 - $2.3 million) in price adjustments related to provisionally priced sales.

 

Page 12

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

10.Cost of Product Sold

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Materials  $4,982   $4,617 
Salaries and benefits   8,690    9,113 
Depreciation and depletion   10,449    12,098 
Contracted services   5,523    5,702 
Maintenance costs   3,593    4,094 
Utilities   2,403    2,313 
Other costs   171    203 
   $35,811   $38,140 

 

11. General and Administrative Expenses        
   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Accounting and legal  $198   $337 
Amortization and depreciation   32    41 
Office and sundry   1,606    1,313 
Provisions   343    173 
Salaries and consulting fees   4,427    3,574 
Incentive payments   297    567 
Transfer agent and filing fees   118    85 
Travel and conference   482    533 
   $7,503   $6,623 

 

12. Finance Expense        
   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Interest on loans and borrowings  $2,732   $3,133 
Loss on interest rate swap derivative   1,823    836 
Accretion of mine closure and rehabilitation provision   268    1,291 
Interest on lease liabilities   77    129 
Other finance expenses   1,751    1,421 
   $6,651   $6,810 

 

Page 13

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

13.Foreign Exchange Loss

 

The following foreign exchange gains (losses) arise as a result of balances and transactions in the Company’s Brazilian subsidiaries that are denominated in currencies other than the Brazilian Reais (BRL$), which is their functional currency.

 

   Three months ended   Three months ended 
   March 31, 2020   March 31, 2019 
Foreign exchange on USD denominated debt in Brazil  $(26,873)  $(136)
Realized foreign exchange on derivative contracts (note 15)   (2,651)   723 
Unrealized foreign exchange on derivative contracts (note 15)   (52,655)   (265)
Other   257    (610)
   $(81,922)  $(288)

 

14.Related Party Transactions

 

Key management personnel consist of the Company’s directors and officers and their compensation includes director retainer fees and management salaries paid to these individuals, as well as share-based compensation. The aggregate value of compensation paid to key management personnel for the three months ended March 31, 2020 was $1.8 million ($1.4 million for the three months ended March 31, 2019). In addition, 43,456 options and 32,327 DSUs were issued to non-executive directors during the three months ended March 31, 2020 (1,100,155 options and 130,636 share units for the three months ended March 31, 2019). $1.3 million was recognized in share-based compensation expense for the three months ended March 31, 2020 for options, Share Units, and DSUs issued ($1.4 million for the three months ended March 31, 2019).

 

During the three months ended March 31, 2020, key management personnel exercised 25,000 options for cash proceeds to the Company of $38 thousand (nil options for the three months ended March 31, 2019).

 

15.Financial Instruments

 

Fair value

 

Fair values of financial assets and liabilities are determined based on available market information and valuation methodologies appropriate to each situation. However, some judgments are required in the interpretation of the market data to produce the most appropriate fair value estimates. The use of different market information and/or evaluation methodologies may have a material effect on the fair value amounts.

 

As at March 31, 2020, derivatives were measured at fair value based on Level 2 inputs.

 

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, deposits, financial investments and accounts payable and accrued liabilities approximate their fair values due to their short terms to maturity or market rates of interest used to discount amounts. The carrying value of value added, payroll and other taxes approximate fair value based on the discount rate applied. At March 31, 2020, the carrying value of loans and borrowings is $185.6 million while the fair value is approximately $189.3 million. The effective interest rates used to amortize these loans are a close approximation of market rates of interest at March 31, 2020 (Level 2 of the fair value hierarchy).

 

Page 14

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

Credit risk

 

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s receivables from customers. The carrying amount of the financial assets below represents the maximum credit risk exposure as at March 31, 2020 and December 31, 2019:

 

   March 31, 2020   December 31, 2019 
Cash and cash equivalents  $44,338   $21,485 
Restricted cash   1,125    1,500 
Accounts receivable   4,268    7,680 
Deposits and other non-current assets   546    2,396 
   $50,277   $33,061 

 

The Company invests cash and cash equivalents as well as restricted cash with financial institutions that are financially sound based on their credit rating. The Company’s exposure to credit risk associated with accounts receivable is influenced mainly by the individual characteristics of each customer. The Company currently has only three significant customers, all of which have no history of credit default with the Company. The Company has not incurred credit losses during the three months ended March 31, 2020 nor recognized a provision for credit losses.

 

(i) Foreign exchange currency risk

 

The Company may use derivatives, including forward contracts, collars and swap contracts, to manage market risks. At March 31, 2020, the Company has entered into foreign exchange collar contracts at zero cost for notional amounts of $381.6 million with an average floor rate of 3.92 BRL to US Dollar and an average cap rate of 4.56 BRL to US Dollar (December 31, 2019 - notional amount of $336.6 million in foreign exchange forward collar contracts). The maturity dates of these contracts are from April 28, 2020 to December 1, 2021 and are financially settled on a net basis. The fair value of these contracts at March 31, 2020 was a liability of $52.7 million, (December 31, 2019 - $nil) which was included in Derivatives in the statement of financial position. The change in fair value of foreign exchange collar contracts was a loss of $52.7 million for the three months ended March 31, 2020 ($0.3 million for the three months ended March 31, 2019) and has been recognized in foreign exchange loss. In addition, during the three months ended March 31, 2020, the Company recognized a realized loss of $2.8 million (a gain of $0.7 million for the three months ended March 31, 2019) related to the settlement of foreign currency forward collar contracts.

 

(ii) Interest rate risk

 

The Company is principally exposed to the variation in interest rates on loans and borrowings with variable rates of interest. Management reduces interest rate risk exposure by entering into loans and borrowings with fixed rates of interest or by entering into derivative instruments that fix the ultimate interest rate paid.

 

The Company is principally exposed to interest rate risk through its Term Facilities of $150.0 million, Brazilian Real denominated bank loans of $6.5 million, Brazilian Real denominated lines of credit of $5.8 million, and Brazilian Real denominated equipment finance loans of $1.9 million. Based on the Company’s net exposure at March 31, 2020, a 1% change in the variable rates would have an impact of $1.6 million on pre-tax annual net income, without consideration of the effects of the swap contracts below.

 

In order to mitigate the above volatility due to variable rates on loans, as at March 31, 2020, the Company has entered into an interest rate swap contract to manage interest rate risk (see note 7). The floating interest on a notional amount of $65 million was swapped for a fixed interest rate of 2.69%. The fair value of this contract at March 31, 2020 was a liability of $3.4 million (December 31, 2019 - $1.7 million) and was included in Derivatives in the statement of financial position. The change in fair value of $1.7 million was included in finance expense.

 

Page 15

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

(iii) Price risk

 

The Company may use derivatives, including forward contracts, collars and swap contracts, to manage commodity price risks. At March 31, 2020, the Company has not entered into any commodity derivative contracts.

 

16. Segment Disclosure

 

The Company’s operations are segmented by entity between MCSA, NX Gold and corporate head office, which is consistent with internal reporting purposes. The Company monitors the operating results of its operating segments separately for the purpose of making decisions about resource allocation and performance assessment.

 

Total revenue from MCSA is from two customers while total revenue from NX Gold is from one customer.

 

Segmented information is as follows:

 

Three months ended March 31, 2020  MCSA (Brazil)   NX Gold (Brazil)   Corporate (Canada)   Consolidated 
Revenue  $56,145   $11,600   $-   $67,745 
Depreciation and depletion   (9,566)   (883)   -    (10,449)
Other cost of product sold expenses   (20,388)   (4,974)   -    (25,362)
Cost of product sold   (29,954)   (5,857)   -    (35,811)
Sales expenses   (1,282)   -    -    (1,282)
Gross profit   24,909    5,743    -    30,652 
Expenses                    
General and administrative   (4,748)   (480)   (2,275)   (7,503)
Share-based compensation   -    -    (2,049)   (2,049)
Finance income   117    40    310    467 
Finance expenses   (2,641)   (332)   (3,678)   (6,651)
Foreign exchange gain (loss)   (79,649)   (2,264)   (9)   (81,922)
Other income   (550)   (143)   -    (693)
Income (loss) before taxes   (62,562)   2,564    (7,701)   (67,699)
Current tax expense   (417)   (674)   -    (1,091)
Deferred tax recovery   15,424    371         15,795 
Net Income (Loss)  $(47,555)  $2,261   $(7,701)  $(52,995)
Assets                    
Current  $56,831   $11,947   $15,915   $84,693 
Non-current   304,187    17,981    2,779    324,947 
Total Assets  $361,018   $29,928   $18,694   $409,640 
Total Liabilities  $141,593   $16,584   $153,234   $311,411 

 

Page 16

 

 

Ero Copper Corp.

Notes to Condensed Consolidated Interim Financial Statements

(Tabular amounts in thousands of US Dollars, except share and per share amounts)

(Unaudited)

 

Three months ended March 31, 2019   MCSA (Brazil)    NX Gold (Brazil)    Corporate (Canada)    Consolidated 
Revenue  $59,495   $12,546   $-   $72,041 
Depreciation and depletion   (9,762)   (2,336)   -    (12,098)
Other cost of product sold expenses   (21,089)   (4,953)   -    (26,042)
Cost of product sold   (30,851)   (7,289)   -    (38,140)
Sales expenses   (1,307)   -    -    (1,307)
Gross profit   27,337    5,257    -    32,594 
Expenses                    
General and administrative   (3,495)   (507)   (2,621)   (6,623)
Share-based compensation   -    -    (1,843)   (1,843)
Finance income   17    110    9    136 
Finance expenses   (3,459)   (285)   (3,066)   (6,810)
Foreign exchange loss   (292)   -    4    (288)
Other income   682    366    -    1,048 
Income (loss) before taxes   20,790    4,941    (7,517)   18,214 
Current taxes   (3,026)   (1,192)   -    (4,218)
Deferred taxes   1,277    210    -    1,487 
Net Income (Loss)  $19,041   $3,959   $(7,517)  $15,483 
Assets                    
Current  $54,019   $8,178   $5,131   $67,328 
Non-current   300,228    17,406    2,898    320,532 
Total Assets  $354,247   $25,584   $8,029   $387,860 
Total Liabilities  $125,377   $14,193   $128,012   $267,582 

 

17.Contingencies

 

MCSA is subject to a number of claims (including claims related to tax, labour and social security matters and civil action) in the course of its business which individually are not material and have not been accrued for in the Company’s financial statements as it is not probable that a cash outflow will occur. While the Company believes that these claims are unlikely to be successful, if all such existing claims were decided against it, the Company could be exposed to a liability of up to approximately $21.8 million as at March 31, 2020 (December 31, 2019 - $31.1 million), which could have an adverse impact on the Company’s business, financial condition, results of operations, cash flows or prospects.

 

Page 17