Ero Copper - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Q3 2023 financial and operating results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you can signal an operator by pressing star then zero. I would now like to turn the conference over to Courtney Lynn, Senior Vice President, Corporate Development and Investor Relations, for opening remarks. Please go ahead.

Courtney Lynn (SVP of Corporate Development and Investor Relations)

Thank you, operator. Good morning, and welcome to Ero Copper's Q3 2023 earnings call. Our operating and financial results were released yesterday afternoon and are available on our website, as are our financial statements and the MD&A for the three and nine months ended September 30, 2023. On the call with me today are David Strang, Ero's Co-Founder and Chief Executive Officer, Makko DeFilippo, President and Chief Executive Officer, and Wayne Drier, Chief Financial Officer. We will be making forward-looking statements that involve risks and uncertainties from which actual results may differ materially. We would refer you to our most recent annual information form available on our website, SEDAR, and EDGAR, for a discussion of the risk factors of our business and their potential impact on future performance. As a reminder, unless otherwise noted, all amounts are in U.S. dollars.

I will now pass the call over to David Strang.

David Strang (Co-Founder and CEO)

Thank you, Courtney, and thank you everyone for joining us today. We're speaking to you today from our offices in São Paulo, Brazil, at the end of a week-long tour with our board, during which we visited each of our operations. I'm happy to share that everyone is buoyed from the visit, especially seeing the great progress our team in Brazil has made in each of our major growth initiatives. Our Q3 financial results reflect our team's exceptional strategic execution and operating performance amid challenging market conditions. Despite the macroeconomic headwinds that led to weaker metal prices and a stronger Brazilian real against the US dollar, we remained focused on executing and broadening our growth strategy, positioning Ero for long-term value creation as a global energy transition gains momentum. During the quarter, our near-term growth projects achieved several critical milestones.

The Tucumã Operation, as announced last month, reached over 70% physical completion. Furthermore, a significant achievement was realized at the Xavantina Operations, where we successfully initiated production from the Matinha vein, resulting in record gold production and operating margins. Meanwhile, at our Caraíba Operations, we continue to advance our Pilar 3.0 initiative as we near completion of the mill expansion project and prepare to commence main sinking at the new external shaft. In parallel, we continue to bolster our medium and longer-term growth pipeline through ongoing regional copper and nickel exploration programs at the Caraíba Operations, as well as through the execution of a binding term sheet to earn a 60% interest in Vale Base Metals' Furnas Copper-Gold Project, which we announced earlier this week.

Before I hand over the call to Makko to provide more detail on the execution of our growth projects, I will summarize ourQ3 operating and financial performance. At the Caraíba Operations, copper production was in line with our forecast at 10,766 tons of copper in concentrate. While our C1 cash costs for the quarter were also in line with our forecast in BRL terms, when converted to US dollars at the average Q3 exchange rate of 4.88 BRL per US dollar, our copper C1 cash costs in US dollar terms remained elevated at $1.82 per pound of copper produced. Copper production is expected to be strongest in the Q4 due to higher anticipated mined and processed copper grades.

As a result, we are reaffirming our 2023 copper production guidance of 44,000-47,000 tons. Due to higher expected copper grades, and with the current quarter-to-date exchange rate averaging over 5.05 BRL per US dollar, we also expect to deliver lower C1 cash costs in the Q4. For the full year, our copper C1 cash cost guidance range, based on the original assumed foreign exchange rate of 5.30 BRL per US dollar, remains $1.40-$1.60 per pound of copper produced. Yet, given the continued strength of the BRL against the US dollar, we are also providing a sensitivity range of $1.50-$1.70 per pound of copper produced, should the BRL to US dollar exchange rate remain at current levels for the remainder of the year.

At our Xavantina operations, as I mentioned earlier, we successfully initiated production from the Matinha vein during the quarter, which contributed to a quarter-on-quarter increase of over 40% in both processed gold grades and gold production. As a result, we produced a record 17,579 ounces of gold at C1 cash costs of $371 per ounce. Due to our strong year-to-date operating performance at the Xavantina operations, we are increasing our 2023 gold production guidance range from 50,000-53,000 ounces to 55,000-59,000 ounces.

We are also reducing our full-year C1 cash costs guidance from $475-$575 to $375-$475 per ounce of gold produced, and lowering our all-in sustaining cost guidance range from $1,000-$1,100 to $900-$1,000 per ounce of gold produced. Our financial results for the period reflect a combination of our strong, continued operating performance, as well as the metal price weakness and BRL strength that I mentioned earlier. As a result, adjusted EBITDA for the Q3 was $42.9 million, and adjusted net income attributable to the owners of the company was $17.3 million, or $0.18 per share on a diluted basis.

As planned, our capital expenditures remained elevated at just over $120 million during the Q3, largely due to the strong progress being made at our Tucumã project. In an effort to maintain the momentum we have carried forward from the second and Q3, we have elected to accelerate select work streams originally slated for the Q1 of 2024 to the fourth quarter of this year. As a result, we have adjusted 2023 capital expenditure guidance for the Tucumã project to include estimated increase of approximately $15-$20 million due to the expected shift in timing of associated payments. We have also provided foreign exchange rate sensitivities across our capital expenditures to guidance ranges to reflect the potential impact of the BRL to US dollar exchange rate remaining at current levels through the end of the year.

I will now pass the call to Makko to discuss the highlights around our Q3 project execution, after which Wayne will discuss our financial results for the quarter.

Makko DeFilippo (President and COO)

Thank you, Dave, and good morning, everyone. With respect to progress on our strategic initiatives, I'm incredibly proud of our operational teams, who were able to continue execution through the Q3 after an excellent first half of the year. Before discussing each of our projects in detail, I would like to congratulate all of our employees and contractors at the Tucumã project, currently totaling over 1,700 people on site, on achieving over 2,000,000 hours without a lost time injury. In terms of progress at Tucumã, we achieved a major construction milestone of over 70% physical completion, as you would have seen in our project update from October.

Noteworthy achievements on site include the completion of earthworks, completion of all major civil concrete pours, major advancements in steel fabrication and erection, as well as installation of several key pieces of process equipment, including our primary crusher, ball mill, and tertiary crushers. As evidenced in our updated site photos, we are making excellent progress in flotation cell installation and site-wide platework and piping. In parallel, our main substation and power line installations are both tracking ahead of schedule, and we expect to tie in to the national grid at the end of this month. As a result, mechanical completion testing and the first commissioning phases of installed equipment are expected to commence prior to year-end.

With the progress made on procurement, manufacturing, equipment deliveries, and construction to date, our primary focus on the project has transitioned to piping, cabling, instrumentation installations, as well as our operational readiness planning, all of which is progressing on schedule. As Dave mentioned, given the excellent performance and momentum we have been able to achieve this year, in particular on the pre-stripping and electrical power installation fronts, we expect to accelerate select work streams related to both mining and plant commissioning from the Q1 of 2024 to the Q4 of this year, which has been reflected in our updated guidance. While our expected project delivery date remains unchanged, we believe the acceleration of these work streams will continue to de-risk our overall commissioning and ramp-up schedule.

Our total direct project capital estimate for the completion of the Tucumã project remains unchanged at approximately $305 million. It is worth noting that a Q2 redesign of our haulage route, combined with decreased emulsion costs, below budget earthworks, tailings, and waste dump construction costs, and reductions in duties on imported equipment versus our budget, have largely offset the impacts of a stronger than anticipated foreign exchange rate and increases in forecast electromechanical erection costs through project completion. At our Caraíba operations, we continue to advance the new external shaft of the Pilar mine and the expansion of our Caraíba mill, both part of our Pilar 3.0 initiative. During the Q3, we finalized the installation of the headframe for the new external shaft, concluded installations, and are currently commissioning both the stage and personnel winders.

We remain fully on track to commence main sinking activities prior to year-end. With respect to supporting infrastructure underground at the Pilar Mine, we are in the final commissioning stages on our underground batch plant, are reaming the waste and ore silos for our ore flow system, and are preparing for the second phase excavation of our crusher chamber. I am pleased to report that all of our underground development requirements remain on schedule for shaft handover to operations in Q4 of 2026. Back on surface at the Caraíba mill, installation of our new ball mill, Jameson Cell, and associated electrical installations were nearly completed during the Q3. We anticipate an on-schedule physical completion of the expansion project prior to year-end.

Last, but certainly, certainly not least, at Xavantina, we successfully developed into and commenced mining of the Matinha vein during the quarter, a fundamental component of our NX60 initiative. During the quarter, we mined ore from three different production levels within the Matinha vein. Our record production results this quarter and revised full-year guidance ranges for the Xavantina operations speak to the positive impact from this initiative. As Dave noted, we are expecting a strong fourth quarter at each of our operations and continued execution across our project portfolio. I will now turn the call over to Wayne to discuss our financial results.

Wayne Drier (CFO)

Thank you, Makko. As David mentioned earlier, our Q3 financial performance reflected record gold production and operating margins, which partially offset a decrease in copper production, as well as continued copper price weakness and a stronger BRL, which averaged 4.88 against the US dollar for the period. The strong operating cash flows of $41.9 million have helped to fund capital expenditures of $121.4 million, which were primarily directed towards the ongoing execution of our organic growth initiatives. We ended the quarter with a strong liquidity position of approximately $238 million. This includes cash and cash equivalents of $45 million, short-term investments of $43 million, and $150 million of undrawn availability under our senior secured revolving credit facility.

Regarding our BRL to U.S. dollar exchange rate hedge program, we reported realized gains of $3.5 million for the quarter. Consistent with our conservative strategy, and in response to a favorable move in exchange rates towards the end of the quarter that extended into October, we opportunistically expanded our foreign exchange rate hedge program to cover the majority of projected operating costs and capital expenditures through the end of 2024. These hedges have a weighted average floor and ceiling of 504 and 543 BRL per U.S. dollar, and includes approximately $145 million designated for major project capital expenditures, with a weighted average floor and ceiling of 510 and 523 BRL per U.S. dollar, respectively.

It's also worth noting that we remain hedged on approximately 75% of our copper production for the remainder of the year through the zero-cost collar hedge program we initiated in January. These copper hedge contracts provide a floor price of $3.50 per pound on 3,000 tons of copper per month through the end of December 2023. With that, I'll now hand the call back to David to share some final remarks.

David Strang (Co-Founder and CEO)

Thank you, Wayne, and thank again to everybody who's been on the call. I think the theme for the quarter has been us operating extremely well as a team, both operationally and on the capital projects in a dynamic macro environment, dealing with exchange rate and metal price volatility on the copper side of things. I cannot thank our team enough, both in Vancouver and here in Brazil, for the strong efforts they have done in terms of continuing to move our projects forward and continuing to operate our operations. And while we don't want to single out any particular operation versus others, the exceptional performance of our team at the Xavantina Operations. And with that, operator, I'll turn it over to you, for question period.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. We'll pause for a moment as callers join the queue. The first question comes from Dalton Baretto of Canaccord. Please go ahead.

Dalton Baretto (Managing Director and Equity Research)

Good morning, guys. Dave, I actually wanted to kick off by talking about this, this new Furnas project that you didn't actually mention on the call. I'm wondering, can you talk a little bit about the project itself, the rationale for the deal, maybe why Vale didn't run with it, and how this thing will compete for dollars versus your existing portfolio?

David Strang (Co-Founder and CEO)

Thanks, Dalton. I think we did mention it at the beginning of the call, but with respect to Furnas, I think there's a couple of things we'd like to be able to point out. Number one, we've always said, and we always want to continue to grow our business here in Brazil. And when we look on the longer-term basis of the future of this company, when the opportunity came to us with respect to Furnas and Vale's approach to us, if we would be interested in looking at it, it was something that, for us, is extremely dynamic. And I'm being somewhat hesitant here because with respect to the rules on the 43-101 and what we can and cannot say with respect to the project.

But what I can say with regards to it is, as you know, Mike and the team, and from the geology side of things, have a great understanding of projects here in Brazil. The work that Vale has put into this project, drilling over 90,000 meters in over 240 drill holes, the opportunity to be able to work with Vale, and this is a bigger relationship that's starting to be established. The contacts between ourselves and Vale were based upon Vale's viewpoint of a partnership that could help look at something that they've looked at historically from, let's say, an open pit perspective, and our opportunities in terms of how we operate underground in Brazil.

Our strong focus on ESG was something that gave Vale comfort that this, we are a company that they feel comfortable that they would enter a relationship like this. That's the generalities I can say right now. As we continue to move forward, as we continue to work on the project, so I think it will become a lot more self-evident to the world with respect to the opportunity that's available to us with respect to Furnas. Furnas is a long-term growth opportunity for Ero Copper. We will be working on it, as you said. Ideally, we'd like to be able to accelerate it faster than the program that we have, but it'll be, we'll be working on that project for the next five years.

Within that, the competition for exploration dollars does not exist between what we're doing in the Curaçá Valley and our nickel projects there and what is happening around Furnas. We have and are extremely comfortable with the budgets that Mike and the team have put together with regards to the work we need to do at Furnas. And remember, with over 240 holes already drilled on the project, the work that Mike and the team there are doing is a lot of compliance-related work with regards to 43-101, and bringing that project into the ability to discuss the resource with the marketplace under 43-101. So it is a great, great growth initiative for this company.

Yeah, we will be talking a lot more about it over the course of the next 12-18 months, and I think in the fullness of time, I think the market will come to understand the great opportunity we have here, and also the great relationship that we're starting to develop with one of the biggest mining companies in the world, and working with them. And I think that should be taken into consideration as well with regards to this. You know, Brazil and Vale have been synonymous, and the opportunity to work with the biggest mining company here in Brazil is a great opportunity for Ero Copper in the future.

Dalton Baretto (Managing Director and Equity Research)

Great, thanks for that, Dave. And then maybe switching gears to Tucumã. Just so you're still guiding to first production in H2 2024, but, you know, the mine's almost there to the sulfides. You're gonna kick off plant commissioning by year-end. Is there any upside to your guidance, and what are some of the key risks between now and then?

Makko DeFilippo (President and COO)

Yeah, it's a great... This is Makko. Great question, Dalton. Yeah, look, I think, you know, we're obviously things are going really well. We've continued to build on the momentum from the first half of the year, obviously seeing the big jump in physical completion relative to last quarter. I think, you know, in terms of starting the first commissioning phases and having a power site early, obviously is gonna help us de-risk our commissioning ramp-up schedule. With respect to project completion, you know, we're working as hard and fast as possible to get ahead. I think the risk is always the same, and that's the rainy season and how much progress we can make. We've planned for that in our current startup schedule.

I think that's, you know, part of the reason that we're moving capital from Q1 next year into Q4, and also continuing to maintain our current plan, which is second half of next year. So, while there's some opportunity there, I think, you know, given the uncertainty, the uncertainties involved, we're gonna stick to our second half guidance for now.

David Strang (Co-Founder and CEO)

Yeah, Dalton, just to reconfirm that, we're taking a conservative approach with regards to what we're doing. Yes, the project is moving forward very, very well, but we are not in a position, nor do we feel comfortable right now to change any guidance with regards to when commissioning and commercial production comes into play. Maybe we have a conversation with the marketplace in the first half of next year with regards to that, but we're not changing guidance right now.

Dalton Baretto (Managing Director and Equity Research)

Thanks, guys. I'll jump back in to you. The next question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Orest Wowkodaw (Managing Director and Senior Equity Analyst)

Hi, good morning. Marco, did I hear you say earlier that the impacts of the FX have been largely offset by savings elsewhere on Tucumã, and that's why the total project CapEx of $305 million is unchanged?

Makko DeFilippo (President and COO)

Yeah, that's exactly right, Orest. So, obviously, there was an impact stronger this quarter or, you know, in Q3, relative to where we're at. If you look at the big offsets there, it's gonna be on the redesign of the mine haulage route. So both in terms of pre-strip and also when we're starting to get into building our run-of-mine stockpiles. Q2 redesign was able to shorten that haul route fairly significantly. We've also seen savings on demolition costs. And then primarily in some of the, as well as import duties on some of the equipment that's arriving on site, that's all flowing through our forecast.

Obviously, as we look ahead, we're seeing a couple of things moving in the opposite direction, including increased electromechanical erection costs for completion. So I think, you know, as we continue to build this project out, both in Q4 and through the first half of next year to project handover, you know, we're gonna continue to see positive adjustments and negative adjustments. Fortunately, to date, those have largely offset each other, and we're continuing to anticipate cost of completion of $305 million. But again, those are that's our best estimate. Things are going up and down on a regular basis.

Orest Wowkodaw (Managing Director and Senior Equity Analyst)

Okay. And just as a follow-up, I mean, given there's a lot of moving parts here, you're bringing forward some CapEx, you've got some currency changes, and now you're also introducing some spending for Furnas. What does CapEx look like for 2024 on it, if we think company-wide?

Makko DeFilippo (President and COO)

Yeah, look, Boris, we're, as I think all companies are from discussions I've had with my counterparts at various companies, we're all in the process of budget season right now. So I think it would be premature to talk about company-wide capital in advance of our budget. With respect to Tucumã, all I can say is that, you know, we're anticipating the cost of completion of that project to be, at the time of handover, to be $305 million, subject to the variations we talked about. But in terms of company-wide CapEx, we're in that process right now.

Orest Wowkodaw (Managing Director and Senior Equity Analyst)

Okay. Thank you.

Operator (participant)

Next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

Stefan Ioannou (Institutional Equity Research Analyst)

Yeah, thanks very much, guys. Just wondering, can you provide any more color just on the exploration at Correia, whether copper or nickel even?

David Strang (Co-Founder and CEO)

Yes, Stefan, the program remains ongoing. We would have liked to have had, and I had spoken in previous quarters of having a more fruitful discussion with the marketplace with respect to advancement of the nickel opportunities. Unfortunately, the ANM, which is the government organization that manages the management of mineral licenses and exploration licenses in Brazil, went on strike in the middle part of the year, and that strike, now ended, has had an effect with respect to our ability to both close some transactions that we've been working on, as well as some auctions that the government was gonna run. That has resulted in us having to delay the discussion with the marketplace with regards to what we are starting to uncover with respect to the nickel exploration.

However, Mike and the team are continuing to explore on the areas that we have been able to explore. We have expanded the exploration program into 2-3 other areas, and the fact that Mike and the team are still got drill rigs turning, is the best I can tell you with regards to the success rate that we're having there right now. But it is our hope that sometime, and we've got to be super careful about giving a timeline with regards to when we can talk more fruitfully about our nickel program. I would love it to be the first quarter of next year. I doubt it will be. It will probably be somewhere in the second quarter that we can have a more fruitful discussion.

However, as the exploration copper program continues and we have anything material that we feel we'd like to discuss with the market on nickel results, we will do so in a timely manner.

Stefan Ioannou (Institutional Equity Research Analyst)

Okay, great. No, that's, that's very helpful. So I guess, you know, timing aside, obviously, lots going on, so just stay tuned then.

David Strang (Co-Founder and CEO)

Yeah. Yeah. I mean, like, like everything else, you know, we'd love to put out the quarterly exploration results. I mean, we're having success in some programs that we're doing, both in the Pilar Mine itself. Again, we've had success in some work that we've been doing at Vermelhos, in terms of some exploration there and some extension work there. We had done some work on some copper in the Vermelhos district, some very deliberately interesting results there. Our exploration program at Xavantina has gone incredibly well, and the team have done a lot of great work there, particularly around extensions to the Santo Antonio Vein System.

So lots of good work that the team are doing in a number of different areas within our exploration program, and we hope to be able to continue, as I said, to be able to talk more fruitfully about things in the new year.

Stefan Ioannou (Institutional Equity Research Analyst)

Okay, great. No, that's very helpful. And then, and just one other, sort of, one other question, just with, you know, shifting back to sort of the Tucumã area and, and I guess, Furnas. There was, you know, previously, there was sort of, you know, high-level sort of talking of, you know, thinking about Tucumã in sort of the greater context of a hub-and-spoke model. You know, Furnas is kind of in the same area, but maybe a bit too far away to be hub-and-spoke, if I read between the lines. Is there still other opportunities that you're seeing there as well, to feed into that strategy over time, or is Furnas kind of the next step for, call it the Carajás and Ero copper?

David Strang (Co-Founder and CEO)

Well, no, I think whether Furnas was in the Carajás or whether Furnas was somewhere else in Brazil, Furnas in and of itself is a great opportunity for our company. With regards to Tucumã, it is a foundational asset in the Western Carajás. And as such, we and Mike and the team are broadening their work on regional exploration in and around Tucumã and the area there. There are some opportunities, potentially, that other people have looked at. We are evaluating these. They are a little bit earlier stage, but we certainly feel we're starting to get our feet wet in terms of the foundation that we have built in the Western Carajás, and the opportunities to potentially grow our business there.

I think it's very much a stay tuned thing right now with as to what's happening in the Western Carajás.

Dalton Baretto (Managing Director and Equity Research)

Okay, great. Great. Well, thanks very much. Appreciate it.

Operator (participant)

The next question comes from Craig Hutchison of TD Securities. Please go ahead.

Craig Hutchison (Mining Equity Research Analyst)

Hi, good morning, guys. Just with regards to Tucumã, the $305 million, can you just provide some clarity in terms of how much that $305 million is left to spend, just the kind of cash component?

Makko DeFilippo (President and COO)

Yeah. Yeah, sure, Craig. So, right, this is Makko, again. So right now, you know, physical completion, well, at the end of September, physical completion, breached, you know, 70%, as you know. Our, physical spend is tracking just behind that, so we're about 60% complete on direct project expenditures through, the end of September.

Craig Hutchison (Mining Equity Research Analyst)

Great. And then just in terms of liquidity, I recognize you guys have a fairly strong liquidity position now, but if copper prices sort of languish here for the next few quarters, are you concerned at all about your liquidity position and any kind of thoughts in terms of bolstering that through an upside to your credit facility or some other means, non-dilutive means, between now and get sort of mid-next year when the project's complete?

David Strang (Co-Founder and CEO)

Yeah. Thanks, thanks for that, Craig. Like any company that has got major capital programs, we are constantly working with respect to scenario analysis on various metal prices, with regards to, as you've seen, exchange rates and anything we can do with regards to mitigating that. At current metal price levels, we're generally pretty comfortable, but you can't run a company on that basis. You have to look at risk and manage risk around that in various scenarios, and do your scenario planning with respect to that. We're in the process of doing that, we do it constantly, and we're looking at all the levers that we have with regards to making sure that the company is protected in such a way that we can deliver Tucumã on time and be able to bring that great operation into production.

So all I can tell you with regards to that is we continually and constantly looking at scenario analysis with regards to that. I will tell you, we will not risk this company with regards to anything, and if, if we feel it's prudent to pull other levers, we will do so. But this time, we're still in the works with regards to evaluating various scenarios that we have.

Craig Hutchison (Mining Equity Research Analyst)

All right. Perfect. Thanks, guys.

Operator (participant)

The next question comes from Alex Terentiew of Stifel. Please go ahead.

Alex Terentiew (Managing Director, Mining Equity Research)

Hey, good morning, guys. Got a couple questions for me. First, the Xavantina mine grades in the quarter are really impressive. The Matinha vein, obviously, you know, a good contributor to that. Were they higher than expected? And if so, any potential read-through to 2024?

David Strang (Co-Founder and CEO)

So yeah, we got into Matinha early, and we did find some areas which the grade was significantly higher than what we anticipated, and that has been a positive benefit. With respect to that, it's too early to say right now where we will continue to go with regards to Matinha. There's some really interesting things that we're seeing, but I don't think any of us are gonna change guidance with respect to what we're thinking with regards to Matinha right now. It's a great start. We're pretty excited. Our team's excited about what we've encountered. It has had a positive correlation. We continue to see higher grades than we anticipated, but we're not gonna change anything with regards to guidance, nor thinking on it right now with respect to Matinha.

Alex Terentiew (Managing Director, Mining Equity Research)

Okay, good. Well, it's a good start anyways. Second question: at Furnas, you said greater than 240 holes drilled so far. That's, that's a lot of holes. So if, can I read into that then? I mean, do you, do you think you have enough information available already to put a, you know, 43-101 compliant resource together? And is that something we could expect over the next few months?

David Strang (Co-Founder and CEO)

We, so let's, let's talk about our work at Furnas. We have signed a binding letter of intent. We now move into negotiating a definitive agreement. Both ourselves and Vale, in terms of the team, each team's work, going into this letter of intent, spent a lot of time. We've been in conversations with Vale for the last 18 months with regards to this. You can read that both companies are motivated with regards to getting the definitive agreement signed. That's gonna take a few months. At the same time, we're doing a baseline study and initiating a baseline study, for our environmental baseline study, for the basis of our work that we will then be adding to, the project. Thereafter, Mike and the team, working with the Vale team, will start our drilling programs.

We have a clear idea of what we would want to do with regards to the drilling that will be supportive of the work that Vale has done in and of themselves.... Vale has been working on this project a long time. Rules have changed with regards to QAQC, and there's a certain portion of the Vale database that needs to be updated, and that work will also be done. Hence, the reasons we're taking a conservative approach with regards to discussing the project right now, until such time as we can get everything, the i's dotted, t's crossed, with regards to it being compliant with 43-101. So we will be working on this project over the course of the next 12 months with regards to getting it there. I can't tell you when the 43-101 will be completed.

With regards to a resource, we have to work with our partner, Vale, to determine that. What you have seen in the definitive agreement, this is an 18-month program that will be completed initially to generate a PEA on the project, and that's what we will be working towards. If there's opportunity, and we feel, along with our partner, Vale, that there's an opportunity to put out a 43-101 earlier, we will do that, but we're gonna be doing and working in partnership with Vale and moving this project forward.

Jackie Przybylowski (Managing Director, Metals and Mining Analyst)

Okay, that, that's very helpful. Thank you.

Operator (participant)

The next question comes from Jackie Przybylowski of BMO Capital Markets. Please go ahead.

Jackie Przybylowski (Managing Director, Metals and Mining Analyst)

Thanks so much. A couple questions for you, and maybe one that's on a slightly different subject. Can you give us an update on the PMA smelter and, and how much of your material you're selling domestically versus versus internationally right now?

David Strang (Co-Founder and CEO)

Thanks, Jackie. With respect to PMA, we did not make any sales during the quarter to PMA. PMA has had maintenance issues with regards to the smelter, and so I've been working through that. Eduardo De Come, as you know, our CEO here in Brazil, has been working with PMA, and the PMA have been very open with regards to working with us on potential solutions down the road. There has been interest with regards to various things. It's not our role to get involved in this towards PMA coming back on stream in a stronger, healthier position. And we remain, 'cause we are an interested party, sitting on the sidelines and talking to various entities.

There may be an opportunity to send some material to them this quarter, but we're not relying upon it with regards to any of our projections that we will be selling anything to them in the Q4.

Jackie Przybylowski (Managing Director, Metals and Mining Analyst)

Okay. No, that's helpful. And that's consistent with the guidance you gave earlier. I just wanted to see if that was changed at all. I appreciate that. If I could ask one other question on. I guess it's really related to the startup of Tucumã, but just in general for the company. As we see Tucumã moving into production, can you talk a little bit about your working capital needs and how that may add to the amount of inventory and just sort of working capital that the company's gonna need in general next year?

Makko DeFilippo (President and COO)

Yeah, Jackie, great question. So, you know, both myself and Wayne have had this discussion numerous times over the past, several months. You know, we have, in terms of working capital draw for first production at Tucumã in sales, we have a number of levers that we're exploring to absorb that working capital impact. So we don't, we don't anticipate a huge change with respect to working capital drawdown, given some of the levers that we're exploring at this stage. I don't know if Wayne-

Jackie Przybylowski (Managing Director, Metals and Mining Analyst)

Thanks a lot, Makko.

Wayne Drier (CFO)

Yeah, I mean, Jackie, it's Wayne here. Obviously, we've had initial indications on the, the concentrate coming out of Tucumã is pretty desirable spec. We're in advanced discussions with various off-takers to enter into first, you know, first-year contracts around that. And obviously, there's opportunity in those to manage our working capital needs.

Jackie Przybylowski (Managing Director, Metals and Mining Analyst)

Sorry, Wayne, I didn't mean to cut you off. Thank you very much, Wayne, and Makko, and David. Thanks for your answers.

Operator (participant)

Once again, if you have a question, please press star then one on your telephone keypads. Please press star then one now. The next question comes from Gordon Lawson of Paradigm Capital. Please go ahead.

Gordon Lawson (Research Analyst)

Hey, good morning. My first question was just stolen, so I'll go over here. Can you clarify the key components of the 3.0 project in terms of timing? And I've got the mill ramping up to 4.2 in 2024, but what does—what and when does the second shaft add to the mining rate?

Makko DeFilippo (President and COO)

Yeah, good question, Gordon. So yeah, that's. You're spot on in the mill expansion. Obviously, we're completing the installations and commissioning phase in Q4, as we outlined in our MD&A news release today. The shaft handover to operations obviously involves, you know, we're, as I like to say, we're 40 meters complete on the pre-sink and about 1,460 meters to go on the shaft. So that progress will start here at the end of the year, in parallel with our underground infrastructure. We're forecasting an on-time delivery of the shaft project in Q4 of 2026. So it'll be fully operational in 2027.

Gordon Lawson (Research Analyst)

Okay. And, do you have an idea of what that would do to the mining rate?

Makko DeFilippo (President and COO)

The overall mining rate from the Pilar Mine will be 3 million tons. That's the objective.

Gordon Lawson (Research Analyst)

Okay. Okay, thank you very much.

Makko DeFilippo (President and COO)

Yeah, that's where the 3.0 terminology comes from.

Gordon Lawson (Research Analyst)

Great. Thanks a lot.

Operator (participant)

This concludes the question and answer session. I would like to turn the conference back over to David Strang for any closing remarks.

David Strang (Co-Founder and CEO)

Thank you, operator, and thank you again everybody for coming on the call. I really appreciate the questions that we have, that we received, and we look forward to talking to you at the... Well, I guess it's gonna be February with respect to, the next call on the annual results. Hopefully, we get to see a lot of you in between that and continue to have the discussions. We're always available to answer anybody's questions with regards to how our operations are doing. And again, I just need to thank the team, our overall team for the great work they continue to do, in terms of delivering, both operationally and on our project spaces, and getting to the goals that we're looking to achieve. So thanks to everybody, and thanks again to everybody on the call. Thank you, operator.

Operator (participant)

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.