Ero Copper - Q3 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Ero Copper Q3 2024 Operating and Financial 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 ask a question, you may press STAR then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing STAR then. I would now like to turn the conference over to Courtney Lynn, Senior Vice President of Corporate Development, Investor Relations and Sustainability. Please go ahead.

Courtney Lynn (SVP of Corporate Development Investor Relations and Sustainability)

Thank you operator. Good morning and welcome to Ero Copper's Q3 earnings call. Our operating and financial results were released yesterday afternoon and are available on our website as are our financial statements in MD&A for the three and nine months ended September 30, 2024. On the call with me today are David Strang, Ero's co-founder and Chief Executive Officer, Makko DeFilippo, President and Chief Operating 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 and 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. We appreciate that this is a busy week, especially with the news surrounding the U.S. Presidential election, so thank you all for taking the time to join us today. Before diving into our Q3 results, I want to take a moment to discuss the leadership succession announcement we made yesterday. This transition is something we've been thoughtfully planning over the last two years beginning with Noel's decision to step down as Executive Chairman in January of 2023. Noel's contribution have been instrumental in shaping Ero Copper from its early stages into the successful high growth copper producer we are today and I am immensely grateful to have him taken this unimaginable journey with him over the past eight years. As I step into the role of Executive Chairman, I am excited about what lies ahead for Ero.

I remain fully committed to our long-term success and look forward to continuing to support our growth in this new capacity. With Makko assuming day-to-day leadership of Ero as President and CEO, we are in incredibly capable hands. Makko has demonstrated exceptional leadership as our Chief Operating Officer, championing safety, advancing our strategic growth initiatives including the successful construction of Tucumã and strengthening our culture of accountability. I have absolute confidence in his ability to lead Ero into this next chapter. I am also pleased that Makko will have the full support of Gelson Batista, who joined us in September in anticipation of this transition. Gelson brings a wealth of experience from his 25 years in the mining industry, most recently serving as Chief Operating Officer of ArcelorMittal's mining division.

His expertise will be invaluable as we continue to strengthen our operations and execute on our growth strategy. With that, let's move to our Q3 operating and financial results. This past quarter brought both notable successes to celebrate as well as new challenges for our team to navigate. Among the successes was the completion of construction at Tucumã Operation culminating in the first production of salable copper concentrate in July 2024. Reaching this milestone just over three years after the publication of Tucumã's optimized feasibility study in September 2021 is a testament to our team's extraordinary dedication and hard work. What makes me most proud, however, is that we achieved this milestone without a single lost time injury.

Another important milestone in the quarter was the execution of a definitive earn-in agreement on the Furnas Copper-Gold Project with a subsidiary of Vale Base Metals in July, consistent with the terms outlined in the binding term sheet announced in October 2023. We are delighted to partner with Vale Base Metals on this opportunity and look forward to advancing the project towards a final investment decision over the next few years. Shortly after executing the agreement, we applied for the drilling permits required to commence the Phase 1 drill program which we received in September. Then in early October we published an initial NI 43-101 compliant mineral resource estimate based on a contemplated high-grade underground mine scenario.

In mid-October the first drill rig arrived at site and we kicked off the 28,000-meter phase one drill program which will focus on infill drilling and extending high grade zones within the broader deposit to depth. As of the end of October, we have two drill rigs on site with an additional two rigs expected to arrive by the end of this month. Our plan includes drilling approximately 4,500 meters in the Q4 with the remainder scheduled for 2025. Alongside these achievements and the strong progress we made in executing our growth strategy, we encountered operational challenges at both Caraíba and Tucumã. On a positive note, we achieved an 11.9% increase in copper production at Caraíba during the quarter, producing 9,920 tonnes of copper in concentrate driven by higher mine grades both for Vermelhos and Pilar.

This improvement reflects progress in developing high grade stopes at Pilar during the quarter. However, underground development rates at Pilar have not advanced at the pace we had anticipated, primarily due to underperformance by the third party contractor we engaged for this work. To address this, we are bringing on a second contractor before year end. In the meantime, lower mining rates at Pilar are expected to extend into the Q4. As a result, we are adjusting our full year production guidance at Caraíba to 35,000-37,000 tonnes of copper and concentrate production. Despite production headwinds at Caraíba, our C1 cash cost for the quarter decreased 24.5% to $1.63 per pound of copper produced. In addition to higher copper grades, several positive factors contributed to this impressive performance.

As mentioned in our previous conference call, the tightness of the copper concentrate market enabled us to secure some of the most favorable treatment and refining terms we have ever seen, which kicked in as of May 2024 for both Caraíba and Tucumã. Another important driver of our C1 cash cost performance has been a more favorable US dollar to Brazilian Reais exchange rate, which averaged approximately 5.6 Reais per $1 in the Q3. Along with this, we also experienced higher gold byproduct credits with regards to improving gold prices. This reduction in unit operating costs supported improved operating margins at Caraíba. At Tucumã, we began the quarter on a strong note, completing our first 24-hour shift of continuous mill operations and producing our first salable concentrate in July. This positive momentum continued through most of August as we gradually ramped up mill throughput.

However, as we approached higher throughput levels in late August, we encountered intermittent voltage fluctuations on the regional third-party power grid which limited our ability to sustain higher throughput levels continuously. Initially, we were informed that the voltage fluctuations were due to regional wildfires which led power utilities to reduce voltage throughout the transmission lines following a decrease in wildfire activity. The area, however, was struck by a severe windstorm causing a 10-day power outage that impacted industrial power consumers, including our Tucumã operation. After power was restored, we safely restarted mill operations on October 16th. However, as we ramped up mill throughput once more, we observed the recurrence of the voltage oscillations initially attributed to wildfires. While the root cause remains under investigation, we've promptly deployed an engineering team to implement a mill power management solution allowing for continuous plant operations despite minor voltage fluctuations.

Since implementing this solution last week, the plant has maintained continuous operations and is increasing throughput daily and advancing toward full capacity due to the intermittent power disruptions. Total mill throughput and consequently copper production for the Q3 was below plan with throughput totaling 110,788 tons and copper production coming in at 839 tons of copper concentrate. The power issues encountered from late August through most of October have also extended our ramp up to commercial production. As a result, we are revising our full year copper production guidance for Tucumã to a range of 8,000-11,000 tons in concentrate. In light of the anticipated delay in achieving commercial production, we are narrowing our copper cash cost guidance to include only Caraíba, where we are maintaining cost guidance at $1.80-$2 per pound for the reasons I outlined earlier.

Before discussing Xavantina's performance, I'd like to briefly address our expectations for copper production in 2025 while we are still finalizing our production numbers for next year's budgets. We anticipate that Caraíba will initially underperform relative to previous 2025 guidance as its second development contractor ramps up in the H1 of the year. However, we expect Tucumã's production to trend towards the higher end of previous guidance due to positive grade reconciliation. Overall at this stage, our preliminary production profile for 2025 suggests production will generally be in line with our previous guidance. Turning now to our Xavantina operations, we delivered another quarter of strong performance with gold production totaling 13,485 ounces. As mentioned on our Q2 conference call, gold grades were expected to be lower in the H2 of the year, leading to decreased production and higher unit costs in the third and Q4s.

Consistent with these expectations, our Q3 C1 cash costs and all-in sustaining costs for the quarter came in at $539 and $1,034 respectively per ounce of gold produced for the full year. We are reaffirming our increased gold production guidance range of 60,000-65,000 ounces and maintaining our reduced cost guidance range of $450-$550 per ounce for C1 cash costs and $900-$1,000 per ounce for all-in sustaining costs. Before I hand the call over to Makko and Wayne, I'll briefly cover our quarterly financial results. Our financial performance for the quarter reflects an expansion of operating margins driven by a significant reduction in unit costs at our Caraíba operations and higher realized gold prices at Xavantina. This margin growth led to quarterly operating cash flows of $52.7 million and adjusted EBITDA of $62.2 million.

Our liquidity position also remains strong with total balance sheet liquidity of $125.2 million at quarter end as we continue ramping up production at Tucumã. We believe we reach the cash flow inflection point in October and anticipate building additional liquidity throughout the end of the year. I'll now pass the call to Makko to discuss our operating results in more detail, after which Wayne will provide more detail on our financial results.

Makko DeFilippo (President and COO)

Thank you Dave and good morning everyone. Before commenting on our Q3 operating performance, I want to start by saying that I am truly honored to have been appointed the next CEO of Ero Copper. Having been with Ero since before our IPO, I take immense pride in what we've been able to achieve together over the past eight years. We have a strong underlying asset base, an outstanding portfolio of growth projects in Brazil, a proven mine building team and an extremely dedicated global workforce. I'm excited and deeply committed to continuing to serve our shareholders and to lead the sustainable execution of Ero's next stage of growth.

Switching gears back to our operations and starting at Tucumã, as David mentioned, we navigated a highly dynamic ramp up environment over the past few months due to intermittent voltage variability that was compounded by a major windstorm-related disruption in early October. While these obstacles created some setbacks in the pace of overall ramp up progress following a very successful July and August, I'm proud of the resilience of our engineering project and operational teams on site who, in a joint effort with other major industrial users in the region, were able to safely restore power to site in just 10 days.

In parallel over the past few weeks we worked closely with our automation partners and our broader engineering group to adjust our mill drive to accommodate this voltage variability. I'm optimistic about the progress we are seeing and we've been able to achieve and sustain higher throughput levels at Tucumã since the implementation of this solution. It is worth mentioning that our recoveries and concentrate grades have continued to remain at or above design levels. During the H2 of October, following restoration of power to site, we produced more copper from Tucumã than all of Q3, averaging recoveries of around 90% and concentrate grades above our design target of 25%. With the capital spend of Tucumã behind us and production and copper sales increasing, we're confident that Tucumã is going to be a fantastic operation.

At Caraíba, we saw a notable improvement in production and operating margins relative to the Q2, driven largely by increased grades from the Pilar and Vermelhos mines. However, as Dave mentioned, our ability to execute on the plans we developed for the Q3 were impacted by underperformance of a third-party development contractor in the Pilar Mine. The lower achieved development rates have now been reflected in our revised guidance range for Caraíba to improve access to high-grade stopes and increase operating flexibility. We are mobilizing a second third-party contractor to site by year-end to support our development efforts in 2025 at Furnas. I am pleased to report that the Phase 1 work program has begun in earnest with drill rigs mobilized to site in October and the first drill cores of our program now coming to surface.

Our primary focus for the remainder of this year and through 2025 will be to complete the 28,000-meter phase one drill program and complete the scoping study as contemplated in the earn-in agreement. I will now turn the call to Wayne to discuss our financial results.

Wayne Drier (CFO)

Thank you, Makko. As Dave highlighted, our Q3 financial results benefited from an expansion in operating margins driven by a significant decrease in unit costs at Caraíba and higher realized gold prices at Xavantina. This resulted in higher adjusted earnings before interest, taxes, depreciation, and amortization of $62.2 million and adjusted net income attributable to owners of the company of $27.6 million or $0.27 per share on a fully diluted basis during the quarter. We took advantage of the rallying gold prices by opportunistically entering into zero-cost collars on 2,500 ounces of gold per month from January 2025 to December 2025. These contracts establish a floor price of $2,200 per ounce and a ceiling price of $3,425 per ounce, allowing us to participate in gold price increases up to a level that is over 20% above the all-time high reached in October 2024.

The total hedge volume of 30,000 ounces represents just over 50% of our projected 2025 gold production at our Xavantina operation. With respect to our foreign exchange hedge. Program, we reported an unrealized gain of $9.8 million and a realized loss of $3.4 million for the quarter. The total notional value of our foreign exchange derivative position through quarter end was approximately $327 million consisting primarily of $315 million in zero cost collars with a weighted average floor and ceiling of 5.23 and 6.08 reais per US dollar respectively. These extending through the end of 2025. Our liquidity position at the end of the quarter remains strong at approximately $125 million. As Dave mentioned earlier, we believe we have passed a cash flow inflection point in October and expect our liquidity position to meaningfully increase as production and concentrate sales at Tucumã ramp up.

I'll now pass the call back to.David to share some closing thoughts.

David Strang (Co founder and CEO)

Thank you, Wayne, and thank you, everybody, for joining us today. Before I move into the Q and A session, I want to take a moment to express my gratitude to the entire Ero team as I continue to be part of Ero's growth journey. I am more excited than ever about what lies ahead for us. I want to extend my best wishes to Makko and Gelson as they step into their new roles. I have full confidence they will exceed all expectations. I'd also like to thank Noel for his dedication and partnership over the past eight years. I'm incredibly proud of what we have achieved together, and I wish him the best in his next chapter of his life. Now I hand the call back to the operator to open the line for questions.

Operator (participant)

We will now begin the Q&A session. To join the question queue you may press star then 1. On your telephone keypad you will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star and then two. Our first question comes from Ralph Profiti with Eight Capital. Please go ahead.

Ralph Profiti (Equity Research Analyst)

Thanks, operator. First off, David, Makko, Noel. I offer my congratulations on the appointments and, Noel, congratulations on his retirement. Firstly on Caraíba, if I may, it sounds like the contractor issues are going to have sort of a knock on effect on dilution versus plan and reconciliation versus plan. I'm wondering if that's kind of what you meant by sort of the underperformance in the mine plan, not only in Q4 but sort of the first part of 2025. And if you can sort of help me to understand kind of what degree versus plan are we impacting dilution and reconciliation?

David Strang (Co founder and CEO)

Thanks. Good question.

Makko DeFilippo (President and COO)

And just to clarify, the issue with the third party development doesn't have to do with dilution or any modifying factors for the stopes. It more has to do with our ability to increase operational flexibility and access additional high grade stopes that we hoped would be in the plan for the H2 of this year. Those are being shifted out into the H1 of next year and obviously there's a knock on effect to the entire plan with the underperformance of development rates. So just to be clear, no impact on dilution reconciliations or anything with respect to the stopes that are in the plan. It more has to do with the access and timing of getting to those stopes and mining them safely. And that's what.

Ralph Profiti (Equity Research Analyst)

Okay, thank you for that clarification. And just coming to Tucumã and power in the prepared comments, it sounded like the trips and these oscillations were happening at higher throughput. And I'm just wondering was Tucumã at the entire allotment of its 25 megawatts on the grid at the time of this disruption? And the reason I'm asking is whether or not these are sort of structural and systemic issues that perhaps require capital and as part of your investigation happening with the public utility and could there be some capital needed to ensure long-term reliability of the system?

David Strang (Co founder and CEO)

It's a really, really good question. With respect to the power grid and what is being done, it's a little bit more complicated in terms of how the whole power grid works up in Pará because there are three separate power providers. Our power provider ties into another network on which this oscillation issue occurs. Frankly, we became aware of it once and through our partners at Vale Base Metals once the Onça Puma mine came back from maintenance and started drawing power back from increased power from the grid. The good news is with respect to that is this is a situation that Vale had been dealing with historically. They have been able to put in systems in their own operations with respect to dealing with this issue. We have worked with our contractor ABB and working on a solution in and around.

And for us it really only affects our mill, it does not affect the rest of the operations. And so with regards to the mill we have worked with them on software updates with regards to that, but we're not going to rest on that. Similar to what Onça Puma and some of the Vale operations have put in place, we are looking at putting another solution in place. The capital cost on these things is not excessive. It's a small amount of money, approximately $1 million with regards to putting one of these systems in. And I can leave it to Makko to talk more broadly with regards to what that system looks like and how it performs.

Makko DeFilippo (President and COO)

It's a good question. I think the main thing to take away from it is that the timing of the voltage oscillations that we experienced I think were coincidental that we're still working with our increased ramp up to understand that the solution itself. As Dave mentioned, two things were done. We immediately started engineering a contingency plan for a longer term installation of a series transformer that allow us to accommodate that voltage volatility at our substation. But in parallel working with ABB and our engineering groups, we implemented the solution at our mill to accommodate the variability there. So I'd say the engineering for the long term solution has been in progress. As I said, at this stage, we view that as a contingency plan, not required, based on what we've seen over the last week.

But obviously we're going to continue to monitor that and evaluate the implementation of that solution. I think the main message to take away from this call is that the permanent fix, if required, is not a significant investment. It's around $1 million.

Ralph Profiti (Equity Research Analyst)

Gotcha. Okay, helpful answers. Thanks very much to the team.

Operator (participant)

The next question comes from Guilherme Rosito with Bank of America. Please go ahead.

Guilherme Rosito (Equity Research Analyst)

Hi. Thank you. Good morning everyone. First, I'd like to also congratulate Dave on your journey and wish you best of luck in your new challenges. And also Makko, best success in your new role. So my first question is on Caraíba. Just wonder if you could go into a bit more detail of what you guys are seeing in this new guidance. If the top range is where you are targeting, then have some room to maybe still have some underperformance and still meet guidance or are you targeting the mid of the guidance? There's an upside risk to the top then into 2025.

When you talk about underperforming H1, should we expect something along the lines of the top end of the guidance and just understand what is the structure of what's going on there and what is circumstantial in terms of the contractor delays so that we can look to the coming years before the shaft is up? My second is to Wayne. I completely agree that you're at a time of inflection in terms of cash generation, especially as Tucumã ramps up and your CapEx bill goes down and then you start to generate a lot of cash. So the question is where is that cash going? What are priorities in terms of capital allocation? Just given the considerable underperformance of the stock recently, does it make sense to open a buyback program?

Would you rather pay dividends or would you rather take down your leverage first and think about that? Just trying to understand what are you thinking about. Thank you.

Makko DeFilippo (President and COO)

So great question. I'll take the first part of that and there was a few component parts of the question, so if I miss anything, just feel free to jump back in and let me know. But I think the primary question was on, you know, what's systemic versus structural or temporary in nature. I think, you know, truly the development delays that we're seeing we see as a moment in time in terms of our ability to, to have enough flexibility in the Pilar Mine to continue to access high-grade stopes. So you know, we see that impacting, as Dave mentioned in the prepared remarks, we see that impacting, let's say the H1 of 2025, it's going to be a few quarters to get things back on track there.

But overall we're not seeing a major structural change in terms of the production volumes that we have over the next few years from the Caraíba Operations altogether. As I said, obviously it's impacting this year because of that underperformance relative to our expectations and we see that, you know, we see that impacting in the next few quarters. But by the H2 of 2025 I think it's fair to say that we expect to be back in a good position with respect to operating flexibility around these high-grade stopes that'll be aided by the efforts of a second third-party contractor that we're bringing on board. I think that was the.

Probably covered a few of the different questions that were asked, but maybe before we get into capital allocation, maybe just pause there and see if there's any questions on the operating side that weren't answered.

Guilherme Rosito (Equity Research Analyst)

I think that was great, Makko, and just one thing to make it clear, when you guys look at the guidance this year, is the top end where you guys are targeting and then have some, now we're targeting the middle of the range and then have some upside in reaching the top end.

Makko DeFilippo (President and COO)

Look, it's a great question. I mean obviously we've got a few months left in the year here. I think we gave ourselves a bit of room on production at Caraíba, but I don't want to. It's a very narrow range at this point so I prefer not to comment on whether we're forecasting to be at the top end or bottom end.

David Strang (Co founder and CEO)

Let me just add in, we've just gone through October on the revised plan. The team did a little better than what the plan had forecast. So Makko doesn't want to go and the hesitancy is just making sure that we don't get too far over our skis. We're certainly with regards to the plan that Gelson put in place since he's arrived in terms of getting us back to where we need to be. October was better than what we expected. Let's see how November goes. But this is all about getting the team to get back on track, start progressing every month and start keep improving. We've put in some conservative assumptions within this plan. Obviously from our perspective as senior leaders of the company, we'd like the team to beat the plan. And so let's see how we're going. October was a good start.

Makko DeFilippo (President and COO)

Capital allocation.

Wayne Drier (CFO)

On the capital allocation question, Guilherme, it's obvious we. The first priority will be to pay back the revolver that we have outstanding. I think once we are comfortable that Tucumã has hit commercial production is running smoothly in 2025, then we can start having a more fruitful discussion around how best to handle the excess cash flow that we expect to produce.I think that's a discussion that is always robust and continually happens at our board. So I think next year will be at a point where we start to formulate some plans on how best to start returning some of the cash to shareholders.

Guilherme Rosito (Equity Research Analyst)

Great. Thank you very much guys.

Operator (participant)

The next question comes from Connor McKay with Ventum Financial. Please go ahead.

Connor McKay (Equity Research Analyst)

Thanks, operator. And I echo the comments of congratulations there for Dave and Makko and the rest of the team on your new appointments. Just wondering at Pilar, what are the cost implications you guys are anticipating of adding the second mining contractor? Is that going to impact long-term sustaining capital or operating costs going forward?

Makko DeFilippo (President and COO)

It's a great question, Connor. I think it's important to note with respect to third party contractors that bringing someone on board in 2025 was always part of the plan. We obviously accelerated that into the H2 of this year in response to some of the challenges we had in the Q1. So it's really a, it's just a pull forward of that plan. So when looking at our longer term outlook and plans for the company, we always had a development contractor in place starting in 2025 to increase the rate of development. We've had a third party development contractor, in fact the same third party development contractor operating successfully throughout our operations for the last several years. So this isn't something new to us. And as I said, it was always part of the operating plan.

The idea with the second third party contractor isn't so much to increase the rate of development versus what we have planned, it's more to distribute the load as a risk mitigation measure more than anything else.

Connor McKay (Equity Research Analyst)

Got it. Thank you, Tucumã, so I assume with the comments surrounding targeting the upper end of 2025 guidance, production guidance out of Tucumã. You're fairly confident that commercial production is within reach in the near future? Probably late this year or early next year, if I'm reading that correctly.

Makko DeFilippo (President and COO)

So let's be clear where we are right now. And we had to make sure everybody understood with regards to what we said. A preliminary work that we're doing right now is showing exactly what we said with regards to general guidance for next year. At the moment, you are correct. We are working. The mill is now in continuous operation. We are not seeing any voltage shutdowns of the mill. Makko and the team are now slowly ramping up that mill to commercial production levels. And it is our anticipated hope that we will be at commercial production within the next couple of months. It may slip into early 2025. Our hope is it's not. That's why we're using terminology like preliminary in general at this stage.

Once we are better suited, once we've got through the next month with continuous operations and as we said, continuing to ramp up through commercial production levels, then we'll be in a much better position to be able to have a more fruitful conversation with everybody regarding that. And that will dictate into our guidance that we will release in January of next year. But as it stands right now, based upon the runway we see going forward here, what we see is there's no reason to change our general guidance for next year.

Connor McKay (Equity Research Analyst)

Got it. Appreciate the clarity there. Thank you. That's all for me.

Operator (participant)

The next question comes from Roald Gooijer with Clarkson Securities. Please go ahead.

Roald Gooijer (Equity Research Analyst)

Good morning, guys. Congrats on the quarter. And congrats on progress with ramping up. So my first question is on Caraíba. I'm just curious if you can provide some color on the key cash cost into the next year after having reached this low level.

David Strang (Co founder and CEO)

Look, I think from a cash cost perspective, there's a couple things that are creating some good tailwinds for us. I think I mentioned this last quarter, although it didn't come out this quarter. In the early last year, we started what we call our Full Potential program. We've seen the benefits of that quarter on quarter. And so we're continuing to get supplier costs come down. I would say, specific to Q3, we started to see the full benefit of improved treatment and refining charges, specifically related to, obviously, the overall treatment refining charges are coming down, as David mentioned, but I think it's important to note that the gold price strength continued to benefit us pretty significantly in Q3.

Makko DeFilippo (President and COO)

We also saw a weakening of the BRL during the quarter, which if you follow the Brazilian over the last 24, 48 hours, has continued to be in a great spot for us in terms of improving margins relative to our expectations early in the year when we put our budget together, so I would say, you know, major tailwinds that we're continuing to experience. Obviously, the TC/RCs, the strength of the gold price, and the weakening of the BRL are all tailwinds we expect to continue here for the next couple of months.

Roald Gooijer (Equity Research Analyst)

Great, thank you. And also on the realized copper price, it seems like for this quarter that the discount looking at the three months LME is a bit bigger compared to last year quarters. Is that something to comment on or is it just a coincidence or should we sort of think that this discount could be also this wide going forward?

Makko DeFilippo (President and COO)

No, look, I mean we had lots of commentary on previous calls about this, really. If you look at Q3, the copper price did slide in Q3 and so all of that is often just driven around when we ship concentrate. We're not a huge producer in terms of volume compared to some of our peers. So a lot of it's driven by the timing of shipments. And simply when you, you can't take a simple arithmetic average, you know, when our shipments, the timing of our shipments does drive that. So last quarter was a little higher than it was the quarter before. Obviously the quarter before we saw a very significantly strengthening copper price in Q2. I would suspect most of our copper peers had a very tight range on their realized product, but that's all it is, nothing significant.

David Strang (Co founder and CEO)

If you look at it, Q2, the LME average price was 442. Q3, the average LME price was 417. So that's why you would see that change in the realized price is related to directly the underlying metal price, offset a small amount by changes in the gold price over the same period of time.

Roald Gooijer (Equity Research Analyst)

Okay, great, makes sense. And lastly for Tucumã, could you give us some color on the sustaining CapEx going forward as you reach nameplate capacity and everything is going as expected?

Makko DeFilippo (President and COO)

Yes, look, I don't think it's appropriate at this point. We're obviously putting together our plans for next year with respect to sustaining capital. We don't see a meaningful variation from what we put out in the past in terms of sustaining capital. Obviously costs have increased relative to when we put out the feasibility study, just generally in the sector. So I think that's probably a fair comment. But we're, you know, I'm going to hold comment on that until we put out our formal guidance in January. We're still focused right now on our ramp up and getting to the commercial production level. So I suggest we revisit that in January with our full year guidance for 2025 because we'll have again put some clarity around what sustained CapEx is going to be.

I expect it to be fairly low in the first year of production. Obviously, we don't have a lot of. It's a brand new plant that will increase a bit over time.

Roald Gooijer (Equity Research Analyst)

Okay, great.I appreciate that, thank you.

Operator (participant)

And the next question comes from Dalton Barreto with Canaccord. Please go ahead.

Dalton Baretto (Equity Research Analyst)

Thanks, operator. Good morning guys. I'm a little surprised to see all these operating challenges in Q3 given that we were just on site in the second week of September. I appreciate all the color that's been given on the call so far, but it's still a little bit unclear to me at Caraíba what the root cause of the productivity issue with the contractor is. I mean, is this a newer contractor? Was there something temporary that happened or is this more of a structural thing? And so I'm just wondering if you can comment on that and then maybe as you're caught up with the second contractor mid-2025, whether you think it's sustainable on a go forward basis at that point in time. Thanks.

Makko DeFilippo (President and COO)

Look, that's a great question, Dalton. And I think really what you're looking at if I go back to, you know, I think when we're talking about performance is relative to the expectation and the performance against the contract we signed. If I go, you know, if I look at the curve of weekly increases, mobilization of equipment, mobilization and training of people, those were all behind, so when I look, you know, over the past couple weeks, I'd say the development rates that the contract is achieving are in line with, you know, the full mobilization. But that mobilization took much longer than we anticipated and largely due to the availability of equipment and resources in Brazil. I think that's a theme probably throughout the sector, but certainly impacted our contractor's ability to ramp up the development rates.

As I said, over the past couple weeks they've increased their productivity and rates. So I don't see that as a systemic issue or like a challenge in the operation itself. It more has to do with the timing and their ability to achieve higher development rates.

Dalton Baretto (Equity Research Analyst)

Okay, thanks for that, Makko. And then maybe switching gears to Tucumã as well. I think Dave said that you've only just installed that power management system last week. And I'm just wondering, I mean, have you tested it at full capacity yet? And with your sort of regional neighbors running at full capacity yet, how comfortable are you that this is a permanent solution?

Makko DeFilippo (President and COO)

Look, it's a great question, Dalton. We took a couple weeks to implement this solution. The first phase was to really measure the volatility and variability that we saw. To put it into context, the power arriving on site, the 138 kilovolt line, we see on millisecond frequencies, voltage drop to the 120 range. It took a couple weeks to measure that data fully so that we could engineer the appropriate set of solution. As Dave mentioned, we put that in last week, we've seen the same levels of variability that, you know, 120 range and the mill hasn't stopped turning. So I would say that we're really encouraged. Although it's only been a week, we've. If you look at the operating performance since we implemented that solution, we've been able to address the root cause of the issue at our mill.

As I mentioned, there's a second, you know, a second solution, more expensive, around $1 million that we could implement. And we started the engineering of that solution in parallel a few weeks ago. But we're really encouraged by the results we've seen with just the bill adjustment that we've done to date.

David Strang (Co founder and CEO)

Dalton, I know I'm going to see you tomorrow, but just Mac has just highlighted something I think we need to clarify. These voltage interruptions are generally 0.7 of a millisecond. These aren't voltage fluctuations that sit there for minutes or half an hour or an hour. They are literally very small frequencies. In fact, when we first brought it up with the power provider, they said there wasn't an issue on the line because their measuring equipment couldn't measure that volatility. The issue with regards to it was the software package that was managing our mill motor was such that it had built in safety frequencies with regards to changes in voltage down to that millisecond.

So what would happen was, if we encountered one within, as Mac has pointed to me, 0.7 of a millisecond, the mill would go into standby mode and then we'd have to just physically restart it. But the issue with regards to the restart is the whole system would take another 15 minutes to half an hour to get booted up again. And when that would happen over eight times in a day, you can imagine how your continuous ability to operate at your. So we were able to operate in between these mill shutdowns by the safety equipment at capacity. But when we average it out on a continuous basis, it was because the mill would go into safe mode or the motor. This ABB solution merely extends out that safety margin on the downside with regards to mill fluctuation.

So what the mill motor will not do now is go into safe mode with regards to a drop in voltage. Still protects it for a change if the voltage goes up, which we don't see. It's just merely the fluctuations of the mill over milliseconds of change with regards to voltage frequency. So we've essentially just desensitized the software package to an extent to be able to allow that when that voltage drop occurs, the mill doesn't go into safe mode.

Dalton Baretto (Equity Research Analyst)

That's great color, Dave. Thank you. That sounds like more of a teething pain type issue as opposed to a more structural issue. I appreciate that.

David Strang (Co founder and CEO)

Correct.

Dalton Baretto (Equity Research Analyst)

That's all for me.

David Strang (Co founder and CEO)

Correct.

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)

Thanks, operator. Again, thank you, everybody. This is the last time I will be leading one of these. The next quarterly will be Makko's lead. And I thank you all for those who have been following us over the last eight years for the length of time you've put up with me and for those new people who are following us in the New York Times. Look forward to meeting some of you if I haven't met you before. But certainly supporting Makko and his role of running these quarterly earnings calls in the future. So thanks very much. Enjoy your day. Bye bye.

Operator (participant)

This brings an end to today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.