Executive Summary / Key Takeaways

• Operational Transformation at Scale: Ero Copper is executing a fundamental shift from capital-intensive development to cash-generating production, with Tucumã achieving commercial production in July 2025, Xavantina completing mechanization, and Caraíba delivering record throughput through zero-cost debottlenecking—setting up a potential margin inflection in 2026.

• Deleveraging Acceleration Through Hidden Value: The monetization of Xavantina's 29,000-ounce gold concentrate stockpile—initiated in October 2025—provides an immediate $10M+ cash boost in Q4, complementing Tucumã's ramp-up to drive net debt leverage from 2.5x at year-end 2024 to 1.9x in Q3 2025, with management targeting 1.5x in the near term.

• Cost Leadership in a Tightening Market: ERO's high-grade Brazilian assets (Caraíba ~1.5% Cu grades) and proprietary underground expertise generate C1 cash costs among the lowest in the peer group, while mechanization cuts Xavantina mining costs by 30-35%—creating sustainable competitive advantage as global copper deficits persist.

• Execution Risk Remains the Critical Variable: While October 2025 delivered "all-time historic monthly records" across all operations, CEO Makko DeFilippo's caution that "1 month doesn't make a quarter" underscores the fragility of the ramp-up, with filtration bottlenecks at Tucumã and Brazil's high inflation posing ongoing challenges.

• Valuation Reflects Transformation Premium: At $25.10 per share, ERO trades at 12.4x EV/EBITDA and 8.0x price/operating cash flow—discounts to Lundin Mining (LUN.TO) (16.6x) and Capstone Copper (CS.TO) (20.2x) despite superior growth trajectory, suggesting the market has yet to fully price the operational de-risking and deleveraging catalysts.

Setting the Scene: The Brazilian Copper Pure-Play

Ero Copper Corp., incorporated in 2016 and headquartered in Vancouver, operates as a pure-play Brazilian copper producer with a strategy built on high-grade underground mining and operational excellence. The company's genesis is unusual: Makko DeFilippo, the current President and CEO, was the first employee, building the organization from scratch around the Caraíba operations in Bahia State. This founder-led dynamic, combined with a singular geographic focus, has created an operationally intensive culture that prioritizes cost control and technical execution over scale for scale's sake.

The business model is straightforward but differentiated: extract high-grade copper ore from underground mines, process it into concentrate, and sell to Asian smelters, with gold and silver byproducts providing margin enhancement. What distinguishes ERO is the ore grade—Caraíba's ~1.5% copper grades are materially higher than industry averages of ~0.6-0.8%, translating into lower unit costs and superior margins. This isn't a volume play; it's a margin play built on geological advantage and mining expertise.

ERO sits in a global copper market facing structural deficits, with demand from electrification, data centers, and renewables projected to outpace supply by approximately 500,000 tonnes in 2025. Yet the competitive landscape is dominated by giants like Southern Copper (SCCO) (235kt quarterly production) and diversified players like Lundin Mining (87kt). ERO's ~20,000 tonnes quarterly production represents a niche position, but one with distinct advantages: faster decision-making, lower corporate overhead, and a Brazilian operational footprint that provides unique local market access.

The company's history explains its current positioning. The 2016 start date meant ERO missed the previous decade's major discoveries, forcing a focus on operational optimization rather than greenfield exploration. This constraint became a strength: the team developed proprietary underground mining techniques and a relentless focus on debottlenecking. The Tucumã project, completed on schedule in 2024 despite weather-related power outages, demonstrates this execution capability. The subsequent challenges—material flow constraints, tailings filter damage, and grid oscillations—were addressed through systematic downtime in early 2025, culminating in commercial production by July 2025. This pattern of "identify, fix, optimize" defines ERO's culture and underpins the investment thesis.

Technology, Products, and Strategic Differentiation: The Mechanization Edge

Ero Copper's competitive moat rests on operational innovations that competitors cannot easily replicate. At Xavantina, the transition to 100% mechanized mining represents more than equipment upgrades—it fundamentally alters the cost structure. The last manual mining crew left in September 2025, and the results are quantifiable: a 30-35% reduction in mining costs per tonne in Brazilian real terms. This matters because it directly addresses Brazil's high inflation environment, where labor agreements and contractor pricing have compressed margins across the industry. While peers like Lundin Mining face cost pressures from Chilean labor disruptions, ERO is systematically removing labor cost exposure through automation.

The mechanization also drives productivity gains. October 2025 gold production hit nearly 7,000 ounces—matching the entire H1 2025 quarterly average—in a single month. This step-change reflects not just equipment but a complete mining method redesign. Initial mechanized stopes show less dilution than manual mining, meaning more metal per tonne moved. The strategic implication is profound: Xavantina can now access higher-grade zones economically, supporting management's target of uncovering 1 million ounces in resource updates. This isn't incremental improvement; it's a step-function increase in both productivity and reserve base.

At Caraíba, the debottlenecking exercise completed in Q3 2025 at "effectively 0 cost" delivered an all-time record monthly mill throughput of 400,000+ tonnes in October 2025—an annualized rate "well beyond installed capacity." The "so what" is critical: this was achieved not through capital expenditure but through operational excellence—optimizing dispatch, tracking, and monitoring systems. While Capstone Copper spends billions on expansions, ERO extracts more from existing assets at near-zero marginal cost. This creates a capital efficiency that directly supports the deleveraging thesis, as cash flow can service debt rather than fund maintenance capex.

The Tucumã operation showcases another technological advantage: it is the only sulfide mill on the western side of the Carajás region. This unique positioning provides strategic leverage with local suppliers and logistics partners. The plant's crushing, grinding, and flotation circuits are performing "exceptionally well," with recovery rates and concentrate grades meeting or exceeding design specifications. The bottleneck is filtration—a solvable constraint through additional capacity that management is actively addressing with a mobile filter press. The key insight: the core processing technology works flawlessly; the remaining issue is peripheral and fixable, de-risking the ramp-up trajectory.

Financial Performance & Segment Dynamics: Evidence of Transformation

Third quarter 2025 results provide the first clear financial validation of ERO's operational transformation. Consolidated copper production set a company record, driven by Tucumã's second consecutive quarter of nearly 20% growth. Revenue of $177 million increased $14 million sequentially, with Tucumã's copper concentrate sales up 24% and gold prices providing additional lift. The "why this matters" is the margin trajectory: adjusted EBITDA of $77.1 million and adjusted net income of $27.9 million ($0.27 per share) demonstrate that volume growth is translating to bottom-line leverage.

Segment performance reveals the transformation's breadth. At Caraíba, copper production rose 25% versus Q1 2025, with October 2025 producing over 3,500 tonnes—on par with the best month of the year. Despite lower grades from mining upper Pilar levels and more Surubim pit material, C1 cash costs are expected to decline in Q4, landing in the lower half of full-year guidance. This cost control amid grade decline proves the debottlenecking's power: higher throughput offsets grade, protecting margins. When normalized for volume, costs are "pretty comparable quarter-on-quarter," per Makko DeFilippo, indicating operational stability.

Tucumã's financial profile shifted fundamentally on July 1, 2025, when commercial production began. Post this date, ramp-up costs are no longer capitalized, and depletion, depreciation, and amortization are recognized. This accounting change explains the Q3 operating cost increase but masks underlying operational improvement. Adjusted EBITDA of $77.1 million includes Tucumã's contribution at full economic run-rate, providing a clean view of normalized earnings power. The $9 million repayment on the copper prepayment facility during Q3—part of $19 million in debt reduction year-to-date—shows cash generation is real, not accounting illusion.

Xavantina's transformation is equally dramatic. Gold production increased 17% quarter-on-quarter in Q3, with October hitting nearly 7,000 ounces. The maiden inferred resource of 29,000 ounces from concentrate stockpiles—based on sampling just 20% of the stockpile—provides immediate cash flow upside. The company expects to sell 10,000-15,000 tonnes of concentrate in Q4 2025 at operating costs of $300-500 per ounce, with 90-95% payability after deductions. At current gold prices, this represents a $15-20 million Q4 revenue boost with minimal incremental cost, directly accelerating deleveraging.

The balance sheet improvement is tangible. Net debt leverage fell to 1.9x in Q3 from 2.1x in Q2 and 2.5x at year-end 2024. Liquidity stands at $111 million ($66.3 million cash plus $45 million undrawn revolver). Management's target of 1.5x leverage is achievable through Q4's expected strong performance and concentrate sales. This deleveraging is the "gateway" to shareholder returns, which Makko DeFilippo has explicitly positioned as step four of the company's strategy after achieving commercial production, deleveraging, and advancing growth initiatives.

Outlook, Guidance, and Execution Risk

Management's guidance framework reflects hard-won realism after prior revisions. The "two halves" narrative—first half foundational work, second half momentum—shapes conservative targets. For 2025, the high end of guidance across all operations sits at the low end of prior ranges, acknowledging H1 challenges. The key insight: this isn't sandbagging; it's transparent planning based on "feedback and learnings" from Tucumã's ramp difficulties.

Tucumã's trajectory illustrates both progress and caution. Management expects to reach "80%-ish" of design capacity by year-end, but full design capacity is not expected until H2 2026 due to filtration bottlenecks. October's record 3,300 tonnes of copper production proves the plant can perform, but sustainability remains the challenge. Makko DeFilippo's comment that "we have a considerable amount of daylight between now and December 31" after October's records signals that investors should not annualize monthly spikes. The mobile filter press arriving in Q4 is a low-capital solution to boost throughput, but consistent performance requires operational discipline, not just equipment.

Caraíba's outlook balances short-term grade decline against long-term productivity gains. The shaft project, at 870 meters below surface in Q3 and tracking for 2027 completion, will reduce travel time from one hour via ramp to five minutes via kibble. This transforms access to higher-grade zones, supporting a step-change in productivity and margins. However, 2025 production will trend to the low end of guidance as the operation optimizes around upper-level mining to control costs. This trade-off—volume for cost efficiency—is strategically sound but requires investors to look through near-term production softness to 2027's inflection.

Xavantina's guidance is more bullish. The mine is now 100% mechanized, with the full benefit of cost reduction and productivity gains flowing through in Q4 and 2026. The concentrate sales program provides a 12-18 month cash flow tailwind of $30-40 million, materially accelerating deleveraging. Management sees opportunities to expand beyond the 1 million-ounce resource target, with recent intercepts of 15 meters at 11-12 grams per tonne indicating growth potential. The key variable is sustaining mechanized production rates while managing the variable recovery rates from carbonaceous material in the deposit.

Furnas represents the long-term growth option. With 50,000 meters of drilling completed and Phase 1 obligations fulfilled, the PEA on track for H1 2026 will define project economics. The partnership with Vale Base Metals (VALE) provides credibility and shared development risk. While not contributing near-term cash flow, Furnas ensures ERO's growth story extends beyond current assets, supporting valuation multiple expansion as deleveraging progresses.

Risks and Asymmetries: What Can Break the Thesis

Execution risk remains paramount. Tucumã's ramp-up has already faced multi-week power outages, filter damage, and material flow constraints. While solutions have been implemented, the plant has not yet demonstrated sustained quarterly performance at target rates. If filtration capacity additions are delayed or if grid oscillations resume, 2026 production guidance could prove optimistic. The "teething pains" that required two extended downtime periods in early 2025 could recur as throughput increases, creating a binary outcome: either the plant achieves design capacity in H2 2026 or requires costly additional capital.

Brazil-specific risks are material and underappreciated. Inflation "still running high in U.S. dollar terms" impacts labor and contractor pricing, while the company "has not benefited as much from a depreciating BRL" as in prior years. The $290 million FX hedge position (BRL 5.59-6.59 collars through December 2026) provides partial protection, but a sharp BRL weakening beyond the collar ceiling would raise costs. Political and regulatory changes in Brazil could affect permitting, environmental rules, or tax structures, directly impacting project economics. ERO's pure-play Brazil concentration offers no geographic diversification, unlike peers Lundin Mining (Chile, U.S.) or Hudbay Minerals (HBM.TO) (Peru, Canada).

Scale limitations constrain bargaining power. At ~80,000 tonnes annual copper production, ERO is a fraction of Southern Copper's 940,000+ tonnes. This limits negotiating leverage with smelters and concentrates buyers, potentially resulting in treatment charges that erode margins. While high grades offset this disadvantage, any deterioration in concentrate market terms would disproportionately impact ERO versus larger producers. The company's small size also limits access to capital markets relative to majors, making debt service and growth funding more dependent on operational cash flow.

Copper price volatility is the macro variable. Management entered zero-cost copper collars covering 3,000 tonnes per month through September 2025, indicating concern about price downside. If prices fall below $4.00/lb, ERO's margin expansion narrative weakens despite cost improvements. Conversely, prices above $4.50/lb provide significant operating leverage, but the company's hedging suggests caution about relying on price tailwinds.

On the positive side, asymmetries exist. If Tucumã reaches design capacity ahead of schedule or if Xavantina's concentrate sales exceed 15,000 tonnes in Q4, cash flow could surprise to the upside, accelerating deleveraging and enabling earlier shareholder returns. The Caraíba shaft project's 2027 start could deliver higher grades sooner than modeled, providing a 2026 production beat. These upside scenarios are not in guidance but are plausible given operational momentum.

Competitive Context: Efficiency Versus Scale

ERO's competitive positioning is defined by efficiency rather than scale, creating a distinct risk-reward profile versus peers. Against Lundin Mining, ERO's Caraíba operations compete directly in Brazil. Lundin Mining's Chapada mine is open-pit with lower grades, resulting in higher unit costs. ERO's underground expertise and 1.5% grades deliver materially lower C1 costs (~$1.50/lb versus Lundin Mining's $1.61/lb), enabling better margins on concentrate sales. However, Lundin Mining's diversified portfolio (zinc, nickel, gold) provides revenue stability that ERO's 90% copper concentration lacks. Lundin Mining's Q3 2025 revenue of $1,007 million and 49% EBITDA margin reflect scale advantages, but ERO's 24% EBITDA growth on a smaller base demonstrates superior operational leverage.

Hudbay Minerals presents a different comparison. Both operate in South America, but Hudbay Minerals's Constancia mine in Peru faces ongoing logistics disruptions that ERO's Brazilian infrastructure avoids. Hudbay Minerals's Q3 revenue fell 29% YoY due to shipment delays, highlighting the risk of concentration. ERO's local supply chain and operational continuity provide resilience, though Hudbay Minerals's byproduct credits (gold, silver) are more significant. ERO's mechanization-driven cost reduction at Xavantina mirrors Hudbay Minerals's cost control efforts, but ERO's execution appears more advanced, with quantifiable 30-35% cost savings already realized.

Capstone Copper competes indirectly through Chilean production. Capstone Copper's Mantos Blancos and Mantoverde operations are larger scale but face higher energy costs and lower grades. ERO's 12.4x EV/EBITDA multiple trades at a discount to Capstone Copper's 20.2x despite similar growth prospects, reflecting market skepticism about ERO's execution that may prove unwarranted if Q4 performance sustains. Capstone Copper's $2 billion Mantoverde expansion requires capital that ERO's debottlenecking approach avoids, giving ERO a capital efficiency edge.

Southern Copper is the scale leader with 235,000 tonnes quarterly production and 59% EBITDA margins, but its Peru operations face political risk and community opposition. ERO's Brazilian focus provides relative stability, though SCCO's integrated smelting operations create a different business model. ERO's growth rate (100%+ YoY at Tucumã) far exceeds SCCO's flat production, but SCCO's 39.3% ROE and 0.1x net debt/EBITDA reflect superior financial health that ERO is working to match through deleveraging.

The key differentiator is ERO's capital-light growth. While peers spend billions on expansions, ERO extracts more from existing assets through operational excellence. This creates a faster path to free cash flow and shareholder returns, but requires flawless execution. The market's valuation discount reflects skepticism that ERO can sustain its transformation; successful Q4 delivery would narrow this gap.

Valuation Context: Pricing the Transformation

At $25.10 per share, Ero Copper trades at a $2.62 billion market capitalization and $3.19 billion enterprise value. The valuation metrics reflect a company in transition: 12.4x EV/EBITDA and 8.0x price/operating cash flow are meaningful discounts to the peer group average of ~15-16x EV/EBITDA. This discount exists despite ERO's superior growth profile, suggesting the market is pricing execution risk rather than fundamental asset quality.

The company's financial structure supports the transformation narrative. Net debt of approximately $200 million (implied from 1.9x leverage on $77M quarterly EBITDA) is manageable, with $111 million in liquidity providing cushion. The debt-to-equity ratio of 0.72 is moderate versus peers: Lundin Mining at 0.09 reflects stronger balance sheet, Hudbay Minerals at 0.39 is comparable, while Capstone Copper at 0.43 and SCCO at 0.71 show similar leverage profiles. ERO's current ratio of 0.82 indicates adequate near-term liquidity, though the quick ratio of 0.36 suggests limited liquid assets beyond cash.

Profitability metrics demonstrate operational leverage potential. Gross margin of 39.7% trails Lundin Mining (46.6%) and Hudbay Minerals (51.7%) but is comparable to Capstone Copper (40.0%). Operating margin of 21.6% is solid, while ROE of 17.3% exceeds Lundin Mining (5.6%) and Capstone Copper (9.4%), though far below SCCO's 39.3%. The key is trajectory: if Tucumã reaches design capacity and Xavantina's mechanization sustains cost reductions, margins should expand materially in 2026, justifying a peer-level multiple.

Free cash flow generation is the critical variable. Quarterly operating cash flow of $97.5 million and free cash flow of $23.9 million in Q3 2025 show positive conversion, though capex remains elevated during the ramp-up. The price-to-free-cash-flow ratio of 61.4x appears expensive, but this reflects temporary investment intensity. As Tucumã stabilizes and Caraíba's shaft project completes, capex should normalize, improving free cash flow conversion. Peers trade at 22-33x P/FCF, suggesting ERO's multiple could compress significantly as cash flow inflects.

The valuation puzzle centers on whether ERO deserves a premium for its pure-play exposure and growth, or a discount for its scale and execution risk. Current pricing suggests the latter, creating potential upside if Q4 2025 and 2026 guidance are met. The absence of shareholder returns (0% payout ratio) is appropriate during deleveraging, but sets up a future catalyst once the 1.5x leverage target is achieved.

Conclusion: The Operational Bet

Ero Copper's investment thesis hinges on a simple proposition: a founder-led team with deep Brazilian operational expertise can transform three assets through mechanization, debottlenecking, and commercial production to deliver margin expansion and rapid deleveraging. The Q3 2025 results provide the first tangible evidence, with record production, improving costs, and net debt leverage falling to 1.9x. The Xavantina concentrate sales and Tucumã's continued ramp offer near-term catalysts to reach the 1.5x leverage target, unlocking the path to shareholder returns.

The story's fragility lies in execution sustainability. October's records are encouraging, but quarterly consistency remains unproven. Filtration bottlenecks at Tucumã, Brazil's inflationary pressures, and the concentration risk of a single-country operation create downside scenarios where cash flow disappoints and leverage stagnates. Conversely, successful delivery of 2026 guidance could drive 50%+ EBITDA growth and multiple expansion, as the market rewards the transformation from developer to dividend-payer.

For investors, the critical variables are Tucumã's throughput consistency and Xavantina's cost reduction durability. If both execute, ERO's discount to peers will close, delivering 30-50% upside from operational leverage alone. If either falters, the leverage target recedes and the thesis breaks. The next two quarters will define whether ERO is a re-rating story or a cautionary tale about ramp-up risk.