Nexa Resources SA Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Aripuanã: Third quarter achieved positive adjusted EBITDA for third consecutive quarter and first full quarter of positive operating cash flow. Treated ore volumes improved, but tailings filter capacity limited to 90%. Plan to acquire a fourth tailings filter in 2025 to boost filtering performance. Reduced plant downtime to lowest levels to date.
• Cerro Pasco Integration Project: Tailings pumping system in Phase 1 undergoing internal approval process. Includes construction of tailings treatment plant and 6 km pipeline connecting to tailings storage facilities.
• Asset Sales: Announced sale of Pukaqaqa greenfield project and non-operational Peruvian subsidiary, aligning with portfolio optimization strategy.
• Capital Expenditures: Invested $191 million in CapEx in first nine months of 2024, mostly for sustaining activities. Adjusted 2024 capital expenditures guidance to $300 million from $311 million. Exploration and project evaluation guidance maintained at $72 million for 2024.

Segment Performance

• Zinc: Third quarter zinc production was 83,000 tons, down 5% year-over-year. Decline due to Morro Agudo's absence and lower grades. Cash cost in third quarter was -$0.01 per pound, a significant decrease from $0.34 per pound in third quarter of last year. Year-to-date cash cost performed within updated guidance range.
• Lead and Silver: Lead and silver production increased by 2% each in third quarter, driven by higher treated ore volumes and grades.
• Copper: Copper production decreased by 4% in third quarter due to lower grade areas.
• Revenue and EBITDA: Total consolidated net revenues for third quarter reached $709 million, up 9% year-over-year. Adjusted EBITDA was $183 million, 111% higher than same quarter last year with an adjusted EBITDA margin of around 26%.

Guidance

• Cash Cost: Reduced 2024 cash cost guidance by 64% from previous guidance issued in February, supported by higher LME metal prices and year-to-date performance.
• Capital Expenditures: Adjusted 2024 capital expenditures guidance to $300 million from $311 million.
• Metal Production: Expect metal production in 2024 to be lower than 2023 due to negative TCs impacting smelters' margins.

Risks

• Aripuanã Tailings Filter: Existing tailings filters limit Aripuanã's capacity to exceed 90% until new filter is installed in 2025.
• TCs Impact: Negative TCs since mid-2023 have increased raw material costs for smelters, adversely affecting margins.
• Market Volatility: Fluctuations in LME metal prices can impact revenues and profitability.

Question and Answer

• Q: Get more color on the status of Aripuanã, specifically when the new tailings filter will be operational and how current throughput is constrained?

A: Fourth tailings filter expected in 2025, implementation takes 10-14 months. Current throughput constrained at 90% due to filter capacity limits as filters can't absorb fans from processing.

• Q: View on impact of recent TCRCs trends on Nexa?

A: TCs are negative, unusual situation due to concentrate shortage. Smelters facing reduced income from TCs and lower metal premiums, may cut production. Market conditions unlikely to dissipate quickly, supporting price positivity.

• Q: Thinking on timing of potential M&A and focus on copper/zinc?

A: Priority to reduce debt first. Actively looking for copper acquisitions (ticket around $800 million for 50-60k tons copper). Also developing mines like Cerro Lindo for reserve extension.

• Q: Year end reserves, particularly at Cerro Lindo, Vazante, and Aripuanã?

A: Cerro Lindo has resources to extend life of mine with new drilling, Aripuanã has 30-35 years of reserve potential, Pasco integration project to increase profitability and extend life of mine.

• Q: Outlook on zinc supply demand dynamics?

A: Tight concentrate market, soft demand in China but supply constraints likely to keep prices strong, fundamentals supportive, prices unlikely to return to 2023 lows.

• Q: Plans for leverage management?

A: Aim to reduce net leverage to 1-1.5 range, focusing on reducing gross debt to lower interest costs and buffer against market cycles.