Nexa Resources S.A. (NYSE:NEXA) Q3 2023 Earnings Call Transcript

Nexa Resources S.A. (NYSE:NEXA) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good morning and welcome to Nexa Resources Third Quarter 2023 Conference Call. All participants will be in a listen-only mode. This event is being recorded and is also being broadcast via webcast and may be accessed through Nexa’s Investor Relations website where the presentation is also available. [Operator Instructions] I would now like to turn the conference over to Mr. Rodrigo Cammarosano, Head of Investor Relations for opening remarks. Please go ahead.

Rodrigo Cammarosano: Good morning, everyone, and welcome to Nexa Resources’ third quarter 2023 earnings conference call. Thanks for joining us today. During the call, we will be discussing the company’s performance as per the earnings release that we issued yesterday. We encourage you to follow along with this onscreen presentation through the webcast. Before we begin, I would like to draw your attention to slide 2, as we will be making forward-looking statements about our business. And we just ask that you refer to the disclaimer and the conditions surrounding those statements. It is now my pleasure to introduce our speakers. Joining us today is our CEO, Ignacio Rosado; our CFO, Jose Carlos del Valle; and our Senior Vice President of Mining, Leonardo Coelho. So now I will turn the call over to Ignacio for his comments. Ignacio, please go ahead.

Ignacio Rosado: Thank you, Rodrigo and thanks to everyone for joining us this morning. Please let’s move now to slide 3 where we will begin our presentation. Let me start by providing you a brief overview on our third quarter of 2023. We continue to experience a scenario of downward pressure on metal prices driven by negative external factors such as inflation and high interest rates in the US in addition to uncertainty about the performance of key sectors of the Chinese economy. Although the prices of our main metals have performed at levels below our expectations, we remain committed to our financial discipline which made possible to have a positive cash generation in the third quarter of this year. Our operating performance was in line with expectations in our mining and smelting segments in both segments.

We also provided cash cost guidance revised downwards. Total revenue reached $649 million and was down 8% year-over-year, mainly due to lower Zinc LME prices and smelting sales volumes. Compared to the last quarter, net revenues increased by 4% as a result of higher mining production and metal sales volume in the period, which were partially offset by lower LME metal prices. Consolidated adjusted EBITDA for the quarter decreased by 32% year-over-year, reaching $82 million. This performance was mainly explained by lower LME prices. Compared to the second quarter of this year, adjusted EBITDA grew 14% due to higher metal sales, mine production and lower costs in Brazil. We revised the Aripuanã production range downwards for the year, given the limitations we found related to the design capacity of the flotation pumping system, which resulted in the extension of the ramp up phase.

Nonetheless, 2023 production estimates for Nexa’s other mines and smelters remain unchanged. Our Cerro, Pasco integration project is advancing as expected. Exploration project evaluation and other expenses were reduced by 15%. However, we are still prioritizing the expansion of the resource and mineral research base in our mines. I would like to close this slide by mentioning that we have successfully closed a $320 million sustainability linked revolving rate facility, which will support Nexa’s liquidity profile and is linked to our carbon reduction key performance indicators. Jose Carlos will go into details later on in the presentation. Now moving to slide 4. Regarding the operating performance of the mining segment, you can see that Zinc production increased to 87,000 tons, up 15% year-over-year, mainly explained by the increase in critical volume and the startup of the Aripuanã mine.

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Q&A Session

Compared to the second quarter of this year, Zinc production was up 8% explained by higher volumes from the Cerro Lindo, Vazante and Morro Agudo mines. With respect to cash cost in the third quarter of this year, it decreased to $0.35 per pound compared to $0.57 per pound in the third quarter of last year, mainly explained by higher, by product contribution related to higher lead prices and Copper concentrate volumes. Compared to the second quarter of this year, mining cash cost decreased by 6%. Looking at the cost per run of mine in the quarter, it was flat year-over-year and quarter-over- quarter, despite inflationary cost pressures, especially in Brazil. Now moving to slide 5. Regarding the operating performance of the smelting segment, metal sales total 154,000 tons in the third quarter, down 5% from the third quarter of last year, and up 3% compared to the second quarter of this year.

The nine months year-over-year production performance was relatively flat. A smelting cash cost in the third quarter of this year decreased to $1.01 per pound compared to $1.36 per pound in the third quarter of last year, and $1.12 per pound in the second quarter of this year. In both periods, this decrease was mainly explained by lower Zinc LME price which reduced the cost of raw materials. Our conversion cost was $0.29 per pound and was up 11% from the third quarter of last year due to higher energy expenses and lower metal production. Compared to the second quarter of this year, conversion cost was down 9%. Now moving to slide 6. Since January of this year, ramp-up activities in the Aripuanã have continued with a strong focus on steadily increasing the plant’s throughput rate, reducing plant downtime, and improving recoveries and concentrate quality and rates.

In the second quarter of this year, the plant performed at an average of 66% capacity versus 50% capacity in the first quarter. In July, we observed some problems in the capacity of the flotation pumping system due to limitations identified in the original design, and as a result, the plant performed at an average rate of 56% in the third quarter. The permanent replacement of pumps is scheduled to take place in the first quarter of next year, driving ramp-up completion to the second quarter of next year. We have also implemented additional actions in the plant that include processes and systems improvements, as well as upgrades on water treatment facilities. That will allow us to return to a high average throughput rate in a more consistent way.

We expect to run at a 70% average utilization rate through the fourth quarter of this year. On the mine site, we have been successfully increasing our run of mine production. We’ve reached 237,000 tons in the quarter, compared to 61,000 tons in the second quarter of this year, up to 190%. Exploration activities in the quarter progress as expected. We are focused on upgrading the mineral resource and expanding our mineral reserves. Our priority in this asset is to keep improving metal recovery and concentrate quality and grades, and to conclude the upgrade in the plant, aiming to achieve a stable production and minimize additional financial impacts Now moving to slide 7. Starting with the plant downtime in the upper left side, we noted an increase of 5% quarter-over-quarter as limitations observed in the third quarter require additional preventive hours.

The plant capacity utilization average 56% versus 66% in the second quarter. However, we can see an improvement in Copper and lead recoveries, while Zinc recovery is slightly reduced compared to the previous quarter, but has been recovering in the last few weeks. Now moving to slide 8. On the slide 8, you can see that Zinc production was 10% lower compared to the second quarter of 2023, reaching 5.8000 tons. Copper production reduced by 12%, while lead and silver production increased by 5% and 2% respectively, mainly driven by higher grades. Now moving to slide 9. On this slide, I would like to highlight that we continue to advance the technical studies of the Pasco Integration Project. These technical studies cover different works, such as new mine design and studies for the underground interconnection, shaft upgrade and engineering assessment of the plant, as well as the assessment of options to improve capacity to provide a long term solution for tailings storage facilities.