Nexa Resources S.A. (NYSE:NEXA) Q1 2024 Earnings Call Transcript

Nexa Resources S.A. (NYSE:NEXA) Q1 2024 Earnings Call Transcript May 3, 2024

Nexa Resources S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Nexa Resources First Quarter 2024 Conference Call. [Operator Instructions] 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] And now I'd 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 first quarter 2024 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 on-screen presentation through the webcast. Before we begin, I would like to draw your attention to Slide 2 where we will be making forward-looking statements about our business, and we ask you to refer to the disclaimer and 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 Operations, Leonardo Coelho. So now I will turn the call over to Ignacio for his comments. Ignacio, please go ahead.

Ignacio Rosado: Thank you, Rodrigo. Good morning, everyone. Thanks for joining us today to discuss our results for the first quarter of 2024. Before starting our presentation, I regret to inform you that in early March, we had a fatal incident involving one of our employees in the El Porvenir mine, and earlier this week, another fatal incident involving one of our employees at the Vazante mine. This is a very difficult time for Nexa and it becomes clear that we need to work even harder on reinforcing our safety system. We extend our heartfelt condolences to the families of our two employees and reassure them and all of our stakeholders that the safety and well-being of every person who works at Nexa are our main values and remain our utmost priority.

We are committed more than ever on enhancing employee safety and achieve zero fatalities. Please let's move to Slide 3 where we will start our presentation with the main highlights of the quarter. Let me begin by saying that I am pleased to report that we had a positive start of the year. We have achieved another quarter of consistent operating performance, maintaining our focus on cost discipline and capital allocation. Despite ongoing challenges in our industry at the beginning of the year such as weak macroeconomic conditions, commodity price volatility and lower demand due to seasonality, we continue to make a steady progress and remain focused on executing our priorities. In the first quarter of 2024, consolidated net revenues were $580 million, down by 13% year-over-year, mainly due to lower zinc prices, lower premiums, and lower metal sales.

Adjusted EBITDA in the first quarter of '24 was $123 million compared to $133 million a year ago. This performance was mainly driven by lower zinc prices and lower metal sales. Despite the still low zinc price scenario in the first quarter of this year compared to last quarter, adjusted EBITDA rose 17% due to strong production, lower costs, and lower mineral exploration and project evaluation expenses. Our Aripuanã project continues to make good progress and we expect to conclude the ramp-up process in mid-2024. Concerning mineral reserves, we had very positive outcomes, as evidenced by a 59% increase in mineral reserves at Cerro de Pasco, as highlighted in our recently released technical report summary. Overall mineral reserves for 2023 increased by 10% compared to 2022.

I encourage you to review both the technical report and our mineral reserves and mineral resources report, which were published at the end of March and are available on our Investor Relations website. I would like to emphasize that we recently announced the divestiture of our Morro Agudo mine, making another step in our capital allocation strategy. Our team has done incredible work providing full support to the employees who work at Morro Agudo for many years. We estimate that around 25% of our employees will be reallocated to other operations by the completion of the transaction. I want to reaffirm that we remain focused on completing the Aripuanã ramp-up by mid-2024. We observe improve in metal recoveries and concentrate quality in the first quarter of this year, maintaining our operational and cost optimization discipline to achieve positive cash flow generation throughout this year and advancing with a formal approval process for execution of the Cerro Pasco integration project.

Before we move to our next slide, I would like to share that we released our 2023 Sustainability Report on April 25th. This report highlights the collective efforts of our team in advancing our ESG initiatives meaningfully. Additionally, in April, we concluded important transactions in line with our liability management program. These transactions included extending our debt profile through the issuance of new debentures and bonds, making a significant milestone for Nexa. This strategy move allowed us to optimize our financial structure, diversify our funding sources, and enhance our liquidity position. Jose Carlos will provide more details on this topic in his presentation later on. Now moving to Slide 4. Regarding the operating performance of the mining segment, zinc production reached 87,000 tonnes in the first quarter of this year, up 17% year-over-year, mainly explained by an increase in treated ore volume and higher zinc average grades, particularly at the Cerro Pasco, Vazante and Aripuanã mines.

Compared to the fourth quarter of '23, zinc production was down 3%, explained by lower volumes from the Peruvian mines and Morro Agudo. Concerning cash costs in the first quarter of '24, it decreased to $0.27 per pound compared to the $0.43 per pound in the first quarter of '23, mainly explained by lower treatment charges and higher volumes. Compared to the fourth quarter of '23, mining cash costs decreased by $0.18 per pound, mainly explained by lower treatment charges and lower operating costs at the Cerro Lindo and the import miner mines. The cost per run-of-mine in the quarter was $45 per tonne, relatively flat of year-over-year and down 6% quarter-over-quarter, mainly explained by lower operating costs. Now moving to Slide 5. Regarding the operating performance of the smelting segment, metal sales totaled 139,000 tonnes in the first quarter, down 4% from the first quarter of '23 and 3% compared to the fourth quarter of last year, mainly impacted by lower production volumes and the typical seasonality of demand in the period.

Smelting cash cost in the first quarter of this year decreased to $0.98 per pound, 22% lower compared to the $1.25 per pound in the first quarter of 2023. This decrease was mainly explained by lower costs of raw materials attributed to lower zinc prices. Compared to the fourth quarter of last year, cash cost was down 3%. Our conversion cost was $0.30 per pound compared to $0.31 per pound in the first quarter of last year due to lower variable costs and lower energy costs. Compared to the fourth quarter of last year, conversion cost was 4% due to higher variable costs and lower smelting sales. Now moving to Slide 6 where we will talk about Aripuanã. In the first quarter, activities in Aripuanã have progressed as planned with our efforts concentrated on the replacement of some critical equipment and on improving the metallurgical process.

Those were important steps to keep improving plant stabilization and reliability. As a consequence, in the quarter, we saw significant advances in recoveries and concentrate quality. Although capacity utilization during the first quarter of 2024 was 57%, we saw an important increase in utilization in March and April with levels reaching more than 80% on certain days of both months and stabilizing at around 70% in the second week of April. In the following months, we expect this positive trend to continue. In the first quarter of this year, we saw an increase in copper, lead, and silver production compared to the previous quarter, while zinc was flat. Our current focus continues on plant stabilization and on adjusting some critical processes such as improving the performance of the tailings filtering circuit, which will allow us to further increase capacity utilization, paving the way for the completion of the ramp-up, which is expected by mid-2024.

Our exploration plan in Aripuanã in the first quarter also progressed as expected, and the results confirm the continuity of mineralization with high polymetallic contents, reaffirming that we have a robust mining asset with the potential to operate for many years. I would like to highlight the important results we obtained in the 2023 exploration campaign, which contributed to Nexa's overall 10% increase in mineral reserves. In the next two slides, we will see more details on the operational performance of Aripuanã in the quarter. Now moving to Slide 7. Starting with the plant downtime in the upper left side, we noted a decrease of 14% quarter-over-quarter, indicating an improvement in the stabilization of the plant. Average capacity utilization averaged 57% in the quarter, but increased to 70% during April.

In the lower left side, we can see the progress of the zinc recovery, which reached 73% in March versus 66% in December. Copper and lead recoveries also improved significantly in March, indicating a strong positive trend. Now moving to Slide 8. On Slide 8, compared to the fourth quarter of 2023, zinc production was relatively flat. Copper production increased by 9% while lead and silver production increased by 14% and 11% respectively. These improvements indicate that we are moving in the right direction to complete the ramp-up in mid-2024. Now moving to Slide 9. On this slide, I would like to highlight that we continue progressing with our exploration program. We have reached important results with an overall 10% increase in our mineral reserves in 2023 net of depletion.

This was mainly driven by the infill and brownfield positive results from drilling activities in Aripuanã and the inclusion of the Atacocha mineral reserves, driven by the positive results from the Cerro Pasco Integration Project. The 2023 results reinforce Nexa's successful track record in not only replenishing, but also increasing our mineral reserves and mineral resources base as well as showing the potential of our assets. Now I will turn over the call to Jose Carlos del Valle, our CFO, who will present our financial results. Jose, please go ahead.

Jose Carlos del Valle: Thank you, Ignacio. Good morning to everyone. I will continue on Slide 10. As you can see, beginning with a chart on your upper left, total consolidated net revenue for the first quarter decreased by 13% year-over-year, mainly due to lower zinc prices, lower net premiums, and lower smelting sales volumes, which were partially offset by higher mining sales volumes. Compared to the fourth quarter of 2023, net revenues decreased by 8%, also as a result of lower smelting sales volumes and lower zinc prices. In terms of profitability, consolidated adjusted EBITDA in the first quarter of 2024 was $123 million compared to $133 million a year ago. This lower performance was mainly explained by a 22% reduction in zinc prices year-over-year and lower smelter sales volumes.

Compared to the fourth quarter of 2023, despite lower zinc price levels, adjusted EBITDA increased by 17%, primarily due to lower costs and lower mineral exploration and project evaluation expenses. Finally, it is worth noting that our consolidated adjusted EBITDA margin increased to 21%, 1 basis point and 3 basis points higher compared to the first quarter of 2023 and to the fourth quarter of 2023 respectively. Now let's move to the next Slide 11. On the top left of the slide, we can see that in the first quarter of 2024, we invested $74 million in CapEx, nearly all of which went to sustaining activities, including mining development and tailing storage facilities. In line with this, our 2024 CapEx guidance for the year remains unchanged at $311 million.

With respect to mineral exploration and project evaluation, we invested a total of $12 million, of which $9 million were related to mineral exploration and mine development to support our exploration activities. However, we expect our investments in these areas to accelerate in the upcoming quarters and therefore we are maintaining unchanged our 2024 guidance for exploration and project evaluation at $72 million. Now let's move on to the next slide in which I will discuss our cash flow. Starting from the $123 million of adjusted EBITDA net of non-operational items, we paid $46 million related to interest and taxes and spent $75 million in total CapEx in our operations. Additionally, loans and investments had a positive net impact of $24 million, mainly due to a new $30 million short-term facility that became effective in March.

We then had a negative impact of $3 million due to the effects of foreign exchange on our cash and cash equivalents, driven by the depreciation of the Brazilian real against the U.S. dollars during the period. Finally, we saw a negative effect of $125 million related to working capital, which is the typical cycle observed in the first quarter of each year and in line with our established payment terms and annual tax obligations in the jurisdictions where we operate. As in 2023, we expect this negative working capital effect to be reversed throughout the year. Combining all these effects, our free cash flow in the first quarter of 2024 was negative in $144 million. Now moving to Slide 13. In this slide, you can see that our liquidity remains healthy and we continue to present a sound balance sheet with an extended debt maturity profile.

At the end of the first quarter of 2024, our available liquidity totaled approximately $644 million, including our undrawn sustainability-linked revolving credit facility of $320 million. Furthermore, in March, we successfully renegotiated and extended by five years one of our remaining export credit notes totaling $90 million, which was previously set to mature in October 2024. Regarding our overall profile, in the first quarter of 2024, average debt maturity was 3.7 years and carried an average cost of 6.1%. It is important to mention that as of March 31st, our total cash position is sufficient to cover the payment of all obligations maturing in the next three years. In terms of our leverage ratio measured by the net debt to adjusted EBITDA ratio, it increased from 3.2 to 3.7 times quarter-over-quarter.

This expected increase is primarily due to the previously explained temporary decrease of $144 million in our cash balance quarter-over-quarter and to the lower adjusted EBITDA registered in the last 12 months, driven by the prevailing trend of lower zinc prices in the period. As previously disclosed and in line with our proactive approach to liability management, in April, Nexa successfully extended its debt profile from 3.7 years to around seven years through the execution of a new bond issuance and tender offers for existing bonds. This strategy also included the issuance of a new $130 million six-year ESG-linked debentures in the Brazilian market. In relation to the bonds transactions, the new $600 million 10-year bond carries a 6.75% coupon and allowed us to repurchase around $485 million and $100 million of the existing notes due in 2027 and 2028 respectively.

These transactions marked a significant milestone for the company, as Ignacio mentioned at the beginning of his presentation. These strategic initiatives allowed us to optimize our financial structure, diversify our funding sources, and enhance our liquidity position. It is important to understand that the extension of our debt profile is part of an ongoing optimization effort and is a reflection of our commitment to prudent financial management and of our confidence in the long term prospects of our business. In this line of thinking, we are always evaluating cost-efficient options to continue to maintain a maturity profile that is in line with the long life of our assets. Moving now to Slide 14. Regarding market fundamentals, it is worth noting that in the first quarter of 2024, LME zinc prices averaged $2,450 per tonne, down by 22% from the first quarter of 2023.

This decrease primarily stems from the conditions present at the beginning of 2024, reflecting lower demand prospects in China and uncertainties regarding the U.S. economy, especially in relation to inflation. Compared to the fourth quarter of 2023, LME zinc prices were down 2%, mainly explained by the Chinese New Year holiday and also lower demand due to seasonality during the first quarter of 2024. LME copper prices averaged $8,438 per tonne in the first quarter of 2024, down by 5% from the first quarter of 2023 and up 3% from the fourth quarter of 2023, also presenting high sensitivity to the Chinese economy throughout the first quarter. Looking ahead, zinc prices are expected to be positively supported by the macroeconomic stimulus in China and by the current tight zinc concentrate market that has driven benchmarks theses to levels that are 40% lower than what they were in 2023.

In the mid to long term, the fundamental outlook for both zinc and copper prices remains positive. Additionally, investments in construction, infrastructure and in the automotive sector will continue to have a positive impact on demand expectations for base metals. Now I will hand over the presentation back to Ignacio for his final remarks.

Ignacio Rosado: Thank you, Jose Carlos. As I mentioned earlier, we expect to conclude the ramp-up at Aripuanã by mid-2024 as we continue gradually reducing plant downtime while increasing capacity utilization and improving recoveries of all the metals. Our Cerro Pasco Integration Project is progressing as expected towards the approval process. Our exploration results provide significant indications not only of the potential to further extend the life of our corner mines, but also of our consistent track record of replenishing reserves. We are focused on our ESG strategy, which prioritizes safe performance across our operations, higher environmental standards, and the development of our communities within a framework of ethics, transparency, and responsibility.

We already took an important step in strengthening our balance sheet with the execution of the liability management transactions at the beginning of this year, which, combined with a disciplined capital allocation and positive cash flow generation, will allow Nexa to start deleveraging and improve its financial position. That concludes our remarks. Thank you for your support and confidence. Operator, we are ready to open the floor for questions.

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