👀 Ones to watch: Undervalued stocks to buy before they report Q3 earningsSee Undervalued Stocks

Earnings call: Nexa Resources faces headwinds but maintains steady course

Published 2024/05/03, 23:12
© Reuters.
NEXA
-

Nexa Resources (NEXA) has disclosed its first quarter 2024 earnings, revealing a mixed financial performance amid industry challenges such as weak macroeconomic conditions and commodity price volatility. The company reported consolidated net revenues of $580 million, a decline of 13% year-over-year (YoY), largely attributed to lower zinc prices, reduced premiums, and decreased metal sales.

Adjusted EBITDA also fell to $123 million from $133 million in the previous year, impacted by similar factors. Despite these headwinds, Nexa has maintained a healthy liquidity position, with available funds totaling approximately $644 million.

Key Takeaways

  • Nexa Resources reported a 13% decline in net revenues YoY, with consolidated net revenues at $580 million.
  • Adjusted EBITDA decreased to $123 million, primarily due to lower zinc prices and metal sales.
  • The Aripuanã project is on track, with completion expected by mid-2024.
  • The company sold its Morro Agudo mine and published the 2023 Sustainability Report.
  • Nexa maintains a strong liquidity position, with $644 million in available funds.

Company Outlook

  • Nexa aims to support zinc prices through macroeconomic stimulus in China and a tight zinc concentrate market.
  • The Aripuanã ramp-up is projected to conclude by mid-2024, aligning with the company's focus on ESG strategy and financial discipline.
  • Nexa plans to maintain its CapEx guidance for the year at $311 million, with investments primarily in mining development and tailing storage facilities.
  • The company is addressing potential changes in tax legislation in Peru and Brazil without anticipating material impacts on operations.

Bearish Highlights

  • Lower zinc and copper prices contributed to the decrease in revenues and adjusted EBITDA.
  • The Magistral Environmental Impact Study is under scrutiny by the National Water Authority, and approval from SENACE is pending.

Bullish Highlights

  • Despite the YoY decline, adjusted EBITDA increased compared to Q4 2023 due to lower operational costs.
  • Nexa is exploring M&A opportunities, focusing on brownfield projects nearing production, with potential investments between $600 million to $800 million.

Misses

  • The company experienced a negative working capital effect in Q1, although it is expected to reverse later in the year.
  • Valuations in the copper market are high, which may affect Nexa's acquisition strategy.

Q&A Highlights

  • Nexa is in ongoing disputes with the Peruvian government over stability agreements, which could impact operations.
  • The company is awaiting the approval of the Magistral project, with investment plans extending until 2028.
  • Nexa emphasizes the completion of current projects like Aripuanã and Cerro Pasco before pursuing new M&A opportunities.
  • Recent safety incidents have led to a reinforced safety system within the company.

Nexa Resources has navigated through a challenging quarter with a strategic approach, focusing on project completions and prudent financial management. The company's commitment to safety, environmental sustainability, and disciplined capital allocation positions it to manage industry volatility and pursue growth opportunities in the near future.

InvestingPro Insights

Nexa Resources (NEXA) has shown resilience in a tumultuous market, but several factors highlighted by InvestingPro could influence the company's future performance. According to InvestingPro Tips, Nexa operates with a significant debt burden, which could impact its ability to navigate economic downturns. On the positive side, analysts have revised their earnings upwards for the upcoming period, indicating potential for financial recovery. Additionally, while the company has not been profitable over the last twelve months, analysts predict Nexa will turn a profit this year.

Looking at the InvestingPro Data, Nexa's market capitalization stands at $965.48 million, with a negative P/E ratio reflecting its past unprofitability. The company's revenue has declined by 16.56% over the last twelve months as of Q1 2024, which aligns with the reported 13% decline in net revenues YoY in the article. Despite this, Nexa maintains a notable dividend yield of 7.13%, evidencing its commitment to returning value to shareholders.

For readers interested in a deeper dive into Nexa's financial health and future prospects, InvestingPro offers additional insights. There are 6 more InvestingPro Tips available, which could be particularly useful for investors contemplating this stock. To access these tips, visit https://www.investing.com/pro/NEXA and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Full transcript - Nexa Resources (NEXA) Q1 2024:

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.

Operator: [Operator Instructions] And our first question comes from Camilla Border from Bradesco BBI. Camilla, please go ahead.

Camilla Barder: So good morning. Two questions on my side. The first one, you commented yesterday on the release about a potential impact -- legal impact in legislation in Brazil and Peru in results and in cash flow. Could you please give more details in terms of magnitude and timing for those impacts? And for Brazil, what would be the exact impact? Is it any cash outflows expected for that? And the second question is about the guidance. You kept production guidance despite the disinvestment in Morro Agudo, right? So could you please share a little bit about the rationale for this maintenance of the guidance? Do you expect better production in other mines to offset the divestment or we could potentially expect production more towards the end of the guidance, the low end of the guidance? Thank you.

Jose Carlos del Valle: No, go ahead, Ignacio.

Ignacio Rosado: No, no. I wanted to clarify. Thanks, Camilla, for the question. You were talking about a -- to make sure that I answer the question correctly, you're referring to some legal -- something in Brazil. I didn't quite get the question. Could you please clarify?

Camilla Barder: Yes. In Brazil, there was a law about that you have to submit impacts for mine until June, but I was not quite sure if there is any outflow related to that or it's just something legal.

Ignacio Rosado: I'm honestly not sure exactly which legislation you're referring to on that one and you mentioned that there was another one on Peru as well. You asked about something in Peru, maybe it's the communication that it wasn't so clear. Sorry.

Camilla Barder: In Peru, you mentioned about a discussion regarding tax that could impact results along 2024.

Ignacio Rosado: You're probably referring to some of the tax contingencies that we have, or you're talking about tax reform, because these are, I mean, these are plain standard wording that we include because there are always discussions about potential changes in the tax regimes, both in Peru and in Brazil. So, I want to know if you're talking about something specific related to a particular operation or you're asking in general about the two countries.

Camilla Barder: Yes, in general.

Ignacio Rosado: Yes, as far as I know, there's -- sorry, you want to say something else?

Camilla Barder: No, go ahead, please.

Ignacio Rosado: No, I can comment in general, and I'm happy to get in touch after the call if you have a specific question that we can help you with. But in general terms, I think there are always discussions both in Peru and in Brazil about potential changes in the tax legislation. And this is something that happens in other countries as well, related to the desire of the government to increase their income. But there is not material that we have flagged as of now, either in Peru or in Brazil, even though there have been discussions, but we have not flagged anything that is material that may affect significantly our operations in either of the countries. But happy to get in touch after the call if you have something specific in mind, maybe that you have read somewhere else or you need further detail, we can help you with that.

Camilla Barder: Okay, thank you. There is also only stability of Cerro Lido that you mentioned.

Ignacio Rosado: Okay, sure. Okay. Yes. This is -- as you may know, this is a matter that has been ongoing for a number of years in Peru and is affecting all the mining companies that have stability agreements, tax stability agreements with the Peruvian government, you may know that I come from Antamina, and in Antamina we had exactly the same program -- the same problem, there is actually an international arbitration that is going on right now between Cerro Verde and the Peruvian government. So these are ongoing disputes and we always, in our mindset of transparency, we always -- we view that these are things that at some point may affect us. But our view is that we have very strong case, but we still have to make that disclosure. So, there's nothing new here. It's just that we're making sure that we are disclosing that we have this contingency just like all the other mining companies that have these stability agreements with the Peruvian government.

Camilla Barder: Okay, clear. Thank you and about the…

Jose Carlos del Valle: Only one comment on this -- no, go ahead. Go ahead, please.

Camilla Barder: The second one about the guidance. But can -- if you want to write something about the guidance, I was asking about.

Jose Carlos del Valle: Yes, so Morro Agudo. Just to start Morro Agudo it was a very small operation for us. It was a marginal operation and we decided to sell because of that. Having said that, Morro Agudo was in our guidance, but still we are maintaining our guidance on production and on costs. So, we don't believe that selling Morro Agudo is stopping a production -- reporting production of Morro Agudo is going to affect our guide for the end of the year.

Camilla Barder: Okay, because it's the marginal investment. What do you expect?

Jose Carlos del Valle: Yes.

Camilla Barder: Okay.

Jose Carlos del Valle: Yes. Yes.

Operator: And our next question comes from Carlos de Alba from Morgan Stanley. Carlos, please go ahead.

Carlos de Alba: Yes. Good morning, everyone. Thank you very much. Two questions. The first one is if you can provide a little bit more comment on the Magistral Environmental Impact Study and the issue there that apparently it might be rejected by the authorities. I wanted to understand what is behind this and what could be the repercussions. And then the second question, maybe on the working capital, typically, yes, there is a seasonality on working capital in Q1, but this time, relative to the last several years, the consumption of cash flows for working capital was much bigger. So I wanted to understand how much of that you expect to be reversed in the second quarter or throughout the year. Thank you.

Ignacio Rosado: Yes. So, thank you, Carlos. So regarding Magistral, what happens is that, the ANA, which is the National water Authority has issued a report where they stated that some of the -- they have still some observations regarding the project's impact on the water deposits that are near our project. This means that this report goes to SENACE, which is the main authority that is going to issue a report of approval or disapproval, and this is now in the hands of the SENACE. So we expect that they will come back to us with an answer in the next one or two months, okay. So in the context of that, I would like to say that, and we said this many times, Carlos, that Magistral is a good project for us and still is an investment of $1 billion. And we always want to compare this investment of $1 billion with other investments that we might be able to do not only in Peru, but also in other countries. So, the contract that we have signed with the government means that we can invest in Magistral until 2028 to start investing in Magistral. In the case that the project is disapproved, we will need to start again all this process that's going to take us at least four years. But then in that case, we will have to assess if that's the priority, or we just let Magistral go for the moment, put it on hold, and try to look for other options in our pipe. So, that's mainly what is happening in Magistral. I guess for the next call in July, we will have more information and we can answer that in a more specific way. And regarding working capital, Jose Carlos, please.

Jose Carlos del Valle: Yes. Good morning, Carlos. As we have seen in prior years, and actually in discussions that we've had with different funds and analysts, there is a lot of seasonality in our working capital, particularly in the first quarter of the year. This is very typical, and it's actually not too different from what we saw last year, and it has to do with increased receivables and much lower payables because there is a trend of increased spending towards the end of the prior year, particularly in CapEx that are large numbers. So you have to pay all of that in the first quarter of the following year. You have to rebuild the inventories because typically you sell everything that you have at the end of the prior year as well. And in addition to that, in the first quarter, we pay a significant amount of taxes and employee bonuses, et cetera. So, for those reasons mainly the first quarter is always negative in working capital and therefore negative in terms of cash flow. Just as last year, we expect this to start reversing throughout the year. Obviously, prices will have an important impact on how quickly this happens, but we will see the reversing trend starting in the second quarter.

Carlos de Alba: Thank you.

Operator: And our next question is going to come from Lawson Winder of Bank of America (NYSE:BAC). [Operator Instructions] Lawson Winder, please go ahead.

Lawson Winder: Thank you operator and hello, good morning Ignacio and team. Thank you for the update. I have a few questions if you don't mind. First, on the balance sheet and the debt, what is your target net debt to EBITDA ratio, and when do you expect to reach that? And then when you think about capital allocation, at what point might more attention be given to an update to the dividend?

Jose Carlos del Valle: Yes, I can comment on that. Good morning, Lawson. I can comment about leverage in general terms obviously in the first quarter, as expected, we had a higher net leverage ratio. This is something that will change throughout the year, quarter after quarter, not only as we accumulate cash, even more so with these prices, but as our adjusted EBITDA improves. As Ignacio mentioned, our Aripuanã project is performing well. We are in the process of achieving the completion of the wrap-up, as we've been commenting in previous calls. So, our EBITDA will improve over time and we expect that leverage will -- net leverage will reduce significantly throughout this year, below -- much lower than the levels that we have seen in the first quarter. Having said that, we continue to say that reducing our debt, not just the leverage, is our top priority. So, the idea is that gradually, over the next few years, as we start generating cash with Aripuanã, and generating more cash flow as a company as a whole, we will start looking to reducing our debt. We have said a number of times that we feel more comfortable with net leverage ratios in the neighborhood of 1.5 times, because that's what gives you the buffer to be able to go through the low price cycles, as we have had in the last few quarters. So we need to -- it is a priority to go back down to those levels and to, in parallel, reduce our debt to get to those levels. So, we will see significant improvement during the year. But it will probably take some more quarters to reduce that to levels that will allow us to have a leverage of about 1.5 times. In relation to dividends, we stated that we will take a look at market conditions and company performance in the second half of the year to make a decision on dividends. That continues to be the case. You know, things are looking good in terms of Aripuanã performance, as I mentioned, prices have improved, but we don't know how long these higher levels will be in place. But definitely will be considerations that we will evaluate once we make a decision, as we anticipated, for the second half of this year.

Lawson Winder: Okay, thank you. That's very helpful. And then just kind of sticking with this theme of capital allocation. So Aripuanã is ramping up, there's still quite a bit of CapEx left to go, next project is Cerro Pasco. When you look beyond Cerro Pasco, what is kind of the thinking around the next likely project that Nexa might be tackling?

Ignacio Rosado: Yes, so it's a very good question. Aripuanã as Jose Carlos is saying, and we have been talking about that a lot so, Aripuanã is -- the ramp up is finishing in the coming months. So, most of the CapEx of Aripuanã is going to be sustaining CapEx. And I would say that Aripuanã wants -- needs more only sustaining CapEx and not growth CapEx, okay. The next one is Cerro Pasco. We hope we approve it in the second half of this year. We are ready to approve Pasco, but we want to make sure, as a company, and this is part of the Board, the conversation that we have with the Board, we are trying to make sure that we finish first the ramp-up of Aripuanã, and then we can announce the approval of Cerro Pasco. We are ready to approve Cerro Pasco, but it's a timing of finishing Aripuanã before. Cerro Pasco is a project that is going to cost us between $140 million and $160 million. And it's going to be -- the investment is going to be in the next three years. This year in Cerro Pasco, we are investing in oil permits, which is the main bottleneck, and in finishing the engineering of the pumping system. So besides that, as Jose Carlos mentioned in terms of capital allocation, with the cash generation that we will have, we want to make sure that one of the priorities on our capital allocation study is to reduce the debt, okay. Having said that, we -- in terms of capital allocation, we also work in our pipeline of projects. Specifically, we have, for example, Tinka Resources that has now issued a new technical report, and we have to make a decision if we advance on that. And we have other projects in our pipeline that we can advance. But in any case, those are five to eight years to become mines, if they might become. So, I would say that the next project that we will bring is a project that will be from our M&A strategy. We are assessing a lot of projects our size, similar to the mines that we have, investments are around $600 million to $800 million. And that's why we need the leverage of 1.5 that Jose Carlos has mentioned, because that will allow us to invest with our cash flow and with some debt to bring the oil project. This is more or less where we are today and we are active on M&A. We are very committed to visit some projects that have more cover, as we said before. And I would say that, that's mainly our capital allocation strategy going forward.

Lawson Winder: Okay, fantastic. And since you touched on M&A, I might follow up and just ask for a little bit more clarification on your latest thinking. I mean, it sounds like it's largely in line to what you said before, but in terms of timeline, what does it look like for you at this point? At what time you might be able to transact on a copper acquisition? And then maybe on some of the details, just update us on your thinking in terms of, are you looking at corporate versus assets M&A producing versus development? And there's been a lot of interesting copper M&A in the past year, both at the asset and in corporate level, I mean, with your work, what are you seeing in terms of valuation? Are you seeing valuations that make sense?

Ignacio Rosado: Yes, -- I mean, valuation -- I mean, products are always expensive in good times and in bad times, they are always expensive. I guess we are in a niche and I guess the project that we look for are in terms of copper, the size of 50,000 tons. It might have some only metallic zinc and lead as well. And that put us on the radar of $600 million to $800 million. This is below the radar of most big mining companies that we understand that. And I would say that the opportunities that we are looking for -- we are flexible on corporate or at an asset level, we are flexible on that. I would say that we are more focused on understanding the potential assets that we will acquire and we are trying to bring -- or the priorities around brownfield projects close to production, all projects that are starting production. And they need some experience to unlock more value for them. There are -- there are not that many projects of that, but they are. And I would say that given that this expertise that we have, these are the ones that we are looking for. Having said that, because of this investment and because of our leverage, our shareholders are conservative, our Board is conservative. So, I would say we have to finish first Aripuanã. We have to approve Cerro Pasco that is coming this year. We have to execute Cerro Pasco and in parallel, while bringing the cash flow, will hopefully assess or bring some of these opportunities that we are assessing and announce an acquisition of some copper, zinc advanced projects, that's more in where we are.

Lawson Winder: Okay, fantastic. Thank you so much.

Operator: Thank you. At this time to handle questions brought up through the webcast, I will turn the conference over to Rodrigo Cammarosano, Nexa's Head of IR. Rodrigo, please go ahead.

Rodrigo Cammarosano: Thank you. Operator. We have two questions from the webcast. The first one is from Hernan Kisluk from MetLife (NYSE:MET). And we also have another question from Alina Seppä from Evli Fund Management Company. So those questions are pretty much the same, and those have been already answered by Jose Carlos. They are related to the leverage and the dividend payment. So I believe that those questions have also already been addressed. And we don't have any other questions. So I will turn the call over to Ignacio for his final remarks.

Ignacio Rosado: Okay, thank you very much, Rodrigo. Thank you very much for everyone for attending the call. We expect to -- we look forward to speak to you in the next quarter. Just wanted to say that we are very committed on our safety program. This is difficult times for us because we had two fatalities in two months and this never happened to us. So, we are very focused on making sure that the system that we have that is a good system has to be reinforced. And we have to make sure that all of our people understand that safety is our main value. And we will dedicate a lot of time on that. We are also working very hard on making sure that Aripuanã finally is at the end of the ramp-up. Cerro Pasco is clear for us. We can approve it today, but we want to make sure that we first start finish Aripuanã, and then we are working always on achieving guidance on costs, on optimization, on CapEx, and on production to have a stable product. It's a simple strategy, but it's a day-to-day strategy that we have to build. So we hopefully can show you that during the second quarter at the end of the second quarter. Thank you very much for attending and have a good day.

Operator: And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect and have a great day.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.