Nexa Resources Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 22, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Nexa Resources 4th Quarter and Full Year 2023 Conference Call. All participants will be in listen only mode. This event is being recorded and is also being broadcast via webcast and may be accessed through Nunex's Investor Relations website where the presentation is also available. After today's presentation, there will be an opportunity to ask questions. Simply type your question in the box and click send, and that will be answered soon.

Operator

I would now like to turn the conference over to Mr. Rodrigo Camarosano, Head of Investor Relations, for opening remarks. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Nexa Resources' 4th quarter and full year 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 on spring presentation through the webcast. Before we begin, I would like to draw your attention to Slide number 2, as we will be making forward looking statements about our business and we just ask that you will refer to the disclaimer and the conditions surrounding those statements.

Speaker 1

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.

Speaker 2

Thank you, Rodrigo, and good morning to everyone. Please, let's move now to Slide number 3, where we will begin our presentation. We appreciate you joining us today to discuss our Q4 and full year 2023 results along with insights into our outlook for 2024. I am pleased to report that we achieved our guidance for the year with metal production at the high end of guidance and total smelting sales at the mid range, while mining and smelting costs were in line with guidance. As many of you are aware, 2023 post persistent challenges to our business, particularly due to zinc prices and the delay in the ramp up of Aripuana.

Speaker 2

Nonetheless, I would like to highlight the dedication and professionalism of our team, which supported us in improving efficiency across our organization, which enable us to deliver solid operational results and also to mitigate in part the negative impacts of lower zinc prices in our 2023 cash flow. For the full year, total consolidated net revenues amounted to £2.573 billion down by 15% year over year, mainly due to lower zinc prices and lower metal sales. Adjusted EBITDA in the Q4 of 'twenty three was $105,000,000 compared to $120,000,000 a year ago. This performance was mainly driven by lower smelting sales volumes and zinc prices. Zinc was down 17% year over year.

Speaker 2

Compared to last quarter, adjusted EBITDA rose 28% due to higher zinc prices, which were partially offset by lower smelting sales volume. For the full year, adjusted EBITDA amounted to €391,000,000 down 49% year over year, primarily driven by lower LME metal prices in addition to lower smelting sales volume. I want to reaffirm that we remain focused on completing the Aripuana ramp up and consequently reaching the nameplate capacity in the Q2 of this year, maintaining our operational and cost optimization discipline aiming to generate positive cash flow throughout this year and advancing with a formal approval process for the Cerro Epasco integration project. Now, I would like to go over the progress of our ESG initiatives. 2023 accurately portrays our efforts to strengthen our sustainable business model.

Speaker 2

Nexa registered its carbon emissions on the LME passport, the London Metal Exchange Platform, which promotes sustainability and transparency across the base metal sector. Nexa Sim production has one of the lowest carbon footprints recorded in the sector with an emission intensity of 0.36 tonnes of CO2 equivalent considered 1 and 2. This achievement positions Nexa as one of the global leaders in carbon reduction within the zinc industry. Moreover, CDP Carbon Disclosure Project recently concluded its evaluation cycle for the year 2023 and announced that Nexa's rating in the climate change questionnaire was upgraded changing from C to B. This recognition is the result of our efforts, disclosure and transparency related to governance, strategy, risk management, metrics and targets.

Speaker 2

Now moving to Slide 4. Regarding the operating performance of the Mining segment, you can see that zinc production increased to 90,000 tonnes in the Q4 of 2023, up 21% year over year, mainly explained by higher production at the Aripuana mine combined with higher production from the Cerro Lindo mine. Compared to the Q3 of 2023, zinc production was up 3%, explained by higher volumes from the Cerro Lindo, Atacocha and Moragudo mines in addition to additional production from the Aripona ramp up. It is important to highlight that in 2023, production was up 12% compared to 2022. In relation to cash costs, in the Q4 of 'twenty three, it increased to $0.45 per pound compared to the $0.20 per pound in the Q4 of 2022, mainly explained by lower byproduct rates from our Peruvian mines, higher operational costs in El Porvenir and higher treatment charges.

Speaker 2

Compared to the Q3 of 'twenty three, mining cash cost increased by $0.10 per pound, mainly affected by lower by product rates from Cerro Lindo and higher operational costs in El Porvenir due to the increase in mine development. The cost per run of mine in the quarter was $48 per tonne, up 3% year over year, explained by higher variable costs and up 10% quarter over quarter also affected by high variable costs. Now moving to Slide number 5. Regarding the operating performance of the smelting segment, metal sales totaled 143,000 tonnes in the quarter of last year, down 14% from the Q4 of 2022 and 7% compared to the Q3 of 2023, mainly impacted by lower volumes in Cajamarquilla and Tres Marias. In 2023, total sales were down 4% compared to 2022.

Speaker 2

The smelting cash cost in the Q4 of 'twenty three decreased to $1 per pound compared to the $1.20 in the Q4 of 'twenty two. This decrease was mainly explained by lower zinc prices, reducing the cost of raw materials purchased, which was partially offset by lower by products contribution. Compared to the Q3 of 'twenty three, cash cost was down $0.01 per pound. Our conversion cost was $0.29 per pound compared to the $0.25 per pound in the Q4 of due to higher maintenance and energy costs. Compared to the Q3 of 2023, conversion cost was relatively flat.

Speaker 2

Now moving to Slide number 6, where we will talk about Aripuana. In the Q4, activities in Aripuana have progressed as planned with our efforts concentrated on further improving plant stabilization and reliability as well as increasing metallurgical performance. In December, we had 5 days of downtime in the plant to address the replacement of equipment together with the execution of important debottlenecking task force activities. Considering this downtime, the average plant capacity utilization in the quarter was 61%, 5% higher compared to the previous quarter. In the last quarter, we also saw improvements in zinc recovery, while concentrate rates and quality were stable.

Speaker 2

As a result, there was an increase in production compared to the previous quarter. Our exploration plan in Aripuana in the Q4 also progressed as expected, and the results confirm the continuity of mineralization with high polymetallic contents, showing that we have a robust mining asset with a potential to operate for many years. We started 2024 with positive progress that keep us confident in estimating the completion of the ramp up in the Q2 of this year. In the next two slides, we will see more details on the operational performance of Aripuana. Now moving to Slide 7.

Speaker 2

Starting with the plant downtime in the upper left side, we noted a decrease of 6% quarter over quarter considering the 5 days planned downtime, which shows improvements in the stabilization of the plant. Average plant capacity utilization increased to 61% versus 56% in the 3rd quarter. In the lower left side, we can see the progress of the zinc recovery, which reached 66% in December versus 59% in September. When compared looking at the January 2024 number, we see that the recovery ratio improved even further, reaching 73%. Copper and lead recoveries also improved significantly in January, showing a strong positive trend.

Speaker 2

Now moving to Slide number 8. On the Slide number 8, you can see that due to all the improvements mentioned above compared to the Q3 of 2023, zinc production was 27% higher reaching 7,400 tons in the 4th quarter. Copper production increased 31%, while lead and silver production grew up 49% 42% respectively. These improvements show that we are in the right direction to achieve nameplate capacity in the Q2 of this year. Now moving to Slide 9.

Speaker 2

On this slide, I would like to highlight that we continue progressing with our exploration program. The 2023 plan shows indications of positive results for both brownfield and greenfield OV8 and OV9 minuteeralized bodies, as well as identifying new mineralized zones at the Pukasaya target and its extensions. For Basante, the focus was on expanding existing mineralized zones in the northern and southern parts of the mine. In Aripona, the program was directed at increasing mineral resources at the Babasu mineralized body and started drilling at the Masaranduba target. Both targets have solid indications of potential resource addition with attractive content.

Speaker 2

Finally, at the Cerro Pascua complex, the exploration program also showed relevant results. The program focused mainly on the integration target, which I will describe in detail in the next slide. In Slide number 10, you can see some of the exploration program results in the Pasco complex, especially in the target integration that keep suggesting potential resource extensions. The target integration is an exploration area located between the El Porvenir and Atacocha underground mines. The results of this exploration confirm the continuity of mineralization at deeper levels with high metal content.

Speaker 2

We will continue to explore this area with the aim of not only increasing the mineral inventory, but also increasing the geological potential. Now I will turn over the call to Jose Carlos Del Valle, our CFO, who will present our financial results. Jose, please go ahead.

Speaker 3

Thank you, Ignacio. Good morning to everyone. I will continue on Slide 11. As you can see, beginning with the chart on your upper left, total consolidated net revenues for the 4th quarter decreased by 19% year over year, mainly due to lower zinc LME prices and lower smelting sales volumes. Compared to the Q3 of 2023, net revenues decreased by 3% also as a result of lower smelter sales volumes, but partially offset by higher zinc prices and higher production in the mining segment.

Speaker 3

In 2023, consolidated net revenues reached $2,600,000,000 down by 15% compared to 2022. In terms of profitability, consolidated adjusted EBITDA in the Q4 of 2023 was $105,000,000 compared to $120,000,000 in the Q4 of 2022. This lower performance was mainly explained by lower smelter sales volumes and lower zinc prices. Compared to the Q3 of 2023, adjusted EBITDA increased by 28%, mainly due to higher zinc prices and higher mining production, which was partially offset by lower smelter sales volumes. In 2023, consolidated adjusted EBITDA reached $391,000,000 down 49% from 2022.

Speaker 3

This is also explained by the reasons I mentioned a moment ago. Now let's move to the next slide, number 12. On the top left of the slide, we can see that in 2023, we invested $309,000,000 in CapEx of which sustaining investments including mine development, totaled $293,000,000 The total investment in the 4th quarter was 111,000,000 dollars leaving us within our guidance for the full year. With respect to mineral exploration and project evaluation, we invested a total of $92,000,000 of which $52,000,000 were related to mineral exploration and mine development to support the exploration activities that Ignacio presented just a moment ago. The total invested in the 4th quarter was $24,000,000 This was $8,000,000 below our guidance as we de prioritize some activities as a result of the cash optimization program that we developed throughout the year.

Speaker 3

Now let's move on to the next slide in which I will discuss our cash flow. For 2023, starting from the $391,000,000 of adjusted EBITDA, net of non operational items, we paid 100 and $70,000,000 related to interest and taxes and spent $309,000,000 in total CapEx in our operations, including Aripuana. Additionally, loans and investments and dividends received had a positive net impact of $66,000,000 mainly due to a new $50,000,000 including the payment of share premium to Nexa shareholders and the contractual dividends paid to non controlling interests. We then had a positive impact of $8,000,000 due to the effects of foreign exchange in our cash and cash equivalents, driven by the appreciation of Brazilian real against the U. S.

Speaker 3

Dollar during the period. Additionally, we had a positive contribution of $101,000,000 in working capital as a result of the efforts deployed throughout 2023, which focus on shortening our working capital cycle. Combining all these effects, our free cash flow in 2023 was negative $41,000,000 Finally, on the top right of the slide, we can see the evolution of our free cash flow generation quarter over quarter. Our operational and cost discipline together with the improvements in working capital throughout the year enabled us to generate positive cash flow in the last three quarters of 2023, despite the external and internal challenges we faced. Now moving to Slide 14.

Speaker 3

On this slide, you can see that our liquidity remains healthy and that we continue to present a sound balance sheet with an extended debt maturity profile. By the end of 2023, our available liquidity was approximately 788,000,000 dollars including our undrawn sustainability linked revolving credit facility of 320,000,000 Regarding our debt, it currently has an average maturity of 3.8 years and a 6.1% average cost. It is important to mention that as of December 31, our total cash is sufficient to cover the payment of all of our obligations maturing in the next 3 years. Nevertheless, we are always evaluating options to continue to keep a maturity profile that is in line with the long life of our mines and at that most competitive costs. Finally, despite the $43,000,000 increase in our cash balance quarter over quarter, leverage, which is measured by the net debt to adjusted EBITDA ratio, increased from 3.1 to 3.2 times in the last 90 days of 2020.

Speaker 3

This is mainly because of lower adjusted EBITDA in the last 12 months, driven by the prevailing trend of lower zinc prices year over year. Moving now to Slide 15. Regarding market fundamentals, it is worth noting that in the Q4 of 2023 LME zinc price averaged 2,498,000 per ton, down by 17% from the Q4 of 2022. The main reason for the decline was a combination of the bullish scenario in 2022, mainly driven by the Chinese post pandemic stimulus and the metal production cuts in Europe due to high energy prices and lower global demand in 2023. This driven by persistent high interest rates in key economies and lower than expected performance of key Chinese zinc consuming sectors like the property market.

Speaker 3

Compared to the Q3 of 2023, LME zinc prices were up 3%, mainly related to the expectation of the federal reserve rate cuts in 2024 and to stronger demand expected in China. LME copper price averaged $8,159 per ton in the Q4 of 2023, up by 2% from the Q4 of 2022 and down by 2% from the Q3 of 2023, also presenting high sensitivity to the Chinese economy throughout 2023. Looking ahead to 2024, metal prices are expected to be supported by easy monetary policy in the U. S. And macroeconomic stimulus in China.

Speaker 3

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. On the supply side for both copper and zinc, we anticipate that we will continue to see challenges to renew significant production online to fulfill expected demand. Now I will hand over the presentation back to Ignacio for his final remarks.

Speaker 2

Thank you, Jose Carlos. On our last slide, I would like to close this presentation by mentioning our priorities for 2024. As we look ahead to this year, we anticipate that volatility across commodities may persist for a while and continue to put pressure on our business. However, we will remain focused on our priorities, including the completion of the Aripuana and Seropasco integration project in addition to our commitment to always seek alternatives to optimize costs, CapEx and corporate expenses as well as strengthen our balance sheet. We will continue our journey as we foster the creation of shared value through operational excellence, environmental protection and the integral development of our communities within a framework of ethics, transparency and responsibility.

Speaker 2

In summary, although we expect 2024 to be a challenging year, we are confident that the growth of our business and the long term fundamentals of our industry will be key to sustain our position. That concludes our remarks. Thank you all for attending this presentation. Operator, we are ready to open the floor for questions. Please.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Camilo Barger from Bradesco. Please go ahead.

Speaker 4

Hi, good morning. Thanks for the presentation. Just a quick question on the cost side. If you could provide some how you're seeing costs evolving throughout the year for the semesters? And if you also could provide some comments on free cash flow expectations, it would be great.

Speaker 4

Thank you.

Speaker 5

So regarding cost, as you saw in the presentation, we were able to keep cost flat in our mines in Peru and in Brazil. And this was, I would say, a combination of higher throughput and measures around reducing fixed costs, incremental activity in 2023. We reduced about 500 people in only our operations. And regardless, let's say, inflation issues, especially in Brazil and some in Peru and regarding some FX impacts, especially in Brazil, we were able to keep costs flat. However, there were some costs that we couldn't control because we needed to develop some mines such as El Porvenir.

Speaker 5

We have been taking additional measures for 2024. So the idea is that we also keep our cost of road flat this year. We are very committed in making sure that all details at the mines and all these measures that we take are being follow-up very closely. So we are confident that we might also have this under control for 2024.

Speaker 4

Thank you. And can you comment on free cash flow expectations as well?

Speaker 5

Well, free cash flow expectations will depend on prices. I would say that this year compared to last year, last year, we needed we had 2 effects on cash flow. The first one was zinc prices, especially because zinc prices went down heavily over the second quarter. And the second one is that the ramp up of Aripuana was delayed and this cost us a lot of money. We're spending Aripuana around $200,000,000 last year.

Speaker 5

And if you see that, I mean, if you see that cash flow generation that we had in the 3rd last quarter that was positive, it was something that we feel proud of. In 2024, as we said, oil prices remain low, but that is in the right track to be on an increase capacity in the Q2. So the idea is that if prices go up a little bit, we expect that that is the case, we are in the bottom of the price cycle. We might generate some cash flow in 2024. Having said that, this cash flow for us is a priority because we have to start reducing our debt.

Speaker 5

Debt went up. We are aware of the leverage we have. And then that went up because of Alipona mainly. So now that Alipona has been completed and is going to start generating cash flow with a combination of cash flow of the other mines. We believe that with some help on prices, the company is really in a good position to generate cash.

Speaker 4

And just confirm, Aripuana breakeven is expected in the 1st semester or the second one?

Speaker 5

Yes. No, no. We to give you some numbers, we are now producing at a rate of 2 20 hours per ton a day an hour, sorry, an hour. And the impact capacity is 2 80. And we are very close on that.

Speaker 5

February and January have been good months. Recoveries are high in the 3 metals. Quality of concentrate is also stable and good. So second quarter, we see achieving net nameplate capacity. We are very close on that.

Speaker 5

So we are confident that in the second quarter, we will be able to achieve that time.

Speaker 4

I mean breakeven?

Speaker 5

Yes. Breakeven, yes, yes. A consequence of nameplate capacity, we are working on controlling our costs. So a consequence of nameplate capacity is going to be breakeven as well. So second quarter, should we achieve we should achieve breakeven on cash flow, yes.

Speaker 4

Thank you very much.

Operator

There are no more questions in the question queue. I'll hand it back to Rodrigo for any webcast questions they may have.

Speaker 6

Thank you, operator. Good morning, everyone. We're going to start with a question from Omar Avellaneda from ARPA IFP. The first question is regarding, is the $300,000,000 your annual sustaining CapEx?

Speaker 5

Yes. No. Yes. 3 $100,000,000 is the CapEx that we have ongoing. Our sustaining CapEx more or less is $230,000,000 or $240,000,000 and the rest is additional CapEx that we spend on explorations and other areas.

Speaker 6

And the second question also from Omar is, what is the CapEx for pass through integration project? And when do you expect to approve the project?

Speaker 5

Yes, it's a good question. We have been talking about integration during the last year. We expect the CapEx and we are still fine tuning, that's why we haven't approved the project yet, to be around $150,000,000 to $200,000,000 This comprises a new piping system that goes from El Porvenir to Atacocha tailings dam, a mine development between the 200 ground mines in Atacocha and El Porvenir, some upgrade of the shaft and some other developments, especially in Atacocha. So we are finalizing the studies here and we expect to approve this project in the coming months. The idea is that we have a we work on we finished all these studies.

Speaker 5

We have more certainty on the investments. So we might approve this probably in the Q2 or towards the middle of the year. So we can communicate to the market what will happen in this very important project.

Speaker 6

We have another question from Herman Cusick from MetLife. If Ericsson reaches full capacity in the Q2 'twenty four, why does the guidance show increased production over the next few years?

Speaker 5

Yes. This is because the Q1 production was not on 100%. And in the second quarter, as we achieve nameplate capacity, we are also not on 100%. So I would say that if you extrapolate the second half of this year through the other years, you will achieve the number that we are showing for 25% and 26%.

Speaker 6

We have another question from Joseline Jensen. When do you expect to start deleveraging?

Speaker 5

As I was saying, we expect delivering this year. As I said, this is a priority. Cash flow, we are in good shape in terms of what we can control in our mines and smelters. We are working very hard on production cost and CapEx, but we are exposed to prices. Those zinc prices did not began that year in a very good pace.

Speaker 5

So hopefully and we are confident that they will recover in the following quarter. So with the cash flow that we will start generating, the idea is we start delivering the comp.

Speaker 6

We have one question from Rodrigo Murrieta from AFP Integra. Are you evaluating measures to decrease cost of per ton of ground in Cerro Lindo going forward?

Speaker 5

Yes. Cerro Lindo is a challenge. Cerro Lindo is a big underground mine, probably is one of the largest underground mines in general. Yes. And the cost per tonne of room today is $40 And we have to give you an idea in Cerro Lindo as mine development, we have to develop 35 kilometers per year.

Speaker 5

So and we have pressures on given that the mine is extending, we have pressures on all of these. So we have been managing in the last 2 years to keep this $40 flat. And this has been a challenge. And as I was saying, we have some consolidation of contractors. We have some measures on productivity, reducing of people.

Speaker 5

We have some measures reducing costs. We have been optimizing our short bridge that is in support of the mine and many, many other measures. So for us to keep that cost per ton below $40 is a challenge, but we believe that we can achieve that during 2024. 2025, we'll see, but with the measures we take, the idea is that we keep our cost below $40

Speaker 6

We have another question. What is the expected CapEx that you are considering for the integration project in Pascua?

Speaker 5

Yes. As I said before, between $150,000,000 to $200,000,000 I already explained what are the components of that. We are still assessing how are we going to finance that. This CapEx is going to be investing 3 years. So part of the cash flow generation of Cielo Pascua is going to be allocated to this and the rest we are assessing if there might be some debt or some other cash flow that we might have from other operations.

Speaker 5

So but still we will communicate that once we go forward.

Speaker 6

Okay. We have another question for Hernan. Can you comment on the alternatives for the Moravudu asset?

Speaker 5

Yes. The Moragudo asset is a marginal asset for us. It's a very small asset. And this is not transformational, has a low life of mine. So I cannot comment on specific actions, but what I can tell you is that we are assessing in detail what are our options in Moragudo.

Speaker 5

We have provided a guidance for production for 2024, but not for 2025 and 'twenty six because as I said, this is a marginal asset and we are assessing the options. As soon as we have some clarity on that, we will come back to the market and communicate what are the next steps on this asset.

Operator

There are no more questions in the queue. This concludes our question and answer session. We will now hand the call over to Ignacio for his final remarks. Mr. Rosado, please go ahead.

Speaker 5

Thank you. Thank you everyone for attending. This has been a 2023 has been a very challenging year. As I was saying, Alipona, the delay on Alipona consumed a lot of cash flow. Prices have not been there.

Speaker 5

We, as I said, we believe that we are in the bottom of the cycle and we are confident that this year is going to be better. The evolution of Aripuana and all the measures that we have taken will help generating cash flow for this year. We are committed to that. We are committed on our cash discipline and making sure that La Rincona is up and running. We are hoping that we approve soon the integration project of El Paso.

Speaker 5

This is important for the company because it will unlock a lot of value, more life of mine for sure because of all these resources that are in the underground part, but also more profitability given the economies of the scale of the 2 assets. So we are committed to that. We are committed to all these measures, and we thank you for the time. And we look forward to speak to you at the end of April with our Q1 results. Thank you very much, and have a good day.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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