Nexa Resources Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to Nexa Resources Second Quarter 2024 Conference Call. All participants will be in a listen only mode. This event is being recorded and is also being broadcast via webcast and may be accessed through Nexa's Investor Relations website where the presentation is also available. After today's presentation, there will be an opportunity to ask questions. Please remember that the participants of the webcast will be able to register via website questions.

Operator

Simply type your question in the box and click send, and that will be answered soon. I would now like to turn the conference over to Mr. Rodrigo Camarensen, Head of Investor Relations for opening remarks. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Nexa Resources' 2nd Quarter 2024 Earnings Conference Call. Thanks for joining us today. During the call, we will be webcast. Before we begin, I would like to draw your attention to Slide number 2, where we will be making forward looking statements about our business, and we ask you to refer to the disclaimer and the conditions surrounding those statements. It is now my pleasure to introduce our speakers.

Speaker 1

Joining us today is our CEO, Ignacio Rosado our CFO, Jose Carlos del Valle and our Senior Vice President of Mining Operations, Leonardo Correa. 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. Thanks for joining us today to go over our Q2 results of 2024. Please let's move to Slide number 3, where we will begin our presentation with the main highlights of the quarter. Let me start by saying that we had a strong second quarter results. We have been witnessing positive momentum from commodity prices from the end of the Q1, which has been sustained throughout the Q2.

Speaker 2

Our solid operational performance and financial results reflect our commitment to our strategy and our focus on executing our priorities, as well as our efforts to optimize key investments and initiatives. In the Q2 of 2024, consolidated net revenues were $736,000,000 up 27% quarter over quarter, mainly due to higher LME prices and increased smelting sales volume. Year over year, net revenues were up by 17%. Adjusted EBITDA in the Q2 of this year was $200,000,000 64% higher compared to the $123,000,000 in the last quarter. This performance was attributed to higher byproduct contribution, higher zinc prices and increased smelting sales volume.

Speaker 2

Compared to the Q2 of last year, adjusted EBITDA increased by 180% from €72,000,000 Our net leverage ratio in the Q2 of 2024 was 2.72 times versus 3.75 times in the Q1 of this year and 2.83 times in the Q2 of last year. These results reinforces our commitment to our strategy and our healthy and steady business fundamentals. Now, let me talk about the operational performance of Aripuana. Throughout April, May June, the plant increased utilization rates, delivered stable concentrate quality and improved metallurgical recoveries that contributed to a solid adjusted EBITDA. In June, we achieved a positive operational cash flow generation.

Speaker 2

These factors confirm the transition of Aripuana to an ongoing operation. I will dive deeper in the key drivers of Aripuana later on in the presentation. Let me also emphasize that our Cerro Pascua integration project continues to advance on all fronts and we expect its approval in the upcoming months. Our brownfield exploration program in the second quarter advanced towards expanding our portfolio and aim to add increase in the life of our mines. That said, our drilling strategy for this year is on track.

Speaker 2

We are focused on near mine expansion, brownfield and infill drilling. As previously disclosed, we announced the divestment of our Moragudo operation at the beginning of April. And on July 1, we announced the closing of the sale transaction. Under these conditions, mining activities ceased at the end of April. The sale of Moragudo is an important step in our portfolio optimization, which is a central part of our strategy to improve cash flow generation and returns.

Speaker 2

This focus allows us to concentrate our efforts on our most attractive operations. Additionally, in April, we concluded important transactions in line with our liability management strategy. These transactions included extending our debt profile through the issuance of new debentures and bonds as well as conducting tender offers. This strategy move allowed us to optimize our financial structure, diversify our funding sources and enhance our liquidity position. Jose Carlos will provide more detail on this topic in his presentation.

Speaker 2

Now, let's move to Slide number 4 to discuss our operating performance. Regarding the operating performance of the mining segment, zinc production reached 83,000 tons in the Q2 of this year, up 2% year over year, primarily due to higher zinc average grades, particularly at Cerro Lindo. Compared to the Q1 of this year, zinc production decreased by 5% due to lower volumes from the Peruvian mines and the absence of contributions from Moragudo in May June of this year following the sale of this asset. In terms of cash cost in the Q2 of this year, it decreased to $0.03 per pound compared to $0.37 per pound in the Q2 of last year. This decrease was mainly due to higher byproduct contribution, driven by higher copper and lead prices and lower treatment charges in the period.

Speaker 2

Compared to the Q1 of 2024, mining cash cost decreased by $0.24 per pound, impacted by lower treatment charges and higher byproduct contribution. The cash cost in the first half of this year performed below the lower range of our guidance. The cost per run of mine for the quarter was $49 per ton, up 10% year over year due to lower treated ore volumes and up 7% quarter over quarter, mainly explained by higher third party services and higher personnel costs. The cost per run of mine in the first half of this year was within our guidance. Now moving to Slide number 5.

Speaker 2

Regarding the operating performance of the smelting segment, metal sales totaled 148,000 tons in the Q2 of this year, down 1% from the Q2 of last year. Compared to the Q1 of this year, metal sales increased by 7%, driven by higher production volumes at Cajamarquilla and Juiz de Fora. Smelting cash cost in the Q2 of this year was $1.19 per pound compared to 1.12 dollars per pound in the Q2 of last year. This increase is mainly attributed to higher raw material costs due to higher zinc prices and lower treatment charges. Compared to the Q1 of this year, cash costs rose by 21%, also impacted by higher zinc prices and lower TCs.

Speaker 2

Our conversion cost was $0.30 per pound compared to the $0.32 per pound in the Q2 of last year due to improved operational efficiency in the period. Compared to the Q1 of this year, the conversion cost was relatively flat. I would like to highlight that both cash costs and conversion costs in the first half of this year performed within our guidance. Now moving to Slide 6, where we will start talking about Aripuana. The solid operational performance of Aripuana and its improved financials mark an important advance in the Q2.

Speaker 2

Our efforts focus on plant stabilization, continuous improved of feed and utilization rates, enhancing metallurgical recoveries and concentrate quality as well as reducing downtime hours. In June, the average utilization rate was 81%, with many days operating above 90%. Freated ore improved significantly by the end of the quarter, reaching 133,000 tonnes, a 32% increase compared to March. In July, we expect to treat more than 140,000 tonnes of ore and we aim to achieve a target capacity of 160,000 tonnes per month by September. At current treatment levels and with improved grades from the Link and Ambrex ore bodies, we anticipate further production improvements that will continue to improve our margins.

Speaker 2

Regarding Aripuana's financial performance, we noted a significant improvement in this quarter with positive adjusted EBITDA for the 2nd consecutive quarter and positive operating cash flow in June. These are key milestones that reaffirm the asset's solid progress. Looking ahead, we expect further increases in plant feed and throughput rates, improved concentrate rates, higher metal recoveries and cost reductions. In the next slide, we will provide more details on Aripuana's operational performance for the quarter. Now moving to Slide 7.

Speaker 2

Starting with the capacity utilization in the upper left side, we noted that it performed at 81% in June based on the design capacity. When considering the 90th percentile for the month, the performance was 86%, indicating solid progress in plant reliability. In the upper right side, which shows plant downtown measured in days of corrective maintenance, we noted a significant decrease. This indicates also an important improvement in plant stabilization. At the bottom of the slide, both metallurgical recoveries and concentrate rates are performing at or near target levels, and in some cases, surpassing those levels.

Speaker 2

As mentioned earlier, this solid operational performance and improved financial results confirm the full transition to an ongoing operation and mark an important milestone in Aripuana. Now moving to Slide 8. On this slide, I would like to highlight our progress with the advanced technical studies for the Cerro Pascua integration project. As we have discussed in previous calls, this project has the potential to unlock significant value for Nexa. We have made substantial progress across the 4 key work fronts, completing important steps such as engineering for the underground mine connection and the El Porvenir shaft upgrade.

Speaker 2

Additionally, we have advanced the engineering studies of the tailings pumping system, which will allow us to pump tailings from El Porvenir to Atacocha. Significant progress has also been executed on the plant's engineering assessment, which represents opportunities to enhance processing capacity. Support activities, including technical reviews and environmental studies and permits are also advancing as expected. In March, we issued a technical report on the joint operations of El Porvenir and Atacocha, reflecting some of the benefits of the integration project and resulting in an increase in the reserves base of the Cerro Pasco complex. We are moving forward with the project closely monitoring market conditions and expect to submit its approval in the coming months.

Speaker 2

Now, I will turn the call over 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 9. As you can see, beginning with the chart on your upper left, total consolidated net revenues for the Q2 increased by 17% year over year. This increase was primarily driven by higher LME metal prices and increased mining sales volumes, partially offset by lower net premiums and slightly lower smelting sales volume.

Speaker 3

Compared to the Q1 of 2024, net revenues increased by 27%, driven by higher LME metal prices and increased smelting sales volume. For the 1st 6 months of 2024, net revenues totaled $1,300,000,000 up by 2% from the same period a year ago. In terms of profitability, consolidated adjusted EBITDA in the Q2 of 2024 was $200,000,000 compared to $72,000,000 a year ago. This improvement was mainly explained by higher mining sales volumes, improved performance in our Aripuana operation, higher byproduct contribution, lower variable costs and higher zinc prices. Compared to the Q1 of 2024, adjusted EBITDA increased by 64%, driven by higher byproduct contribution, higher zinc prices and increased melting sales volume.

Speaker 3

In the first half of twenty twenty four, adjusted EBITDA reached $323,000,000 up by 58% compared to the same period a year ago. Finally, it's worth noting that our consolidated adjusted EBITDA margin increased to 27% in the Q2 of 2024, representing a 16 basis point improvement compared to the Q2 of 2023 and a 6 basis point improvement compared to the Q1 of 2024. Now let's move to slide number 10. On the top left of the slide, we can see that in the 1st 6 months of 2024, we invested $138,000,000 in CapEx, with nearly all of this amount directed towards sustaining activities, including mining development and tailing storage facilities. In line with this, our 2024 CapEx guidance for the year remains unchanged at $311,000,000 With respect to mineral exploration and project evaluation, we invested a total of $29,000,000 with $17,000,000 allocated to mineral exploration and mine development to support our exploration activities.

Speaker 3

Following the typical pattern that we see every year, we expect our investments in these areas to accelerate in second half of twenty twenty four, and thus we're maintaining our 2024 guidance for exploration and project evaluation at $72,000,000 Now let's move on to the next slide where I will discuss our cash flow generation for the quarter. Starting from the $200,000,000 of adjusted EBITDA net of non operational items, we can see that we generated a solid cash flow from operations before working capital variations at $133,000,000 in the quarter. We then paid $36,000,000 related to interest and tax and spent $67,000,000 in total CapEx for our operations. Additionally, as part of our liability management strategy, we can see that loans and investments had a positive net impact of $146,000,000 This resulted from our new bond offering of CAD 600,000,000 at eVenture issuance of approximately CAD130 1,000,000 and a BMDS credit line of approximately CAD40 1,000,000 dollars These were partially offset by loans and financing payments, including cash tenders for part of our bonds maturing in 20272028. Furthermore, we paid $4,000,000 of contractual dividends to non controlling interests.

Speaker 3

Then we had a negative impact of $6,000,000,000 from foreign exchange variations in our cash and cash equivalents, driven by the depreciation of the Brazilian real against the U. S. Dollars during the period. Finally, in line with typical annual trends, we saw a negative effect of $17,000,000 related to working capital, a significant improvement from the negative $125,000,000 in the Q1. As in 2023, we expect this working capital effect to be reversed positively throughout the second half of the year.

Speaker 3

Combining all these effects, our free cash flow generation in the Q2 of 2024 was $149,000,000 Now moving to Slide number 12. In this slide, you can see that our liquidity remains healthy and we continue to present a sound balance sheet with an improved and extended debt maturity profile. At the end of the Q2 of 2024, our available liquidity was approximately $794,000,000 including our undrawn sustainability linked revolving credit facility of $320,000,000 Regarding our overall debt profile, the average debt maturity in the Q2 of 2024 was 5.9 years, an increase from the 3.7 years reported in the first quarter of 2024. In line with our proactive approach to liability management, you may remember that we successfully extended our debt maturity profile at the beginning of the Q2. This was achieved through the issuance of a new 10 year bond, funding a cash tender offer for part of our existing notes that were due in 2027 and in 2028, while obtaining a 6 year term ESG linked debenture of approximately $130,000,000 and a new credit line from BMDS of approximately $40,000,000 for an 8 year term.

Speaker 3

As Ignacio mentioned at the beginning of his presentation, these transactions marked a significant milestone for the company. As a result, we now carry an average cost of debt of 6.61%. It is important to mention that as of June 30, our total cash position is sufficient to cover the payment of all obligations maturing over the next 4 years. In terms of leverage, as measured by the net debt to adjusted EBITDA ratio, this measure decreased from 3.7 to 2.7 times quarter over quarter. This substantial decrease is primarily due to the increase in adjusted EBITDA over the last 12 months and to a reduction in net debt.

Speaker 3

These strategic moves have allowed us to optimize our financial structure, diversify our funding sources and enhance our liquidity position. The extension of our debt profile is part of our ongoing optimization effort and reflects our commitment to proven financial management and our confidence in the long term prospects of our business. Following these transactions, we will remain attentive to market conditions. We continuously evaluate options to maintain a maturity profile that is in line with the long life of our assets and at the most competitive costs. Moving now to Slide 13.

Speaker 3

Regarding market fundamentals, it is noteworthy that in the Q2 of 2024, LME zinc price averaged $2,833 per tonne, up 12% from the Q2 of 2023 and 16% from the Q1 of 2024. This increase is primarily due to macroeconomic factors such as expectations of lower U. S. Interest rates and expectations of Chinese government stimulus and fundamental factors such as tight concentrate market and low zinc inventories. The LME copper price averaged $9,753 per tonne in the Q2 of 2024, up 15% from the Q2 of 2023 and 16% from the Q1 of 2024, mainly attributed to bullish fund manager investments in addition to the macroeconomic factors mentioned a moment ago.

Speaker 3

Looking ahead, zinc prices are expected to remain positively supported by U. S. Monetary policy, economic stimulus in China and the current tight zinc concentrate market. In the mid- to long term, the fundamental outlook for both zinc and copper prices remain positive. Moreover, investments in construction, infrastructure and the automotive sectors are anticipated to continue to positively impact demand expectation for base metals, while growth in supply is expected to remain relatively limited.

Speaker 3

Now I will hand over the presentation back to Ignacio for his final remarks.

Speaker 2

Thank you, Jose Carlos. I would like to conclude this presentation by sharing some important news in our sustainability agenda. As part of Nexa's circular economy initiatives, we completed our first commercial sale transaction in May involving 26 point 4 tons of waste material from our Tres Maria smelter. This project aims to sell significant amounts of waste from our smelter by developing partnerships and evaluating viable technologies and trade routes for these materials. Additionally, in collaboration with the Brazilian Agricultural Research and the Brazilian Micro and Small Business Support Service, Nexa partnered to expand the rural practices project in Vazante, Brazil.

Speaker 2

This initiative aims to enhance the income of 40 selected farmers by introducing new agricultural techniques and market strategies. This project demonstrates Nexa's commitment to improve local agricultural practices and supporting community development. Another notable achievement is that Nexa Peru was recognized for the 3rd consecutive year as one of the 16 leading companies in sustainable practices by the Peruvian Stock Exchange for the 2024 2025 period. This recognition reflects Nexa's ongoing commitment to integrating ESG strategies into its operations and advancing responsible mining practices. These highlights underscore our commitment to operational excellence and transparency, as well as our dedication to creating sustainable value for our shareholders and the communities where we operate.

Speaker 2

Looking at the remainder of the year, we will continue to focus on enhancing productivity, efficiency and performance across operations and corporate areas, while also prioritizing the safety of our people. We will maintain our discipline, focus on our priorities, including the further improvement of Aripuana's performance, the development of the Cerro Pascua integration project, delivering on guidance, extending the life of our mines and consistently improving our cash generation. We believe that Nexa is well positioned to maintain positive momentum. We have an established business with a proven track record and unwavering commitment to stakeholder value creation. This concludes our remarks.

Speaker 2

Thank you for your support. Operator, we are ready to open for questions.

Operator

We will now begin the question and answer session. Our first question comes from Lawson Winder with Bank of America Securities. Please go ahead.

Speaker 4

Thank you, operator, and good morning Ignacio and team. Thank you for the update as always. I wanted to start off with your thoughts on the zinc market. So that was really helpful, the color you provided. And but just ask in particular about some new production coming on in Central Africa and in Congo there's new production and just your thoughts on whether or not that would be a concern of yours as you look out to the second half of this year and then 2025 as that asset starts to hit run rate capacity?

Speaker 1

Okay, Lawson. It's Rodrigo here. Thank you so much for your question. Yes, I mean, we expect we have been following the possible new productions very closely. We know that some mines are about to put more concentrate in the market in the coming months, including Aripuana or mining Aripuana.

Speaker 1

But we keep our view that this is not going to be enough to somehow offset the tight concentrated market that we are seeing right now. So as a consequence, we may still see, in terms of fundamentals based on the supply demand rationale, we may see a positive support for zinc pricing in the following months. Of course, just like we said and also mentioned in the sorry, Jose Carlos mentioned in the presentation, we may see some volatility, especially driven by the U. S. Elections and the expectations on Fed rates cuts.

Speaker 1

But we keep our review. We are very confident on the fundamentals of Zynq not only in the short term but also in the mid long term. And we will keep following this possible new production that should come as well as monitoring the Chinese market very closely. So as everybody knows, China is another important player in the zinc industry and it's important to understand what's happening in terms of the production and the consumption of zinc concentrated in China. And thanks again for your question.

Speaker 2

Yes. And just to add to what Camaro is saying, Lawson, regarding the smelters, you know that TCs are so low now that in some cases we have negative TCs and the premiums as well that most smelters are not making money. In our case, we are in privileged markets. We are in Peru and in Brazil. So we are very close to the producers of concentrate, but it's a very tight market.

Speaker 2

And in the cycle, when you see that, you see that this couldn't last many months. So we know that some smelters are making money and are trying to keep up with the market, but this is not sustainable. So we believe that zinc prices have to go up because otherwise scarcity of metal will come in the coming months.

Speaker 4

Okay. Thank you very much for that color. All very helpful. If I might, I'd like to also ask about capital allocation. Go

Speaker 2

ahead, Lawson.

Speaker 4

Yes. If I could just ask about capital allocation and how you guys are thinking about making a decision on investments in the Cerro Pasco expansion versus paying down debt and the continued ramp up of Aripuana. I guess Aripuana, you're now expecting that to be EBITDA positive going forward. So does that now provide some additional flexibility with capital return? And then what's the timing of the decision around Cerro pasta?

Speaker 2

Yes. So very good questions. Aripuana is starting to make some money. And for the rest of the year, as we were saying, throughput capacity is going to be 80%, 90% of our target. And with the production that we have based on stable recoveries and good quality of concentrates, we will start accumulating cash in Aripuana.

Speaker 2

So it will not longer be a cash deficit mine. However, building Aripuana was really difficult because we spent a lot of money in this project, and part of that has been translated into a very high gross debt. So part of the capital allocation that we want is that our priority is to reduce this gross debt. We believe that in the second half of this year and starting 2025, we will start bringing more cash flow and part of that cash flow is going to go to pay down debt, okay? Part it's going to go to pay dividends as well because we are a company that pay dividends.

Speaker 2

It might not be the case this year or probably the Q1 of last year, but long term we pay dividends. And then we will invest in growth. Pasco is the most advanced project that we have. Our 2 operations, we have 2 operations there. So it's a no brainer because, as we said before, there is a lot of potential in the intersection of the 2 mines, and we will unlock potential of Atacocha that today has resources, cannot be converted into reserves because we cannot access them.

Speaker 2

And by using the infrastructure of El Porvenir, we will access that. The CapEx for this is BRL150 1,000,000. We will approve this in the coming months. I'm trying to say that probably before the year end. And probably the bottleneck here is the pumping system that will pump tailings from Porvenir to Atacocha, so we extend life of mine of the dam, yes, is probably the first bottleneck and we will have to approve equipments to buy because the lead times are long.

Speaker 2

We will approve that in the last quarter of this year and finishing engineering of the shaft, finishing engineering of this tailings dam facility and advancing with the permits will help us approve on an official basis this project in the next 4 months. But the idea is that with this $150,000,000 is going to be fund with our own cash. We have some possibilities of advancing sales of lead, etcetera, etcetera. We will communicate that. But so in summary, bringing down the debt, paying some dividends going forward, once the cash flow is accumulated and bring PASCO in the next I mean, approve that in the next months.

Speaker 2

This project lasts 3 2 to 3 years, but is the most important project that we have to bring more cash flow later on. So that's more or less where we are today.

Operator

And the next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Speaker 5

Yes. Good morning, Ignacio, Carlos and Rodrigo. Just maybe following on Sarabhai Pasco before I ask a question on Aripuana. So just to confirm, the $150,000,000 CapEx that you mentioned is for the entire project or just for a 1st estate?

Speaker 2

Yes.

Speaker 5

Okay.

Speaker 2

No, no, no, it's entire project because I can give you color on that if you want. But please go ahead. [SPEAKER CARLOS ALBERTO

Speaker 5

PEREIRA DE OLIVEIRA:] Yes. Can you talk a little bit about the CapEx for several parts integration project in total? And if there are different stages, if you can add color to that and the pace of these boards, because I think you mentioned that it could take potentially 3 years to complete the project. So if you can give us a little bit of color on the total CapEx and maybe the pace of disbursements in those 3 years, that would be great.

Speaker 2

Perfect. So the 3 years has 2 components. 1 is permits because we need a modification of studies for the integration of the 2 mines. 2 mines. The 2 mines are now connected, but we will have to connect them at a lower level, at least at 2 kilometer, and we will have to extract the mineral from Atacocha through the Porvenir shaft.

Speaker 2

So that will take time. That takes at least 2 years. So that is our restriction. The other restriction is the pumping system. We have 4 components in this project.

Speaker 2

The pumping system that pumps tailings from El Porvenir to Atacocha is key. Why? Because El Porvenir tailings dam will finish in 3 years. So to continue exploiting Porrenir, we will have to pour the tailings into Atacocha. The engineering of that project take us to probably $80,000,000 We are finishing that and we will need to start buying the equipment because they are long lead time.

Speaker 2

That project itself, this CAD80 1,000,000 is going to probably demand 2 years those $80,000,000 also it's $40,000,000,000, $40,000,000,000,000, $24,000,000,000,000, okay? Then we will have to upgrade the shaft, the shaft of El Porvenir is a very efficient one. We don't need to upgrade all the shafts. There are some parts that are in good conditions and are very reliable. So we are assessing that and that might cost between $15,000,000 to $20,000,000 Okay?

Speaker 2

Then we have to build a water management plant because close to the tailings that could cost in Atacocha especially that could cost us between CHF 20,000,000 CHF 25,000,000 And the rest is the integration, the integration of the 2 mines, yes, and all the development of the mines to, let's say, extract the mineral is sustaining CapEx that is not considering in this project. So €80,000,000 for the pumping, €20,000,000 for the water management, 15, 20 for the shaft and then the remaining for 2 integrated 2 mines. But there is a lot more CapEx than sustaining CapEx. So this is more or less a very straightforward project. And what is the beauty of this?

Speaker 2

The NSR of El Porvenir today has an NSR of $100,000,000 $110 per ton, okay? So by extracting Atacocha, the idea is that we extract mineral and that's in resources, so it has a lot of certainty of $150 So our mix is going to be give us a higher NSR. But the most important part is that in the integration, we have a lot of potential with grades and mineral that the NSR is above $200 We don't have even resources there, it's only potential, so once we build all these 4 components and in parallel, and we will communicate that probably next year, we will start drilling this intersection so we can bring all of this high grade mineral and change the mind of the plan to have a more positive NAV. This is more or less where we are finishing engineering and I guess towards the end of the year, we will announce probably before the pumping system and I would say at the beginning of the next year, we will announce all the components of the project and how are we going to treat them. So this is more or less the context of these several PASCO CapEx.

Speaker 5

Great, Ignacio. Thank you for the color. And so the total CapEx is indeed EUR 150,000,000, right? [SPEAKER CANDIDO

Speaker 1

BOTELHO BRACHER:] Yes.

Speaker 2

It's the total CapEx. I mean, it might change a little bit because of the engineering, but it won't be material. Right.

Speaker 5

Okay. And then moving on to Atacor Aripuana, sorry. So now that the operation, the mine has graduated to an operating mine, would you start disclosing cost for Aripuana and stop making the adjustment on the EBITDA for the ramp up expenses?

Speaker 2

That's the idea. We have now moved to an operation, and we will need to start disclosing that as well. Yes, that's the way it has to be from now on.

Speaker 5

And would that start in the next quarter or until 2025?

Speaker 2

No, no, next quarter. The idea is that 3rd quarter, we start doing that.

Speaker 5

Okay. Any color that you can any advance that you can give us now? Or should we just wait until you report the Q3?

Speaker 2

I think we have to wait. I think we have to wait because, yes, we don't know prices.

Operator

And the next question comes from Camilla Barter with Bradesco BBI. Please go ahead.

Speaker 6

Hi. Just two quick questions on my side. First on CapEx, maybe still early to say, but could you talk about your expectations for CapEx next year? And secondly, you kept your guidance for costs this year unchanged, but it would be great to hear if you could provide some more color on how you see costs evolving through the 2nd semester? Thank you.

Speaker 7

Hi, Camilla. Thank you for the question. Jose Carlos here. I'm not sure if I heard everything well, but I'll try to give it a shot. The first one was in relation to CapEx for next year, if I heard correctly.

Speaker 7

We are obviously always looking beyond the current year and we have an expectation of what CapEx should be. We're finalizing or fine tuning the projects, the numbers of all the different priorities that we have. So we don't expect a significant reduction in CapEx. I think it should be somewhere around where we are today for 2024, somewhere between in the low to in the low 400s. So I don't expect a significant variation on that.

Speaker 7

We have a number of projects and investments that we have to make mostly sustaining, but things that have to happen in 2025. Can you please repeat the second question you mentioned? I think it was related to cost, but I don't know

Speaker 3

if there was a specific question.

Speaker 7

I just heard cost, but if you could please clarify.

Speaker 6

It was cost to the second half.

Speaker 7

Cost for the second half. Okay. Sure. As we mentioned in the earnings release and I think we mentioned in the presentation as well, I mean, we feel good about the cost levels that we are having, mostly within guidance. So we for now, we're keeping our cost guidance and we don't expect that we're not expecting right now that we will make a change.

Speaker 7

Obviously, things can change, but we feel comfortable that we are being able to be within the guidance that we provided, mitigate the impact of inflation that is still there in all of our operations. So always finding ways in which we can compensate for the pressure that we see in some of the inputs and in 3rd party services. So for now, we're keeping things the way they are and we expect that we will be within the guidance.

Operator

And the next question comes from Orest Wowanda with Scotiabank. Please go ahead.

Speaker 8

Hi, good morning. Two questions. Sorry, could you just clarify, did you say that we should anticipate CapEx for 2025 around $400,000,000 mostly sustaining. Did I hear that correct?

Speaker 7

No. What I said was that we shouldn't expect a significant variation from what we have in 2024. And the guidance we have for 2024 is $412,000,000 so something in that same range.

Speaker 2

Jose,

Speaker 1

just to clarify because in this calculation that Jose is mentioning, we consider the CapEx, which our guidance for this year is 311, mostly sustaining. We expect this level to be the same next year. The difference for the 400,000,000 because Jose Carras is also including some of the expenses that we consider together when evaluating the total CapEx internally here at Nexa. But in terms of the CapEx to compare with the guidance for this year, it's EUR 311,000,000 and we expect the level to be the same next year. Also considering a scenario, which is pretty much what we have right now.

Speaker 1

But if we approve Cerro de Pazco integration project, we may increase this the CapEx, the total CapEx because we're going to include the investments that we have to do in Cerro del Pasco next year according to what Ignacio explained. So this $400,000,000 is a combination of the CapEx plus some operational expenditures that we have that internally we consider as CapEx. Just to clarify and make sure that there is no misunderstanding, okay?

Speaker 7

Yes. Thank you. And

Speaker 8

just secondly, I'm just wondering, we previously heard some discussion about trying to diversify into copper and potentially looking at some copper acquisitions. Is that still on the table from a strategy perspective?

Speaker 2

Yes. Yes, that's on the table. And the reason behind is that we are, let's say, a very competitive company in terms of the underground mining. We believe ourselves that our one of our competitive advantage is underground mining. And we already have some copper in our portfolio.

Speaker 2

We have copper in Cerro Lindo and in now in Aripuana. So we are looking for projects that are similar to those that have a higher copper content. Why is that? Because we have the advantage of exploiting that type of deposits, but copper is more resilient than zinc for certainty. I mean, if you look at volatility on copper, it's much lower than zinc.

Speaker 2

And given our advantage, if we focus more on copper, our cash flow volatility is going to be lower as well. The fundamentals for copper are very important as the same as the zinc ones. So yes, the idea is that we bring more copper into our portfolio for the coming years.

Operator

There are no further questions from the phone. I will now transfer it over to Mr. Rodrigo to read questions from the webcast.

Speaker 1

Okay. Thank you, operator. We have a couple of questions from the audience in the webcast. So I'm going to start with a question from Mr. Luis Ordonez.

Speaker 1

The question is, do our expectations that higher production levels and metal price would continue in the coming quarters? Ignacio, can you jump in

Speaker 2

on that? [SPEAKER DANIEL MARTINEZ VALLE:] Yes. When we try to focus is on reliable production, reliable controlling of costs and reliable controlling of CapEx. So I can tell you that we are on track to achieving that for the second half of the year in the guidance that we gave. The levels of EBITDA are influenced by prices.

Speaker 2

Our view is that prices are going to remain similar to those of the second quarter, but volatility is there and we don't know. If pressures remain, it might be the case that we might have these current levels of EBITDA, but we don't know that. But what we can confirm is that we are committed to our targets on production costs and CapEx that are the main components of the EBIT.

Speaker 1

Okay. Thank you, Ignacio. Following up the question from Luis, we also have another question from Luis. Do you does Nexa have a guidance of target or a target for the net leverage? I assume this is by the end of this year.

Speaker 7

[SPEAKER CARLOS ALBERTO PEREIRA DE OLIVEIRA:] Yes. Thank you, Rodrigo, and thank you, Luis, for the question. I will talk in general because we have mentioned this before. We have a conservative approach to this. And obviously, in a mining company that has to go through different cycles, you're subject to changes in some factors that you don't control.

Speaker 7

So you have to take that into consideration. We're setting a target. In the Q1, we had a high leverage exactly because of that, because prices were low. And in the last 12 months, our EBITDA had suffered because of these low prices. This leverage level is already coming down in a material way.

Speaker 7

And as Ignacio mentioned, one of our main objectives is to bring down the gross debt. And as much as we accumulate cash, we will focus on bringing down the gross debt. So the combination of that will help us continue to reduce our leverage until we bring it down to levels below 1.5 times, which is something that we feel more comfortable with. And it's our short to medium term target is to have it back below 1.5x.

Speaker 1

Yes. Those were the questions from the audience. So we are operator, we are all set here. I would like to thank you so much and hand over to Ignacio.

Speaker 2

Okay. Thank you very much for the time. Again, in this quarter, just want to reiterate that we are very focused on achieving guidance on production cost CapEx and trying to start reducing our gross debt. We are very happy with the advancements on Aripuana. Aripuana has been a very, very difficult project to build, and now we are towards the end of the ramp up and starting making cash flow.

Speaker 2

Aripuana is a mine that is going to give us very good surprises in the coming years because it's a long life asset with very good net smelting return. We are very confident that PASCO is coming in the next 3 years. So with all of our mines past Coa Ripona, Cerro Lindo and Basante, the priority is to extend the life of the mine and have stable cash flows going forward given our operational guidance. In the case of the Smelters, given the location and given the markets that we face, they are stable Smelters even in these difficult situations we are making money. So the idea is to keep that in that going forward.

Speaker 2

Thank you very much, and we will speak to you soon in the next 3 months. Have a good day.

Operator

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

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Earnings Conference Call
Nexa Resources Q2 2024
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