Q3 2023 Nexa Resources SA Earnings Call
Participants
José Carlos del Valle Castro; Group CFO & Senior VP of Finance; Nexa Resources S.A.
Juan Ignacio Rosado Gomez de La Torre; President & CEO; Nexa Resources S.A.
Leonardo Nunes Coelho; SVP of Mining Operations; Nexa Resources S.A.
Rodrigo Cammarosano; Head of Treasury & IR; Nexa Resources S.A.
Presentation
Operator
Good morning, and welcome to Nexa Resources Third Quarter 2023 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)
I would like now to turn the conference over to Mr. Rodrigo Cammarosano, Head of Investor Relations, for opening remarks. Please go ahead.
Rodrigo Cammarosano
Good morning everyone and welcome to Nexa Resources Third Quarter 2023 Earnings Conference call. Thanks for joining us today. During the call, we will be discussing the company's performance as per the earnings release that we issued yesterday. We encourage you to follow along with this on screen 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 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, José 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.
Juan Ignacio Rosado Gomez de La Torre
Thank you, Rodrigo, and thanks to everyone for joining us this morning. Please let's move now to Slide number 3, where we will begin our presentation. Let me start by providing you a brief overview on our third quarter of 2023. We continue to experience a scenario of downward pressure on metal prices, driven by negative external factors, such as inflation and high interest rates in the U.S. in addition to uncertainty about the performance of key sectors of the Chinese economy. Although the prices of our main metals have performed at levels below our expectations, we remain committed to our financial discipline, which made possible to have a positive cash generation in the third quarter of this year. Our operating performance was in line with expectations in our mining and smelting segments in both segments, we also provided cash cost guidance revised downwards. Total revenue reached $649 million and was down 8% year-over-year, mainly due to lower zinc LME prices and smelting sales volumes.
Compared to the last quarter, net revenues increased by 4% as a result of higher mining production and metal sales volume in the period, which were partially offset by lower LME metal prices. Consolidated adjusted EBITDA for the quarter decreased by 32% year-over-year, reaching $82 million. This performance was mainly explained by lower LME prices. Compared to the second quarter of this year, adjusted EBITDA grew 14% due to higher metal sales, mine production and lower costs in Brazil. We revised the Aripuanã production range downwards for the year, given the limitations we found related to the design capacity of the flotation pumping system, which resulted in the extension of the ramp-up phase. Nonetheless, 2023 production estimates for Nexa's other mines and smelters remain unchanged.
Our Cerro Pasco integration project is advancing as expected. Exploration project evaluation and other expenses were reduced by 15%. However, we are still prioritizing the expansion of the resource and mineral reserve base in our mines. I would like to close this slide by mentioning that we have successfully closed a $320 million sustainability-linked revolving credit facility, which will support Nexa's liquidity profile and is linked to our carbon reduction key performance indicators. Jose Carlos will go into details later on in the presentation. N
ow moving to Slide number 4. Regarding the operating performance of the Mining segment, you can see that zinc production increased to 87,000 tonnes, up 15% year-over-year, mainly explained by the increase in credit or volume and the start-up of the Aripuanã mine. Compared to the second quarter of this year, zinc production was up 8%, explained by higher volumes from Cerro Lindo, Basante and Morro Agudo mines. With respect to cash costs in the third quarter of this year, it decreased to $0.35 per pound compared to $0.57 per pound in the third quarter of last year, mainly explained by higher byproduct contribution related to higher lead prices and copper concentrate volumes. Compared to the second quarter of this year, mining cash cost decreased by 6%. Looking at the cost per run of mine in the quarter, it was flat year-over-year and quarter-over-quarter, despite inflationary cost pressures, especially in Brazil.
Now moving to Slide number 5. Regarding the operating performance of the smelting segment, metal sales totaled 154,000 tons in the third quarter, down 5% from the third quarter of last year and up 3% compared to the second quarter of this year. The 9 months year-over-year production performance was relatively flat. Smelting cash cost in the third quarter of this year decreased to $1.01 per pound compared to $1.36 per pound in the third quarter of last year and $1.12 per pound in the second quarter of this year. In both periods, this decrease was mainly explained by lower zinc LME prices, which reduced the cost of raw materials. Our conversion cost was $0.29 per pound and was up 11% from the third quarter of last year due to higher energy expenses and lower metal production. Compared to the second quarter of this year, conversion cost was down 9%.
Now moving to Slide number 6. In January of this year, ramp-up activities in Aripuanã have continued with a strong focus on steadily increasing the plant's throughput rate, reducing plant downtime and improving recoveries and concentrate quality and grades. In the second quarter of this year, the plant performed at an average of 66% capacity versus 50% capacity in the first quarter. In July, we observed some problems in the capacity of the protection pumping system due to limitations identified in the original design. And as a result, the plant performed at an average rate of 56% in the third quarter. The permanent replacement of pumps is scalable to take place in the first quarter of next year, driving ramp-up completion to the second quarter of next year. We have also implemented additional actions in the plant that include processes and systems improvements as well as upgrades on water treatment facilities. That will allow us to return to a high average throughput rate in a more consistent way. We expect to run at a 70% average utilization rate through the fourth quarter of this year.
On the mine side, we have been successfully increasing our run of mine production. We reached 237,000 tons in the quarter compared to 61,000 tons in the second quarter of this year, up 290%. Based activities in the quarter progress as expected. We are focused on upgrading the mineral resource and expanding our mineral reserves. Our priority in this asset is to keep improving metal recovery and concentrate quality and grades and to conclude the upgrade in the plant, aiming to achieve a stable production and minimize additional financial impacts.
Now moving to Slide number 7. Starting with the planned downtime in the upper left side, we noted an increase of 5% quarter-over-quarter as the limitations observed in the third quarter required additional preventive hours. The plant capacity utilization averaged 56% versus 66% in the second quarter. However, we can see an improvement in copper and lead recoveries while seeing recoveries slightly reduced compared to the previous quarter, but has been recovering in the last few weeks.
Now moving to Slide number 8. On Slide number 8, you can see that zinc production was 10% lower compared to the second quarter of 2023, reaching 5,800 tons. Copper production reduced by 12%, while lead and silver production increased by 5% and 2%, respectively, mainly driven by higher grades. Now moving to Slide number 9. On this slide, I would like to highlight that we continue to advance the technical studies of the Pasco integration project. These technical studies cover different works, such as new mine design and studies for the underground interconnection, shaft upgrade and engineering assessment of the plant as well as the assessment of options to improve capacity to provide a long-term solution for tailing storage facilities. Furthermore, we continue to advance the required environmental pyramids. And as studies progress, the project demonstrates the potential to unlock important value for Nexa through economies of scale, cost improvement and extension of asset life. We expect to submit this project for approval during the first quarter of next year.
Now I will turn over the call to José del Valle, our CFO, who will present our financial results. Jose, please go ahead.
José Carlos del Valle Castro
Thank you, Ignacio. Good morning to everyone. I will continue on Slide 10. As you can see, beginning with the chart on your upper left, total consolidated net revenue for the third quarter decreased by 8% year-over-year, mainly due to lower zinc prices and lower smelting sales volumes. Compared to the second quarter of 2023, net revenues increased by 4% as a result of higher mining production and metal sales volumes, partially offset by lower zinc prices. In the first 9 months of the year, consolidated net revenues reached $1.9 billion, down by 14% compared to the same period a year ago. In terms of profitability, consolidated adjusted EBITDA in the third quarter of 2023 was $82 million compared to $121 million in the third quarter of 2022. This lower performance was mainly explained by lower zinc metal prices. Compared to the second quarter of 2023, adjusted EBITDA increased 13%, mainly due to higher mining and metal sales and lower costs in Brazil, which were partially offset by lower zinc prices and FX split. In the first 9 months of this year, consolidated adjusted EBITDA reached $286 million, down 55% from the same period last year, also explained by the reasons I mentioned in the moment.
Now let's move to next Slide number 11. On the top left of the slide, we can see that in the first 9 months of 2023, we invested $198 million in CapEx of with sustaining investments, including mine development totaled $185 million. The total investment in the third quarter was $82 million. With respect to mineral exploration and project evaluation, we have updated our guidance for the year, and we now expect to be at $100 million in 2023, which is a reduction of EUR 10 million from the previous guidance, mainly due to initiatives to improve our cash flow for the year. In the first 9 months of 2023, we invested a total of $69 million, of which $39 million were related to linear exploration and mine development to support our exploration activities.
Now let's move on to the next slide, in which I will discuss our cash flow generation in the third quarter of the year. For the third quarter of 2023 and starting from our $82 million of adjusted EBITDA, net of nonoperational items, we paid almost $38 million related to interest and taxes and spent $75 million in sustaining CapEx and HSE in our operations, including medifund. Additionally, lows and investments and dividends received and they had a positive net impact of $3 million. We then had a negative impact of also $3 million due to the effects of foreign exchange on our cash and cash equivalents. This was driven by the depreciation of the Brazilian real against the U.S. dollar during this period. Finally, there was a positive contribution of $93 million from an improvement in working capital, which is part of the result of our ongoing program of cash optimization measures for 2023. Now combining all these effects, our free cash flow in the third quarter of 2023 was $14 million.
Now moving to Slide 13. On this slide, you can see that our liquidity remains healthy and that we continue to present a solid balance sheet with an extended maturity profile. Cash balance increased and net debt declined in the third quarter of 2023 as a result of positive cash flow generation during the period. As a result, available liquidity at the end of the third quarter of 2023 was approximately $722 million, including our undrawn revolving credit facility of $300 million. I would like to highlight that we recently announced a successful closing of a 5-year $320 million sustainability-linked revolving credit facility, which became effective on October 20, 2020. This new revolving credit facility replaces Nexa's 2019 $300 million RCF that was set to mature in October 2024. The amounts drawn are subject to an initial interest rate of 1.6% plus a term soldier. The applicable margin is subject to compliance with current reduction KPIs, reflecting Nexa's unwavering commitment to reducing its carbon footprint. As you can see, these efforts are consistent with our ESG conviction and ambition.
Regarding our debt, it currently has an average maturity of 3.9 years and a 5.6% average cost. It is important to mention that as of September 30, our total cash is sufficient to taller the payment of all allegations maturing in the next 4 years. Finally, despite the $40 million increase in our cash balance leverage, which is measured by the net debt to adjusted EBITDA ratio increased from 2.8% to 3.06x quarter-over-quarter, mainly because of lower adjusted EBITDA in the last 12 months, driven again by the prevailing trend of lower prices. Now moving to Slide 14. Regarding market fundamentals, it is worth noting that in the third quarter of 2023, LME zinc price averaged $2,428 per ton, down by 26% from the third quarter of 2022 and by 4% from the second quarter of 2025. At the same time, LME copper price averaged $8,356 per ton, up by 8% from the third quarter of 2022 and down by 1% from the second quarter of 2020.
The main reason for the decline in LME zinc prices were speculation related to the goal economy, such as potential new high-end interest rates in the U.S., slower economic growth, et cetera. But also the acknowledgment that the Chinese economy has not responded as expected to economic stimulus, particularly in the property sector. Looking ahead to the rest of 2023 and the following months, despite the fact that we're already seeing some zinc mining production cuts as a result of a current challenging price environment. Metal prices are still expected to be negatively impacted by short-term variables such as monetary policy in Europe and in the U.S., as well as by the steel prevailing uncertain about the Chinese economy. In the mid- to long term, the fundamental outlook for both zinc and copper prices remains positive. Additionally, investment in construction, infrastructure and the automotive sector will continue to have a positive impact from demand expectations for base metals. On the supply side, both for copper and in, we anticipate that we will continue to see challenges to bring new significant production online.
Now I will hand over the presentation back to Ignacio for his final remarks.
Juan Ignacio Rosado Gomez de La Torre
Thank you, Jose Carlos. On our last slide, and I would like to close this presentation by mentioning our priorities for the rest of the year. The completion of the Aripuanã ramp-up is our top priority. The focus is to improve recoveries and quality of concentrates while replacing pumps at a flotation circuit to increase capacity. We are advancing on the studies related to the Cerro Pasco integration project. We look forward to approve this project in the first quarter of next year. We remain committed to looking for alternatives to optimize costs, CapEx and corporate expense in addition to strengthening our balance sheet. We will continue to accelerate our exploration program, prioritizing the life station of our assets. We will continue to focus on safety, productivity and ESG public commitments. Looking forward, we are confident in the long-term fundamentals of our industry and our business.
Thank you all for attending this presentation. With that, we will be happy to take your questions.
Question and Answer Session
Operator
We will now begin the question-and-answer session. (Operator Instructions)
Rodrigo Cammarosano
Now we are going to address some questions that we got from the audience, on the online audience. We will start with a question from Alexandra Alexandra Symeonidi, from William Blair & Company. What is the interest rate in this new sustainability-linked RCF?
José Carlos del Valle Castro
This is Jose Carlos del Valle. In relation to this question, just to clarify, the interest rate is sulfur, which is the secured overnight financing rate, plus 1.6% with the possibility of another points depending on compliance with the ESG targets that have been established for this sustainability-linked facility.
Rodrigo Cammarosano
We have another question from the audience from Alexandre Simon as well. In terms of leverage, it seems that the leverage has increased in this quarter. Is there a leverage target for the company? How does the company plan to address this?
José Carlos del Valle Castro
This is something that we talk about continuously. And as you can imagine, the leverage has increased mainly because of the reduced EBITDA because our net debt hasn't changed that much. Currently, we are right above 3x, and we are doing all our efforts to bring this below 3x towards the end of the year. However, in the mid to long term, definitely, we will feel more comfortable with levels around 2x. We don't have any leverage going in our facilities. But we believe that something around 2x would be more sustainable. So we continue to work on a number of initiatives to bring this down. Our top priority in the next month and years is to reduce our net debt. Obviously, a good part of that will depend on prices, but we're trying to influence all the factors that we can control to try to maximize customer generation and reduce net debt and consequently bring leverage to below the levels it currently is.
Rodrigo Cammarosano
We have another question from Camilla Barder from Bradesco BBI. What can we expect in terms of free cash flow impact in Q4 and 1Q '24 for Aripuanã?
Juan Ignacio Rosado Gomez de La Torre
So far, the impact on cash flow in Aripuanã in the first 9 months of this year was $146 million as we put it in the presentation. For the fourth quarter, we expect a number of cash outflow of around EUR 40 million to EUR 50 million. And depending on the ramp-up, how it goes in the summer or in the first quarter of next year, we will assess the impact on cash flow. But the idea is that we start to be in breakeven towards the end of the third quarter and the year in the fourth quarter. We cannot put a number here because this is a process. So we will keep the market posted when we provide guidance in January for the rest of the month.
Rodrigo Cammarosano
We have a follow-up question from Camilla from Bradesco BBI. And could you provide some color on what do you expect in terms of volumes for zinc and copper for 2024?
Juan Ignacio Rosado Gomez de La Torre
Yes, this is going to come also in our guidance that is coming in January. I would like you, please to wait until we provide that in 2 or 3 months.
Rodrigo Cammarosano
We have a question from Orlando Barriga from Credicorp Capital. My first question is related to costs in Cajamarquilla. Why cost increase quarter-on-quarter despite lower raw materials and conversion costs.
Juan Ignacio Rosado Gomez de La Torre
Actually, the main driver of increasing the conversion cost or cost driving us in Cajamarquilla was energy.
Rodrigo Cammarosano
We have a question from Alexandra Symeonidi, from William Blair & Company. There was a big working capital outflow due to higher payables and lower inventory in the quarter. Can you please give more color there? And shall we expect this to reverse in Q4?
José Carlos del Valle Castro
Actually, if you go back and you review the results of the first quarter, you will see that we had a very significant investment in working capital, which is actually what we've been reversing in the second quarter and the third quarter. So if we compare ourselves with the beginning of the year, we're pretty much at the same level, marginally lower working capital. These deteriorations actually are the result of a number of initiatives that we have taken to optimize working capital, have more control or inventory as we should always do, but also to changing a way that the terms that we have with our suppliers, for example, all within industry standards renegotiating slightly longer payment terms. So this is a structural change that actually will continue. This takes time to implement as contracts renew. It’s related to our cost control initiatives when we renegotiate contracts, consolidated contracts in order to get better terms. So I wouldn't worry about that. I don't expect that there will be a reversal in the fourth quarter because I think the key point here is that we are recovering the working capital that we lost in the first quarter of the year.
Rodrigo Cammarosano
We will go back to one question because it seems that we had an audio problem. And the question was from Orlando Barriga, from Credicorp Capital. The question was related to Cajamarquilla costs. So why did cost increase quite over quarter despite lower raw material and conversion costs? Yes.
Juan Ignacio Rosado Gomez de La Torre
So as I was explaining, I'm sorry about that, probably with the communication. As I was explaining, Cajamarquilla was is exposed to mainly to energy cost inflation. And this is linked to our contract. We have a longer contract that this has been to that. So this was the main variable the increment the conversion cost. Having said that, we started a program in September to work on reducing costs to work on increasing production to work on productivity measures to have fewer people in the operation, and this is being very successful. Most of these benefits are going to be shown in our budget for next year and in the first quarter of next year as well.
Rodrigo Cammarosano
We have a question from Carlos Asencio, from Bank of America. Could you give us some color about capital allocation going forward? Is Nexa considering inorganic growth in other geographies?
Juan Ignacio Rosado Gomez de La Torre
Yes, this is a very important question. With these prices, it's worth mentioning that most of our mines still make money on our smelters. And with all the problems, optimization programs that we are running are also helping us with generate more cash. However, as you can see, we had a high debt and the majority in this capital allocation is to reduce the debt. We are putting together the budget for the coming months and for the coming year. And we have to assess how much cash generation we're going to provide to start reducing the debt, as I was saying, this is the priority. And based on that, we might look for other options to change the capital allocation of the company. This is still early days and we will provide more color to the market at the beginning of next year or mid next year. From the inorganic growth, I think the best option. We have some good options in organic growth. This is something that we are assessing. As I was saying today, the priority is to finish Aripuanã to start -- have more clarity on the approval of the several past projects and reducing the debt. So these are the 3 priorities that we have for the coming months and for 2024.
Rodrigo Cammarosano
We have one question related to Aripuanã. It's Alexandra Symeonidi, from William Blair & Company. What production should we expect from Aripuanã next year? And what is the annual capacity?
Leonardo Nunes Coelho
So we expect to keep the ramping up over the next year. So by the second quarter, we expect to start to reach full production. And when reading the full production, the running ratio is about 2.2 million tons a year. We still work on the plan, and we're going to provide more color when we issued the guidance in the next quarter.
Rodrigo Cammarosano
There’s another question related to Aripuanã from Orlando Barriga from Credicorp Capital. When would you expect Aripuanã to reach breakeven?
Juan Ignacio Rosado Gomez de La Torre
So as Leonardo was mentioning, we expect full capacity towards the end of the first quarter of next year. And probably in those months, we will reach also breakeven. Having said that, this is also the case because this -- the CapEx that we are investing in Aripuanã is related to changing the pumps and installation of these pumps and it's a higher CapEx. So this is affecting our breakeven costs. But as we said in the presentation, in the second quarter of next year, we should be at breaking.
Rodrigo Cammarosano
We have another question related to Aripuanã. It comes from (inaudible) from Morgan Stanley. Are there any other bottlenecks for Aripuanã ramp-up that the management can identify.
Juan Ignacio Rosado Gomez de La Torre
Yes, this is a very good question. And as I can say as a summary that Aripuanã has been very difficult to start the ramp-up because there were some flaws in the urinal design that also affected construction. So we had many small bottlenecks in some of the processes. But today, I would say the main exposure that we have is in a flotation pumping system. So besides this, we don't see any other small bottlenecks. We might have some related to the ramp up, but this is the day today. But the replacing of the pumps in the flotation system is the one that is going to take us to full production towards the end of the first quarter of next year. So these are all the questions that we have. We go back to the moderator, please.
Operator
This concludes our question-and-answer session.
Now I will hand over to Ignacio for his final remarks. Mr. Rosado, please go ahead.
Juan Ignacio Rosado Gomez de La Torre
Thank you, everyone, for attending. As you can see, this is still a difficult quarter for us. As we were saying, we are committed to our financial discipline. We're working in many work streams to reduce the cost to try to bring the CapEx up and to make sure that Aripuanã is up and running in the coming months. So thank you very much again for the time, and we look forward to provide you more color in the next quarter at the end of the year. Have a good day. Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
