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Nexa Resources S.A.  (NYSE:NEXA)
Q2 2019 Earnings Call
Aug. 01, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Nexa Resources Second Quarter Conference Call. [Operator Instructions] Presenters on this call today are Mr. Tito Martins, CEO of Nexa Resources; and Mr. Rodrigo Menck, CFO of Nexa Resources. Also joining the call is Ms. Roberta Varella, Head of Investor Relations. [Operator Instructions]

I would now like to turn the conference over to Mr. Tito Martins, CEO of Nexa Resources. Please go ahead, sir.

Tito Martins -- President and Chief Executive Officer

Thank you. Good morning, everyone, and thank you for participating in another Nexa's earnings conference call. Today, we will be talking about our results for the second quarter of 2019.

Please, let's move to Slide 3, where we will begin our presentation. Here, we present some of the main highlights of the quarter. Considering our mining operations, zinc production was slightly lower year-over-year at 91,000 tons, and the lower production in Cerro Lindo was offset by the increase from our other mines.

Unfortunately, we had a fatal accident with one of our employee in Cerro Lindo, which stopped our mining operations for three days, and as a consequence, we faced some instability in the month production, which was normalized in July. Once again, we would like to express our condolences to the family of the victim and assure that all necessary measures were implemented to improve safe conditions.

Our smelting operations were solid. Metallic zinc sales volume was up 3% year-over-year and around 8% quarter-over-quarter, driven by stronger seasonal demand. Adjusted EBITDA was $118 million, down 28% from the same period a year ago, but up around 10% when compared with the first quarter. It's worth mentioning that this number was negatively affected by an increment in provision expenses of $12 million. Liquidity remained strong, and we ended the quarter with a leverage of 1.3 times. We were able to revert the net loss registered in the first quarter and we recorded a net income of $23 million in the quarter.

Regarding the guidance provided, we decided to maintain the forecast for zinc production for the year as we expect to successfully execute our mining plan during the second semester. Copper and lead ranges were revised downward, but on the other hand, we increased our expected production for silver and gold. Our guidance for zinc metal sales and capex are maintained. In terms of projects, our construction works in Aripuana continue to advance and 58% of the total capex project has been committed. We are happy to announce that Vazante dry-stacking tailings project has been ramping up.

Moving to the next slide, we provide more updates on Aripuana. Slide 4; construction works in Aripuana continue to move forward. The access ramp for the Arex mine was concluded, and then we have achieved 90% of physical progress for the access ramp at the Link mine. Around 58% of the total project capex has been already committed and we maintain our capex guidance of $140 million for 2019. The installation of electrical transmission line and temporarily facilities have started. And we also have started our recruitment program and 515 local candidates have been selected for future mine and plant operations. We are also working different programs with the local communities, including the improvements on the local public hospital and public schools.

Now please move to Slide 5. On Slide 5, we will comment on our mineral exploration and project development investments. As part of our strategy, we aim an average life of mine of 12 years for our current operations. As a result, our exploration duties are primarily concentrated on identifying new ore bodies and the validation of mineral resource and its conversion to reserves. We also believe project development is an intelligent manner of maintaining an optimized portfolio of organic and inorganic options for growth. During the second quarter, mineral exploration expenses were $19 million, mainly related to greenfield and brownfield exploration. Project development disbursements amounts $9 million, including $5 million in FEL1 and FEL2 project studies stages.

Turning to the Slide 6, we will comment in more detail where we are investing. In Cerro Lindo, our main mine complex, our objectives are to extend known bodies and develop exploratory drillings to find new mineralized zones. 12,294 meters of drilling were executed, focusing on nearby greenfield areas in the southern region of the Topara Valley, close to our current operations, and to a lower extent, on the named Orcocobre region. As a result of our exploration program, we expect to update the data for Cerro Lindo by November 2019 through a new technical report.

Now please move to Slide 7. In Vazante, 6,880 meters of drilling were executed, focusing on extending resources. At our main target, Extremo Norte, deep far north extension, drilling confirmed a new zinc mineralized zone.

Please now turn to Slide 8. Slide 8 refers to drilling campaign in Pasco Complex. 13,294 meters of drilling were executed at El Porvenir new mine, focusing on extending known ore bodies, and 10,422 meters were drilled in Atacocha, looking to identify nearby greenfield areas such as San Gerardo underground and the Atacocha-El Porvenir operational integration area. Over the following months, exploration campaigns will target extensions below level 2,900.

Now please move to Slide 9. On this slide, we will comment on Hilarion, one of our polymetallic greenfield project that is currently in exploration stage. 2,469 meters of drilling were executed so far in 2019, with the objective of increasing inferred resources. Growth drilling, targeting northward extension confirmed zinc and lead mineralization. Detailed information of these achievements will be released next week as we expect to file a technical report until the end of the year following the information released last March. For the year, we expect to reach our plan of 8,500 meters in 11 holes in the Hilarion mineralized trend.

Now, I would like to pass to Rodrigo Menck, our CFO, who will comment on our quarter result. Menck, please.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

Thank you, Tito, and good morning, everyone. Let's please turn to Page 10, where we will comment our second quarter consolidated results. Beginning with the first chart on your left, regarding mine production, we had lower average zinc and copper head grades, partially offset by higher treated ore volumes, driven primarily by the Brazilian mines. As such, zinc production of 91,000 tons was down 1% from the same period of last year, lower than initially expected as it was negatively impacted by the Cerro Lindo production decrease of 7%. Copper production of 8,000 tons was 5% lower than the second quarter of '18, given the already mentioned lower grade.

On our Smelting segment, overall sales volume has increased 3% when compared to the second quarter of '18, driven by higher exports over Cajamarquilla, as well as higher local sales in Brazil. The planned maintenance shutdown at Cajamarquilla to implement the Jarosite process conversion initially scheduled for the end of the third quarter of 2019 was postponed in November due to delay of shipping of some equipment. Nonetheless, we do not expect this delay to impact our sales for the year-end, thus maintaining our 2019 guidance.

On the following graph, adjusted EBITDA was $118 million in the second quarter, down 28% compared to the second quarter of '18, and we will get into more details on the next page. Finally, net income was $23 million, better than the first quarter, driven by higher revenues and better margins of our smelters. Similarly to the graphs of this page when compared to the same period of '18, it reversed a net loss of $35 million, which was at that time, negatively impacted by non-cash foreign exchange losses.

Please move to Slide 11, where we will discuss EBITDA. Compared to the first quarter of '19, adjusted EBITDA increased 10% to $118 million. This performance is primarily explained by lower base metal prices, higher costs in our mining segment and an increase in exploration and project development disbursement, which were positively compensated by the increase of byproducts revenues in our smelting segment, mainly sulfuric acid, the US dollar appreciation against Brazilian real and the positive effect of IFRS 16. Also, there was the impact of other operation expenses, including incremental provisions in the quarter.

Please move to Slide 12, where we will present our mining performance in the quarter. As we already mentioned treated ore volume increased 2.6% year-over-year as shown in this page, partially compensating lower grades. As such, the lower production volume in Cerro Lindo offset the better performance from the other mines and total zinc production was 91,000 tons, down 1% compared to the second quarter of '18. Also, copper production followed the same trend and decreased 6% to 8,000 tons. As a result, net revenues for the Mining segment were $246 million, down 18% year-over-year and primarily as a result of lower metal prices. EBITDA was $44 million in the quarter, lower than the same period of last year as a result of both the decrease of net revenues, as well as of higher operating costs across all mines. Thus, cash cost, net of by-product revenues, increased to $0.48 per pound from $0.25 per pound, as highlighted at the bottom of the page, driven by market-related factors as well as higher operating costs, although with a positive contribution of byproduct sales.

Let's please move on to Slide 13, where we present our smelting performance. Metallic zinc sales of approximately 147,000 tons in the second quarter were 3% higher than the second quarter of '18 and almost 8% compared to the first quarter of '19, driven by a seasonally stronger demand and higher exports from our operation in Peru. EBITDA for this segment was $73 million, 57% higher than the same quarter of last year as a result of higher treatment charges byproduct prices and lower zinc prices, partially offset by higher energy costs and provisions. Consequently, smelting cash cost decreased by 20% when compared to the second quarter of '18. Differently from our Mining segment, market-related factors had a positive contribution, emphasizing the importance of the mining and smelting integration.

Please move to Slide 14. On Slide 14, regarding our debt profile and cash position, we continue to report a healthy balance sheet with extended debt profile and low leverage and maintain the debt breakdown characteristics by source and currency, as seen on the lower left side of the page. As of June 30, the average maturity of our total debt was 5.6 years with an average cost of 4.7% per annum in US dollar terms. On the right side of the page, we see net debt increase as a result of the reduction of our cash position, given the disbursement of our expansion projects. Consequently, our leverage measured by the net debt to last 12 months EBITDA ratio stood at 1.3 times, further increased when compared to the first quarter as expected, given the disbursements of our projects.

Let's please move to Slide 15. On Slide 15, we see that Nexa invested $95 million in the second quarter, being 42% of expansion projects, including Aripuana. Moreover, 58% were directed to non-expansion projects mainly related to sustaining capex, health and safety and environmental investments. Finally, we reaffirm our 2019 capex guidance of $420 million.

Let's please move to the next page. Here on Page 16, we see Nexa free cash flow generation. Coming from our $118 million EBITDA, we have had a negative working capital change of $60 million. $36 million of tax and interest paid, $95 million of capex including Aripuana and $4 million related to our share buyback program, causing effective free cash flow to be negative $60 million. Additionally, we have increased investment tenor of $53 million of our cash position at Nexa Peru to periods above 90 days to capture higher time deposit yields. This is recorded as an investment activity. And although it is a non-cash event, it caused our consolidated free cash flow for the quarter to be negative $113 million.

Let us please move on to Page 17, where Tito will continue our presentation.

Tito Martins -- President and Chief Executive Officer

Thank you, Menck. On Slide 17, I will comment on the zinc market. In the second quarter, average zinc price was $2,763 per ton, down 11% year-over-year, but up 2% when compared to the previous quarter. Zinc prices started the quarter in an upward trend but reversed in May, mainly driven by the escalation of the US and China trading war and the deceleration of the manufacturing sector in China. It's worth mentioning, zinc benchmark in the second quarter of 2019 are still at high levels around $245 per ton compared to an average benchmark of $137 per ton in 2018. This may be an indicative of a persistent pressure on defined zinc supply, mainly driven by the not yet fully recovered production in the Chinese smelters. Zinc metal stocks remain in very low levels.

Look at the slide on its upper right. This graph shows the comparison between the market estimates in 2017 and 2019. As illustrates, supply projections are usually more optimistic than reality despite regular operating disruptions. New zinc supplies coming from China and riskier mining jurisdictions as Africa will not stock up as initially expected. Also, environmental protection is still affecting both mines and smelters production in China. In a scenario where demand is relatively stable, our expectations are, there will be a delay in new production around the world, mainly in China.

Over to Slide 18. On Slide 18, we list our main greenfield projects. We believe our robust project pipeline is crucial to support our long-term growth strategy and our commitment to value creation. Our main priority is to continue to expand our portfolio in both zinc and copper. After Aripuana, which is a polymetallic mine with zinc as main product, our next project should be a copper project. We have good copper projects in our portfolio like Magistral and Pukaqaqa. Magistral has already completed pre-feasibility study and the FEL3 is in progress. We expect to have an updated technical report by the end of 2019.

Pukaqaqa is in pre-feasibility stage and we will likely have a technical report by the end of the year. Its FEL3 should start still in 2019. We see both projects as very promising. And as I mentioned in the previous quarter conference call, once we get more detailed results, we will have a good problem to decide which one will come after Aripuana. Considering our zinc projects, we have Hilarion and Shalipayco as our main priorities. Shalipayco is in pre-feasibility study stage, and we are negotiating with local communities to receive the social license. Hilarion is in exploration stage, and with good results, we expect Hilarion PEA to be concluded in October 2019.

Now let's move to Slide 19. We had some operational setbacks in the first semester, especially in our largest mine, Cerro Lindo, but our priorities do not change. On the contrary, we will continue to focus on efficiency, productivity and cost gains in order to believe better results. Aripuana project is moving as planned, and we do not see any issues that could prevent us to complete the project as expected. Vazante's dry-stacking facility is ready, and we are working on its ramp up. We faced the 30-day delay in the Jarosite conversion in Cajamarquilla, but we expect to conclude it by November, which will allow us to increase zinc recovery to 97% in the smelter.

We are committed to maintain the market update about our brownfield and greenfield projects. And as a result, we expect to file new reports for Cerro Lindo, Magistral, Pukaqaqa and Hilarion along the next few months.

Before ending the presentation, we would like to reiterate that health and safety in the workplace remains our top priority, and we continue our efforts to eliminate accident risks. Thank you all for your time, and let's move on to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Petr Grishchenko with Barclays. Please go ahead

Petr Grishchenko -- Barclays -- Analyst

Hi, Good morning, and thanks a lot for taking my questions. II got a few. So I guess to begin with, can you please provide a little more color on declining ore grades and how this incorporates in your guidance? Because frankly, I'm a little bit confused on your press release that says you expect grade to increase in line with the mine plan, but then you also suggest that the guidance assumes higher treated ore volumes to compensate for forecast of lower grade. So any color on that aspect would be helpful.

Tito Martins -- President and Chief Executive Officer

Hi, Petr. Thank you for your questions. Actually, the mine planning forecast increase in ore grades, well, we faced during this second quarter some geomechanical instability when we were assessing the ore body. So for those months, May and June, we had a slight decrease in our ore grades, but they are projected to be reversed in -- actually now corrected and reversed in the beginning of this third quarter. So we expect to fulfill our guidance based on that.

Petr Grishchenko -- Barclays -- Analyst

Yes, different timing difference, I guess, in that. And also on treatment charges, can you perhaps provide an update on what you're seeing for the second half? And how you see treatment charges impacting your mining and refining operations in aggregate? And I also cannot recall percentage of your sales that are benchmarked versus negotiated annually, so if you can remind me that, that will be helpful.

Tito Martins -- President and Chief Executive Officer

Okay. So let's break down this answer to you. Around 60% of our needs are fulfilled by our own mines, which have the benchmark this year the reference, right? The other 40% comes from the market, and we have 90% of annual contracts, which have the three-year average as reference. As we can see now in our earnings release, this is $188 per ton, right? The other 10% goes with the market. The market in Peru where we buy our concentrates, they are not as well as we see in Asia, for example. So it's ramped. It's been close to the benchmark. Benchmark was $245, and we have recently seen the benchmarks around $260, $270 a ton.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

And the first half of the year -- beginning -- the first quarter of the year, we actually closed some contracts with this around $230, $235. We see this start to go up. So we have a range that varies in between $225 and $250.

Petr Grishchenko -- Barclays -- Analyst

All right. Okay. That's helpful. And another question. Can you provide some more color on the working capital for the second half because first half consumption was a little more than I modeled. So if you can provide any guidance, that would be helpful.

Tito Martins -- President and Chief Executive Officer

Working capital, actually, this is -- these accounts, they are running normally, Petr. Why is that? We have some tax recoverables that follow -- very peculiar to Peru. Sometimes in the end of the period, they are reduced, because we have there recent what we're paying them, right? With specific regard to account receivables, we have some shipments that were done with very short term but they were not paid until the end of the quarter. So actually, we shouldn't be seeing in the following quarter working capital variations that are volatile or too wide or wider than the $60 million that we have seen. Thank you for the question.

Petr Grishchenko -- Barclays -- Analyst

Okay. And then the last question, if I may. On the capital allocation front, how are you thinking about balancing dividends and buybacks with rising leverage metrics this year? And also, do you have any expectations, like internally, if you can provide any guidance the way you think the leverage will shape by the end of the year?

Tito Martins -- President and Chief Executive Officer

Petr, leverage has been increasing basically because of our investments in growth, Aripuana mainly, right? So we are spending this year the way we were forecasting. If you follow our disbursements as per our guidance until the end of the year, this will not be increasing much more than 1.5 times, 1.6 times. This is what it has been forecasting, right? About capital allocation, this is a result of results as well, right? So we need to wait until next year to see how our final cash generation before investment to see what can be said to the market. We have our policy -- we have our minimum dividend policy. So this is a good indication at this point in time.

Petr Grishchenko -- Barclays -- Analyst

Great, thanks a lot for answers and best of luck to you guys.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Jens Spiess with Morgan Stanley. Please go ahead.

Jens Spiess -- Morgan Stanley -- Analyst

Yes, hello, thank you for taking the call. I just want to know if you could tell us what your expectations are for other operating expenses? They were higher this quarter than usually. Do you expect them to continue this way or, yes, what's your expectation going forward?

Tito Martins -- President and Chief Executive Officer

Expectation going forward is this line to be decreased because we had the FX impact this quarter and also the provisions, which were a one-off.

Jens Spiess -- Morgan Stanley -- Analyst

Okay. So basically, all the provisions shouldn't be expected to continue, right?

Tito Martins -- President and Chief Executive Officer

Yes.

Jens Spiess -- Morgan Stanley -- Analyst

And regarding production, it seems that production has to increase in the second half of the year in order to reach your guidance, and you seem to expect that. But could you maybe give more details if that will be evenly during the third and fourth quarter? Or will it be gradually that production jump?

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

In principle, even.

Tito Martins -- President and Chief Executive Officer

You have to remember that I think Menck mentioned before, we had some instability in Cerro Lindo. We're not expecting to have it in the second half. All the lines are operating very well and within Pasco, a huge amount of work within Pasco Complex. So having fixed the issues that we faced in Cerro Lindo makes us believe that everything is going to be really stable along the second half. So reason is that.

Jens Spiess -- Morgan Stanley -- Analyst

Okay, great. Thank you. And on the Cerro Lindo updated technical report, any preview you could give us on what you expect there? Will there be big changes in the short-term production sequence or is it more changes in the long term and extending the life of mine there?

Tito Martins -- President and Chief Executive Officer

I would love to say something Cerro Lindo right now, but because of the legal standards, since we are planning to release the technical report sometime along the second half, but not in the next 45 days, I'm not supposed to say anything. I hope we have good news.

Jens Spiess -- Morgan Stanley -- Analyst

Okay, great. Thank you so much.

Operator

And our next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Yeah. Hey, good morning, gentlemen. Just wanted to ask, firstly, at high level, do you think about the weaker copper and zinc prices when contemplating further expansion and maybe slowing it down or maybe changing your plans at all given recent trends?

Tito Martins -- President and Chief Executive Officer

Timna, how are you. Basically, what we're seeing is clear. The market is looking at China and this -- the trading war situation. And we actually have seen some slowdown in manufacturing in China. I believe that the reaction of the commodity price has to do with that. But in general terms, we are still not seeing growth in zinc concentrate production there, which implies that the concentrate production growth will come only from the western world, which means that we may still see the lack of the metal in the market -- the warehouse, the stocks in the warehouse are really low to date. So the fundamentals tell us that price of zinc should be higher than they are today. And it seems to me that's just a perception of a slowdown in China that's making them falling; they have fallen along the last four, five weeks, right?

In terms of the copper, it's pretty much the same. You were having a discussion yesterday about this and we came to the conclusion that copper price should be around $6,000 per ton until the end of the year basically because of the slowdown I mentioned to you. And on the other hand, we are not seeing new production coming to the market. So we should work with copper around $6,000, and expecting that zinc price should be higher than they are today.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Okay, no change to investment plans because...

Tito Martins -- President and Chief Executive Officer

No, no, no. About production, about plans, we are keeping everything. We work with the long-term prices and our targets in terms of projects and development of new mines, we will skip it out. In the long term, we are positive about the mines.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Okay. And then, the other question I had was just if you could comment on some of the headlines coming out of Peru about changes to the mining law. Just your opinion on that? Or if that would have any impact on you, what's driving that, I appreciate it. Thank you.

Tito Martins -- President and Chief Executive Officer

Very good question. What happened is the President of Peru last weekend, because they are celebrating the national -- it's the most important event in Peru this weekend, I've forgotten the name of the event.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

National Day.

Tito Martins -- President and Chief Executive Officer

National Day. That's the event. He made a speech of what an hour and a half, and actually, he was focusing on propose a change, resignation of the Congress and himself as well, and proposed new election for the next year. And in the middle of the speech, he came up with the potential change in the mining code in Peru. Reaction in Peru was really strong against that. I mean, the mining association was against this, industry association was against, politics were against, basically because Peru is in a very good position today. Lots of new projects being developed. We can say that Peru is the new frontier for the mining business around the world. So I don't think that we'll see a concrete change. I don't see the possibility that -- and not even the power to do any modification in what we have today. The mining code in Peru is a good one. It's a pro-business. So I don't see any possibility at all to see those change. And I have been speaking with a lot of people there. Everybody has the same concept about what's going on.

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Okay, very helpful. Thanks you.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And our next question comes from Oscar Cabrera with CIBC. Please go ahead.

Oscar Cabrera -- CIBC -- Analyst

Thank you, operator, and good morning, everyone. Tito, I was wondering if you could provide context around your zinc production. I appreciate that you maintained your guidance, but if you look at the bigger zinc producers, so Cerro Lindo, Vazante and El Porvenir, and you look at your budgets for the year in terms of grade and throughput, how would you qualify these for the second half? Your expectations to beating expectations or below expectations? That would be helpful just to put context around the production for the balance of the year.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

Hello, Oscar, this is Menck. How are you? Thank you for your question. Actually, it's pretty much the same way I answered a previous question. We expect to have pretty more volumes similar to the first quarter, I think, they love it. And as we go through the mine planning, we will recover grades. So we expect to have a smooth and continuous production during the third and the fourth quarter. That's why I believe we can achieve our guidance. Was it clear?

Oscar Cabrera -- CIBC -- Analyst

Okay. No, that's helpful, Menck. But just -- let's focus on Cerro Lindo then. The grades or the average grade in the fourth quarter of last year was 2.35% zinc. We're averaging about 2% this on the first half of the year. Are you expecting to get back to the 2.35% level for the second half? Or should we expect just a small increase from what you see in the first half?

Tito Martins -- President and Chief Executive Officer

Oscar, it's Tito here. We are expecting actually to increase the throughput in the plant. The volumes will be higher. The grades will not change much, but we will have more run of mine through the plant. We want to keep the stability between 20,000 tons per day and 21,000 tons per day. That's how we're going to reach the production that we are forecasting.

Oscar Cabrera -- CIBC -- Analyst

That's perfect, Tito. And so we expect the same thing out of El Porvenir and in Vazante, I assume?

Tito Martins -- President and Chief Executive Officer

Yes, yes. Vazante is doing very well. Pasco is doing very well also.

Oscar Cabrera -- CIBC -- Analyst

Thank you. Now, if I may, move on the bigger development projects. Do you have -- you said there in your remarks that you'd be looking at Magistral and Pukaqaqa to see which one goes ahead. Magistral, you have provided like figures around capex, about $0.5 billion and 52,000 tons of production. What does the other project look like? Is it comparable in terms of CapEx and production?

Tito Martins -- President and Chief Executive Officer

Yes. What happened with this information, Oscar, I'm not allowed to release it yet. We're planning to have the pre-feasibility study plus the technical report ready some time along the semester. So after we have it, we have production. And in terms of objectives, both projects are pretty much aligned with what we want. I hope I can have this information passed on to you, OK?

Oscar Cabrera -- CIBC -- Analyst

Yes. No, that's -- I can appreciate it, Tito. Just trying to sort of like reconcile your comments on the last question in terms of, if you're in a tougher copper price environment over the next couple of years, would you go after something that is less capital intensive, but we'll wait for the results. The other thing within your projects, and this chart as you provided is very helpful. How much time are you allotting for permits, i.e. when we talk about Magistral and Pukaqaqa, we can see that a start of -- I'm assuming start of construction in 2021. How long do you think the permits would take to get these projects through?

Tito Martins -- President and Chief Executive Officer

I'm trying to get be precise here, but let me explain once more. In the case of Magistral, we already have -- we had the agreement with the local communities. So technically speaking, with hours as it burns, it's just a matter of the formalization with the government. What we did in the first half, we have to renegotiate with the level of municipality a change in the project, which was the location of the tailings dam and it was done. We renegotiate this agreement. So we are in the process to formalize with the central government the new agreement. When it happens, the bureaucratic process, we should have the permits for construction granted. I would say, it will be very easy. I mean less than six months to get it.

In the case of Pukaqaqa, we already have the permit. Yes. There is nothing that is pending for construction. Why? Because we have the local agreement. And we have the broader agreement with the central government as well. So there is no restrictions at all in terms of permits to build those two projects. The rules of the branches deemed to place or to get the permits you may need, as long as you have a good relationship with the communities and you can have the social -- what they call the social agreement, the central government doesn't delay the permit. So we are fine with that.

Oscar Cabrera -- CIBC -- Analyst

Okay. No, that's very helpful. Thank you, sir.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from Carlos de Alba with Morgan Stanley. Please go ahead.

Carlos de Alba -- Morgan Stanley -- Analyst

Good morning, everyone. Thank you for the question. Just, Tito, what options do you think has the Company -- what options do you think are available to the Company to try and improve the liquidity, which is one of the issues that we keep getting feedback from investors as to why the stock, despite the value that it offers, continues to trade below PSA in valuation and definitely suggest a lot of upside to the average price target?

Tito Martins -- President and Chief Executive Officer

Carlos, Carlos, this is a very difficult question. We've been discussing different options. We have not -- we have come up with the final conclusion about this. But I agree with you, liquidity has been one of our big concerns about the performance of our shares. Clearly, there was a shift, a big shift in between last year and this year. We have tried to figure out what to do. Hopefully, we can come up with something soon. But so far, I don't have the answer for that.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

Carlos, this is Menck. The best thing we can do in the end of -- in this period is continuously explain to the market what we are, increasing our level of transparency and disclosure. We're preparing ourselves for that and hoping that this stimulates the market also to trade more.

Roberta Varella -- Head of Investor Relations

Yes, and also to add, we have been attracting new investors to the share, but also in terms of the profile, they long-term investors, part of them. So it helps with, I'd say, with the liquidity issue, but we are working to try to improve that as well.

Carlos de Alba -- Morgan Stanley -- Analyst

Right. Understood as well. Thank you very much and hopefully they'll get a technical report to do the trick.

Operator

And our next question comes from Alex Hacking with Citi. Please go ahead.

Alex Hacking -- Citi -- Analyst

Yes, just following up on Oscar's question earlier around Cerro Lindo. Obviously, the reserve grade at that mine is below what you're currently mining. I think it's closer to 1.8%. Do you have ability to further increase throughput at the mill to offset that over time or is this something that you hope to resolve with the drilling campaign to potentially increase that reserve grade as well as potentially expanding life of mine? Thank you.

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

Alex, this is Menck here. It's a very good question, but unfortunately, all the responses will be comprised in anticipating any results that will come out in the technical reports that we put or we intend to release into the end of the year. So I will ask for your patience on that. And you will be able to have much more color once we have it out in the market.

Tito Martins -- President and Chief Executive Officer

Yes. I don't have the numbers in my mind, but I can tell you one thing. The three months technical report stated that the grade should be a little bit above the ones we we find today. So on average, they should be higher than they are than what we are producing from today, yes. That, we can say.

Alex Hacking -- Citi -- Analyst

Okay, I got it. I look forward to seeing the technical report. Thank you for the time.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Tito Martins for any closing remarks.

Tito Martins -- President and Chief Executive Officer

I would like to thank you all for this opportunity and state again that we are very confident that we actually can reach the guidance that was provided. July, I can advance it was a good month. So we are very optimistic about our production. Nobody asked anything about the smelting. The smelters are doing really very well, the general site of project. There's a delay of one month, but we will be implementing it at the end of November. And so we are glad to see that production is back on track. And hopefully, the market -- the price of the commodities can react also in the second half. We do have expectations about what the China and US will do about the trade war. Everybody's losing with that, right? So hopefully, they come up with a good conclusion, a good agreement, and the market goes back to what it was last year. Thank you very much, again.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Tito Martins -- President and Chief Executive Officer

Rodrigo Menck -- Senior Vice President Finance and Group Chief Financial Officer

Petr Grishchenko -- Barclays -- Analyst

Jens Spiess -- Morgan Stanley -- Analyst

Timna Tanners -- Bank of America Merrill Lynch -- Analyst

Oscar Cabrera -- CIBC -- Analyst

Carlos de Alba -- Morgan Stanley -- Analyst

Roberta Varella -- Head of Investor Relations

Alex Hacking -- Citi -- Analyst

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