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Nexa Resources S.A. (NYSE:NEXA)
Q3 2020 Earnings Call
Oct 30, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Nexa Resources' Third Quarter 2020 Conference Call. [Operator Instructions] The presenters on this call are Mr. Tito Martins, CEO of Nexa Resources; Mr. Rodrigo Menck, CFO of Nexa Resources; and Ms. Roberta Varella, Head of Investor Relations. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Tito Martins. Please go ahead.

Tito Martins -- President and Chief Executive Officer

Thank you, and good morning and good afternoon, everyone. Thanks for joining us in another Nexa's earnings conference call. Today, we will be talking about our results from the third quarter of 2020. I hope you and your loved ones remain safe and healthy.

Please, let's move to Slide 3, where we will begin our presentation. In the last six months, we have been confronted by COVID-19. The spread of the virus in LatAm is currently at a slower pace, but remains a big concern. Additional health and safety protocols in all of our operations remain in place. Essential site personnel continue working remotely. Mining operations in Peru have gradually ramped up, as we still face some constraints related to the workforce availability. As a consequence of the situation, we are reducing our copper production guidance for the year. But zinc and lead [Indecipherable] are maintained, and mining cash cost has also been revised. Metal sales guidance for the year remains unchanged too.

As promised in our last conference call, we are updating our '21-'22 guidance that had been suspended at the beginning of the pandemic. Menck will discuss guidance in more details during his presentation.

We, our industry and our clients are still learning how to adapt to this new reality. But I believe that we have done well so far, maintaining our operations under difficult conditions, keeping health of our employees and providing support for our communities. Third quarter was a very strong quarter. Our adjusted EBITDA stood at $152 million, and our cash generation was over $150 million. As a consequence, financial leverage decreased from 4.9 times to 3.2 times. These results come from our commitment to capital discipline in our efforts to reduce costs and improve our operational efficiency.

I also would like to take the opportunity and thank our team, who stepped up in such a challenging circumstance. Although a high level of uncertainty remains, going forward, we are assuming our operations will remain operating at normal levels. Market conditions are better than we anticipated. And as a consequence, we have also revised our investment guidance for the year. It will be discussed in the next slide.

So, please turn to Slide 4. In the third quarter, we invested $85 million with a cumulative capex of $234 million in the first nine months of the year. In response to COVID-19 and the Peruvian lockdown, last May, we revised our capex guidance from $410 million to $300 million. At that time, we also assumed we would have a better view of the market in the second half of the year. Surprisingly, demand improvement has been faster than anticipated, allowing us to operate in full capacity. Because of this positive situation and in order to keep our operations running safely and stable, we have updated our sustaining capex to this new reality. Additionally, on October 6, we published an update of the Aripuana project, and its capex for the year was revised

To $193 million. Considering this, now, we estimate a total capex of $350 million for 2020. On the other hand, exploration and project development expenses have been revised downwards from $68 million to $50 million. Some of our exploration activities returned in the third quarter, but we decided to maintain some of our projects on hold.

Turning now to the next slide, Slide 5. In early October, we published an update on the Aripuana project. Zinc equivalent production is now estimated at 119 tons per year for approximately 11 years, a slight decrease from our previous estimate of 13 years. Based on currently inferred mineral resources and considering our track record of conversion, we believe life of mine would easily be extended beyond 20 years. Total capex was revised to $547 million compared to the previously estimated of $392 million. Project timeline was also updated [Indecipherable] completion is forecasted for the fourth quarter of '21. Cost increase and time extension resulted primarily from a number of factors: delays in the completion of the detailed engineering and some exogenous events. Despite the challenge we faced, Aripuana continues to be an accretive project. It's one of the few zinc projects under development in the world. And its implementation is consistent with our strategy of increasing the integration between our mining and smelting operations.

Moving now to the next slide, Slide 6. On this slide, we provide year-to-date milestones of the Aripuana project. Overall project physical progress reached 56.7% at the end of September. With the current status of our engineering, procurement and construction packages, we believe we will continue to deliver according to the updated execution plan. In addition, we are preparing ourselves for the commissioning and future production. We have already mobilized the operational readiness team. The pre-operational phase equipment are on-site. And the stopes development should start in January 2021.

Please move to the next side. This slide shows the other projects in our pipeline. Since the beginning of the pandemic, we have been very concerned about our capital allocation. Because of that, we decided to revise our project portfolio and its timeline. Magistral project today is the most advanced in our portfolio. Engineering studies continue to progress, and we expect FEL3 to be completed in the first half of 2021. The pre-feasibility studies at Shalipayco and Pukaqaqa remain on hold. In addition, we are renegotiating the environment impact study for Pukaqaqa, which should also caused extension of the project timeline. Regarding Hilarion, we have already resumed our exploration campaign in the third quarter. One successful project currently on hold is expected to resume in the beginning of '21.

Now, I would like to pass on to Roberta Varella, our Head of Investor Relations, who will comment our third quarter results. Roberta, please?

Roberta Varella -- Head of Investor Relations

Thank you, Tito. Good morning and good evening, everyone. Please, let's move to Slide 9. Beginning with the first chart on your left, zinc production of 82,000 tons decreased by 16% compared to third quarter of 2019. The continued solid performance of our mines in Brazil was offset by the gradual ramp-up of our Peruvian mines. Compared to the second quarter, zinc production was 31% higher. Copper production followed the same trend and decreased by 25% year-over-year but increased by 68% compared to the previous quarter. In respect to our smelter segment, total metal sales of 158,000 tons were slightly higher versus the same period a year ago. Compared to the second quarter, sales were 32% higher, mainly driven by the recovery in demand in our home markets. On the following graph, consolidated net revenue was $538 million compare with $564 million a year ago, mainly driven by lower volume and decrease in zinc and lead metal prices.

Turning to Slide 10, we will comment on our consolidated EBITDA. Adjusted EBITDA increased from $58 million to $152 million in the third quarter of 2020. This strong performance was mainly driven by lower operating costs and expenses with a positive variation of $44 million, the reduction in exploration and project development expenses, the increase in byproducts prices due to higher prices and quarterly limestone sales record, which were partially offset by Atacocha expenses related to the underground suspension. The US dollar appreciation against Brazilian real had a positive impact of $21 million.

Please, let's move to Slide 11. We will discuss our mining segment performance. As I mentioned earlier, the solid performance of our operations in Brazil was offset by the decrease in our Peruvian mines, which had gradual increase in their throughput rates after restarting operations in second quarter. Cerro Lindo and El Porvenir still faced some limited workforce availability, while Atacocha San Gerardo open pit was able to resume full capacity.

Regarding cash costs, in third quarter of 2020, mining cash costs averaged $0.33 per pound, down 20% from last year, primarily driven by the temporary decrease in costs in Peru as we did not incur [Phonetic] in some operating activities, following lower production volumes and also due to reduction cost initiatives, a positive impact of the Brazilian currency devaluation in Vazante and Morro Agudo costs, and higher by-product credits, which were partially offset by higher TCs and lower volumes. Compared to second quarter of 2020, mining cash costs also decreased, positively affected by higher volumes and by-product credits.

Moving to the next slide, on Slide 12, we will discuss the mining segment performance. Adjusted EBITDA in third quarter for the mining segment was $67 million compared with $33 million a year ago. This increase was primarily due to the decrease in operating costs, as I explained in this slide, the positive impact from the Brazilian real depreciation against the US dollar, an increase in byproducts contribution, and the decrease in mineral exploration and project development expense.

Moving to the next slide, on Slide 13, we will discuss our in smelting segment operational results. Total production was 154,000 tons, down 1% from the same quarter a year ago. Compared to second quarter, production increased by 21%, primarily driven by Cajamarquilla smelter, which operated at a reducing rate until mid-May, following the measures required by the Peruvian government to control the spread of COVID-19. Total sales in the third quarter of this year were 158,000 tons, slightly up year-over-year, but 32% higher compared to the previous quarter, mainly driven by higher production and demand recovery in our home markets. Regarding cash cost, smelting cash cost decreased from $0.99 per pound in third quarter 2019 to $0.79 per pound in this quarter. The 20% decrease is explained by market-related factors such as lower LME prices, higher treatment charges and the Brazilian currency devaluation and lower operating costs, positively affected by the new energy contract and decrease in cost of materials in Cajamarquilla smelter.

Moving on to the next slide, smelting EBITDA was $86 million in third quarter, compared with $25 million a year ago. This increase was mainly explained by higher treatment charges, the positive price effect related to changes in market prices in respect of quotation period adjustments, a decrease in operation costs, partially offset by the negative impact of byproduct credits due lower sulfuric acid prices.

I will now turn over the call to Rodrigo Menck, our CFO, who will provide more detailed information about our debt profile. Menck, please?

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

Thank you, Roberta. Good morning, and good afternoon, everyone.

I am now on Slide 15. As demonstrated in the upper left graph, our liquidity remains strong, and we continue to report a healthy balance sheet with extended debt profile. By the end of the third quarter, our current available liquidity was $1.3 billion, which includes our undrawn revolving credit facility of $300 million. The debt breakdown by category and currency is shown on the lower left side of the slide. As of September 30, the average maturity of our total debt was 5.4 years. On the right side, we see net debt decrease compared with the previous quarter, reflecting the improvement results of our operations and cash generation. Our leverage, measured by the net debt to adjusted EBITDA ratio also decreased to 3.23 times as a result of higher adjusted EBITDA and improved cash generation.

Now moving on to Slide 16. On this slide, we present Nexa's free cash flow generation. During the quarter, we generated $159 million. Describing it further and starting from our $152 million adjusted EBITDA, we had a $52 million gain in working capital, mainly as a result of increased average supply of payment terms, partially offset by $30 million of sustaining capex and another $9 million of interest paid and taxes. Still, Nexa has generated $165 million of cash flow before expansion projects during this quarter. Non-sustaining capex, which includes mainly our expansion project in Aripuana, amounted to $49 million. Finally, during the quarter, we had a positive net impact from loans and financial investments of $71 million, partially offset by $28 million of other non-operational expenses, resulting in a final cash flow generation of $159 million.

Now moving on to Slide 17. On this slide, we will comment on our updated mining segment guidance. But before discussing guidance, I would like to comment on our assumptions behind the scenario. As previously disclosed, our guidance is subject to the continuous evaluation of several factors, including the impact of COVID-19 on our operations, supply chain and demand for our products. After our year-to-date operational performance in the nine months, which reflected the temporary suspension of production at the Peruvian mines due to COVID-19 and their gradual ramp-up in the third quarter. We maintain our 2020 production guidance for zinc, lead, while slightly decreasing the copper production range by 4,000 tons.

In our efforts to continuously improve our disclosure, have updated our production guidance for 2021 and 2022, which were temporarily suspended in response to COVID-19's uncertainties. For 2021, zinc production is estimated to increase 6% over 2020 and a further 10% in 2022 over 2021, after the Aripuana ramp up. We also have revised our 2020 mining cash costs due to the gradual ramp-up of our mining operation in Peru and our estimates for Q4, we have updated our mining average cash cost to $0.45 per pound of zinc sold, down from $0.59 per pound.

Now moving to Slide '18. On this slide, we will comment on our updated smelting segment guidance now. Our sales guidance for 2020 remains unchanged as our smelters are estimated to continue operating at higher utilization rates. Metal sales are estimated to be between 540,000 and 580,000 tons in 2020. Despite the decrease in demand year-over-year due to COVID-19, demand has recovered from second quarter levels to this upward trend and is expected to continue in the fourth quarter. Similar to our mining segment, we have updated sales guidance for 2021 and 2022. For 2021, metal sales volume is forecasted to increase 65,000 tons over 2020 at the midpoint of the guidance range and a further 2,500 tons in 2022 over '21. Our smelting average cash cost has been revised slightly up to $0.78 per pound of zinc sold due to the higher metal prices.

I will now hand over the call back to Tito. Tito, please.

Tito Martins -- President and Chief Executive Officer

Thank you, Menck. Here, we will make some comments about the market fundamentals. During the quarter, zinc price continued to recover, reaching pre-pandemic levels in August. Metal demand has shown some recovery in China, although in other countries, constructions are taking longer to normalize. In terms of our home market, Latin America, zinc demand trended upwards, driven by civil construction, infrastructure, energy, every business and to a certain extent, the auto segment. In terms of copper, prices have shown a significant depreciation during the quarter, driven primarily by a weaker US dollar and the decline of inventories throughout the period. Similar to zinc, demand has improved in China as sectors such as construction, infrastructure and transportation responded positively to the economic stimulus.

The short-term outlook for zinc and base metals should remain volatile as prices should continue to be influenced by the US dollar variation. In terms of fundamentals, zinc concentrate supply is expected to continue to tighten as the Chinese mining output may not perform as market expects, potentially pushing TC levels down and prices up.

Moving to our last slide. As I said earlier, in such a challenging scenario, we have delivered a strong result. Third quarter performance demonstrates the resilience of our business, the contribution of Nexa Way program and the commitment of our team with operational excellence and good performance. We remain confident with the recovery of demand, and we are preparing ourselves to generate long-term value creation for our stakeholders, always keeping financial discipline and a strong balance sheet.

Thank you all for your time, and let's move to the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] The first question will be from Jens Spiess with Morgan Stanley. Please go ahead.

Jens Spiess -- Morgan Stanley -- Analyst

Yes. Hello. Thank you for taking my questions. I just wanted to ask, what are the main drivers behind the decrease in your 2021 to '22 guidance versus the original guidance you had published before? And also, I noticed that the smelting sales guidance didn't change much. I was wondering why didn't it go down because you are no longer doing the Jarosite project, right? So didn't that have an impact on your guidance for those years? Thank you.

Tito Martins -- President and Chief Executive Officer

Hi James. Thank you very much for your question. Tito here, speaking. Let's go for the production guidance. You have to see during the COVID in the first half, we had postponed some of the development in our mines. So we were not able actually to have people working there. So because of -- there was an impact in our -- the development in the second half and so affecting directly production for next year. Besides that, we have to prioritize some routes in the production line. So it also affects the -- in some case, the type of the ore and the content of zinc or copper may be affected. So that's why we decide to be more conservative in terms of production for '21.

In terms of the smelting, production hasn't changed much because we were never affected in terms of -- in the case of Brazil, we were never affected at all. In the case of smelting in Peru, production was affected for some time, but came back very easily. And the supply of concentrate has been very stable. So we are not expecting any change. Jarosite is suspended. We have not abandoned it yet. And I don't think we will. We do intend to come back to the project as -- the market conditions come to a more stable situation. But surprisingly, the recovery in Cajamarquilla has improved along the last two years. So we believe that we can keep having a recovery between 44%, 45% even before Jarosite -- it'll come up with the end of the implementation of Jarosite. Thank you.

Jens Spiess -- Morgan Stanley -- Analyst

Okay, great. Thank you.

Operator

The next question will be from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Hi, good morning. Tito, I'm curious, your comments that you -- there's enough demand to run the smelters at full capacity. I'm just curious, is that being -- is that domestic demand, or are you exporting a good chunk of the refined zinc outside of Latin America?

Tito Martins -- President and Chief Executive Officer

Hi Orest. Good to hear from you. I'm going to try to describe what's going on. But I doubt anybody actually can say that -- we were not expecting to see such a strong demand we've seen since, let's say, July. Clearly, let's talk about our home market, by home market, I mean LatAm, OK? It's not only Brazil. So what happened is, since July, looks like there was -- there was restocking, most of the countries. And then we thought maybe the strong demand will be. Weak on the fourth quarter. But I can tell you, we are still seeing the same strong demand. And actually, we are starting to believe that the situation came in May and the first quarter of next year. It has to do with a lot of steel makers in the first half, they cut production. Some of the automakers -- most of the automakers also cut production. And somebody -- everybody came back to an almost normal situation, and it is impacting. So it seems that there is a huge imbalance in supply of different materials, most basic materials. And it's actually helping us to sell more.

Just to give an example, we stopped -- we reduced production [Indecipherable] smelting at the end of the first half, assuming that we could actually have a cutting in demand. It never happened. If I have more metal available today, I will be able to sell it. Thank you.

Orest Wowkodaw -- Scotiabank -- Analyst

And are you -- so it's not -- so it's all LatAm demand? It's not like you're selling to traders that's shipping to China?

Tito Martins -- President and Chief Executive Officer

No, no. Not at all. Not at all. Actually, we had to cut -- we had -- we always have some -- a small portion of our sales that we leave to sell in the spot market. And if it's not possible to do it, we have agreements with -- long-term agreements with trading companies where we can sell to now. We have actually to reduce those sales to supply to the -- our home market because of the strong demand. But nothing from us is actually moving to Asia, for example. I'll give another the example, it's very uncommon to bring metal from Cajamarquilla in Peru to Brazil or Argentina. We had to do it because of the demand.

Orest Wowkodaw -- Scotiabank -- Analyst

That's great to hear. Thank you.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] The next question will be from Hernan Kisluk with MetLife. Please go ahead.

Hernan Kisluk -- MetLife -- Analyst

Hello, good morning. Thank you for taking my question, and congratulations on the very good results. So my questions are on cost. We have seen a stabilization in mining cash cost in the last two quarters at lower levels than we have seen in the past. But nevertheless, the guidance for the year seems to point to an increase in the 4Q. So first question, could you please confirm that 4Q is going to have a cash cost of $0.58? I just want to check my math here. And the second one, thinking about the longer term, how sustainable do you think that the cost that we're seeing now are in the future, mostly thinking to 2021 when you will ramp up production in other mines, new projects?

Tito Martins -- President and Chief Executive Officer

Hello, Hernan. How are you? I'm sorry. I was on mute here and speaking. I think this is common now during the pandemic.

Thank you very much for your question. I believe the -- that it's good to clarify here. First of all, our costs, they have been really impacted by the price of byproducts, right? So our byproducts really have been benefiting us. So to that extent, even though we have been really reviewing our cost structure, this is volatile to the extent that external factors can also impact it in the coming quarters, right? But we have been seeing part of our cost efficiency from our Nexa Way program as well. And you can consider that as a successful program that helped us to become our operations more efficient. I don't know if I covered well your question. This is what we have been seeing here.

Hernan Kisluk -- MetLife -- Analyst

Okay. So before byproducts, would you say that the cash cost that we are seeing today is going to be repeated more or less into 2021?

Tito Martins -- President and Chief Executive Officer

Yes. We are coming back to normality with our utilization rates at higher levels. So it's back to normality, as we say. So I would expect the same level that we are seeing now.

Hernan Kisluk -- MetLife -- Analyst

Okay. Thank you very much.

Tito Martins -- President and Chief Executive Officer

Thank you.

Operator

The next question will come from Isabella Vasconcelos with Bradesco BBI. Please go ahead.

Isabella Vasconcelos -- Bradesco BBI -- Analyst

Hi. Thank you for the questions, and good morning, everyone. Congratulations on the results. I just have one question actually. If you could provide a little bit more color on what are the next steps and new opportunities identified for the Nexa Way project -- program? And if you could give us a little bit of more timing in terms of execution for the new steps and new opportunities that you guys identified, that would be helpful. Thank you.

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

Hello, Isabella. Thank you for your question. I hope you're well. Nexa Way is a continuous program. It's -- it hasn't identified [Phonetic] many initiatives in all levels of the Company, both operationally and corporate. And when we see new initiatives, we implement it right away. This is all related to procedures, to feedstock utilization, recovery ratio. So, all of that goes toward what we have been disclosing to the market, which is an expectation of up to $120 [Phonetic] million of EBITDA impact every year on a recurring basis. So with this, we mentioned specifically this quarter, that's mostly because when we had our operation suspended, as much of our initiatives are related to production, somewhat was -- this program was somewhat hindered in a way. But now, we are back to the full rhythm of production. And then, these initiatives can be seen, as we have shown this, gains that were recorded of $24 million in the quarter, $67 million in the year, on top of what was already identified last year. So this is what we are trying to convey as a message to you.

Isabella Vasconcelos -- Bradesco BBI -- Analyst

Great, thank you.

Tito Martins -- President and Chief Executive Officer

Thank you, Isabella.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. Now, I will hand the call back to Tito for his final remarks. Mr. Martins, please go ahead.

Tito Martins -- President and Chief Executive Officer

Thank you. And before we finish, I would like to say that we were very glad to see our performance this quarter. And we remain very optimistic about the remainder of the year. As I said before, demand is strong. We are back in full production after so many difficulties, mostly caused by the lockdown. Nexa Way, as Menck just explained, helped us a lot during the pandemic because, in some ways, we are not forecasting that, but the implementation of the program, which started last year, helped us, not only with the -- as a continuous improvement program, but also changing the culture of our organization. And now, we are confident that it can actually help more in the short and medium term. Our expectations are huge in terms of keeping up with [Indecipherable] so far and look toward the prices of zinc and copper. Unless there is a disruptive condition caused by a second wave of COVID, this should be in a very stable -- high and stable level, which implies that we should have hopefully better results to show you in the future.

In terms of the Aripuana project, as said before, we are optimist we -- we want to reassure you that we are back on track, and actually, we have high expectations about the project. And we believe that the beginning of production at the end of '21 will be in a time when demand will be stronger than we have today and I hope will be more stable. And we are also seeing that supply may suffer because we are not seeing new mining projects being developed, and clearly, the supply of concentrate in China actions falling when you compare with the previous years. So if the smelting production remains strong as it is in Asia, with a lack of concentrate, we should see actually a more positive market for us.

And finally, I would like to thank our IR team for [Indecipherable] and say that we are available for answer any questions or doubts you may have. Thank you very much for being here with us. Stay healthy, and have a nice weekend. Bye.

Operator

[Operator Closing Remarks]

Duration: 37 minutes

Call participants:

Tito Martins -- President and Chief Executive Officer

Roberta Varella -- Head of Investor Relations

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

Jens Spiess -- Morgan Stanley -- Analyst

Orest Wowkodaw -- Scotiabank -- Analyst

Hernan Kisluk -- MetLife -- Analyst

Isabella Vasconcelos -- Bradesco BBI -- Analyst

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