Nexa Resources S.A. (NEXA) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to Nexa Resources Second Quarter 2026 Earnings Conference Call. Please note that today's event is being recorded and broadcast live via Zoom, with access also through Nexa's Investor Relations website. A slide presentation accompanying the webcast is available for download as well as the replay of the conference call following its conclusion. [Operator Instructions] Now I would like to turn the conference over to Mr. Rodrigo Cammarosano, Head of Investor Relations and Treasury, for his opening remarks. Please go ahead.

Good morning, everyone, and welcome to Nexa Resources second quarter 2026 earnings call. Thank you for joining us. Today, we will walk through the results we published yesterday. If you would like to follow along, the presentation is available through the webcast. Before we begin, please take a moment to look at Slide #2. It contains our forward-looking statement disclaimer, and we ask that you review it along with the related risk factors. Here with me today are Ignacio Rosado, our CEO; Jose del Castro Valle, our CFO; and Leonardo Coelho, our Senior Vice President of Mining Operations. Ignacio, over to you.

Thank you, Rodrigo, and good morning, everyone. Let me start on Slide #3. The operational inflection we have been pursuing becomes visible this quarter. Adjusted EBITDA grew 78% year-over-year, $286 million with a margin of about 31%. Net income was $98 million or $0.52 per share, and net leverage continued coming down, closing the quarter at 1.4x, a steep drop from where we were a year ago, supported by last 12 months adjusted EBITDA of over $1 billion. Three things drove the results. First, a constructive price environment across our entire metal mix, most notably silver, where prices averaged 117%, above the second quarter of last year. Second, the recovery of production at our Peruvian mines after the first quarter setbacks as those assets returned to normal run rates. And third, better performance at our Brazilian smelters, including the contribution from byproducts, which partially offset the challenges at Cajamarquilla. Two milestones position us well for the second half of the year. At Aripuana, the fourth tailings filter is now up and running. That removes a key bottleneck and gives us more production flexibility going forward. And at Cerro Lindo, we implemented the block caving mining method. It is an important milestone. And over time, we expect it to contribute to lower unit costs and better access to higher grade areas. In mining, zinc production reached 79,000 tonnes, up 8% year-over-year on better grades. In smelting, zinc metal and oxide sales totaled 134,000 tonnes, down 7% year-over-year and 8% quarter-over-quarter, impacted by the fire at Cajamarquilla in May. It is important to mention that the event affected the casting house, not upstream processing. So we continued producing cathodes while we restored operations. Activities resumed gradually and returned to normal levels in June. That cathode inventory underpins the recovery of the affected volume in the second half. Free cash flow was slightly negative in the quarter, mainly reflecting $131 million tax settlement payment in Peru related to the Cerro Lindo Stability Agreement. Looking ahead, we expect positive cash flow in the coming quarters, supported by improved production at Aripuana, the recovery of production at Cajamarquilla, and a resilient pricing environment. Let's move to Slide #4 for a closer look at the mining. Year-over-year, the 8% increase in zinc production comes from better ore grades across key assets. Sequentially, production was broadly flat. The recovery in Peru offset temporary lower grades at Aripuana, the commissioning of the fourth tailings filter and the scheduled ball mill liner replacement. Cash cost net of byproducts came in at $0.04 per pound in the quarter. For the first half, that puts us at negative $0.35 per pound, well below our 2026 guidance range. The drivers were strong byproduct credits from higher copper, silver and gold prices and lower treatment charges. Cost per tonne of run-of-mine was $57 per tonne in the quarter and $57 per tonne for the first half, in line with full year guidance. The year-over-year increase came from the appreciation of the Brazilian real against the U.S. dollar and from higher personnel and maintenance costs at most of our units, partially offset by a stronger byproduct contribution. The financial picture for the segment is strong. Net revenues of $524 million and adjusted EBITDA of $220 million, a 42% EBITDA margin, that is the kind of operating leverage we expect when prices and volumes both move in the right direction. Let me turn to Aripuana on Slide #5. Aripuana delivered a strong year-over-year performance. Treated ore was up 33% to 399,000 tonnes and zinc production up 44% at 8,800 tonnes. That reflects higher throughput and better grades as the operation keeps moving towards design capacity. Sequentially, the decline was expected. It reflects the commissioning of the fourth tailings filter during the quarter, together with the scheduled ball mill liner replacement, and we are already beginning to see the benefit of the new liner material. The filter itself was the milestone of the quarter. The new capacity processed more than 50,000 tonnes of tailings and supported average plant feed rates of 249 tonnes per hour in June. That is more than 86% capacity utilization. For the quarter as a whole, plant utilization averaged 71% with peak daily rates above 92%. What that tells us is that the operation can now sustain higher throughput with more flexibility and, importantly, with materially less exposure to weather disruptions during the rainy season. As the new filter stabilizes, we expect utilization rates and production to increase further in the second half of the year. On exploration, we did not conduct exploration drilling at Aripuana in the first half, but we completed over 23,000 meters of infill drilling. For the second half, the priority is the geophysical program, generating and refining targets, expanding known mineralization and identifying new opportunities to support future mineral resource growth. Now to Slide #6 for the Cerro Pasco Integration Project. This quarter, alongside continued progress on Phase 1, we completed a review of the project's long-term configuration. With a more favorable metal price environment, we reassessed some operating parameters at the Atacocha open pit mine, including a review of economically mineable areas. Based on these results, we now expect the open pit to remain in operation for longer than originally anticipated. And because the open pit will sustain production longer, we are able to defer Phase 2, spreading capital over a longer period without reducing the complex's expected production. On CapEx, total estimated investment moves from $138 million to $180 million, concentrated in Phase 1. The CapEx review was primarily driven by the incorporation of a geomembrane lining in the Atacocha tailings, together with engineering updates and the decision to anticipate the Atacocha tailings storage facility raise into the current project phase. Our 2026 CapEx for the project remains unchanged at $31 million, with the incremental investments allocated to 2027 and beyond, and Phase 2 is deferred to 2032. On execution, this quarter, we completed the main civil works, started electromechanical assembly, including the tailings thickener, and concluded the structural assembly of the pumping building. Looking ahead, the third quarter focus on completing assembly and starting commissioning. Mechanical completion of the pumping system is expected in December. From there, we expect approval of the MEIA by SENACE and the start of the operating authorization process in the first quarter of 2027. Cerro Pasco is a well-known, high-potential polymetallic district. This review further derisks the project and strengthens our integrated position there, sequencing the ore body to maximize value and minimize risk while preserving the long-term production of the complex. Now on Slide #7, I will talk about our exploration results. Our first half exploration results reinforce the quality and depth of the portfolio. On Slide #7, you can see the high-grade intersections from our brownfield programs. The two highlights came from Vazante and El Porvenir. At Vazante, drilling at the Conexao Sucuri Norte target returns strong zinc mineralization close to existing infrastructure, which supports resource growth within the current mine plan. At El Porvenir, drilling at the Integracion target continues to confirm high-grade polymetallic mineralization and extended known zones, which reinforces the strategic upside of the Cerro Pasco Integration Project. At Cerro Lindo and Aripuana, our geological and target generation programs advance priority targets and open new opportunities for future drilling campaigns. Taken together, these results support the potential for future mineral resource growth and life-of-mine extensions across our assets. Let's turn to Slide #8 for smelting. In smelting, zinc metal and oxide sales were 134,000 tonnes, down 7% year-over-year and 8% quarter-over-quarter. Both declines mainly reflect the temporary suspension at Cajamarquilla after the fire in May. That was partially offset by higher volumes at both Brazilian smelters year-over-year and at Juiz de Fora, sequentially. We expect to recover the affected volume in the second half, supported by the cathode inventory built during the quarter, and our 2026 sales guidance remains unchanged. Byproducts continue to gain weight in the segment year-over-year. Sulfuric acid sales rose 4%, silver content sales 22%, and copper cement sales were up 40%. On costs, cash cost net of byproducts was $1.44 per pound in the quarter, $1.42 per pound in the first half, above the upper end of our annual guidance. That reflects higher zinc LME prices impacting raw material costs, together with temporary higher operating costs at Cajamarquilla due to the fire and the appreciation of the Brazilian real. Conversion cost was $0.36 per pound in the quarter and $0.35 per pound in the first half, slightly above guidance, mainly on lower volumes at Cajamarquilla. As volumes recover through the second half, we expect conversion costs to move back towards the guidance range. Despite the lower volumes, the segment delivered a strong financial performance. Net revenues of $584 million and adjusted EBITDA of $66 million, up 162% year-over-year and 11% margin. The year-over-year improvement came from lower raw material costs driven by the consumption of calcine inventory, with lower unit costs and a higher share of zinc concentrate from our own mines, together with a stronger byproducts contribution. With that, I will hand over to Jose del Castro, our CFO, for the financial slides.

Thank you, Ignacio, and good morning, everyone. Let's go to Slide #9 for an overview of the financials. The momentum we achieved in the fourth quarter of last year carried through into the second quarter of 2026, supported by a favorable price environment and by the normalization of our Peruvian mining operations despite a softer quarter in smelting. Net revenues totaled $908 million, up 28% year-over-year and 2% quarter-over-quarter. The year-over-year increase came from higher metal prices across the portfolio, including a $99 million larger byproduct contribution, together with higher zinc prices. This was partially offset by lower smelting sales volume. The sequential improvement was more modest, reflecting continued strength in metal prices and higher mining volumes, again, partially offset by lower smelting sales volume. Adjusted EBITDA came in at $286 million, up 78% year-over-year with a margin of 31.5%. The year-over-year improvement reflects price realization, which translates into a stronger byproduct contribution, along with higher volumes in mining. Sequentially, adjusted EBITDA was broadly stable. The positives were: lower raw material costs in smelting; lower maintenance expenses in Peru; and a higher share of zinc concentrate sourced from our own mines. Those were partially offset by lower byproduct contribution, mainly on lower silver prices and by lower smelting sales volume. Let's move to investments on Slide #10. We invested $89 million in CapEx during the quarter, bringing the first half total to $160 million, about 42% of our full year guidance. Most of it went into sustaining activities, mine development and Tailings Storage Facilities. Phase 1 of the Cerro Pasco Integration Project accounted for $9 million in the quarter and $17 million in the first half versus our $31 million guidance for the full year. Our total 2026 CapEx guidance of $381 million, remains unchanged, with disbursements weighted towards the second half as execution intensifies, mainly on Cerro Pasco Phase 1. On exploration and project evaluation, we invested $17 million in the quarter, mainly in exploration drilling and mine development. First half investment represents about 38% of the full year guidance, which is broadly in line with our typical first half pace. We expect disbursements to weigh towards the second half as drilling programs advance at Vazante, Aripuana and the Cerro Pasco Complex. Our full year guidance of $86 million remains unchanged. Let's now turn to Slide #11 to discuss cash flow generation for the quarter. Starting from adjusted EBITDA of $286 million and adjusting for nonoperational items, operating cash flow before working capital and CapEx was strong at $286 million. From there, $92 million went to CapEx and $93 million to interest and taxes. Foreign exchange had a negative impact of $3 million. On the financing side, regular debt service and lease payments resulted in a net outflow of $22 million. Dividends were a net negative of $4 million, reflecting dividends paid to noncontrolling interest, partially offset by dividends received by our subsidiary, Pollarix, from Enercan. Working capital and other variations were negative at $82 million in the quarter. This was mainly driven by the $131 million payment made in June related to a tax settlement in Peru, associated with the Cerro Lindo Stability Agreement controversy with SUNAT, following the final ruling issued by the Peruvian tax authority in May. Let me be clear on what this payment represents. Following a reassessment of uncertain tax positions, we made the required payment to preserve our legal right to continue disputing the assessments in the Peruvian judicial system. By doing so, we also secured reductions in penalties and interest available under the Peruvian tax law. This payment does not represent in any way acceptance of the positions asserted by the tax authority. Furthermore, we continue to believe our technical and legal positions provide a strong basis for recovering the disputed amounts in the next few years. Excluding that payment, free cash flow for the quarter would have been positive $120 million. Including this one-off payment to SUNAT, free cash flow was slightly negative at $10 million. On the remaining working capital items, the second quarter showed a meaningful recovery from the seasonal outflow recorded in the first quarter. We expect further improvement in the quarters ahead. Let's move to Slide #12 to talk about liquidity, indebtedness and credit rating. Our liquidity position remains healthy. We ended the quarter with $707 million in total liquidity, including our undrawn $320 million sustainability-linked revolving credit facility. As you can see, our cash on hand alone covers substantially all of our financial commitments over the next 3 years. Additionally, average debt maturity stood at 7 years at quarter end with an average cost of debt of 6.22%, a slight improvement from the 6.27% at the end of the first quarter. Net leverage continued trending down at 1.4x from 1.59x in the prior quarter and 2.28x a year ago. This improvement was driven primarily by stronger adjusted EBITDA for the last 12 months, now above $1 billion. Looking ahead, we will maintain our commitment to disciplined deleveraging, gross debt reduction and lower interest expense over time. For year-end, we are targeting net leverage close to 1x, while preserving our investment-grade rating and a competitive cost of capital. With that, I'll hand it back to Rodrigo to discuss the market fundamentals section.

Thank you, Jose Carlos. Let me turn to the zinc and copper markets on Slide #13. Zinc prices stayed well supported through the quarter on tight fundamentals and persistent geopolitical risk with the LME price averaging $3,466 per tonne, 31% above the second quarter of last year. Smelter margins, on the other hand, remained compressed. Spot treatment charges in China fell further into negative territory, ending the quarter at minus $109 per tonne. That is a clear sign of how acute the concentrate shortage still is. Byproducts are what cushion that pressure, especially sulfuric acid, and that is where we are well positioned as a net producer. Looking ahead, we expect zinc to stay supported by tight concentrate supply, low exchange inventories and resilient demand. TC pressure on global smelter margins is likely to persist, and continued geopolitical uncertainty could push energy prices up, which can further constrain smelter utilization and tighten refined supply. On copper, the LME price averaged $13,329 per tonne in the quarter, 40% above a year ago, supported by tight fundamentals and by expectations around U.S. import tariffs. Spot treatment and refining charges remained structurally negative, reflecting a persistent concentrate deficit. We did see some short-term volatility linked to trade policy and inventory dynamics, but the structural picture remains constructive over the medium and long-term, supported by electrification, the energy transition and decarbonization. Now let's turn to Slide #14 for a look at precious metals. In the second quarter, silver peaked at nearly $87 per ounce in May, then retracted, closing June around $59 per ounce. Despite that volatility, prices averaged $73 per ounce in the quarter, more than double the level of a year ago. Forecasts now point to a more balanced silver market, supported by higher mine supply and by accelerated substitution in cost-sensitive applications, and weaker expectations for further Federal Reserve rate cuts amid persistent inflation and geopolitical instability added volatility during the quarter. Nexa remains a significant player in the global silver market with annual production of around 11 million ounces. And with the Cerro Lindo streaming step-down effect since May, that exposure matters more. A larger share of production is now realized at spot prices, which supports stronger cash generation. On gold, the rally moderated during the quarter with prices averaging around $4,500 per ounce, 37% above a year ago. Gold stayed supported by Middle East tensions and persistent U.S. inflation, while expectations that the Federal Reserve easing cycle had run its course, took some momentum out. Looking forward, both metals should continue to provide diversification to our polymetallic portfolio, and their byproduct credits continue to reduce unit cash costs across our operations. Now on Slide #15. We continue advancing our ESG priorities during the quarter. On safety and community, we strengthened controls and reduced personnel exposure with remote-operated blasting and the start-up of block caving at Cerro Lindo. We also continued investing in the communities around our operations in both Brazil and Peru. On innovation and circular economy, we moved several projects toward commercialization, turning waste into value, and began deploying artificial intelligence in our operations at Vazante and Cajamarquilla. And on governance, we reinforced risk management under our ERM framework, advanced tailings management in line with international best practices, and were awarded once again the Gold Seal of the Brazilian Greenhouse Gas Protocol Program. With that, I will hand it back to Ignacio for the closing remarks.

Thank you, Rodrigo. Before we open for questions, let me close on Slide 16 with a quick recap of our priorities. First, Aripuana. With the fourth tailings filter now fully operational, we are positioned to unlock full production capacity in the second half of the year, supported by its long reserve life and significant resource potential. Aripuana remains one of the key pillars of our long-term cash flow generation strategy. Second, the Cerro Pasco Project. The scope review prioritizes lower-risk, low-cost open pit extraction at Atacocha and sequences capital more efficiently, while preserving the production profile we expect. It is a well-known, high-potential polymetallic district, and that project strengthens our integrated position there. Third, exploration. Our first half exploration program delivered encouraging results with positive drilling results at El Porvenir and Vazante as well as continued success in extending life of mine across Cerro Pasco, Cerro Lindo and Vazante. Our goal is not simply to replace depletion, it is to further grow our resources and reserve base. Fourth, growth. We continue to actively evaluate value-generating opportunities in mining-friendly jurisdictions. Underpinning all of this is a consistent set of priorities, financial and operational discipline, a stronger balance sheet, balanced capital allocation that includes shareholder returns, a consistent ESG strategy and, above all, our commitment to the safety of our people and our communities. With the first quarter constraints in Peru behind us, the Aripuana filter up and running, Cajamarquilla back to normal levels and the Cerro Lindo silver streaming step-down in effect, we entered the second half of the year with strong momentum and a clear set of priorities. With that, let's open the line for questions.

[Operator Instructions] The first question comes from Pedro Mello with Citi.

My first question is regarding the production guidance for other metals, especially copper, silver and lead. We saw that production in the first half of the year reached about midpoint of the guidance for the year for zinc and bottom for the other metals. So based on the grades that you have for the next 2 quarters and dynamics for each asset, does it make sense to imagine a midpoint for the year or higher in the second half? Or do you see the quarterly pace to keep reaching a level between bottom to the mid of the range? And the second one is regarding the liability management. We saw another deleverage in the quarter. What's the timeline do you foresee for the gross debt payments now that the leverage is lower? And how should we view this payment pace in the coming quarters?

This is Rodrigo here. Thanks for your question. I will address the first question regarding the guidance, and then I will pass over to Jose Carlos to talk about the liability. In terms of the guidance, you're right. So if we look at the first half of the year, it was mainly driven by the -- in terms of the mining production by the impacts of the setbacks that we saw, especially at El Porvenir at the beginning of the year. We are -- we pretty much recovered everything in El Porvenir and with the [indiscernible] also up and running in Aripuana, we expect to increase production in the second half of this year. So that's why the production guidance for the mining segment remains unchanged. So we expect -- it's hard to say if this is going to be midpoint or lower end, but we are confident that we're going to be able to keep increasing production in the second half and try to maximize production as much as we can. In terms of the smelting, we also had in the first half of the year the impact of the fire in Cajamarquilla. Important to mention that the fire was specifically in the casting house. So we were able to keep producing cathodes during the incident. And during the time we were recovering the operations, and now we are moving forward to recover the production we missed in the second half of this year. But again, maximizing production and keeping also the smelting guidance -- production guidance unchanged. So I will pass to Jose Carlos to address the liability part of the question.

Thank you for the question. It is true that we are lowering our net leverage, and this is, as Rodrigo, we mentioned during the presentation, mainly related to the higher EBITDA that we are recording for the last 12 months. And this trend is expected to continue. So we see that as something favorable. However, we continue to have as a first priority the goal of reducing gross debt because, as you know, EBITDA can change depending on what prices are. So we cannot just rely on that. We want to continue to reduce gross debt in line with the priorities that we have communicated over the last couple of years. And we can assume that any excess cash that we generate, we will use part of that to pay dividends within our dividend policy, but any excess cash additional to that will go to pay down debt. Difficult to tell exactly how long that will take because it will depend on a number of factors that we don't control, but you can be sure that, that will continue to be our first priority.

The next question comes from Lawson Winder with Bank of America.

I just wanted to drill down a little bit on costs. There was a comment that you made in the release -- I apologize for the background noise. There was a comment you made in the release about addressing smelter costs that were running ahead of guidance in the first half of the year. I mean it's not surprising given the incident that occurred. Could you maybe speak to why you highlighted that in the tax and whether you see the ability to recover from those higher costs in the second half of the year? And then I might have a follow-up on that, too.

So just to clarify, you were talking about, our conversion cost was high in the first half of the year and why we are projecting that it's going to go down. Is that really your question?

Yes, that's exactly it. And then I'm just... yes, that's fine.