Nexa Resources S.A. Q1 FY2020 Earnings Call

Good morning, and welcome to Nexa Resources First Quarter 2020 Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. The presenters in 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.

Thank you. Good morning, and good afternoon, everyone. I hope you and your families are doing fine in a time so complex for our lives. Thank you for being here in another Nexa’s earnings conference call. Today, we’ll be talking about our results for the first quarter of 2020. Please let’s move to Slide 3, where we will begin our presentation. On Slides 3, 4 and 5, I will comment on the measures we have taken in response to the COVID-19 outbreak. We are living in an unprecedented scenario that should not only affect the way we manage our business, but it will also affect our personal lives. What has not changed, and is part of our core value, is our commitment to protect and preserve the well-being of our people and our communities. We think our reaction to the COVID-19 escalation was actually quick; even before the authorities in Peru and Brazil started to take measures to deal with the coronavirus outbreak, we decided to set up a crisis committee to care for preventive procedures in our operations and offices. It was clear to us that we should look at the health and safety of our people and we needed to preserve the continuity of our business. A strong communication plan addressing our workers and stakeholders was implemented, and we also decided on additional safety measures in our operations. Here we have some examples: social distancing, increased site cleaning and hygiene services, health screening and fever monitoring, no official site personnel, risk group and corporate employees all working remotely, restriction of external visitors, suspension of non-essential business trips and events, health and well-being programs regarding COVID-19 related issues, and an increase in the use of technology to manage our business. I’m sure everybody here can attest that we would be working and running businesses, as we are doing today, with a lot of technological support. Now, please move to Slide 4. We are also strengthening our relationship with our host communities and local governments. In Brazil, we provide medical equipment, kits for medical systems and technical support in the locations where we operate. In Peru, even during the state of emergency, we managed to provide supplies such as fruits and medicine. Some of these initiatives were done in partnership with Votorantim Institute, which provides some financial support. We are also maintaining regular communication with local authorities, trying to help them in the fight against COVID-19 and to get their support for the continuity of our operations. Now please turn to Slide 5; in response to the measures announced by the Peruvian government, we maintained our mining activities limited to the critical operations from March 18 until May 11. Regarding the Cajamarquilla smelter, we were able to secure some raw material supply and given the limitation of the workforce, we had to operate at reduced rates. During this period, mining and smelting in Brazil operated at normal levels without any interruptions. As most of you, our office areas in Brazil and Peru are using home office and surprisingly, we’ve seen productivity improvements in some of them. To navigate this uncertain global scenario, we have been proactively taking measures to strengthen our balance and improve our cash flow. CapEx was reduced by more than $100 million and the total CapEx now for the year is $300 million. Non-essential trips were suspended, such as greenfield projects and development and exploration investments. The only expansion among greenfield projects is Magistral, which is in an advanced stage of the FEL3 phase. On top of that, we are still making cost savings of something around $20 million, mainly related to bonus suspension, travel expenses and third-party services. It’s important to mention that our Board members are reducing their remuneration by 20%. These amounts will be added to the resources Nexa is using to combat COVID-19. Now I would like to pass it over to Rodrigo Menck, our CFO, who will comment on the measures we have adopted to improve our liquidity. Menck, please?

Thank you, Tito, and good morning, everyone. I’m on Slide 6 now. As you know, prior to the COVID-19 escalation and taking into account our strong cash position, we approved in February, the payment of $50 million of dividends to shareholders. Also in February, taking advantage of the capital market momentum at that time, we announced and completed a tender offer of our Nexa Peru 2023 notes in the amount of $215 million and completed this liability management exercise, entering into a new five-year term loan of $100 million, with lower costs. Moving forward, as a response to the worsening conditions of the COVID-19 global spread in March, we increased our liquidity position by adding almost $600 million to our cash balance through new debt, of which $250 million was in March, and $44 million in April, both through our Brazilian subsidiary, and also the drawdown of our revolving credit facility in the amount of $300 million in April, through Nexa Resources in Luxembourg. Therefore, our available liquidity is approximately $1 billion and as such, we believe we have a strong balance sheet to navigate through this uncertain scenario. We will continue to monitor the market developments, as well as our capital structure, analyzing opportunities to support us in our deleveraging process in the future. In terms of leverage, measured by the net debt to EBITDA ratio, we ended the quarter at 3.3 times. Considering the current scenario and projections, it is likely that we will not comply with the maximum level of leverage allowed by our financial covenant clauses defined in some agreements. We are already discussing such situations with the interested counterparts to address it. Moving to Slides 7 and 8, I will comment on our revised guidance for 2020. But before discussing guidance, I would like to comment on our assumptions behind the scenarios. Despite the high level of uncertainty, we have to choose a path, and thus we are assuming a gradual recovery during the second semester. As we estimate that the worst of the pandemic will have passed. We have implemented business continuity measures in our operations, supply chain and financial situation to mitigate and reduce the potential impacts of the continuous efforts to fight COVID-19, but we still estimate having restriction protocols to access our mines, particularly in Peru, which will affect our operating rates. So now turning to Slide 7, I will comment on our mining segment guidance for 2020. Zinc production is estimated to be between 300,000 and 335,000 tonnes, down 11% from previous estimates. The decrease in throughput should be partially offset by increased sales. The main assumptions behind our revised guidance are, the suspension of production at the Peruvian mines of Cerro Lindo, El Porvenir, and Atacocha, from mid-March to May 10. The restart of Cerro Lindo and El Porvenir production activities on May 11, but assuming additional health and safety protocols that will limit our operational capacity and impose a ramp-up curve. Atacocha activities remain suspended, and there has been no change in our Brazilian operations. We estimate to continue running at normal levels in Brazil. Copper and lead production were also affected, and we forecast a reduction of 11,000 tonnes for copper and 17,000 tonnes for lead, considering the mid-range of the guidance. With regard to our 2020 cash cost guidance, it was revised considering changes such as the updated production in Peru, lower commodity prices, FX variations in Brazil and Peru, and higher treatment charges. As a result, we estimate that mining average cash costs will increase to $0.57 per pound of zinc sold, approximately 10% higher compared with the previous guidance of $0.52 per pound released in January 2020. Moving to Slide 8, to discuss our smelting segment guidance. Metal sales were also revised downwards, and we estimate a reduction of approximately 10%. The main assumptions behind the guidance revision are; reduced operation rates in Cajamarquilla from mid-March until the end of May, lower demand in our home market, and a reduction of Juiz de Fora operating rates to 60% during the months of May and June. Depending on market conditions, we may extend this period further, or as an alternative, we may rebalance the capacity utilization rates of all three smelters. Regarding costs, smelting benefits from higher TCs, and the smelting cash cost guidance for 2020 was reduced to $0.74 per pound compared with $0.90 per pound in January 2020. To have an appropriate comparison, please note that the cash cost levels for both mining and smelting do not improve the cost of idleness in our operations. I now hand the call over to Roberta Varella, our Head of Investor Relations, who will comment on the results for the first quarter. Thank you. Roberta?

Thank you, Menck, and good morning everyone. Please let’s move to Slide 10. Beginning with the mining segment, as you can see in the first graph on the upper left, zinc production decreased by 14% year-over-year. The temporary suspension of our Peruvian mines required by the local government on its efforts to control COVID-19 spread offset the performance of our Brazilian operations. In respect to our smelting segment, first quarter metal sales were relatively flat, reflecting the steel use demand by mid-March. Consolidated net revenue was $442 million, down 22% year-over-year, primarily driven by steep declines in LME price. Turning to Slide 11, we will comment on our consolidated EBITDA. Compared to the fourth quarter of 2019, adjusted EBITDA decreased 59% to $44 million. This performance is primarily explained by the negative price variation between lower LME prices and changes in market prices in respect of quotation period adjustments and the decrease in byproducts revenue, due to lower volume and LME prices. This effect was partially offset by lower operating costs and expenses. The U.S. dollar appreciation against the Brazilian real had a positive effect of $14 million. Turning to Slide 12; we will comment on mining segment performance. In the first quarter of 2020, adjusted EBITDA was negative $17 million, compared with $83 million a year ago. This decrease was primarily driven by market-related factors such as lower LME prices and higher treatment charges, with a negative variation impact of $64 million and $9 million respectively. Lower volumes, which were impacted by the temporary suspension in Peru, also had a negative impact of $29 million and lower by-product credit, particularly in Peru totaling $4 million. This negative effect was partially offset by lower operating costs and a decrease in mineral exploration project development expenses. Looking at the graph at the bottom right, we present the global cash cost curve for zinc. Despite the challenging scenario, we remain well positioned at the beginning of the third quarter of the cash cost curve. Moving to this next slide. On this slide, we will discuss smelting segment performance. Different from mining, adjusted EBITDA increased over 100% to $61 million in the first quarter of 2020. The increase was primarily driven by the positive net effect of $14 million related to change in market prices in respect of quotation period adjustments, which offset lower LME zinc price. The positive variation of $10 million was due to higher treatment charges and lower operating costs, positively affected by Tres Marias performance and lower energy prices. Market-related factors had a positive contribution to our smelting average cash cost, which decreased by 30% year-over-year to $0.80 per pound. Once again, the results of our smelting clearly show the importance of the mining-smelting integration, reinforcing our strategic advantage of having smelters in our portfolio. We believe we are well positioned to mitigate the risks and capture the opportunities in the commodity cycle. Looking at the graph at the bottom right, we present the global cash cost curve for zinc smelters and Nexa’s position at the beginning of the second quartile of the curve. Moving to the next slide. On Slide 14, we present Nexa’s free cash flow generation. Starting from our $44 million adjusted EBITDA, we had a negative change in working capital of $68 million, driven by a decrease in average supplier terms. We spent $39 million in sustaining CapEx and another $27 million in interest paid and taxes. As a result, cash flow before expansion projects was negative $19 million. Non-sustaining CapEx, which includes our expansion projects that we contribute to additional cash generation in the future, amounted to $46 million. During the quarter, we also paid $15 million in dividends in March, which were approved in February and amortized an amount of $39 million lower than finance, which led to a negative cash flow of $246 million. Moving forward, we have adopted a manner to improve our cash flow by reducing our investments and costs. I will now turn over the call to Tito, who will continue our presentation.

Thanks. Please turn to Slide 16 and 17. Here, we will comment on the Aripuana project. As previously announced, we are working on a rebased line of the project. Production is now scheduled to start in the third quarter of 2021. Of course, the rebase line is subject to a successful execution of the updated plan, and it’s also subject to the COVID-19 outbreak expense. For 2020 we’ve revised our CapEx plan and estimate to invest something close to $200 million. The updated CapEx contemplates a foreign exchange gain of $50 million, which offsets the estimated increase in costs. In the first quarter of 2020, $29 million was invested in the project. Aripuana is a highly profitable project. We will work on our capital allocation strategy to balance our resources and keep its development unchanged. As you know, Aripuana is located in a remote area, and in light of the crisis we are facing, our stakeholder agenda has been upgraded. Awareness campaigns were made, we have provided antibody tests and medical equipment, and many other initiatives related to combating COVID-19 have been implemented in the city. A strong protocol for mobilization and incoming site personnel was also sent. Please move to Slide 18. I’m going to make some comments about our pipeline of projects. As I previously mentioned, in response to COVID-19, we reassessed our capital allocation strategy and decided to put on hold our greenfield projects and some exploration plans, with an exception for Magistral, which is in the FEL3 stage. Its feasibility study work is advancing but may face delays due to the current conditions. Some of the needed work at the site cannot be performed until the end of the restrictions imposed by the lockdown in Peru. Anyway, we are still considering the completion of the FEL3 in the second half of 2020. The pre-feasibility studies at Shalipayco and Pukaqaqa were both placed on hold. As for Hilarion, after filing our PA in March, with promising results, we intend to continue with the exploration campaign in the second half of this year, of course, if the market conditions and cash generation allow us to do so. Moving to our last slide. As we mentioned on our last call, we initiated in 2019 the Nexa Way program, aiming not only to improve efficiency in our operations but also to strengthen our organization and our culture to prepare ourselves for the future. It allows us to build some foundations to navigate this crisis we are seeing now. We have rapidly responded to the COVID-19 escalation, being able to mitigate any potential impacts on our operations, our financials and our supply chain. We managed to support our host communities and local governments in different fronts. The short-term scenario is very challenging. We need to guarantee the sustainability of our business in the long run. We expect to continue delivering our guidance and improve our results, especially in the second half of the year. We expect the worst has passed. Our strategy has not changed. We remain committed to building the mine of the future, supported by our operational and financial discipline with a highly qualified team. Thank you all for your time. Let’s move to the Q&A session.

We will now begin the question-and-answer session. Our first question comes from Carlos de Alba with Morgan Stanley. Please go ahead.

Yes. Good morning everyone. Hopefully, you guys and your families are safe and healthy. So my first question, if I may, has to do with the financial covenants. If you could maybe remind us what the current covenants are? And what is the status of the discussions that you’re having with the relevant parties in trying to structure them? And do you expect what is the amount, if any, of fees or penalties that you expect you may incur as you refinance or rearrange this covenant? And then given – well, your liquidity definitely has improved significantly. Your net debt also has increased. So the leverage has gone up. Are there any plans to either sell projects or potentially raise equity just to strengthen the balance sheet? Or you don’t think that is necessary given that the mines in Peru are starting to produce again, as we speak. And then another part of my question, if I may, is related to the impact of the idle capacity. I noticed that in the cash cost guidance of $0.57 for the mining operation. This cost of idle capacity or the impact on cost of idle capacity is not included. Can you maybe talk about how much do you expect that impact to be? And if it is, what do you plan on booking this? Is it going to be spread between COGS and expenses? Or it’s going to be mostly in COGS?

Hello, Carlos, it’s Rodrigo Menck here. Thank you for participating. I hope all of you on the call are safe and well with your families. Well, Carlos, first of all, financial covenants. We have four agreements with nine counterparts. It’s equivalent to 25% of our debt. We have financial covenants of net leverage of 4 times net debt to EBITDA, right? So the capitalization ratio of a minimum of 0.3 times and debt service ratio of a minimum of 1 time, right? We estimate that the net leverage one will be the one that we probably will reach. We are talking with the banks and the counterparts. We are beginning this discussion, sharing projections and all that. We will be updating the market when appropriate. I don’t know which fees they’re going to charge, but it’s market practice. This type of fee is pretty much standardized, and I don’t expect anything high. In terms of liquidity, we have been adding liquidity, both locally and also through the drawdown of our RCF. The debt profile that we have of our $2 billion debt is pretty comfortable, right? So we have an increase in leverage, mainly due to the reduction of the last 12 months EBITDA. So what we understand is that once everything comes back to a normalized flow, this EBITDA denominator will be compounded back to levels that will naturally reduce the leverage. Of course, we are also monitoring the market to take benefit of any opportunities that might arise in the coming months so that we can reprofile our debt or even deleverage using some other opportunities. To this extent, we don’t believe raising equity at this very moment is either necessary nor interesting. And also selling projects depends on the evolution of the market. Certainly, at this point in time, where you have a stressed scenario, pricing projects to be sold is not necessarily interesting for the company, and provided that we have a good liquidity position with a long and well-spread debt curve, we don’t see this as necessary at this point in time, but we are aware and alert to analyze possibilities. On the idle capacity costs, I will pass to Roberta. She has more details to show you.

Hey, Carlos. In terms of the idle cost, it is included in our cost of sales. We have a note in our earnings release. We exclude it from our cash cost guidance in order to better compare it from the estimates that we provided in January. But we also add it in our earnings. So I would say almost 15 days of our mines being suspended cost us around $11 million and $2 million for the smelter. So that could be a good reference for you, considering now that you have a month, a little bit more than a month, from April until May 10. So that could be a reference for you in terms of the cash cost.

Our next question comes from Isabella Vasconcelos with Bradesco BBI. Please go ahead.

Hi, good morning everyone. Can you hear me well?

Yes, go ahead, please.

Okay. Great. I hope you are all doing well. So I have two questions here. First, could you please comment on how demand within the key end-use markets for zinc has been developing so far in the second quarter compared to your initial expectations going into the crisis? And then my second question, on the lockdown in Peru, do you already have a timeframe you’re working on to resume operations at Atacocha? Or is it still too early? These are my two questions.

Thank you for your questions, Isabella. We are fine. I hope you are also fine with your family. Regarding demand, what we are seeing so far, clearly, there was a major drop in demand in our home market. By home market, we mean everything below Mexico and LatAm. Brazilian customers, Argentinian customers, they are not doing well; they have been almost completely closed for more than 45 days. That’s the reason why we decided to reduce production in Juiz de Fora for a couple of months exactly to monitor and see how the demand will behave, and to be able to produce to not produce in excess and generate more stocks in our facility in Brazil. In general, what we are seeing abroad, and I mean in Asia, is there is an adjustment in the market right now. If you notice, the price of zinc has been increasing in the last two weeks, now around $1,000 per ton, compared to almost $1,650 per ton 45 days ago. It looks like the lockdown in Peru, associated with a recovery in China, has been supporting the price to come up. We’ve also seen a reduction in metal stocks around the world, which implies that recovery in Asia is actually being able to demand more than has been supplied everywhere. Of course, there are a lot of uncertainties. We don’t know where it will take us or how it will move in the next few months, but we are paying a lot of attention to that. Regarding the second question, the operations in Peru. We are coming back with Cerro Lindo and El Porvenir, as mentioned before. Atacocha, because of its size, will remain suspended for at least the next month. It’s going to be interesting to see how the return is done; a lot of protocol and arrangements to be made in order to have our people back to the site. Hopefully, we can return to that question next month.

Our next question comes from Orest Wowkodaw with Scotiabank. Please go ahead.

Hi, good morning. I’m curious if you can give us some insight into how Brazil is coping with COVID-19. And by that, I mean, do you see any risk factors of the mines or smelters having to close because of the increasing spread of the virus?

Orest, thanks for the question. Very good question. Brazil is having a case with COVID-19. Actually, we can split the country into many different areas; the impact of the outbreak is different from state to state. Of course, the big cities like Sao Paulo and Rio have been more affected, and we also saw some huge impacts in the north of the country. Surprisingly, many of the states where we are located have not been impacted yet. We are running a lot of different protocols. We’ve been in direct contact with the local authorities and have been very supportive to them. Even some of our internal protocols have been applying to the cities we are located in. You have to remember that some of the areas are very small, so in some ways, you can actually control it. To say that we would not be impacted is very difficult now. What I can tell you is that so far, in Brazil, we have, within our sites and our operations, just one case of contamination, which actually was in Sao Paulo. We haven’t had any cases in our other operations, usually in Teresina, Rio, Barbacena and Paracatu. With set protocols, we are testing people regularly, but we haven’t seen anything yet. We have to wait and see how the situation evolves over the next few months. Hopefully, we can control it. Risks for lockdowns may be in the big cities. There are rumors that Rio will implement one and Sao Paulo may follow suit. Some of the states in the north, as I mentioned, have done that already, but not where we are, not yet. And even at Aripuana, which is a very remote and isolated place, we have had some cases in the city, but they were controlled, and we have more than 1,500 people at the site in Aripuana today and no case registered so far. So let’s wait and see. But we have to be optimistic, right?

That’s right. And just following up on the previous question on demand. Can you give us a sense specifically in April? I mean, you announced with this update that you’re going to pull back smelting capacity at one of the smelters for mid-May and June. But can you give us a sense of how much refined zinc sales were down in April versus what they normally would be?

Specifically in April, I don’t have this number with me, but I can tell you the following: based on what we’ve seen so far, we saw a potential drop in demand in our home market of around 17% until the end of the year. Why are we assuming that? Because we already see some of our customers in the home market actually postponing some orders to the second half and even some to the beginning of 2021. That was why we decided to stop for a couple of months to see if the situation remained as it was or could improve or become worse. So that’s where we are today. In May processing we produced, and we were able to sell because we have the option to sell in the spot market. Assuming that we would reduce production in May and June in Juiz de Fora, we are trying to balance how much we are producing, and how much we are selling in the spot market, not taking the risk of producing too much and being forced to sell at a loss in the spot market and investing in working capital.

Okay. And just finally, if you’re assuming a 17% demand reduction this year in your home market, does that leave the door open to reduce smelting production even more?

We have to see. I hope not. If we calibrate with the reductions that we have implemented in Juiz de Fora, we should be able to deal with that. Once again, it will depend a lot on how much we will actually be able to shift to other markets. It’s an unprecedented situation. Yes, we are leaving right now Juiz de Fora. The decision was made basically to reduce production and evaluate how the market would behave in order to avoid excess production in the short term. We may go for full production everywhere because, as I said, we have the spot market if our traditional customers decide to delay and postpone some orders. But it was just a measure, a conservative approach in order to check what’s going on. It’s completely new for everybody. It’s the first time; I’ve been here for eight years, and we never had to reduce production in the smelters. This is the first time. We always operate at full capacity. We are doing this because we are really concerned about having an excess of working capital.

Okay. And then just finally, though, the cost – the maintenance cost for the closed capacity, is that going to be put through as OpEx or CapEx in the second quarter in terms of these standby fees?

OpEx.

Our next question comes from Jackie Przybylowski with BMO. Please go ahead.

Hi, good morning Tito and team. I just wanted to ask you about the Aripuana project. I know in the release, you said you’re working on a new baselining for that project. Can you tell me what that means exactly? What are you doing in terms of baselining? And maybe is there a timeline where we can expect to hear the results of this study or review?

Hello, Jack. Thank you for the question. Basically, what we did was first reprogram the project based on the impacts we suffered at the end of last year. We mentioned in the call at the start of 2019 that we have been impacted by an excess of rains in late 2019 and also a delay in rebuilding an important bridge for access to the project. Because of that, we knew that we needed to change the schedule of the project. It has been done already. When we say that production should start at the beginning of the third quarter in 2021, it’s due to that. Some of the impacts we already saw were coming from COVID-19. Just to give an example, we have to set up protocols to bring in more people, to mobilize more people to our construction. Nowadays, we have to bring in people and keep them in quarantine for a couple of weeks before they can actually be on-site. Then we have also modified and revised the budget for the CapEx for the project. We are doing that, but given the uncertainties we are faced with the COVID, we decided not to set a precise value for the project. We are still working with the same budget between $100 million and $92 million, assuming that beyond the contingencies, there will be an increase that may be between 10% and 25%. I could provide a number today, but we decided not to do so due to the level of uncertainty we are following. There is also the fact that FX has been offsetting the CapEx. I don’t know if you are following up, but exchange rates in Brazil have moved very fast over the last four months. Now, the real against U.S. dollars is almost $6. Most of the projects we are running are in real, with the Brazilian currency. So the combination of those factors means we believe it would be best to guide anyone looking at the projects later. That’s why we’ve decided to wait and see how productivity on the site moves on, given the impacts of COVID-19 and how the exchange rate will impact us in order to be able to come up with a new number. The second half will be crucial for us because of the productivity of the construction sites. Hopefully, exchange rates will have more stability sometime after this momentum has passed, right?

Absolutely. Yes. Okay, that makes sense. Can I ask also about your cost savings program, Nexa Way? I know the last quarter, you’d given us an update on how much that program has cost you. Are you able to give an update on how much the cost savings program has cost you so far in consultant fees and things? And how much you’ve realized in savings so far beyond what you highlighted in the release for things like FX or reduced travel because of COVID? Is there anything that’s more specific to the...

No, no, no. Correction, Jackie. The extra savings are not related to the Nexa Way program; the additional $20 million are not related. We have had some gains, and those gains are not specifically related to cost savings; they are also related to some KPIs and performance improvements. That’s why we are saying that the $120 million we were expecting to see along 2020 may not be achieved until 2021 because the parameters we were using were effective. When you calculate the potential gain, you’re going to make improvements; for example, recovery in one of your plants has to do with the price you’re using to define that. As prices dropped dramatically, some of the external factors are affecting our results, the numbers are beginning to look a little bit massive. We still assume that we can reach $120 million in gains with Nexa Way, but not only with cost savings and not necessarily only in 2020. In the first quarter, those gains were $21 million. They are embedded in the results of the first quarter. The savings we’ll have within SG&A, the $20 million will happen along the year. We are not expecting to pay additional fees until the end of the year. The reason for that is that let’s deal with the problem. The definition of the fees is based on where you identify and characterize the gains you may have. Last year, we paid a significant amount, but we generated – we almost matched the amount paid. This year, almost everything that will be generated will be retained by the company without any fee being paid because we paid already last year.

Okay, thank you. That’s all I had. Thanks.

Thank you.

Our next question comes from Oscar Cabrera with CIBC. Please go ahead.

Thank you operator. Good morning, everyone. Best wishes for you and your families to stay healthy during these abnormal times. I have three questions. Let me start with just the smelting segment. Approximately 46% of the seed for the smelters come from third parties. And with elevated treatment charges, have you had any discussions with companies that may not be able to continue operations and therefore, you may have lower fees for your smelters?

Hi Oscar, thank you for asking this. Yes, we are monitoring all of our suppliers. We have long-term contracts with the main suppliers. Our acquisition in the short term in the spot market is very small. If we were operating in normal times, we would not need to actually buy anything from the spot market. We did that last month because of the shutdown in Peru. Some of our suppliers were not able to supply. Therefore, we had to look for stocks available from other sources. We are pretty comfortable about our raw material. We are not expecting to see even if there is a disruption in one of the main suppliers. We already received assurances from others that we should have the concentrate available. Regarding the TCs, all contracts cover the year’s supply. No, we have not had any discussions about the change in TCs. Our average TC is around $300 for the year and should remain that way. There is no apparent concern about it. Even when we talk about the larger producers.

Okay. That’s great to hear, Tito, because this shows the countercyclicality of your smelting business in these tough times. Second question, can you please remind us – a lot of companies are benefiting from depreciation of local currencies. Can you remind us the amount of cost or the percentage of cost on currency for your Peruvian and Brazilian operations, please?

Hi Oscar, it’s Rodrigo here. We have around 80% of our costs in Brazil denominated in real. We have been sharing with you all the sensitivity analysis we periodically do. We have approximately a $7 million to $8 million EBITDA impact for each $0.10 change in the FX in the Brazilian real, approximately. Does that cover anything you were asking?

Yes. That’s for Brazil. For Peru?

In Peru, it’s the other way around. It’s approximately 80% in U.S. dollars. As you know, the Peruvian economy is much more dollarized than the Brazilian one. So in Peru, we have less impact from the FX rate because it varies a lot less. Just to have a comparison, ever since the beginning of this more volatile time, the Peruvian currency has fluctuated around $0.15, from PEN 3.30 to PEN 3.45, approximately. On the other hand, in Brazil, you have seen where we are. So we are nearing those levels of BRL 6 per $1. So it’s really different by the mechanics.

Right. Yes. Then on the sustained capital deferrals of around $40 million. Can you just give us an idea of where those savings are coming from? And how should we think about when you’ll be spending this capital if things return to normal in the second half of this year?

Hi Oscar. All we did was a broad exercise to maintain everything that is essential, right? So everything that is legally binding to us, such as tailing dams and investments to maintain the main operations at a safe level in all of our units. We are maintaining everything that is essential. We are withholding everything else that relates to increasing capacity or expansion aside from Aripuana and also the final investments at the beginning of the Vazante mine. We have postponed all the investments with regard to growth. We are maintaining things for basic maintenance in all lines. We increased health and safety expenditures, of course, for the new protocols. Everything is being scaled down to the minimum level that we should preserve cash with. That did cover?

I should say minimal but enough to keep the stability of operations, right?

Yes.

Correct. But I assume from your comment that the amount you have outlined on Slide 14 is mostly for maintenance of all operations?

Yes, it is. For maintenance and operations.

Okay. Thank you very much, and best of luck.

Thank you.

Next question comes from Lucas Yang with JPMorgan. Please go ahead.

Hi, this is Lucas. I hope you and your family are doing well. I have just one question on by-products. We noticed that the majority of the by-products production in 2019 came from your Peruvian operations. So besides lowering production, is it fair to assume a very sharp decrease in by-products volumes in the second quarter? Or do you have inventories that can compensate for that? Thank you.

I would say that what happened is, the most significant impact in the first quarter on by-products has to do with price, right? The production in terms of volumes was less impacted than the reduction in price. Menck, do you want to add anything?

No.

No. Demand impact, yes.

My fear was that 98% of the by-product production will be halted for the period of the lockdown, right? Is that a correct assumption?

Yes, it is.

I’m not sure I understand the...

For the Brazilian property will remain yet.

Okay, very clear. Thank you.

Our next question is a follow-up from Carlos de Alba with Morgan Stanley.

Yes, thanks, again. Tito, I wanted to explore a little bit in more detail the 17% decline, potential decline that you see in demand in Nexa’s home market. Could you maybe elaborate if this 17% applies to all of those end markets? Or do you see differences between the auto sector and construction or some of the other important relevant...

All sectors, all sectors. Because what happened is that our main customers are the steelmakers, right? They are the suppliers to the different sectors, automakers, and construction, and so on. All of them were, in some way, affected. For sure, automakers were the main ones because almost 100% of the Brazilian production was shut down for at least a month. I was reading yesterday, sales in April in the auto business were down 98%. They went back to levels in 1954. It’s amazing. We know for sure that the other steelmakers also closed, those who supply construction or infrastructure. The direct use of zinc was also impacted. By die-casting and everything was affected everywhere across LatAm.

Okay. And then Nexa continued to pay dividends in this past quarter. How should we think about dividends for the remainder of the year given the situation in which the company is operating?

Hi Carlos, this is Rodrigo. For this year, no more payments. We usually pay once a year in March. So when we had this deliberation by the Board in February, we were far from this volatile times that engulfed us. Once we disclosed it, it was already a commitment to the market. We paid it. Now we don’t have any more expectations of paying in the rest of the year.

And then we have to see what’s going to happen along into 2020, right? The year that should never happen.

Right, exactly. So just two final questions very quickly. What is the average CapEx of Aripuana that is exposed to BRL? And second, we saw a big decline in El Porvenir cash cost in the second quarter. How do you see that in the coming quarters?

Okay. First of all, Aripuana. The expenditures are mainly in real. So overall, in the project, we had approximately 20% of the overall costs exposed to the dollar. At that point in time when we began the project, we hedged the flow of the dollar disbursements, right? So this is pretty much what remains is in real, okay? On the El Porvenir cash cost, I’ll pass it to Roberta; she has more detail.

So Carlos, we provide information in terms of the cash cost for the year. We are not seeing so many changes year-over-year. In terms of the first quarter, as we mentioned, it excludes the item for Porvenir, and we also have by-products here that affected our cash cost. But year-over-year should be aligned with the guidance that we provided. And for the year, we are actually seeing a little increase because of what we are considering in terms of the higher treatment charges and lower by-product credits due to the lower metal price.

Yes, excellent. Thank you very much, everyone. Stay safe.

Thank you.

Thank you, Carlos.

Thank you.

This concludes our question-and-answer session. We will now hand over to Tito for his final remarks. Mr. Martins, please go ahead.

Thank you. Before we end this call, I would like to call your attention to three important points, some of which were mentioned here today already, but I think it’s very important to repeat them. The first one is that our mine costs have been affected into 2020, mostly because of the TCs. It is very important to note that. It looks like the integration we have with the smelters is not only important but, when you look at the picture, the TCs had a huge impact on the mines. But on the other hand, they were benefiting these smelters, and we hope that it will continue. As I said before, the TCs were in the best shape at the beginning of the year, and we expect them to remain for the rest of the year, around $300 per ton. The second point has to do with the guidance, the new guidance we are providing. We decided to be very conservative, as was said today, and this has to do with the level of uncertainty we still have in terms of how many people will be able to return to the operations in Peru, how long we’ll be able to operate, and how fast we reach full capacity. There was an interview given by the Head of the Mining Association in Peru, a couple of days ago, stating that most of the mines are coming back, assuming they will be producing with 80% capacity. We did pretty much that; we wanted to be conservative instead of throwing numbers that we don’t know today if they will be achievable or not. I hope we can do better than what the guidance suggests because of that. It is related to the challenges we face in returning and coping with the protocols we have to follow in order to keep people healthy. The third point has to do with Aripuana. I explained already today why we did not come up with a new CapEx for Aripuana, but it’s important to note that Aripuana is a very good project. It’s in the second quartile of the industry; it’s moving well in terms of development. We have already performed 39% of the project. We see it having a lot of potential. We have not come up with a new technical report, but we are still drilling there. Just remind you, the project was approved considering 13 years of reserves, and we believe we can go beyond 20 years, given what we know today. We are committed to this project. This is the future of Nexa. It’s a challenge, but we can overcome it, and we believe we can do it. I would like to thank you all for being here with us, and wish you all well, hoping we can come out of this difficult situation and the abnormal life we are having very soon. Have a good day. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.