Nexa Resources S.A. Q1 FY2022 Earnings Call

Good morning, and welcome to Nexa Resources First Quarter 2022 Conference Call. This event is being recorded and is also being broadcast via webcast and may be accessed through Nexa's Investor Relations website where the presentation is also available. I would now like to turn the conference over to Mr. Roberto Varella, Head of Investor Relations, for opening remarks. Please go ahead.

Good day and good afternoon, everyone, and welcome to Nexa Resources' First Quarter 2022 Earnings Conference Call. Thanks for joining us today. During the call, we will be discussing the company's performance as per the earnings release that we issued yesterday. We encourage you to follow along with this unscreened presentation to the webcast. Before we begin, I'd like to draw your attention to Slide #2, as we will be making forward-looking statements about our business, and we just ask that you refer to the disclaimer and the conditions surrounding those statements. It's now my pleasure to introduce our speakers. Joining us today is our CEO, Ignacio Rosado; our CFO, Rodrigo Menck; and Leonardo Coelho, our Senior Vice President of Mining, as well as the Investor Relations team. With that, I'm going to go ahead and turn the call over to Ignacio. So Ignacio, please go ahead.

Thank you, Roberta, and thanks to everyone for being with us this morning. Please let's move now to Slide #3, where we will begin our presentation. As the main highlights, you can see that overall operating performance was as expected and in line with guidance. In the first quarter, our production was mainly affected by the Vazante flooding due to the heavy rains. However, we announced in early April that Vazante is operating at full capacity. Also, in this quarter, we have continued to benefit from high base metal prices that combined with our solid operational performance and financial discipline generated a record high adjusted EBITDA and a strong operational cash flow. Our balance sheet continues to be strong with a low financial leverage. In this quarter, we also announced and concluded the early redemption of our 2023 notes in the amount of $130 million. Aripuana has continued to progress, and we are on track to start production in the third quarter of this year. Mechanical completion has ended, and we are at more than 75% of commissioning. In Aripuana, it is worth mentioning that at the beginning of the year, we signed an agreement to replace an obligation of royalty payments for a five-year copper supply contracts. The copper concentrate produced by Aripuana will be sold during this period at market prices subject to a cap, including then a financial instrument. The fair value of this financial instrument had a noncash impact of $19 million in the quarter, and it's excluded from our adjusted EBITDA analysis. Finally, we would like to emphasize that we remain very optimistic about market fundamentals for the coming months. Moving now to the next slide, Slide #4, where I will discuss our results in more detail. In this slide, you can see that zinc production in the first quarter of this year decreased by 14% compared to the first quarter of 2021. This was mainly driven by the temporary reduced capacity in Vazante and lower treated ore volume in Cerro Lindo. As previously disclosed, Vazante underground mine was partially flooded from mid-January until the end of March due to the heavy rainfall levels in the state of Minas Gerais. At Cerro Lindo, treated ore volume was below our expectations as the workforce was impacted by COVID, and we also anticipated maintenance at the concentrator plant. For the next quarters, we expect zinc production from Cerro Lindo and Vazante to improve, while Cerro Pasco Complex and Morro Agudo are estimated to be relatively stable, similar to the first quarter performance. Mining cash cost in this quarter decreased by 23% compared to the prior year. This was mainly explained by higher byproducts and lower TCs, which offset higher operating costs and a decrease in zinc volumes. Similar to the end of last year, we continue to face inflationary cost pressures in third-party services, consumables, and logistics expenses. Now moving to the smelting segment in Slide #5. In the first quarter, metal sales totaled 134,000 tons lower compared to the first quarter of last year following lower production in Peru and in Brazil. In Brazil, smelter production was affected by the decrease in supply of Vazante as well as lower calcine availability from Peru. In Peru, as previously anticipated, production in Cajamarquilla decreased year-over-year due to the reduction of calcine supply. For the second quarter, smelter production is expected to increase as Vazante supply is normalized, and sales are expected to follow higher production volume. Our 2022 guidance remains unchanged. Our smelting cash costs in this first quarter increased by 26.5% compared to the same period of last year. This was mainly driven by higher zinc LME prices, which increased 37%, lower TCs, and higher operating costs. These factors were partially offset by higher byproducts contribution. Conversion costs in the first quarter were $0.25 per pound compared to $0.18 per pound in the first quarter of last year. This increase is driven by the increase in energy prices and other variable costs, also influenced by higher inflation rates. Now moving to the next slide, related to the completion of our Aripuana project. In Aripuana, we continue to make solid progress in all areas. The beneficiation plant was delivered to the operations team for commissioning, which reached more than 75% of progress by the end of March. In the second quarter, we plan to continue with the cold and hot commissioning of flotation circuits of the 3 minerals under concentrate filters. Also, the rest of the beneficiation plant, Circuit as flocculants are under the commissioning phase to allow the start of operations. We are on track to start commercial production in the third quarter of 2022. In mine development, we have been very successful developing our REX and link mines and have reached 3.3 months of production in stockpiles. I had the opportunity to visit Aripuana at the beginning of this month, and I am confident that we are close to completion. As I mentioned before, Aripuana will become a long-life flagship mine. Now moving to the next slide, where I will give you an update on exploration. In the first quarter of this year, we executed our exploration program as planned and 28,000 meters were drilled. At Cerro Lindo, the exploration program continued to focus on extensions of known ore bodies to the south-east of the mine and on the new VMS discovery at the Puka Saya target, in which drilling keeps confirming the continuity of zinc and lead mineralization. At Aripuana, the Babaçu Northwest revealed thick intersections with still pending assay results. At the Pasco complex, drilling remained focused on extending the existing mineralized bodies. In Bonsucesso, infill and deep exploratory drilling continued to reveal thick and high-grade mineralized intersections that will increase resources in the north extent of this body. Now moving to the next slide to show our financial results. In Slide #8, beginning with a chart on your upper left, consolidated net revenue for the first quarter grew 20% compared to the first quarter of 2021. This was mainly driven by higher LME prices, which compensated for lower volumes. Consolidated adjusted EBITDA for the quarter was $208 million, a record high for our first quarter, an increase by 16% from the first quarter of 2021. This performance is explained by higher metal prices and higher byproducts contribution, which offset lower volumes and the increase in unit costs resulting from inflationary pressures. Compared to the fourth quarter of last year, adjusted EBITDA increased by 53%. So in addition to the comments mentioned before, adjusted EBITDA was also affected by the decrease in mineral exploration and project evaluation expenses and lower SG&A expenses. In the next slide, I will discuss the financial performance by segment. In the Mining segment, net revenue totaled $322 million in the first quarter and increased 26% versus the first quarter of last year. This factor was mainly driven by higher average LME prices. Adjusted EBITDA for the mining segment followed the upward trend and reached $127 million, 31% compared to the first quarter of 2021. Higher prices and byproducts contribution offset the decrease in volumes and the increase in variable and fixed costs, as well as the increase in pre-operating expenses of the Aripuana project in the amount of $10 million. In the Smelting segment, net revenue in the first quarter totaled $62 million and rose 20% versus the first quarter of last year, also supported by higher LME prices. Adjusted EBITDA was $82 million, a slight decrease compared to the first quarter of last year, but a strong recovery from the fourth quarter of last year, and this was explained by higher LME prices, the expected reverse in hedge book difference, as we explained in the previous quarter and higher byproducts contribution and higher TCs. I will now turn over the call to Rodrigo Menck, our CFO, who will comment on our investments.

Good morning and good afternoon, everyone. In the first quarter, we have invested $83 million in CapEx, being $27 million directly to the Aripuana project. The Brazilian real's appreciation against the U.S. dollar had a negative impact of $4.7 million in the quarter on this specific line. With regards to mineral exploration and project evaluation, we invested a total of $16 million in the quarter, being almost $11 million related to mineral exploration and mine development. As part of our long-term strategy, we will maintain our efforts to replace and increase mineral reserves and resources supporting our business growth. Total planned exploration and project evaluation expenditures are expected to be $82 million in 2022 and remain unchanged. Moving to the next slide, where we will discuss our cash flow generation. Here on Slide 11, starting from our $208 million adjusted EBITDA and considering the reconciliation to cash flow, cash flow provided by operations before working capital changes was $227 million. We had $93 million from interest paid in taxes and $46 million of sustaining CapEx. Still, Nexa has generated $80 million of cash before expansion projects and working capital during the analyzed period. After that, we invested $10 million in nonsustaining CapEx and $27 million in Aripuana. We also had a negative net effect of $43 million due to the early redemption of our 2023 notes of approximately $133 million, partially offset by a new export credit agreement in the principal amount of $90 million. Dividends and shareholder premium payments totaled $50 million, and foreign exchange effects on cash and cash equivalents were positive in $31 million. Finally, there were working capital investments of $156 million in the first quarter, highly impacted by higher LME prices on inventories and receivables and lower outstanding amounts of account payables. With all the effects presented in this slide, free cash flow was negative at $168 million in the first quarter. This negative effect was financed by our strong balance, explained in the following slide. On Slide 12, you can see that our liquidity remains strong, and we continue to report a healthy balance sheet with an extended debt profile. By the end of the first quarter, our current available equity was approximately $900 million, which includes our undrawn revolving credit facility of $300 million. Total cash decreased compared to December 31, 2021, and was mainly driven by the early redemption of the outstanding 2023 notes and the continued investment in excess of operational cash flows over the quarter. As of March 31, the average maturity of our total debt was 5.4 years, with a 5.60% average debt cost. Our leverage, measured by the net debt to adjusted EBITDA ratio, was 1.53x compared with 1.37x at the end of 2021 and 1.73x a year ago. Moving to the next slide. On this Slide 13, we show you the average zinc price in the first quarter of the year increased more than 35% when compared to the same period one year ago as limited supply has continued to support higher prices. Furthermore, the Russia-Ukraine war boosted base metal prices, which were already on a strong trend. Copper prices similarly increased by 18% in the first quarter of 2022 compared to the first quarter of '21. Regarding market fundamentals, there is no change from what we presented in our conference back in February. The supply projections for zinc continue to be above real mine production. And this effect, combined with solid demand, should support higher zinc prices. I will now hand the call back to Ignacio, who will continue our presentation.

Thank you, Rodrigo. I am now on Slide 16. Corporate social responsibility is key for our industry, and it is core to our strategy. Last year, we started to revise our material topics related to corporate goals and ESG management guidelines. We have already established ESG metrics to our executives' annual compensation. In the first quarter of this year, we published our code of conduct for suppliers. The purpose of this document is to establish the rules that will guide our suppliers' ethical and social environmental behavior, which are directly related to our code of conduct and reflect responsible and transparent performance. In May 2022, we expect to publish our annual sustainability report which provides detailed and transparent information on the ESG results achieved throughout the year. For this year, we expect to finalize and have the final approval of the Board of our ESG targets and KPIs to be disclosed to the market. We aim to enhance our transparency and accountability to our ESG initiatives. Now turning to our last slide. I would like to close this presentation by briefly reinforcing our priorities for this year. We are very close to delivering our third flagship mine, Aripuana, and we need to focus on its startup and commercial production as well to continue to work on its life of mine extension. We will continue working on improving our cash flow generation from our operations. Inflationary cost pressures are expected to continue, and we remain committed to our financial discipline on costs and CapEx optimization. Extending the life of mine of our main assets remains a priority. And this action has to be implemented in combination with a clear growth strategy in copper. Finally, we need to deliver a strong balance sheet so we can fund most of our growth with our cash flow while generating value to all of our stakeholders. Thank you very much for attending this presentation. I will now open up for questions.

The first question comes from Carlos De Alba with Morgan Stanley.

Thank you very much, everyone. So first question, if I may, is on the new offtake agreement in Aripuana that replaced a royalty liability. We read that the notes you heard the comments earlier, but maybe if you could explain a little bit more, I still don't fully understand what exactly happened? Was this an obligation that you were supposed to start paying earlier than the startup of the new start-up of Aripuana and exactly what is happening there in terms of the volume which you escaped the concentrate sales as well as the price? I think if I understood correctly, you either the lower of the LME price or a fixed price. So if you could provide details around that so that we can model that, it will be great as well as to when exactly these concentrate deliverables will start presumably as early as the third quarter when the operation commences. My second question, if I may, has to do with working capital and costs of run-of-mine trends. In the first quarter, all working capital increase, part of that definitely is prices. But if you could comment as to how your level of inventories in terms of volumes? Where do they stand right now? And what are the trends that you expect in working capital from that perspective, that will be very useful. And then also any comments that you may have on the trend of cost per run of mine given that they have been the increasing year-on-year and quarter-on-quarter as well.

Thank you for the questions, Rodrigo here. First of all, regarding the offtake, I can provide some insights even though the details of the contract are confidential, so I can't disclose specifics like the price adjustment. However, as mentioned in the intangibles, we started in January, which relates to the cost of mining rights. The mark-to-market impact on our results reflects the price variation. We have committed to delivering up to 31,000 tons of copper over five years beginning this October. There will be a delivery schedule during those five years that corresponds to the project ramp-up. Once we fulfill the delivery of approximately 31,000 tons, our obligation will end. This obligation also reduces part of the royalties we hold for Aripuana, specifically tied to this particular offtake we previously secured. This negotiation was part of how we managed past royalty agreements. You will see updates in the upcoming quarters through the mark-to-market disclosures, which may have either a positive or negative impact based on future copper prices. I hope this clarifies things.

Just to comment...

The second topic is working capital, which is primarily affected by pricing, especially concerning receivables and inventories. Our inventory volumes for the first quarter have increased slightly, particularly for copper and zinc concentrate, as we prepare for maintenance stoppages in certain areas of our process. We expect to consume this inventory in the upcoming quarter, though not all at once, as it provides production stability in our smelters. This is crucial for us. Pricing has been rising, and by the end of the quarter, it exceeded $4,000 per ton, increasing the mark-to-market value of our inventory. This value is expected to decrease in the following quarters as we use up the outstanding inventory. On the payables side, we experienced higher payments compared to the generation of new payables. This was due to our investment of approximately $160 million in CapEx in the fourth quarter, with half that amount invested in the first quarter. Given that our average payment term is around 45 to 50 days, the outstanding amounts were reduced, which impacted our working capital investments. Overall, we are balanced in our working capital index, with just $9 million invested across our balance sheet. I hope this explanation is clear.

Yes. And Carlos, just to add to Rodrigo's comment, as you can see on Slide 11, the main effects that affect our cash flow was mainly working capital. And as Rodrigo was explaining, we were building this inventory and then some receivables and payables. And some of these effects are going to turn back. So we believe that in the second quarter, we will have, hopefully, with these prices, a cash flow positive quarter. Yes. Regarding costs, yes, we already factor in our projections and the guidance that we gave to the market, 7% of inflation in cost because these inflation pressures were not in this quarter; they began during last year. There were a lot of increases in energy costs a lot of it in cement in line. And we had a lot of pressure from the contractors in terms of salaries and in terms of replacement of equipment, etcetera, etcetera. This has been the case in this quarter, and given that we have anticipated that, we sort of comply with the cost per ton that we had in the quarter. In the second quarter, we don't see more important effects. However, we have to be very cautious because at high zinc prices, and these high prices that we have all the industry and all the providers also face pressures, and we have to be balanced with them as well because we have to keep long-term relationships. So we are cautious. We don't see in the second quarter more increases. But if we see those, we will get back to you and we will provide guidance to the market as well.

Our next question comes from Orest Wowkodaw with Scotia Bank.

I also wanted to discuss costs further. I'm quite surprised that you're not anticipating or indicating higher costs. Considering the current impacts on your business, such as the increase in zinc treatment charges and the strength of the Brazilian currency, as well as the general rise in input costs, I'm curious about your cost guidance. I assume you have already factored in a 7% increase in your cost outlook. However, I'm wondering how to interpret these factors in light of the unchanged cost guidance.

Yes, there are many variables to consider here. The comment I made earlier was about the cost per ton, which is primarily controlled at the mine. However, external indicators, such as transportation costs, will have an impact, and they are increasing. You are correct about that. Nevertheless, our byproducts and the sales prices and volume we have will help offset the C1 cash cost. The cost per tonne per mine is what I referred to earlier, and while we are experiencing pressures on those costs, we anticipated this 7% increase. We are facing additional pressures, but we are managing these through increased volume and internal initiatives focused on efficiency in areas such as equipment utilization and mine operations. While we do not control certain factors, the prices of byproducts influence our costs, so we do not expect the C1 cash cost to rise significantly. Regarding the currency exchange, we did forecast a higher exchange rate, with an average of $5.2 million.

I think for the year, cost guidance was projected with an exchange rate of $5.5 million. Now that we are below that, we face some pressure and sensitivity that we can use as reasoning for the entire year. For every $0.10 fluctuation, we see a nominal dollar increase of $10 million over the year, and this increase is distributed throughout the year. The initiatives I mentioned also play a role, creating a balance between factors. Importantly, regarding our 7% expectation in our guidance, we were quite pessimistic about energy costs. In Brazil, our primary energy source is hydrological. At one point, we had raised a red flag in our system due to anticipated price hikes. Fortunately, the rainy season was favorable for our basins, leading us to a green flag now, with expectations for costs to decrease. We are monitoring the situation; it's still early in the year to determine if this will positively impact us, as we also face pressures on transportation, logistics, and other inputs like warehouse items. Therefore, we are proceeding with caution. We will update the market if changes arise, but at this moment, we don't anticipate anything above the 7% increase in dollar terms for the year. Is that clear?

It is. And then...

We do have a bit of a difference that Brazil has with the other countries.

Definitely. Can you please remind us just on how your smelting contracts work? The new TC, I assume, will come into effect here in the second quarter for zinc. But can you just remind us sort of how that 3-year kind of trailing TC is going to work for your smelting business?

The increased treatment charge is linked to the global availability of smelting, particularly in Europe, where energy costs are exceptionally high, leading to the closure of some smelters and driving treatment charges up. In our smelting operations in Peru, about half of our inputs come from Cerro Lindo, Porvenir, and Atacocha, while in Brazil, a significant portion is sourced from Vazante and Morro Agudo. The new treatment charge will influence the mines because we need to adapt to market trends, but the profit will primarily benefit the smelters. Additionally, much of the concentrate we purchased to supply the plants was secured at previous rates, so we won't fully gain from the treatment charge increase in our smelters. However, we do have some smaller contracts that will benefit from the new rates. This represents the current scenario regarding the impact of the new treatment charges in the market.

If you want some proportions or just a reminder of our concentrated sourced by our own lines, the new TC will impact as an accounting policy from the beginning of the year and throughout the year as a reference. From our internal transience, 50% of what we consume is sourced by third parties, with 80% to 90% under the BRIC agreement, and 10% to 20% from other sources. While there is a mild impact, it remains very marginal overall. It's increasing slightly due to business factors, just to remind you of the percentages.

Our next question comes from Alex Hacking with Citi.

I have a couple of follow-up questions. Firstly, regarding the smelting charges, is there any price participation related to zinc in those contracts?

I'm sorry, Alex, just for me to clearly understand your question. You mean escalation mechanisms in case zinc prices go up, such as what was disclosed as the benchmark?

I'm sorry. I had a problem with my headset. My question was just around price participation in the treatment charges this year. Is there any price participation in the contracts?

No, this is not a common feature for us. In some negotiations, you might encounter some escalation. For example, it's currently 230, and if prices remain above a certain level, you could see additional dollars in the CPCs. However, we don't include this type of feature in our agreements. As for the percentages I mentioned in response to Orest's question, what remains in this spot is actually 10% of the 50%, which means 5% overall and has a minor effect on our overall PCs impact. Is this clear?

Yes, that's clear. And then just a follow-up on Carlos' question earlier about the Aripuana uptake. Just to clarify, it's 30,000 in total, right, over 5 years, so it would be roughly 6,000.

6,000 over 5 years, yes, yes, yes. So it's 30,000 over 5 years. So it's not 30,000 per year.

Okay. Perfect. And then just finally on the cost side, are you seeing significant increases in the cost of your explosives? This is something that a couple of other miners who have highlighted as seeing significant cost inflation for them?

No, from our perspective here, as I explained, we are cautious. We are experiencing pressure on our costs, which is really within the 7% range that we have disclosed. However, if this increases, we will be updating our estimates.

Next question comes from Jacky Przybylowski with BMO Capital.

Congratulations on the quarter. I wanted to ask a question about Aripuana and its commissioning. It seems like you're still on track to achieve commercial production later this year. Could you discuss how you define commercial production in relation to full nameplate capacity? Do you expect to reach full nameplate capacity by the third quarter? Additionally, could you share any potential risks you foresee in the upcoming months that might impact achieving commercial production?

Yes. As I mentioned, 75% of the commission is already completed. We are currently testing with water most of the equipment, and so far, we are not encountering any issues. As you may know, the plant is fully automated, so we need to install all the cables and ensure that the automation process functions properly. We are in that process now and are very close to beginning the ramp-up of the plant. While I can't provide a precise timeline since it is a process, I believe it will happen soon, likely in the third quarter, hopefully starting from early to mid-third quarter. I’m not sure about the timeline for commercial production.

So commercial production, we have defined the level of the stability that needs to be achieved for us to call it commercial production. And that will be throughout the ramp-up process. So once we have it, we will be disclosing, as Ignacio, there is a plan of the ramp-up, but things can happen, and this might be variable. We expect to achieve it throughout this year yet.

Yes. But, I mean we are very, very confident that we are towards the end of the project. This is going to be in the third quarter, and we are very confident that that's happening.

Yes, sorry. I mean, maybe just to clarify my question. Can we assume that when you hit commercial production or let's say, by the end of the third quarter or sometime this year, like Rodrigo mentioned, can we assume you're at your nameplate? Or is there still a gap between where you hit commercial production and where you hit full capacity? I'm just wondering because some people define commercial production as a lower throughput rate than that.

Yes, there is a gap between what we call commercial production and nameplate capacity, certainly. nameplate capacity will be achieved only by next year probably in the second half of next year. Remember that our disclosure for the ramp-up period was up to 15 months. So we are working the curve throughout this period. Usually, commercial production is around 70% of the nameplate capacity utilization. So we are working on those curves and numbers, Jackie.

And once the ramp-up starts, Jackie, I think we can provide more guidance to the market on how this is going to evolve through the end of the year. So we will do that.

Our next question comes from Herman Kisluk with MetLife.

I have two questions. The first one is about your plans to expand copper production. In the report, you mentioned a target of 100,000 tons at some point. I've seen the projects in the pipeline, like Magistral and Pukaqaqa, but it appears that Pukaqaqa is currently on hold. Could you provide more details on when and how you plan to allocate resources for copper production? My second question concerns Cerro Lindo's production. Since the end of 2020, and throughout 2021 into the first quarter of 2022, production seems to have been on a downward trend that has continued. What do you anticipate for Cerro Lindo's production moving forward? Additionally, costs per ton before byproducts are increasing, likely due to lower dilution. What can we expect in terms of costs from this mine?

Yes, I can take the question. They informed me that they have lost connection. However, you're correct that for the past years, Cerro Lindo has been reducing production primarily due to grades, which was anticipated by our reserve model. The throughput has stabilized at around a million tons a year. We expect to maintain that production level in the coming years. We're still evaluating our geotech models to understand long-term behavior. Currently, we do not anticipate any significant changes in grades for the long run. We continue to observe that we are achieving an average grade for the deposit. Regarding cash costs, there was an impact in the first quarter due to volume effects, but we believe that costs can stabilize at the current levels.

Okay. So basically, we should expect stable from Cerro Lindo in terms of product?

You're right. We intend to see some stability from our at the levels you were seeing in the previous years.

Okay. I'm very sorry. This is Ignacio. We just don't know what happened, but our call was canceled, and we are back. I’m not sure if we answered the Cerro Lindo question. Is that correct?

And do you have the answer for the copper strategy, Hernan?

No, not that one.

In terms of copper, we produce nearly 30,000 tons at Cerro Lindo, and when we consider other mines and Aripuana, we could see a 40% increase. Our goal is to achieve production of at least 100,000 tons in five years. We are working towards this target with several projects underway. The most significant one is Magistral, located in Tel 3, which is a promising project in Peru. However, I am concerned that our current operations in Peru may be impacted by economic factors such as changes in taxes that could affect our profitability. It is important to approach the funding of a project in Peru costing between $800 million and $1 billion with caution, and we need to evaluate this investment against other market options. Our team is actively searching for opportunities and remains flexible in considering various options, particularly ground field projects near existing production or operational mines. We are closely examining numerous prospects and remain engaged in the market. We hope to provide updates in the future. Given the current price cycle, it is challenging to find an investment that adds value to the company, but as we move forward, we will evaluate many opportunities with the aim of reaching that 100,000 tons of copper in five years.

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

Ignacio, Rodrigo and team, thank you for the exploration report you released earlier this week; it was very helpful. I want to ask about the work at Cerro Lindo, particularly regarding Puka Saya. First, are all four drill rigs operating underground, or is some drilling being done from surface? Secondly, how much of the Puka Saya material is already part of the existing reserve and resource estimates? How significant do you view the opportunity here? Finally, what confidence do you have that Puka Saya will ultimately contribute to reserves in your year-end update?

Puka Saya is a significant VMS deposit and is located approximately 3 to 4 kilometers from the structural center of Cerro Lindo. We are currently working on extending Puka Saya. As of now, it is not included in the current reserves we have. From a structural perspective, Cerro Lindo has an estimated lifespan of eight years, and we are in the process of replacing reserves mainly from the areas surrounding the main ore bodies, which are being drilled at a lower grade. Puka Saya, as a new discovery, holds substantial potential and is still open for exploration. Our plan is to drill Puka Saya this year and next, and we will provide updates on its expansion and potential volume, as well as how we will integrate that mineral into our reserves.

Okay. That's great color. Are there other targets... No, that's extremely helpful. Are there other targets at Cerro Lindo on which you're focusing drilling in 2022?

Yes. As I mentioned, we have additional targets near the mine, but they are not as promising as Puka Saya. However, these targets show continuity with the ore bodies we are currently mining. Our expectation is to increase resources that can be converted into reserves in the coming years. We have about 2 or 3 targets very close to the mine, though I can't recall their names at the moment. It’s important for us to add these as reserves in the coming years as well.

Ignacio, if you allow me to complete to add additional information, those targets, the satellite targets, they are drilled from the surface. Once you identify them and close a minimum level of understanding, the target is to develop towards underground to get a better shape on that and that add into our resources base and reserves later on.

Yes, that's super helpful. And then maybe just sort of 1 final question to wrap this all up. What proportion of the entire exploration budget for 2022 is for Cerro Lindo is just focused at Puka Saya?

The Cerro Lindo target today, let me see, I think we have like 18,000 meters in Cerro Lindo, this should be like 10% total budget of exploration that includes also greenfield in Cerro Lindo, more or less.

So Now we have questions from the web. So first 1 comes from BTG, Jose. Can you give a range of the EBITDA contribution that we should expect from Aripuana in 2023, given your current assumptions?

In 2023, we will still be in the ramp-up stage, so we won't reach cash generation capacity just yet. For instance, our second-quarter report is somewhat outdated. I expect that the EBITDA contribution from Aripuana will be greater than what is reflected in the technical report due to higher prices. The technical report estimates the EBITDA contribution at full capacity to be $120 million, but with current prices around $2,600 and $42,700, we can anticipate a significantly higher EBITDA, above $200 million, at full capacity. However, this remains a forecast, and we need to closely monitor the ramp-up curve to refine these projections. I would still reference the technical report for estimation purposes.

We have another question from the webcast asking for more details on zinc markets, specifically the balance between metal and concentrate, any surpluses or deficits this year, and information about treatment charges.

Yes. As mentioned, the primary focus in the zinc market today is on the smelters. Many smelters in Europe are experiencing very high power costs, which could lead to shutdowns or capacity reductions. Meanwhile, mine supply and concentrate levels have remained relatively stable or slightly increased. Despite this, we are observing strong demand for our metal, which is reflected in significantly higher spot premiums. Therefore, we are very optimistic about the price of zinc. While we can't predict what will happen in the future, our current outlook for the coming months is positive, indicating a high zinc price. However, we remain uncertain about next year, especially given potential geopolitical tensions that could impact Europe’s economy. For this year, the elevated treatment charges and premiums suggest that the market is quite tight due to the challenges faced by smelters.

And we have time for one more question from the web from Joanna. Can you just remind and this energy accounting total costs? Can you comment on the higher net leverage ratio compared to the end of 2021? And also mentioned you intend to deleverage. Can you tell us if you have any net leverage target or guidance for the end of the year? In terms of waiting, do you have any expectations regarding an upgrade of the S&P rating to investment grade?

Thank you for your questions, Joanna. Regarding the first question, the overall impact is around 5%. It's quite complex to mitigate the effects of energy cost volatility everywhere due to the immediate pass-through of energy prices. In Brazil, we monitor the internal energy curve, and now that we are in a better position, the pressure on costs is starting to ease. As for leverage, we do not have specific targets. Our policy aims to maintain a net debt to EBITDA ratio below 2x, which we are currently achieving. With current prices, we expect to generate more cash, potentially lowering this ratio to around 1x by year-end. Last year, we reduced our gross debt, and out of our $1.7 billion debt, $1.2 billion is long-term bonds. The rest consists mainly of export credits in Brazil with a maturity of up to 5 years and other export credit agencies. This means we have less debt for further deleveraging. We will generate cash and consider this capital for growth or returning it to shareholders. In terms of credit ratings, we've been in close contact with rating agencies and do not expect any changes in our ratings in the short term. Our credit metrics and business fundamentals remain robust, and we will continue to monitor this as per their reports. I hope this answers your question.

Yes. I want to mention that the net debt EBITDA ratio at the end of the year was 1.37, and it has now risen to 1.53, indicating that we are increasing. To clarify, the net cash we used in the quarter was $168 million, with $156 million of that attributed to working capital, which we have already discussed. We believe that a significant portion of this working capital will reverse. Therefore, I expect the leverage ratio to decrease as prices decline in the second quarter and continue to fall toward the end of the year. This will help maintain our influence within this range.

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

Thank you, everyone, for joining the call. We hope we clearly communicated our results for this quarter. We are pleased that Vazante is operational again. We anticipate a strong month in April and believe we will meet our guidance for the second quarter. Regarding Aripuana, we are confident it will start ramping up in the third quarter. We are committed to maintaining discipline despite the inflationary pressures we are facing. We are holding numerous meetings each week with operations to ensure we have initiatives in place to address these pressures, and we are dedicated to increasing our cash flow, which is our main objective. Thank you for attending the call and for your time. We will speak again soon. Roberta and her team are available for any further questions you may have, and we would be happy to assist later. Thank you, and have a good day.

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