Nexa Resources S.A. Q2 FY2022 Earnings Call

Good morning, everyone, and welcome to the Nexa Resources Second 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. After today's presentation, there will be an opportunity to ask questions. I would now like to turn the conference call over to Ms. Roberta Varella, Head of Investor Relations, for opening remarks. Please go ahead.

Good day and good afternoon, everyone, and welcome to Nexa Resources second 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 on-screen presentation through the webcast. Before we begin, I'd like to draw your attention to Slide 2, as you 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 Ignacio Rosado, our CEO; Leonardo Coelho, our Senior Vice President of Mining; and Mrs. Claudia Torres, our Interim CFO. So now I will turn the call over to Ignacio for his comments. Ignacio, please go ahead.

Thank you, Roberta, and thanks to everyone for joining us this morning. Please let's move now to Slide 3, where we will begin our presentation. We had a very strong performance in our operations in this quarter. As anticipated, mining production increased from the first quarter of this year, mainly due to the resumption of the Vazante mine to full production. As previously disclosed, Vazante was affected by heavy rainfall. The smelting business also performed well, and total metal production was up 15% quarter-over-quarter as a result of the higher supply of zinc in concentrate from Vazante in Brazil and the improved operational performance of Cajamarquilla in Peru after the temporary decrease in roaster utilization in March. Our solid operational performance combined with our efforts to mitigate inflationary cost pressures and with a positive effect on prices generated a record high adjusted EBITDA and a strong operating cash flow. We are happy to announce that we are on track to meet our production, sales, and investment guidance for the year. Our cash cost guidance, however, has been revised, and I will explain this in more detail in the upcoming slides. Aripuana ramp-up is progressing in accordance with our plan, and the first batch of copper in concentrate was delivered at the beginning of July. The exploration program in Aripuana also continued to progress, and we believe we will be able to increase its mineral resource at the end of the year. Our balance sheet continues to be strong with financial leverage decreasing to 1.3x from 1.5x in the previous quarter. Regarding ESG, we are close to finalizing our updated strategy, and we expect to disclose our new long-term goals during the coming months. Now moving to the next slide. In Slide 4, you can see that zinc production in the second quarter decreased 3% year-over-year because of lower average head grade and treated ore volume. However, compared to the first quarter of this year, zinc production of 79,000 tons increased by 19%, mainly driven by higher treated ore volume and higher zinc grade. Average grade was positively affected by the increase in production from Vazante and at Cerro Lindo, treated ore volume recovered as expected, although organic material in some of our ore bodies remains a challenge. Following higher treated ore volume, copper, lead, and silver production in the second quarter increased by 39%, 14%, and 16% from the first quarter of this year. For the upcoming quarters, we expect zinc and lead production to be similar to the second quarter, while copper and silver should be slightly lower. However, we believe we are on track to achieve from the mid to the upper range of the production guidance for all metals. Moving now to the next slide. In Slide 5, run of mine mining cost in the second quarter was $43 per ton compared to $38 per ton in the second quarter of last year, reflecting inflationary pressures on costs and lower ore throughput. Compared to the first quarter of this year, run of mine mining cash costs decreased by 5% with improved volumes due to the Vazante resumption, returned to operational stability at Cerro Lindo, and our cost control initiatives. Mining cash cost in the quarter decreased by 14% compared to the prior quarter, which was mainly explained by higher zinc volume and by-products credits and lower operating costs, which were partially offset by higher TCs and the Brazilian real appreciation against the U.S. dollar. Now moving to the smelting segment in Slide 6. In Slide 6, in the second quarter, metal sales totaled 152,000 tons, down 3% year-over-year, but up 13% quarter-over-quarter following higher production in Peru and in Brazil. In Brazil, smelter production increased quarter-over-quarter because of the improved zinc in concentrate supply from the Vazante mine, in addition to a better performance in the Tres Marias smelter after its roaster maintenance. In Peru, production increased because, as mentioned before, at the end of the first quarter, there was a temporary decrease in the roaster utilization in Cajamarquilla due to maintenance activities. For the upcoming quarters, smelter production is expected to remain stable compared to the second quarter of this year. As all sites are operating at full capacity, sales are expected to follow higher production volume and our 2022 guidance remains unchanged. Our smelting cash cost in the second quarter increased by 35% compared to the same period of last year, mainly driven by higher zinc prices. Compared to the first quarter of this year, a smelting cash cost increased by 8%, and this factor was due to higher operating and maintenance costs, lower by-product prices following the market trend, and the Brazilian real appreciation. These factors were partially offset by higher volumes. Conversion costs in the second quarter was $0.29 per pound compared to the $0.25 per pound in the first quarter of this year. This increase is mainly driven by the increase in energy prices and other variable costs. Now moving to Slide 7. Growing concerns about the global recession have put downward pressures on commodities, and base metals had a significant decrease in prices. We also believe that inflationary cost pressures could persist in the second half of this year. And as a result, we have updated our cash cost guidance for both segments. Full-year mining cash costs have increased to $0.28 per pound, given year-to-date performance and forecasts for lower by-product metal prices. Full-year smelting cash costs have been revised to $1.37 per pound from $1.15 per pound, primarily driven by higher zinc prices, higher energy costs as well as higher fuel and consumable prices. Now moving to the next slide to our Aripuana project. As announced in early July, ramp-up activities at Aripuana Mine have safely started, and we are happy to confirm that the first batch of copper in concentrate was delivered at the beginning of the month. The ramp-up is progressing as planned, and we are focused on steadily increasing the plant throughput rate. The milling capacity utilization rate is expected to reach an average of 30% to 40% in the third quarter of this year and 70% to 80% by December of this year. Hence, commercial production is expected in the fourth quarter. At the end of June, there were approximately 670,000 tons of ore available in stockpiles, which is enough to cover six months of the estimated ramp-up period. Furthermore, the mine is already fully operational and underground mining activities are focused on developing and preparing new areas and increasing mineral reserves with our infill drilling campaigns. In the second quarter, we invested $27 million in Aripuana, totaling $54 million in the first half of this year, which includes a negative effect of the Brazilian real appreciation against the U.S. dollar of $5 million. The total estimated CapEx for the project remains unchanged at $625 million. Now moving to the next slide, where I will give you an update on Aripuana's exploration program. In Aripuana, almost 16,000 meters of infill drilling were completed at Ambrex in the second quarter. No drilling activity was executed at Babacu as we decided to anticipate the infill drilling campaign at the Ambrex ore body to potentially increase our resources. The latest drill holes resulted indicated that the mineralization has been confirmed, which should support the conversion of inferred to indicated mineral resources. At the Babacu target, we have received excellent assay results, which confirm a high-grade mineralization zone as shown on the slide. For the third quarter, we expect to complete infill drilling at the Ambrex ore body and resume the exploratory program of the Babacu target. Now moving to the next slide to show our financial results. In Slide 10, I am pleased to report positive momentum for the second quarter of 2022, delivering a strong operating performance and sound financial results. Beginning with the chart on your upper left, total consolidated net revenues for the second quarter increased by 21% year-over-year, and this was mainly driven by higher LME prices. In the first half of this year, consolidated net revenues reached $1.6 billion versus $1.3 billion in the first half of last year, an increase of 20%. In the second quarter of this year, consolidated adjusted EBITDA increased by 23% year-over-year. This performance is mainly explained by higher metal prices, changes in market prices in respect of quotation period adjustments, and higher by-product sales. These positive factors were partially offset by pre-operational expenses of the Aripuana project, inflationary pressures on operating costs, higher exploration investments, and an increase in workers' profit sharing participation. Compared to the first quarter, adjusted EBITDA in the second quarter increased by 37%, mainly driven by higher volumes. In the first half of this year, consolidated adjusted EBITDA reached $494 million versus $413 million in the same period of last year. In the next slide, I will discuss the financial performance by segments. In the mining segment, net revenue totaled $370 million in the second quarter, a 19% increase versus the second quarter of last year. This factor was mainly driven by higher average LME prices and the increase in by-products volume. Adjusted EBITDA for the mining segment of $145 million follows the upward trend and increased 3% year-over-year. Compared to the first quarter of this year, adjusted EBITDA increased 14%, mainly driven by higher volumes. Increases in net revenue and adjusted EBITDA during the first half of this year compared to the same period of last year were also driven by higher prices. In the smelting segment, net revenue in the second quarter totaled $683 million, an increase of 31% versus the second quarter of last year, also supported by higher LME prices, which offset the decrease in volumes. In the same period, adjusted EBITDA totaled $140 million, an increase of 52% that was explained by the positive net price effect of $58 million and higher by-products contribution, which offset the increase in operating costs, lower volumes, and the Brazilian real appreciation. In the first half of this year, net revenue for the smelting segment totaled $1.2 billion compared to $989 million in the first half of last year, while adjusted EBITDA totaled $223 million compared to $176 million. Now moving to the next slide to show our investments. In the second quarter, we invested $98 million in CapEx, of which $27 million was directly associated with the Aripuana project. In the first half of this year, CapEx amounted to $180 million, where $54 million was related to Aripuana, and the remaining mainly related to sustaining CapEx. The Brazilian real appreciation against the U.S. dollar had a negative impact of $8 million in the quarter and $13 million in the first six months of this year. We are happy to announce that our 2022 CapEx guidance remains unchanged at $385 million. With regard to mineral exploration and project evaluation, we invested a total of $24 million in the second quarter, being $13 million related to mineral exploration and mine development. In the first half of this year, we invested a total of $40 million related to these topics. As part of our long-term strategy, we are maintaining our efforts to replace and increase mineral reserves and resources, supporting our organic growth. Total plant exploration and project evaluation expenditures are expected to be $82 million in 2022. So guidance remains unchanged. Now moving to the next slide where I will discuss our cash flow generation in the quarter. In Slide 13, the cash flow provided by operations was $241 million. We had $49 million from interest paid and taxes and $69 million invested in sustaining CapEx. Therefore, Nexa has generated $123 million of cash before expansion projects and working capital during the period. Our free cash flow from the second quarter was positive at $29 million. This free cash flow was also affected by $27 million invested in Aripuana, the investment in Tinka of $7 million included in loan and investments, dividend payments to non-controlling shareholders of $9 million related to Pollarix, our company, which manages our energy assets, foreign exchange effects on cash and cash equivalents of $16 million, and an increase in working capital of $23 million. Now moving to the next slide, where I will discuss our cash flow generation in the first half of the year. In the first half of the year, the cash flow provided by operations was $465 million. We had $139 million from interest paid and taxes and $115 million invested in sustaining CapEx as well. Therefore, Nexa has generated $211 million of cash flow before expansion projects and working capital. Our free cash flow for the period was negative $139 million, also explained by $54 million invested in Aripuana, $60 million explained by the early redemption of our 2023 notes in the first quarter of this year, dividends of $59 million, which included Pollarix, and working capital changes of $179 million. This high amount of working capital has been highly impacted by a negative variation of $166 million in inventories in our smelting segment due to the higher lead times in logistics and also a negative variation of $63 million in trade payables, partially offset by a positive variation of $42 million in trade receivables. We expect to reverse most of the increases in inventories during the coming months. Now moving to Slide 15. In Slide 15, 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 second quarter, our current available liquidity was approximately $933 million, which includes our undrawn revolving credit facility of $300 million. As of June 30, the average maturity of our total debt was 5.1 years, with a 5% average debt cost. Our leverage measured by the net debt to adjusted EBITDA ratio was 1.3x compared to 1.5x at the end of the first quarter and 1.2x a year ago. Now moving to the next slide on ESG. I am now on Slide 17. Here, I will briefly give you an update on the progress we are making in our ESG program. First, I would like to highlight that we are enhancing our ESG strategy to reflect our commitment to long-term value creation and sustainable development. Since last year, our team has worked hard to develop a broad study base on different fronts, including climate change, natural capital related to water use, social legacy, health, safety, well-being, and people. Several strategic discussions were held and we are in the final process to define our main ESG long-term goals for 2030, which we expect to disclose in the coming months. Now turning to our last slide. I would like to close this presentation by briefly reinforcing our priorities for the rest of the year. As I mentioned earlier, Aripuana is in the ramp-up stage. Our efforts now are on the commercial production, while our exploration strategy focuses on increasing mineral resources and the extension of the life of the mine. We remain focused on efficiency and committed to improving our cash flow generation and productivity in all aspects of our business, in addition to continuing to deliver on guidance. The expansion of the life of the mine of our operations continues to be an important goal to drive organic growth. With regard to our exploration project pipeline, we are reevaluating our project portfolio. And in parallel, we are very active in the market, assessing growth opportunities. Finally, as mentioned before, enhancing our ESG strategy is key to our business, so we will be communicating our main goals for 2030 in the coming months. Thank you all for attending this presentation. With that, I will be happy to take your questions.

And our first question today comes from Jens Spiess from Morgan Stanley. Please go ahead with your question.

Yes. This is Jens. I just wanted to ask on this last point you mentioned about the project portfolio. Could you provide any update on Magistral? And maybe any color regarding whether you're still quite negative on Peru or if, given the current situation, that the President or the current executive power will likely not be able to implement any legislative changes. Has your view changed there?

Sure. Yes, in the case of Magistral, we're still spending some money here in Magistral because this is a process that we have with the government, and we need to advance in the phases of Magistral to comply with the contract that we have with the government. However, Magistral, we believe, is a very good project. It's a project that is going to give us between 15 to 17 years of life of mine of good copper. But the problem is, and it is related to the second part of your question, the problem is if we want to invest between $800 million to $1 billion in Peru, in this context where Peru is facing some noise around the mining sector. So what we are doing is we're still assessing. Magistral is still a very important project for us, but we are evaluating if we team up in this project with other partners, so we can reduce our risks. And we are also comparing this project with other alternatives in the market outside Peru. So we evaluated the opportunity because of building Magistral in Peru or acquiring another project that is sort of in the same stage in other countries and decide which one is the best to add value to the company. So that's more or less what we have in Magistral looking for some partners and also assets in other projects with the same size and characteristics in other countries. There are not that many, but there are some, and we are very active on that.

Okay. Perfect. And if I may, just you mentioned that you expect to be on the higher end of your production guidance in the Mining division. Any particular mines where you will be above your existing guidance? And lastly, on the smelting division, did your cost benefit from provisional pricing from third-party purchases from concentrate this quarter that were made last quarter? And how much was that impact?

No problem. Yes. I guess regarding the production guidance of our mines, the main mines are Vazante, Cerro Lindo, and Porvenir. And we are very stable in their throughput and in the average grade that we are projecting in the budgets, and that's why we put in guidance. We had some problems in Atacocha in Peru. This is a small pit because of community issues. But this doesn't affect the outlook on guidance for the rest of the year. So we expect most of our mines to be very stable, and as we were saying in the presentation, they should be very similar to the performance of the second quarter. And that's why we can achieve mid to the higher range of production guidance for the rest of the year. Regarding the second question, the smelting costs. The smelting cash cost is influenced by conversion cost, and the conversion cost has gone up because of some energy prices increases in Peru. That is linked to oil in any case. Any increases or inflationary increases in all derivatives of that, diesel, and some reactives. And in Brazil, we had a problem with the real. So that's why the conversion costs went up from the first quarter to the second quarter. And from the year, it was much higher. But the part that was much higher was because the prices, when you buy the concentrate, you sort of pay the spot price or the price that is from a month above, so prices were up, and so the value of concentrate was higher, and that's why the cash cost was up. Having said that, this effect on hedge or this effect on these hits that we have sometimes are positive; sometimes are negative are based on when we hedge this financial. When we hedge the inventory, it has a certain price. So when you realize that price in the month that the price is lower, you realize a gain, which is what happened this quarter. But this is offset in reality because when you sell, given that you hedge everything at the end of the year, the positives and negatives should be 0. So that's why we have some fixed terms, negative in the quarter. This is related to dropping on prices. Prices have dropped, as you know, in the last quarter, the stock that we had was with higher fixed with a higher price when it goes down, and you have a gain because it was fixed with a higher price. So that's why we recorded $19 million in this quarter of gain. I don't know if that was clear to you, but this is going to reverse. At the end of the day, you will see that when we produce and we sell towards the end of the year, these negative and positive effects that we have in the quarter are going to offset each other, and we would have close to 0 of these effects.

Perfect. Very clear. So $19 million positive effect this quarter, which might or might not be sustainable depending on housing prices above. Perfect.

And our next question comes from Lawson Winder from Bank of America. Please go ahead with your question.

Hello, Ignacio. Good morning. Thank you for the update today. I would like to also ask about the project review. It's quite clear that part of this review is a bit of a hesitancy with exposure to Peru. What jurisdictions at this point are attractive for Nexa?

Yes, that's a great question. We established a new area in February, and our DPO of exploration is currently overseeing it. We have been actively exploring the market, primarily focusing on the Americas. Our search includes projects in Brazil, Peru, Chile, Mexico, as well as some in the U.S. and Canada. The challenge lies in the limited availability of projects, which often requires us to think creatively to uncover value in our assessments. However, we are indeed very active in the Americas and are on the lookout for opportunities there. Regarding Peru, while it has always been a mining country, the current situation poses challenges. Nevertheless, within Peru, we can identify more favorable alternatives, particularly those with less exposure to community issues and towns that complicate mining operations. We're also exploring some opportunities in this context. Specifically, for the Magistral project, the situation remains challenging due to its location and community relations concerns. To sum up, our primary focus is on the Americas, with some potential opportunities in Europe. We evaluated a project in Spain six to eight months ago, but it was acquired by another company. So, our focus remains on opportunistic chances in both Europe and the Americas.

One thing that stands out from the list is Bonsucesso near Morro Agudo. So one, it's in Brazil. So one reason that stands out. The other is that I mean, Bonsucesso, I kind of thought of being the future of Morro Agudo, the complex. What does that imply for the status of Morro Agudo? I mean is it a key asset for you guys going forward? Or is it non-core?

It's a very good question, and this is the strategy that we have been discussing with the team. This is common in the evolution of companies. We focus on Nexa's key assets, which include Cerro Lindo, Vazante, and the ramping up of Aripuana. These are strong assets. Currently, Cerro Lindo is smaller, but we have promising projects like Porvenir and Atacocha that we are evaluating. Then there's Bonsucesso. The drill holes and potential of that deposit look excellent. The Morro Agudo plant is at breakeven right now, and all the minerals from the Morro Agudo mine are also at breakeven. We see smaller projects potentially being phased out of our portfolio. Given our time limitations and company size, we are seeking opportunities that match the scale and profitability of Cerro Lindo, Vazante, and Aripuana, as they require the same investment of time but offer more transformative potential for Nexa. We are currently assessing our status and will update the market later with more details. Regarding your question, Bonsucesso is indeed a promising prospect; it's small, with about 30,000 tons of zinc and significant resource potential. The mineral from Morro Agudo will be utilized, but the costs are manageable, making it a good project. However, we need to consider if it's the size we are looking for, and at this moment, the answer is no. We should concentrate on projects similar to Cerro Lindo, Vazante, and Aripuana.

Would that mean there's a risk that Morro Agudo could be closed in the next few years?

It could be. I mean, we are always assessing. Morro Agudo has some benefits in terms of the smelters, in terms of Tres Marias and Juiz de Fora. But to be honest, the money that we make in Morro Agudo is very little; it's very small now. And we are assessing, and the team of the VP of Operations is assessing how much CapEx we are going to allocate in the next three to five years compared to this CapEx putting it in a different project. So the answer is we are still assessing, and I would say it might be the case that in the coming years, we will decide to close Morro Agudo. But this is something that we will communicate in a proper way and in advance to the market.

And then just maybe one final question on this project review. Two of the projects on that list, Florida Canyon and Shalipayco, have partners. Have there been any preliminary discussions with those partners regarding a potential purchase transaction for Nexa's shares?

Yes. No, we are in this process right now. Shalipayco, we believe, is a very good project, early stage. But it's very near Pasco, and this will need a new plant and new permits. So the opportunity cost of leaving Shalipayco and putting it to a new plant, I would say, is in a lower category than buying other projects that are more advanced and more aligned with our strategy. So we are assessing what we are doing in Shalipayco, and that is also the case in Florida Canyon, which is early stage. So still, we are still assessing, and I can tell you that in the coming months, we will be more specific on these projects as well. We might get back to the partners and try to do something with them and try to make some more concrete actions in these projects that are early stage, and if we want to create Nexa that is, I would say, transformation, we need to focus on operations that are similar to Cerro Lindo and Vazante and Aripuana.

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

Hi, good morning. I wanted to discuss operating costs and inflationary pressures, as they have been a significant theme in this reporting season, as well as the previous one. Could you clarify if your updated cost guidance reflects the current spot pricing for energy and input costs? Have you factored in the current spot pricing for the rest of the year, or what assumptions underlie the new cost guidance?

I would like to clarify this. The cash cost that we presented, and I'm using the mining example that is going to go from $0.23 to $0.28 has three components for us. So the first one is the cash cost per ton or the run-of-mine cash cost per ton for the mines, which is how much cash I invest that is in the operating costs in the mine. We said that we had almost $43 this year in the second quarter; that was $45 in the first quarter, and last year it was $38 or $39. From last year to this year, it increased. The reason for the increase was for two reasons. One was throughput, and the second one was inflation. We said in the first quarter, in the last quarter call that we incorporated inflation in our estimates for this year. So that's why it went to $45 in the first quarter of this year. The second quarter is $43, and we believe that the following quarters are going to be similar to $43. So the cash cost per ton from our mines is being stable, with high inflation at the beginning, and this inflation is mainly related to energy, to diesel, to some reactives in the plant, to some cement, et cetera. So specific items that are bigger items in the mine. How you mitigate that is with two things. One is volume. So we increased our volume, especially in Vazante and Cerro Lindo with initiatives in the mine. So all these inflation is to mitigate how we're mitigating the mines. Again, for example, we have a lot of short grid or rock support in the mine because this is underground. We optimize the short grid. We renegotiated some conditions with contractors. We changed the process of water disposal to be inside the mine so we don't need to treat. We renegotiated all other targets with contractors. There are many activities or actions that we took to offset the inflation and to make sure that our cost per ton is flat. So this is what we control. On top of that, you have two other items that go to the cash costs. The first one is the treatment charges. I mean if you follow the benchmark, the benchmark for the year has gone up from last year, but they're sort of flat. So it shouldn't be the TCs that is going to change the cash cost. What really changes the cash cost is the income on by-products because what happens is that you have your total costs on all the by-products that you are selling having a lower price because prices are going down. So this discount on the costs of these by-products is now lower, and that's why your cash cost is going up. This is the dynamic that we are following in the mines, and that's why we're saying that it comes from $0.23 to $0.28.

Could you remind us how your energy power contracts work at the smelters, considering the significance of energy and power contributions to those operations?

Yes. I would say, in Brazil, we are self-sufficient in energy. We have a company called Pollarix that holds some assets, and we sort of generate our own energy. That's why we are not exposed to the market in Brazil in that regard. I would say that in Brazil, the main factor that influenced the cost or the conversion cost in the smelters was the real, the real depreciation. This was influenced by some inflation as well. In Peru, that Cajamarquilla consumes a lot of energy; we have a contract. This contract is linked to factors that are in our control. This energy costs are going up. That is why the smelters have inflation and inflation related to energy, but especially in Peru.

Sorry. Regarding Cajamarquilla, is the power contract updated fairly regularly?

Yes. The structure involves contracts that last from three to five years, using a formula for energy provision. Our hydroelectric energy is beneficial for sustainability and is subject to renewal. The contract ensures delivery, but the price is influenced by two main factors: the cost of the grid, which is rising, and external factors like oil prices, which have also increased. From last year to this year, we experienced a rise in costs, particularly in Cajamarquilla. Depending on market conditions, we might see further inflation in energy costs at Cajamarquilla as the year progresses.

So we received a question here from Jose Maria from BCG by Cloud. Congrats on the good results. We'd like to know, given the currently updated assumptions, what kind of EBITDA contribution we should expect in 2022 from Aripuana?

Yes. Okay. No, it's going to be small in Aripuana, as we are saying is in ramp-up is good. The ramp-up activities are progressing really well. As I was saying in the call, between 30% to 40% of capacity is going to be reached at the end of September. Then at the end of December, it should be between 70% to 80% of the capacity. But a mineral that is going to be produced when you start the ramp-up to make sure that the plant is up and running in a good way, recoveries will adjust, and the mineral that you use to feed the plant is mineral with low grades. I would say in that regard, the profitability of the minerals that we are getting from this ramp-up is lower. So the EBITDA is going to be very low in this year. However, 100% of capacity is going to become in the first quarter of next year. So Aripuana's EBITDA contribution for next year is going to be much better.

The second question comes from Joanna Feliz from Bank of America. What's your net leverage through the cycle given investments and weaker economic prospects, assuming that you tend to remain investment-grade? Can you please clarify your revised cash cost guidance?

Yes, we have already clarified our cash cost guidance. It's crucial to consider our leverage. Given our debt profile and the capital expenditures we make in our operations, we need to maintain a breakeven cash cost. It's important to monitor where our leverage stands to determine if we are investment-grade. Our preference is to keep leverage below 2.5 to 3 times, especially under stress conditions. The Aripuana project will contribute to EBITDA next year, and the other mines will be operational as well. We may invest some capital in Cerro Pasco next year to integrate El Porvenir and Atacocha. Generally, we expect our leverage to remain below 2 to 2.5 times through the cycle. With the cash flow we generate, we intend to pay dividends as part of our strategy to return value to shareholders. We will also focus on growth, which may require additional leverage and potentially more debt. However, we view a 3 times leverage ratio as our upper limit. This should be a peak, as companies typically reduce capital expenditures and optimize costs when prices are low, and some operations may need to be scaled back. In summary, the limit is 3 times.

Can you break down your major costs into energy, freight, and logistics? Also, can you comment on your views in terms of the outlook for both segments?

I don't have that detail; I'm very sorry. We can follow up that you have.

Yes. In terms of energy cost, let's say on a consolidated basis, considering the cost of goods sold is about 8% to 10%. And in terms of logistics, about 5%. Usually, the freight cost is deducted from our gross revenue. The next question we have is from Hernan from MetLife. Now that investments in Aripuana are mostly done, what should we expect for capital allocation?

Yes. I already answered that. I would explain again. Part will go to dividends, and the part has to go to find projects similar to Aripuana. As I was saying, Magistral is one of them, and we are assessing Magistral towards against other projects that we are looking at in the market. So capital allocation will go to finance these projects and make sure that we have Cerro Lindo, Vazante, Aripuana, and any other mine of that size. Pasco could be something that is a backup. Pasco could be a backup. But I would say that we will try to allocate that capital to projects of that similar size.

So we don't have any other questions. We thank you all for the time and consideration here. We would like to close the presentation by announcing that we have, for the first time, we will have our Investor Day in October in New York, given that it's five years of our IPO. This is a very important milestone for Nexa. This will be an opportunity for an in-depth discussion on how we are envisioning our developing business. We will have presentations around exploration and how we are going to extend the life of the mine; you will be able to meet all the team, and we will discuss our ESG strategy, which is something that is very important for any mining company that is around responsibility with your stakeholders, I would say. We will put our commitment for 2030. We will tell you in advance the date. We are very excited to do this, so hopefully, some of you could join us in New York. We know that some of you work there, so probably it will be fantastic to give you all these views of Nexa for the coming years in person.

Okay. And with that, again, I would like to close this presentation and this Q&A by thanking you for your time. I hope we will see you in three months with the next results that we have. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.