Business Context and Reporting Period
Nexa Resources S.A. is a large-scale, integrated zinc producer with mining and smelting operations primarily in Peru and Brazil. Incorporated in Luxembourg, the company operates five mines and three smelters. This Form 20-F covers the fiscal year ended December 31, 2017. The company completed its initial public offering (IPO) in October 2017, listing on the NYSE and TSX. Financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).
Key Financial Metrics (Year Ended Dec 31, 2017)
| Metric | 2017 (US$ Millions) | 2016 (US$ Millions) |
|---|---|---|
| Net Revenue | 2,449.5 | 1,964.8 |
| Profit for the Year | 165.3 | 110.5 |
| Profit Attributable to Owners | 126.9 | 93.2 |
| Adjusted EBITDA | 667.5 | 403.9 |
| Operating Cash Flow | 378.9 | 585.1 |
| Capital Expenditures | 197.6 | 183.0 |
| Net Debt | 225.1 | 126.1 |
| Cash and Cash Equivalents | 1,019.0 | 915.6 |
Margins: Gross profit margin was 31.4% in 2017 compared to 26.8% in 2016. Adjusted EBITDA margin was 27.0% in 2017 versus 20.6% in 2016.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 24.7% to $2,449.5 million, driven primarily by a 38.2% increase in average LME zinc prices, which offset a 6.9% decline in zinc equivalent production.
- Production Decline: Zinc contained in concentrate production fell 9.9% to 375,402 tonnes due to lower ore grades, severe rains/floods in Peru in Q1 2017, and safety-related operational adjustments.
- Profitability: Profit for the year increased 49.6% to $165.3 million. Adjusted EBITDA surged 65.0% to $667.5 million, reflecting higher metal prices and disciplined cost management.
- Financial Results: Net financial results swung from a gain of $79.1 million in 2016 to a loss of $130.2 million in 2017. This was largely due to a $53.9 million foreign exchange loss resulting from the depreciation of the Brazilian real against the U.S. dollar, impacting intercompany debt.
- Capital Structure: The company raised $312.0 million net in its October 2017 IPO and issued $700.0 million in 10-year bonds in May 2017. Net debt increased to $225.1 million, with a net debt-to-Adjusted EBITDA ratio of 0.34x.
Guidance, Outlook, and Risks
2018 Production Guidance:
- Zinc contained in concentrate: 370,000 – 390,000 tonnes.
- Metallic zinc sales: 560,000 – 580,000 tonnes.
- Capital Expenditures Budget: $280.4 million (up from $197.6 million in 2017), focusing on the Vazante mine life extension and the Cajamarquilla Jarosite process conversion.
Management Commentary: Management highlighted that 2017 operational challenges were mitigated by strong metal prices. The company expects to maintain a healthy capital structure while funding growth projects. Distributions to shareholders totaled $430.0 million in 2017 via share premium reimbursements.
Key Risks and Contingencies:
- Internal Control Weaknesses: The company identified material weaknesses in internal controls over financial reporting related to earnings per share calculations and hedge accounting designations, leading to restatements of 2016 and 2015 EPS. Remediation is ongoing.
- Commodity Prices: Performance is highly sensitive to volatile zinc, copper, and lead prices.
- Operational Risks: Exposure to natural disasters (e.g., 2017 Peru floods), tailings dam failures, and supply chain disruptions for zinc concentrate.
- Political/Economic: Risks associated with economic instability and regulatory changes in Brazil and Peru, including tax rate changes and mining royalty adjustments.
- Legal Proceedings: Total contingencies for probable and possible claims were approximately $395.5 million, with a net provision of $57.9 million established.
Investor Verification Checklist
- Restatement Impact: Verify the full extent of the restatements regarding Earnings Per Share (EPS) and the effectiveness of the remediation plan for internal control weaknesses.
- Production vs. Guidance: Monitor Q1 and Q2 2018 production volumes to ensure they align with the 370k-390k tonne zinc guidance, given the 2017 production miss.
- FX Exposure: Assess the impact of Brazilian real volatility on future net financial results, given the significant intercompany debt denominated in USD.
- Capital Allocation: Track the execution of the $280.4 million 2018 capital budget, specifically the Vazante deepening project and Cajamarquilla conversion.
- Legal Provisions: Review updates on the $395.5 million in legal contingencies, particularly environmental and tax-related proceedings in Brazil and Peru.