Nexa Resources S.A. — 2019 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 20, 2020. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under IFRS as issued by the IASB, in U.S. dollars.
Business context
Nexa is an integrated zinc producer operating five polymetallic mines in Peru and Brazil and three zinc smelters. It was developing the Aripuanã mine in Brazil and acquired the remaining 30% interest in that project in 2019, bringing ownership to 100%. Votorantim S.A. controlled 64.25% of Nexa’s shares as of March 16, 2020.
Financial and operating performance
| Metric (US$ millions, except per-share data and ratios) | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | 2,332.3 | 2,491.2 | Down 6.4% |
| Gross profit / gross margin | 387.6 / 16.6% | 602.3 / 24.2% | Gross profit down 35.6% |
| Operating income (loss) | (111.0) | 334.6 | Turned to loss |
| Net income (loss) | (159.0) | 91.0 | Turned to loss |
| EPS (US$) | (1.11) | 0.56 | Turned to loss |
| Adjusted EBITDA (non-IFRS) / margin | 349.0 / 15.0% | 604.8 / 24.3% | Down 42.3% |
| Operating cash flow | 122.8 | 347.6 | Down 64.7% |
| Capital expenditures | 410.3 | 299.7 | Up 36.9% |
| Cash and cash equivalents at year-end | 698.6 | 1,032.9 | Down 334.3 |
| Total debt / net debt | 1,508.6 / 787.8 | 1,424.9 / 302.8 | Net debt increased |
| Net debt / Adjusted EBITDA | 2.3x | 0.5x | Higher leverage |
Current assets were US$1,375.4 million and current liabilities US$699.0 million at year-end. Cash flow from investing was negative US$335.4 million and financing cash flow was negative US$119.3 million. Debt included US$33.2 million current and US$1,475.4 million non-current; 92.1% was U.S.-dollar denominated, and 24.3% bore floating rates. Nexa reported compliance with applicable financial covenants. An undrawn US$300 million revolving facility was in place at year-end.
Mining production was 564.2 thousand tonnes zinc-equivalent, down 1.9%; contained zinc production fell 3.2% to 361.1 thousand tonnes. Smelter product sales rose 0.7% to 621.2 thousand tonnes. Average LME prices declined year over year for zinc (12.9%), copper (8.0%) and lead (10.8%).
Material changes and unusual items
- Lower metal prices, lower zinc head grades, higher mining costs and Nexa Way program expenses pressured performance. Mining gross profit fell to US$198.2 million from US$456.0 million; smelting gross profit rose to US$210.7 million from US$151.8 million.
- Nexa recorded a US$142.1 million non-cash impairment of the Cerro Pasco cash-generating unit, primarily following a reduction in reserve and resource estimates that shortened its mine life from 21 to 13 years.
- The Nexa Way operational-efficiency program generated US$41.4 million of non-recurring SG&A costs in 2019. Management expected implementation to continue through September 2020, with potential gains in 2020–2021.
- Cost of sales increased 3.0%, while SG&A increased 35.7%. Net financial loss narrowed to US$104.9 million from US$202.7 million, mainly because the foreign-exchange loss decreased to US$12.9 million from US$148.5 million.
- IFRS 16 adoption added lease liabilities and right-of-use assets; the company reported a US$3.3 million reduction in 2019 income before tax from adoption. IFRIC 23 adoption affected uncertain-tax accounting.
- Operating cash flow fell while capex rose; cash declined by US$334.3 million. The company spent US$71.1 million, including transaction costs, to acquire the Aripuanã minority interest and paid US$113.4 million in dividends and other distributions through financing cash flows.
Outlook, commentary and risks
- Management’s 2020 production guidance: contained zinc 338–375 thousand tonnes; copper 40–46 thousand tonnes; lead 50–55 thousand tonnes; and silver 8.825–9.230 million ounces. Refined metallic zinc sales guidance was 578–596 thousand tonnes, with zinc oxide sales of 37–39 thousand tonnes.
- 2020 cash-cost guidance, net of by-product credits, was US$0.52 per pound of zinc sold for mining and US$0.90 per pound for smelting. Management projected zinc-equivalent production of 539–595 thousand tonnes in 2020, 553–634 thousand in 2021 and 600–695 thousand in 2022, with growth primarily dependent on Aripuanã.
- 2020 capex was budgeted at US$410 million, including US$220 million for Aripuanã and US$16 million for the Vazante deepening project. Management expected to fund spending from operating cash flow and cash on hand, while noting borrowing could be needed.
- Aripuanã construction was 28% complete at year-end, behind the original schedule due to weather, bridge upgrades and engineering delays. Commissioning was still expected in 2021, but the schedule and capex were being re-baselined for an update in Q2 2020.
- Management cited macroeconomic and commodity-price headwinds and uncertainty from the COVID-19 outbreak. Guidance and spending plans did not include potential COVID-19 effects; the filing said impacts were not predictable as of its date.
- Principal risks include metal-price and demand volatility, foreign-exchange and interest-rate exposure, project execution and financing, reserve-estimation uncertainty, permitting and community relations, labor disruption, water and energy supply, environmental liabilities, tailings facilities, and political and regulatory changes. One fatality occurred at Cerro Lindo in 2019. The filing reported that all Brazilian and Peruvian mining tailings facilities received stability declarations in September 2019; Brazilian rules require decommissioning of upstream dams, while Nexa said its Brazilian dams were downstream except for one facility previously raised by the upstream method and later raised by downstream/centerline methods.
- Reported legal proceedings with probable or possible loss totaled US$402.8 million in the main table, with US$26.1 million of net provisions; separate financial-statement disclosures list US$370.4 million of possible-loss contingencies. The filing’s overview also cites an aggregate US$702.8 million disputed amount, so the scope and reconciliation should be checked.
Key investor verification points
- Review the audited financial statements and reconcile the differing litigation-contingency totals and classifications.
- Assess the Cerro Pasco impairment assumptions, updated reserves and remaining mine-life estimates, including the sensitivity to metal prices and discount rates.
- Track operating cash generation against planned capex, dividends, debt maturities and the rise in net debt leverage.
- Verify Aripuanã’s re-baselined construction schedule, updated total project cost, financing needs and COVID-19-related impacts.
- Compare realized production, sales and mining/smelting cash costs with 2020 guidance, and monitor the expected timing of Nexa Way benefits versus implementation costs.
- Review the March 2020 US$100 million Nexa Peru term loan and the February 2020 tender of the 2023 notes; these events occurred after the reporting date.
Audit and controls: PwC issued an unqualified opinion on the IFRS financial statements and internal control over financial reporting as of December 31, 2019. Management also concluded disclosure controls were effective.