Nexa Resources S.A. — FY2018 Form 20-F summary
Reporting period: Fiscal year ended December 31, 2018; filed April 3, 2019. This is an annual report, not a quarterly filing, and the supplied text does not provide clear standalone fourth-quarter financial statements. Figures below are in US$ millions unless stated otherwise. Financial statements are prepared under IFRS as issued by the IASB.
Business context and key financial metrics
Nexa is an integrated zinc miner and smelter operating five polymetallic mines and three zinc smelters in Brazil and Peru. It also produces copper, lead, silver, gold and smelter by-products.
| Metric | FY2018 | FY2017 | Change / note |
|---|---|---|---|
| Net revenue | $2,491.2 | $2,449.5 | Up 1.7% |
| Gross profit / margin | $602.3 / 24.2% | $696.7 / 28.4% | Margin contracted |
| Operating income / margin | $334.6 / 13.4% | $401.6 / 16.4% | Down 16.7% |
| Net income | $91.0 | $165.3 | Down 44.9% |
| Net income attributable to Nexa shareholders | $74.9 | $126.9 | Basic and diluted EPS: $0.56 vs. $1.09 |
| Adjusted EBITDA | $604.8 | $667.5 | Down 9.4%; margin 24% vs. 27% |
| Operating cash flow | $347.6 | $378.9 | Down 8.3% |
| Capital expenditures | $299.7 | $197.6 | Up $102.1 |
| Cash and cash equivalents | $1,032.9 | $1,019.0 | At year-end |
| Total debt | $1,424.9 | $1,447.3 | Mostly long-term; $32.5 current |
| Net debt / Adjusted EBITDA | $302.8 / 0.50x | $225.1 / 0.34x | Leverage increased |
Year-end financial investments were reported as $91.9 in the balance sheet; management’s net-debt calculation uses $92.2. Current assets were $1,698.0 and current liabilities $651.8. Cash plus financial investments totaled approximately $1,125.1. Debt was about 91% US-dollar-denominated, and 26.7% bore floating rates. Nexa reported compliance with its debt covenants.
Material changes versus FY2017
- Revenue edged higher on slightly firmer metal prices and increased smelting sales, partly offset by lower by-product sales volumes.
- Cost of sales rose 7.8%, reducing gross profit and margins. Management cited mine safety spending and higher purchased-concentrate costs.
- Net financial loss widened to $202.7 from $130.2, principally reflecting $148.5 of foreign-exchange losses, associated largely with the Brazilian real’s 14.6% depreciation and US-dollar intercompany debt.
- Mine production declined 2.9% to 555.7 thousand tonnes zinc-equivalent, while smelting sales volume increased 3.9% to 616.9 thousand tonnes.
- Cash flow from operations fell, while investment in capital projects rose. Cash nevertheless increased by $13.9 during the year.
- Net debt increased and the net-debt-to-Adjusted-EBITDA ratio rose from 0.34x to 0.50x.
Outlook, management commentary and notable items
- For 2019, Nexa forecast mined production of 375–395 thousand tonnes zinc, 37–40 thousand tonnes copper, 52–57 thousand tonnes lead, 8.0–8.6 million ounces silver and 21–23 thousand ounces gold, all contained in concentrate.
- 2019 refined-product sales guidance was 573–591 thousand tonnes of metallic zinc and 37–39 thousand tonnes of zinc oxide. These estimates include a possible temporary production slowdown during the Cajamarquilla process conversion.
- Nexa budgeted $420 million of 2019 capital expenditures, including $140 million for Aripuanã, $24 million for the Vazante mine-life extension and $24 million for the Cajamarquilla Jarosite conversion. It expected to fund spending primarily from operating cash flow, with additional borrowing possible.
- Management also forecast approximately $128 million of 2019 mineral exploration and project-development expenses. Aripuanã, a Brazilian underground polymetallic project, was under construction and targeted to begin operating in 2021; total estimated project capital expenditure was $392 million.
- A Brazilian court decision granted Nexa Brazil approximately $59.7 million in federal tax credits: about $33.7 million principal recognized in other income and $26.0 million interest recognized as financial income. The credits are to offset future federal tax payments.
- Environmental and asset-retirement provisions included an additional $18.3 million recorded in 2018. At year-end, undiscounted asset-retirement cash obligations were estimated at $287.1 million.
- Possible and probable legal claims were reported at an aggregate disputed amount of approximately $343.8 million, against a net provision of $30.6 million. A separate January 2019 Peruvian tax assessment of $37.8 million was classified as possible loss, with no provision recorded.
- Following the January 2019 Brumadinho dam disaster at another company, Minas Gerais introduced rules requiring decommissioning of upstream tailings dams and restricting new or expanded dams in certain areas. Nexa said it was assessing the potential impact. Nexa reported 46 disposal facilities, including 22 operational facilities.
- Management reported effective disclosure controls and internal control over financial reporting at December 31, 2018, and the auditor issued unqualified opinions on the financial statements and internal controls. Earlier material weaknesses had led to restatements of 2016 and 2017 statements; management said remediation was completed.
Most important facts for investors to verify
- Review the audited statements and notes for the drivers of lower earnings and margins, especially operating costs, the foreign-exchange loss and the tax-credit benefit.
- Reconcile reported working-capital figures: the selected-data section reports adjusted working capital of $109.0, while its detailed calculation gives $92.9; the narrative also cites $109.0. The filing text does not explain this difference clearly.
- Assess whether the $420 million capital plan, Aripuanã spending and exploration program can be funded without materially increasing net debt, and monitor project timing and cost risks.
- Monitor zinc prices, concentrate availability and treatment charges, currency movements, production recovery at Cerro Lindo, and the impact of Cajamarquilla’s conversion project.
- Verify the status and potential financial consequences of dam-related regulatory changes, environmental obligations, legal contingencies and the $37.8 million Peruvian tax assessment.
- Consider reserve-estimate uncertainty: Atacocha and Morro Agudo had no mineral reserves reported under SEC Industry Guide 7, and reserve estimates depend on commodity-price and operating assumptions.