Nexa has ‘global player’ ambitions in zinc

VANCOUVER — Brazil’s Votorantim Metais drew the mining world’s attention in October when it filed an initial public offering (IPO) for Nexa Resources (TSX: NEXA; NYSE: NEXA) on the Toronto and New York stock exchanges.

The US$570-million deal brought the world’s fourth-largest zinc miner to North American markets, it ranked as the third biggest mining and metals listing in Canadian history.

The listing involved 35.7-million shares priced at US$16 per share. The company has US$952 million in cash and US$310 million in net debt.

Nexa produced 417,000 tonnes zinc, 41,550 tonnes copper, 59,000 tonnes lead, 8.3 million oz. silver and 28,000 oz. gold last year.

The integrated mining and smelting company has over 60 years of operating experience and its assets in Brazil and Peru include five operating mines, three smelters and a large exploration portfolio.

Nexa Resources’ Paracatu zinc mine in Brazil. Credit: Nexa Resources.

“We’re now entering a new phase for our company, where we are in transition from a local producer to a global player,” Nexa CEO Tito Martins said during the company’s inaugural conference call in November.

“Proceeds from our IPO will help us accelerate important projects, such as the Aripuana zinc development and Vazante mine extension in Brazil. We expect to drill almost 400 km in the near-term on greenfield projects in Brazil and Peru, where we already have an established mining base. It’s about creating a sustainable future,” he said.

Nexa’s asset base is underpinned by long-life mines, including the Atacocha mine in Peru, which has operated since 1936; the El Porvenir mine in Peru, which started operations in 1949; and the Vazante mine in Brazil, which started in 1969.

Nexa Resources CEO Tito Martins. Credit: Nexa Resources.

The company also owns three smelting complexes: two in Brazil’s Minas Gerais state and one in Peru, in Cajamarquilla.

Nexa’s first quarterly results filed on Nov. 10 were headlined by adjusted earnings before interest, taxes, depreciation and amortization of US$161 million.

The company reported quarterly concentrate production containing 81,000 tonnes zinc, 10,800 tonnes copper, 11,500 tonnes lead, 1.8 million oz. silver and 7,100 oz. gold.

Nexa Resources opens the Toronto Stock Exchange on Oct. 27, 2017. Credit: TMX Group.

Nexa attributed lower-than-expected production due to “energy supply disruption” at the Atacocha mine, lower grades at the Cerro Lindo mine and the “revision of processes” to assure higher safety standards.

Nexa has earmarked US$277 million in IPO proceeds for brownfield expansion projects it intends to finish over the next six years, with the major investment being a US$184-million extension at the underground Vazante mine that is slated to continue production through 2028.

Furthermore, the company will spend US$68 million on exploration this year, which will include 389,000 metres of drilling across seven greenfield projects and “generative volcanogenic massive sulphide opportunities.”

The company holds exploration rights to 25,500 sq. km in Brazil and 3,860 sq. km in Peru.

“Our brownfield projects are the first step towards growth, and we’ve established better access to international capital markets following the IPO to help support future development. But we’re also looking towards the potential in our exploration portfolio,” Martins said.

“We’re very confident in the zinc market for the next 24 to 36 months. We spent a long road show talking about it, and there is a dearth of metal and concentrate in the market. We don’t see prices coming down until it becomes clear on how much more supply might come online,” he continued.

BMO Capital Markets analyst Alex Terentiew initiated Nexa coverage on Nov. 21 with an “outperform” rating on the stock and a $24 price target.

BMO estimates that the company’s production will increase 87% through 2025 before peaking at an annual 1 million equivalent tonnes zinc.

“Over the next few years, we see Nexa emerging as a growth leader, not only in the zinc market, but with one of the strongest base metals production profiles amongst its covered peers,” Terentiew writes.

Underground miners at Nexa Resources’ Vazante zinc mine in Minas Gerais, Brazil. Credit: Nexas Resources.

BMO adds that the “long-term start-up of the Magistral project is ideally timed for what we anticipate to be a tight copper market.”

Nexa shares have traded within a post-IPO range of $19.80 to $23.94 per share, and closed at $21.41 per share at press time. The company has 133 million shares outstanding for a $2.9-billion market capitalization.