Nexa Resources - LATAM Stocks Investment Analysis #26
Nexa Resources is the 5th Largest Zinc Producer in the World and the Largest Zinc Smelter in Peru.
Dear LATAM Stocks Readers,
In this edition, I’m diving into Nexa Resources, the fifth-largest zinc producer in the world and the only zinc smelter in Peru. The zinc price chart recently caught my eye, leading me to explore some major players in this market. Latin America is a key region for zinc production, with Peru being the second-largest producer globally, right after China. However, I found that there are surprisingly few companies focused on zinc.
Most zinc comes from big mining companies like Glencore and Trafigura, where zinc is just a tiny part of their overall business. Because of this, rising zinc prices don’t significantly impact their financials or stock prices. For investors looking to take advantage of higher zinc prices, these stocks aren't viable options.
However, there are a few Zinc stocks out there. And one of the largest, Nexa Resources, happens to be entirely LATAM focused. Nexa operates mining and smelting asset in Peru and Brazil. They are as close to a pure-play zinc stock that I could find.
However, Nexa's financials present challenges. The company carries a heavy debt burden and has consistently reported net losses. Investors considering a position in Nexa should proceed with caution, recognizing that the stock price may struggle if zinc prices do not rise sustainably, and even then, Nexa may face ongoing difficulties.
Despite these concerns, I am long Nexa Resources stock, and I think there is a bull case to be made…
The macroeconomic outlook for higher commodity prices, including zinc, is robust and improving. Nexa owns several significant zinc mines and one of the most strategically important zinc smelters globally.
Moreover, the company has shown improvements in operating margins and financials in the first half of 2024, with net losses significantly reduced.
Additionally, management has successfully restructured the company’s debt profile, extending major maturities by several years, which should enhance Nexa’s cash flow situation in the coming years.
From a technical analysis perspective, the outlook appears positive. Nexa's stock has potentially formed a two year long consolidation/bottoming pattern. The stocks trading volume is relatively low, largely due to 65% of its shares being held by the Brazilian conglomerate Votorantim. This dynamic suggests that a modest increase in volume could lead to substantial price movements. Should a few large investors choose to invest in the zinc trend via Nexa’s stock, the price could experience a rapid rise.
Nexa represents a high-risk, potentially high-reward trading opportunity. This is not a buy-and-hold play; investors should closely monitor the company’s financial health and the zinc market, remaining prepared to cut their positions if necessary.
I hope you enjoy this analysis! I would be very eager to test this idea and discuss Nexa and zinc…
So as always, questions, comments, and criticisms are welcome in the comments below!
Common Stock: Nexa Resources (NYSE: NEXA)
Industry: Zinc Mining & Smelting
Current Market Price: $6.99
Market Capitalization: $925 million USD
*I own shares in Nexa Resources stock
**All values in this article are expressed in United States Dollars (USD) unless otherwise noted.
***A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.
Summary of the Company
Nexa Resources is one of the world’s largest zinc producers, responsible for approximately 4% of global zinc output. The company operates in two main segments: mining and smelting, with a presence in Latin America for over 65 years.
The current entity, Nexa Resources, was established in 2017 following the spin-off of Votorantim Metals’ zinc assets and their subsequent merger with the Peruvian company Milpo.
Nexa operates five long-life polymetallic mines: three in the Central Andes of Peru, and two in Brazil—one located in Minas Gerais and one in Mato Grosso.
Two of Nexa’s mines, Cerro Lindo in Peru and Vazante in Brazil, rank among the 40 largest zinc-producing mines globally.
While zinc represented 54.5% of Nexa’s mined metal production in 2023 (measured on a zinc-equivalent basis), the company also produces substantial quantities of copper, lead, silver, and gold as by-products.
Nexa owns and operates one zinc smelter in Peru and two in Brazil, producing metallic zinc, zinc oxide, and various by-products. Notably, 95% of the company’s zinc output is processed at its own smelters.
The Cajamarquilla smelter in Peru, the country’s only active zinc smelter, was the fifth largest worldwide by production volume in 2023, according to Wood Mackenzie. Peru ranks as the second-largest zinc mining producer globally.
In 2023, the mining segment accounted for approximately 22% of Nexa’s total gross profit, while the smelting segment contributed the remaining 78%.
The majority of Nexa's sales (71.5%) in 2023 were to customers in industries such as continuous galvanizing, general galvanizing, die casting, transformers, and alloys. The remaining 28.5% were sold to international traders.
In 2023, the company's top ten customers accounted for roughly 58% of total sales volume. Nexa serves over 330 customers across 45 countries.
Mining Assets
Cerro Lindo – Located in Peru, the Cerro Lindo mine is an underground operation that commenced production in 2007. In 2023, the mine produced approximately 78.2 thousand tonnes of zinc, 28.6 thousand tonnes of copper, 13.0 thousand tonnes of lead, 3.54 million ounces of silver, and 3.4 thousand ounces of gold, all contained in concentrates.
Vazante – The Vazante mine, situated in Brazil, operates both underground and open-pit sections. Having been in operation since 1969, it produced around 145.7 thousand tonnes of zinc, 1.4 thousand tonnes of lead, and 575.6 thousand ounces of silver in 2023, all contained in concentrates.
El Porvenir – Part of the Cerro Pasco Complex in Peru, El Porvenir is an underground mine that has been active since 1949. In 2023, it yielded approximately 55.8 thousand tonnes of zinc, 0.4 thousand tonnes of copper, 24.9 thousand tonnes of lead, 4.27 million ounces of silver, and 8.7 thousand ounces of gold, all contained in concentrates.
Atacocha – Also part of the Cerro Pasco Complex in Peru, Atacocha is both an underground and open-pit mine that began operations in 1938. In 2023, it produced about 8.2 thousand tonnes of zinc, 11.1 thousand tonnes of lead, 1.4 million ounces of silver, and 7.6 thousand ounces of gold, all contained in concentrates.
Aripuanã – Located in Brazil, the Aripuanã mine is an underground operation where ramp-up activities began in July 2022. By 2023, it had produced approximately 22.1 thousand tonnes of zinc, 4.4 thousand tonnes of copper, 6.3 thousand tonnes of lead, 513.9 thousand ounces of silver, and 8.0 thousand ounces of gold, all contained in concentrates.
Smelting Assets
Cajamarquilla – Located in Peru, the Cajamarquilla smelter began operations in 1981. It is the largest zinc smelter in Latin America and ranked as the fifth largest globally in 2023, according to Wood Mackenzie. With a nominal production capacity of 344.4 thousand tonnes of zinc per year, it produced 323.1 thousand tonnes of zinc metal for sale in 2023. That year, 27.2% of the zinc raw material processed at Cajamarquilla came from Nexa’s mines in Peru, while the remaining 72.8% was sourced from third parties or secondary feed materials.
Três Marias – The Três Marias smelter, located in Brazil, has been in operation since 1969. With an annual production capacity of 192.2 thousand tonnes of refined zinc, the facility produced 182.3 thousand tonnes of zinc metal and zinc oxide in 2023. Of the raw materials used in production, 87.3% were sourced from Nexa’s mines in Brazil and Peru.
Juiz de Fora – Situated in Brazil, the Juiz de Fora smelter began operating in 1980. It has a nominal production capacity of 96.9 thousand tonnes per year and produced 82.1 thousand tonnes of zinc metal in 2023. That year, 41.7% of the zinc raw materials processed at Juiz de Fora were sourced from Nexa’s mines.
Thoughts on the Global Zinc Market
There isn't a lot of analysis on zinc markets, and I found it challenging to source strong zinc specific research that supports (or disconfirms) a case for sustained higher prices. If there’s a weak point in my Nexa thesis, it's the possibility that I’m wrong about zinc prices continuing to rise. However, I am long Nexa, so here are some key factors about the zinc market that I'm considering.
The macro environment appears favorable for commodities, including zinc.
The Federal Reserve recently made its first interest rate cut in four years, and many analysts believe more liquidity may be on the way. Globally, monetary conditions are loosening, which is typically favorable for commodities in the short to medium term. If this trend persists, there’s no reason zinc shouldn’t follow the broader commodity complex higher.
Zinc smelters are under pressure, with many struggling or shutting down.
In 2022, Europe saw the closure of three major zinc smelters. One notable example is the Budel smelter, owned by Nyrstar, which resumed operations in 2024 but at reduced capacity. A Reuters article provided some valuable insights into this development.
Chinese smelters have also been cutting back. In 2024, a group of 14 Chinese smelters, responsible for around 70% of the country’s zinc production, agreed to curtail output by delaying the commissioning of new capacity.
Since China is the largest zinc producer globally and Peru is the second-largest, this shift could potentially enhance Peru’s (and thus Nexa's) strategic position in the zinc market.
The technical chart for zinc looks bullish.
In January 2023, zinc completed a top formation, followed by a 15-month downtrend that eventually formed a bottom. In April 2024, zinc prices broke out decisively, rising by approximately 40% from their February 2024 lows.
Over the past five months, zinc has been consolidating in a well-defined ascending triangle pattern, which classical chartists typically view as bullish. The price is currently above both the 50-day and 200-day moving averages on daily and weekly charts. Coupled with the favorable macro environment, I believe the odds favor zinc moving higher.
This pattern also provides clear trade parameters for those who invest directly in the commodity, as well as strong indicators of potential future revenues for Nexa investors.
Recycled supply remains a significant factor in the zinc market.
One potential risk to sustained higher zinc prices is the increase in recycled zinc entering the market, which could boost supply and suppress prices. If this happens, it may cut zinc’s bull run short, limiting the positive financial impact on companies like Nexa.
Currently, about 34% of global zinc production comes from recycled or secondary zinc sources, such as scrap galvanized steel and zinc from batteries. However, products like galvanized steel have long service lives, which can affect the availability of recyclable material in any given year.
The Financials
Revenue and Cost Analysis
In the first half of 2024, Nexa generated revenue of $1.31 billion, a slight increase from $1.29 billion in the same period of 2023.
The company reported a gross profit of $265 million, resulting in a gross margin of 20%, a notable improvement from the 12% margin in the first half of 2023.
Earnings before interest and taxes (EBIT) reached $67 million in the first half of 2024, a significant turnaround from an operating loss of $72 million during the same period last year.
While Nexa experienced a net loss of $80 million in the first half of 2024, this marked an improvement compared to the net loss of $118 million reported in the first half of 2023.
Balance Sheet Analysis
As of June 30, 2024, Nexa has a leveraged balance sheet, with a debt-to-equity ratio of 2.7.
Their liquidity position is acceptable but not robust, as indicated by a current ratio of 1.1.
Given the company's poor operating performance their balance sheet isn't nearly as bad as you might expect.
Debt Analysis
Nexa's total debt outstanding as of June 30, 2024, amounts to $1.85 billion USD, of which $100 million is classified as current debt.
In Q2 2024, Nexa made significant adjustments to its debt structure by issuing two new debentures totaling $730 million. The company utilized $585 million of the proceeds to retire portions of two existing debt issuances through tender offers.
Nexa’s credit ratings reflect its financial standing: Fitch and S&P rate the company at BBB-, just above investment grade, while Moody’s assigns a rating of Ba2, categorizing it below investment grade.
Share Dynamics and Capital Structure
As of year-end 2023, Nexa has 132,438,611 common shares outstanding, with no preferred shares issued.
The company’s controlling shareholder, Votorantim S.A., owns 65% of Nexa’s shares.
Votorantim is a large and historic Brazilian conglomerate with diverse operations in sectors such as cement, energy, and finance.
The remaining 35% of Nexa’s shares are available for public trading.
Dividends
Nexa has not paid a dividend since 2022, and given the company’s current financial position, it appears unlikely that a dividend will be declared in the near term.
Technical Analysis Notes
The price chart for Nexa appears neutral, with a potential bottom pattern taking shape. Currently, the stock price is situated between the 50-day and 200-day moving averages, both on daily and weekly charts.
A clearly defined resistance level exists around $7.50 per share, evidenced by multiple touch-points.
Nexa experiences relatively low trading volume, largely due to 65% of its shares being held by Votorantim. Volume has been decreasing throughout the current two-year consolidation/bottoming pattern. In my view, these dynamics suggest that it wouldn't take much additional volume to drive the price significantly in either direction.
Positives
Owns the only operating zinc smelter in Peru, the second-largest zinc-producing country in the world.
Shares are tightly held by Votorantim, a major global conglomerate.
The macro outlook for commodities appears potentially positive in the short to medium term. If this holds true, zinc should benefit, especially since there are few pure-play zinc stocks available for equity investors looking to capitalize on this trend.
Management has successfully restructured existing debt, extending the maturity profile. Nexa does not have any significant maturities due until 2027.
Gross margins are improving.
Negatives
Heavy debt burden: financing expenses have been, and will continue to be, a drag on earnings.
Nexa requires higher zinc prices for its financials to improve. If zinc prices decline, there is little chance of meaningful improvement in the company’s financial performance.
Conclusion
Nexa Resources is a major player in the global zinc market, operating critical mining and smelting assets in Peru and Brazil, including the only zinc smelter in Peru. As one of the few pure-play zinc stocks globally, it offers unique exposure to the zinc market, which, in my opinion, is poised for higher zinc prices.
While the company's heavy debt load and dependence on higher zinc prices present significant financial risks, its strategic positioning, improved margins, and recent debt restructuring provide a foundation for potential upside. The global zinc market shows signs of recovery, driven by tightening supply, especially in China, and a favorable macro environment for commodities. However, Nexa remains a high-risk play, relying heavily on sustained zinc price increases to bolster its financials, making it suitable for investors who are comfortable with volatility and closely monitoring the zinc market.
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Disclaimer
**A complete Disclaimer about LATAM Stocks Investment Overviews can be found by following this link.
I linked to your post for my Monday emerging markets links roundup: https://emergingmarketskeptic.substack.com/p/emerging-markets-week-september-30-2024
Korea Zinc (KRX: 010130) is another zinc player ("Total non-ferrous metal smelting company") BUT there is a family and P/E soup opera or fight for control of them that's ongoing - Douglas Research Insights Substack has been covering that... 640,000+ tons of zinc or zinc products a year - not sure where they get the zinc from or if that makes them a big player compared to Glencore etc: https://www.koreazinc.co.kr/en/?pageName=product/index&mainMenuId=kz-product-en&subMenuId=kz-product-index-en