Good morning, and welcome to the Nexa Resources Second Quarter Conference Call. All participants will be in listen-only. [Operator Instructions] After today’s presentation there will be a opportunity to ask questions. [Operator Instructions] Presenters on this call today are Mr. Tito Martins, CEO of Nexa Resources; and Mr. Rodrigo Menck, CFO of Nexa Resources. Also joining the call is Ms. Roberta Varella, Head of Investor Relations. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tito Martins, CEO of Nexa Resources. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for participating in another Nexa's earnings conference call. Today, we will be talking about our results for the second quarter of 2019. Please, let's move to Slide 3, where we will begin our presentation. Here, we present some of the main highlights of the quarter. Considering our mining operations, zinc production was slightly lower year-over-year at 91,000 tons, and the lower production in Cerro Lindo was offset by the increase from our other mines. Unfortunately, we had a fatal accident with one of our employee in Cerro Lindo, which stopped our mining operations for three days. And as a consequence, we faced some instability in the month production, which was normalized in July. Once again, we would like to express our condolences to the family of the victim and assure that all necessary measures were implemented to improve safe conditions. Our smelting operations were solid. Metallic zinc sales was up 3% year-over-year and around 8% quarter-over-quarter, driven by stronger seasonal demand. Adjusted EBITDA was $118 million, down 28% from the same period a year-ago, but up around 10% when compared with the first quarter. It's worth mentioning that this number was negatively affected by an increment in provision expenses of $12 million. Liquidity remained strong, and we ended the quarter with a leverage of 1.3x. We were able to revert the net loss registered in the first quarter, and we recorded a net income of $23 million in the quarter. Regarding the guidance provided, we decided to maintain the forecast for zinc production for the year as we expect to successfully execute our mining plan during the second semester. Copper and lead ranges were revised downward. But on the other hand, we increased our expected production for silver and gold. Our guidance…

Thank you, Tito, and good morning, everyone. Let's please turn to Page 10, where we will comment our second quarter consolidated results. Beginning with the first chart on your left regarding mine production, we had lower average zinc and copper head grades, partially offset by higher treated ore volumes, driven primarily by the Brazilian mines. As such, zinc production of 91,000 tons was down 1% from the same period of last year, lower than initially expected as it was negatively impacted by the Cerro Lindo production decrease of 7%. Copper production of 8,000 tons was 5% lower than the second quarter of 2018, given the already mentioned lower grade. On our Smelting segment, overall sales volume has increased 3% when compared to the second quarter of 2018, driven by higher exports over Cajamarquilla as well as higher local sales in Brazil. The planned maintenance shutdown at Cajamarquilla to implement the Jarosite process conversion initially scheduled for the end of the third quarter of 2019 was postponed in November due to delay of shipping of some equipment. Nonetheless, we do not expect this delay to impact our sales for the year-end, thus maintaining our 2019 guidance. On the following graph, adjusted EBITDA was $118 million in the second quarter, down 28% compared to the second quarter of 2018, and we will get into more details on the next page. Finally, net income was $23 million, better than the first quarter, driven by higher revenues and better margins of our smelters. Similarly to the graphs of this page when compared to the same period of 2018, it reversed a net loss of $35 million, which was at that time, negatively impacted by non-cash foreign exchange losses. Please move to Slide 11, where we will discuss EBITDA. Compared to the first quarter of…

Thank you, Menck. On Slide 17, I will comment on the zinc market. In the second quarter, average zinc price was $2,763 per ton, down 11% year-over-year, but up 2% when compared to the previous quarter. Zinc prices started the quarter in an upward trend but reversed in May, mainly driven by the escalation of the U.S. and China trading war and the deceleration of the manufacturing sector in China. It's worth mentioning, zinc benchmark in the second quarter of 2019 are still at high levels around $245 per ton compared to an average benchmark of $137 per ton in 2018. This maybe an indicative of a persistent pressure on defined zinc supply, mainly driven by the not yet fully recovered production in the Chinese smelters. Zinc metal stocks remain in very low levels. Look at the slide on its upper right. This graph shows the comparison between the market estimates in 2017 and 2019 and illustrates supply projections are usually more optimistic than reality, despite regular operating disruptions. Using supplies coming from China and riskier mining jurisdictions as Africa will not stock up as we should expect it. Also, environmental protection is still affecting both mines and smelters' production in China. In a scenario where demand is relatively stable, our expectations are, there will be a delay in new production around the world, mainly in China. Over to Slide 18. On Slide 18, we list our main greenfield projects. We believe our robust project pipeline is crucial to support our long-term growth strategy and our commitment to value creation. Our main priority is to continue to expand our portfolio in both zinc and copper. After Aripuanã, which is a polymetallic mine with zinc as main product, our next project should be a copper project. We have good copper projects…

We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Petr Grishchenko with Barclays. Please go ahead.

Hi. Good morning and thanks a lot for taking my questions. I got a few. So I guess to begin with, can you please provide a little more color on declining ore grades and how this incorporates in your guidance? Because frankly, I'm a little bit confused on your press release that says you expect grade to increase in line with the mine plan, but then you also suggest that the guidance assumes higher treated ore volumes to compensate for forecast of lower grade. So any color on that aspect would be helpful.

Petr, thank you for your questions. Actually, the mine planning forecast increase in ore grades, well, we faced during this second quarter some instability – geomechanical instability when we were assessing the ore body. So for those months, May and June, we had a slight decrease in our ore grades, but they are projected to be reversed in – actually now corrected and reversed in the beginning of this third quarter. So we expect to fulfill our guidance based on that.

Yes, different timing difference, I guess, in that. And also on treatment charge. Can you perhaps provide an update on what you're seeing for the second half? And how you see treatment charges impacting your mining and refining operations in aggregate? And I also cannot recall percentage of your sales that are benchmarked versus negotiated annually, so if you can remind me that, that will be helpful.

Okay. So let's break down this answer to you. Around 60% of our needs are fulfilled by our own mines, which have the benchmark this year the reference, right. The other 40% comes from the market, and we have 90% of annual contracts, which have the three-year average as reference. As we can see now in our earnings release, this is $188 per ton, right. The other 10% goes with the market. The market in Peru where we buy our concentrates, they are not as well as we see in Asia, for example. So it's ramped. It's been close to the benchmark. Benchmark was $245, and we have recently seen the benchmarks around $260, $270 a ton. And the first quarter of the year, we actually closed some contracts with this around $230, $235. We see this start to go up. So we have a range that varies in $225 and $250.

All right. Okay. That's helpful. And another question. Can you provide some more color on the working capital for the second half because first half consumption was a little more than I modeled. So if you can provide any guidance, that would be helpful.

Working capital, actually, these accounts, they are running normally, Petr. Why is that? We have some tax recoverables that follow and we can't – these are peculiar to Peru. Sometimes in the end of the period, they are reduced because we have there recent what we're paying them, right. With specific regard to account receivables, we have some shipments that were done with very short-term, but they were not paid until the end of the quarter. So actually, we shouldn't be seeing in the following quarter working capital variations that are volatile or too wide or wider than the $60 million that we have seen. Thank you for the question.

Okay. And then the last question, if I may. On the capital allocation front, how are you thinking about balancing dividends and buybacks with rising leverage metrics this year? And also, do you have any expectations, like internally, if you can provide any guidance the way you think the leverage will shape by the end of the year?

Petr, leverage has been increasing basically because of our investments in growth, Aripuanã mainly, right. So we are spending this year the way we were forecasting. If you follow our disbursements as per our guidance until the end of the year, this will not be increasing much more than 1.5x, 1.6x. This is what it has been forecasting, right. About capital allocation, this is a result of results as well, right. So we need to wait until next year to see how our final cash generation before investment to see what can be said to the market. We have our policy, we have our minimum dividend policy. So this is a good indication at this point in time.

Great. Thanks a lot for your answers, and best of luck for you guys.

Thank you.

And our next question comes from Jens Spiess with Morgan Stanley. Please go ahead.

Yes. Hello. Thank you for taking the call. I just want to know if you could tell us what your expectations are for other operating expenses. They were higher this quarter than usually. Do you expect them to continue this way? Or, yes, what's your expectation going forward?

Expectation going forward is this line to be decreased because we had the FX impact this quarter and also the provisions, which were a one-off.

Okay. So basically, all the provisions shouldn't be expected to continue, right?

Yes.

And regarding production, it seems that production has to increase in the second half of the year in order to reach your guidance, and you seem to expect that. But could you maybe give more details if that will be evenly during the third and fourth quarter? Or will it be gradually that production jump?

In principle, even.

You have to remember that I think Menck mentioned before, we had some instability in Cerro Lindo. We're not expecting to have it in the second half. All the lines are operating very well and within Pasco, a huge amount of work within Pasco Complex. So having fixed the issues that we faced in Cerro Lindo makes us believe that everything is going to be really stable along the second half. So reason is that.

Okay, great. Thank you. And on the Cerro Lindo updated technical report, any preview you could give us on what you expect there? Will there be big changes in the short-term production sequence? Or is it more changes in the long term and extending the life of mine there?

I would love to say something Cerro Lindo right now, but because of the legal standards, since we are planning to release the technical report sometime along the second half, but not in the next 45 days, I'm not supposed to say anything. I hope we have good news.

Okay, great. Thank you so much.

And our next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.

Yes. Hey, good morning, gentlemen. Just wanted to ask, firstly, at high level view, think about the weaker copper and zinc prices when contemplating further expansion and maybe slowing it down or maybe changing your plans at all given recent trends?

Hi Timna. How are you? Basically, what we're seeing is clear. The market is looking at China and the trading war situation. And as we have seen some slowdown in manufacturing in China, I believe that the reaction of the commodity price has to do with that. But in general terms, we are still not seeing growth in concentrate – zinc concentrate production there, which implies that the concentrate production growth will come only from the western world, which means that we may still see the lack of the metal in the market – I mean the warehouse, the stocks in the warehouse are really low to-date. So the fundamentals tell us that price of zinc should be higher than they are today. And it seems to me that's just a perception of a slowdown in China that's making them falling. They have fallen along the last four, five weeks, right. In terms of the copper, it's pretty much the same. You were having a discussion yesterday about this and we came to the conclusion that copper price should be around $6,000 per ton until the end of the year basically because of the slowdown I mentioned to you. And on the other hand, we are not seeing new production coming to the market. So we should work with copper around $6,000, and expecting that zinc price should be higher than they are today.

Okay. So no change to the investment plans, because...

No, no. No, about production, about plans, we are keeping everything. We work with the long-term prices and our targets in terms of projects and development of new mines, we will skip it out. In the long-term, we are positive about the mines, yes.

Okay. And then the other question I had was just if you could comment on some of the headlines coming out of Peru about changes to the mining law. Just your opinion on that or if that would have any impact on you, what's driving that? I appreciate it. Thank you.

Very good question. What happened is the President of Peru last weekend, because they are celebrating the national – it's the most important event in Peru this weekend, I've forgotten the name of the event.

National Day.

A National Day, that's the event. He made a speech of what, 1.5 hours and actually, he was focusing on propose a change, resignation of the Congress and himself as well, and proposed new election for the next year. And in the middle of the speech, he came up with the potential change in the mining code in Peru. Reaction in Peru was really strong against that. I mean, the mining association was against this, industry association was against, politics were against, basically because Peru is in a very good position today. Lot's of new projects being developed. We can say that Peru is the new frontier for the mining business around the world. So I don't think that we'll see a concrete change. I don't see the possibility that – and not even the power to do any modification in what we have today. The mining code in Peru is a good one. It's a pro-business. So I don't see any possibility at all to see those change. And I have been speaking with a lot of people there. Everybody has the same concept about what's going on.

Okay, very helpful. Thanks again.

Thank you.

[Operator Instructions] And our next question comes from Oscar Cabrera with CIBC. Please go ahead.

Thank you, operator, and good morning, everyone. Tito, I was wondering if you could provide context around your zinc production. I appreciate that you maintained your guidance, but if you look at the bigger zinc producers, so Cerro Lindo, Vazante and El Porvenir, and you look at your budgets for the year in terms of grade and throughput, how would you qualify these for the second half, your expectations to beating expectations or below expectations? That would be helpful just to put context around the production for the balance of the year.

Hello, Oscar. This is Menck. How are you? Thank you for your question. Actually, it's pretty much the same way I answered a previous question. We expect to have pretty more volumes similar to the first quarter. I think, they love it. And as we go through the mine planning, we will recover grades. So we expect to have a smooth and continuous production during the third and the fourth quarter. That's why I believe we can achieve our guidance. Was it clear?

Okay. No, that's helpful, Menck. Thank you. But just – let's focus on Cerro Lindo then. The grades or the average grade in the fourth quarter of last year was 2.35% zinc. We're averaging about 2% this – on the first half of the year. Are you expecting to get back to the 2.35% level for the second half? Or should we expect just a small increase from what you see in the first half?

Oscar, its Tito here. We are expecting actually to increase the throughput in the plant. The volumes will be higher. The grades will not change much, but we will produce – we will have more run of mine through the plant. We want to keep the stability between 20,000 and 21,000 tons per day. That's how we're going to reach the production that we are forecasting.

That's perfect, Tito. Thank you very much. And so we expect the same thing out of El Porvenir and in Vazante, I assume?

Yes, yes. Vazante is doing very well. Pasco is doing very well also.

Thank you. Now, if I may move on the bigger development projects. Do you have – you said there in your remarks that you'd be looking at Magistral and Pukaqaqa to see which one goes ahead?

Yes.

Magistral, you have provided like figures around CapEx, about $0.5 billion and 52,000 tons of production. What does the other project look like? Is it comparable in terms of CapEx and production?

Yes. What happened with this information, Oscar, I'm not allowed to release it yet. We're planning to have the pre-feasibility study plus the technical report ready some time along the semester. So after we have it, we have production. And in terms of objectives, both projects are pretty much aligned with what we want. I hope I can have this information passed on to you, okay.

Yes. No, that's – I can appreciate it, Tito. Just trying to sort of like reconcile your comments on the last question in terms of, if you're in a tougher copper price environment over the next couple of years, would you go after something that is less capital intensive, but we'll wait for the results. The other thing within your projects, and this chart as you provided is very helpful. How much time are you allotting for permits, i.e. when we talk about Magistral and Pukaqaqa, we can see that a start of – I'm assuming start of construction in 2021. How long do you think the permits would take into – to get these projects through?

I'm trying to get be precise here, but let me explain once more. In the case of Magistral, we already have – we had the agreement with the local communities. So technically speaking, with hours as it burns, it's just a matter of the formalization with the government. What we did in the first half, we have to renegotiate with the level of municipality a change in the project, which was the location of the tailings dam and it was done. We renegotiate this agreement. So we are in the process to formalize with the central government the new agreement. When it happens, the bureaucratic process, we should have the permits for construction granted. I would say it will be very easy. I mean less than six months to get it. In the case of Pukaqaqa, we already have the permit. Yes. There is nothing that is pending for construction. Why, because we have the local agreement. And we have the broader agreement with the central government as well. So there is no restrictions at all in terms of permits to build those two projects. The rules of the branches deemed to place or to get the permits you may need, as long as you have a good relationship with the communities and you can have the social – what they call the social agreement, the central government doesn't delay the permit. So we are fine with that.

Okay. That's very helpful. Thank you, sir.

Thank you.

And our next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Good morning, everyone. Thanks for the question. Just – Tito, what options do you think has the company – what options do you think are available to the company to try and improve the liquidity, which is one of the issues that we keep getting feedback from investors as to why the stock, despite the value that it offers, continues to trade below PSA in valuation and definitely suggest a lot of upside to the average price target?

Carlos. Carlos, this is a very difficult question. We've been discussing different options. We have not – we have come up with the final conclusion about this. But I agree with you, liquidity has been our – one of our big concerns about the performance of our shares. Clearly, there was a shift, a big shift in between last year and this year. We have tried to figure out what to do. Hopefully, we can come up with something soon. But so far, I don't have the answer for that.

Carlos, this is Menck. The best thing we can do in the end of – in this period is continuously explain to the market what we are, increasing our level of transparency and disclosure. We're preparing ourselves for that and hoping that this stimulates the market also to trade more.

Yes, and also to add, we have been attracting new investors to the share, but also in terms of the profile, they long-term investors, part of them. So it helps with, I'd say, with the liquidity issue, but we are working to try to improve that as well.

Right and this is well. Thank you very much, and hopefully they have the technical reports and do the trick.

Okay, that's great.

And our next question comes from Alex Hacking with Citi. Please go ahead.

Yes, just following up on Oscar's question earlier around Cerro Lindo. Obviously, the reserve grade at that mine is below what you're currently mining. I think it's closer to 1.8%. Do you have ability to further increase throughput at the mill to offset that over time? Or is this something that you hope to resolve with the drilling campaign to potentially increase that reserve grade as well as potentially expanding life of mine? Thank you.

Alex, this is Menck here. It's a very good question, but unfortunately, all the responses will be comprised in anticipating any results that will come out in the technical reports that we put – or we intend to release into the end of the year. So I will ask for your patience on that. And you will be able to have much more color once we have it out in the market.

Yes. I don't have the numbers in my mind, but I can tell you one thing. The three months technical report stated that the grade should be a little bit above the ones we have – we find today. So on average, they should be higher than they are than what we are producing from today, yes. That, we can say.

Okay. I got it. Look forward to saying the technical report. Thank for the time.

Thank you.

Thank you.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Tito Martins for any closing remarks.

I would like to thank you all for this opportunity and state again that we are very confident that we actually can reach the guidance that was provided. July, I can advance it was a good month. So we are very optimistic about our production. Nobody asked anything about the smelting. The smelters are doing really very well, the general site of project. There's a delay of one month, but we will be implementing it at the end of November. And so we are glad to see that production is back on track. And hopefully, the market – the price of the commodities can react also in the second half. We do have expectations about what the China and U.S. will do about the trade war. Everybody's losing with that, right. So hopefully, they come up with a good conclusion, a good agreement, and we are back – the market goes back to what it was last year. Thank you very much, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a great day.