Fitch Ratings has assigned a 'BBB-' rating to Nexa Resources S.A.'s (Nexa) proposed senior unsecured notes of benchmark size due 2034.
The proceeds of the notes will be used to concurrently refinance any or all tender offer of its 2027 notes and capped tender offer of its 2028 notes and the remainder, if any, for general corporate purposes. Fitch currently rates Nexa's Long-Term Foreign and Local Currency Issuer Default Ratings at 'BBB-'/Stable and Nexa's National Scale long-term rating at 'AAA(bra)'/Stable.
Nexa's rating is related to that of its ultimate parent, Votorantim S.A. (VSA; BBB-/Positive), to which Fitch applies its parent-subsidiary linkage criteria as described below. Nexa's Stable Rating Outlook results from the assessment of Fitch's Top Down -1 rating approach.
Nexa's standalone credit profile (SCP) reflects its integrated zinc operations, average cost position in both mining and smelting, and moderate leverage. Nexa's ratings are constrained by the company's moderate size, asset concentration and relatively low mine life compared with Fitch's Mining Navigator rating factor.
Key Rating Drivers
Parent Subsidiary Linkage: Fitch applies its Parent and Subsidiary Rating Linkage (PSL) criteria following the Stronger Parent path to Votorantim S.A. (VSA; BBB-/Positive) and Nexa, which is 64.7% owned by VSA. The legal incentive for support is considered to be low, the operational incentive to be medium, and the strategic incentive to be high, resulting in a Top Down -1 rating approach.
Given the narrow differential between the subsidiary's SCP (bb+) and the credit quality of the parent the final result is an equalization of the ratings. Nexa's Stable Outlook differs from VSA's Positive Outlook as in a scenario of an upgrade in the parent rating, Nexa would likely remain at 'BBB-', reflecting Fitch's PSL criteria of a Top Down -1 Approach.
Key Subsidiary of VSA: Nexa, along with Votorantim Cimentos (BBB-/Positive), are deemed to be key subsidiaries of VSA by Fitch. Nexa accounted for approximately 32% of VSA's EBITDA during 2023 and 18% of its net debt. Nexa is listed as a material subsidiary under cross-default and acceleration provisions on approximately 13% of VSA's total debt. Even though treasury and management are descentralized in VSA and its subsidiaries, VSA can move cash among the group or reduce upstream dividend flows to bolster the credit profiles of its key subsidiaries.
Production Up, Prices Down: Zinc prices remain depressed at about USD2,500/MT due to expected market surpluses despite global mine cutbacks. Nexa managed to increase zinc output in 12% during 2023 and Fitch expects it to grow by an additional 5% in 2024 thanks to the ramp-up of its newest greenfield, Aripuana. It is expected to breakeven in 1H24 by reaching full nameplate capacity, and overcome pumping and piping systems setbacks that temporarily affected costs and delayed the conclusion of the ramp-up. Zinc contributes with almost 60% of revenue.
Diversifying Mine Concentration: Aripuana is forecast to contribute with 9% of sales including smelting in 2024 and stabilize at about 10% thereafter, providing a similar input to that of the El Porvenir mine. This will help Nexa to diversify away from its reliance on low-cost mine Cerro Lindo, which is expected to represent almost 20% of sales in 2024. Aripuana will also allow Nexa to process less third-party zinc concentrate at its smelters.
Improving Cash Flow: Nexa's EBITDA is forecast to increase to about USD515 million in 2024 from USD390 million in 2023. The ramp-up of Aripuana mitigates the decline in metal prices. Capital expenditures remain at about USD310 million in 2024, according to Fitch projections. As the Aripuana construction and ramp-up ends, FCF after capex and dividends is expected to turn marginally positive in 2024 and remain so in 2025. Fitch forecasts FCF to reach USD42 million and USD87 million in 2024 and 2025.
Stable Leverage: Fitch projects Nexa's gross debt to average USD1.5 billion between 2024 and 2026, down from the USD1.7 billion average of the past three years, after debt repayments in 2021 (USD425 million) and 2022 (USD134 million). Notwithstanding, gross and net leverage are expected to average 3.1x and 2.4x in 2024 and 2.8x and 2.0x in the next two years, similar to the 2.9x and 2.0x of the three prior years' average. Nexa has covenants of 4.0x net leverage, 0.7x debt capitalization, and 1.0x of service coverage ratios.
Zinc Mining Performance: The company operates six polymetallic mines across Brazil and Peru, with a combined cost position in the third quartile of zinc all-in sustaining costs, according to metals consultancy CRU. The consolidated mine life is nine years in terms of mineral reserves, with Aripuana's 14 years as the largest. Managment expects Aripuana to have the potential to reach 20 years of mine life. Decreasing energy costs have eased their sway in the zinc smelting and refining market, which is expected to post a surplus dragging prices.
Zinc Smelting Position: Nexa operates three zinc smelters across Brazil and Peru and is the fifth-largest producer of refined zinc globally. It is the largest in the Americas with 590,000 MT of zinc metal plus zinc oxide sold in 2023. Nexa supplied around 50% of its zinc concentrate to its smelters in Brazil and Peru in 2023. Nexa benefits from the close proximity of its smelting facilities to its own mines and third-party concentrate producers. Peru is the second largest zinc producer worldwide assuring concentrates availability.
Derivation Summary
Nexa's ratings consider its fairly diversified production of base and precious metals as similar to Volcan Compania Minera S.A.A. (CCC-), but more diversified than its peer Minsur S.A. (BBB-/Stable). Nexa's scale of operations is similar in size to the previously mentioned peers, but much smaller than Southern Copper Corp. (BBB+/Stable), Industrias Penoles, S.A.B. de C.V. (BBB/Stable) or Teck Resources Ltd. (BBB-/Stable).
Nexa's consolidated mining operations are within the third quartile of the global zinc cost curve, similar to Penoles' gold operations (third quartile). This is lower than Volcan's zinc operations (fourth quartile), but higher than Minsur, Teck or Southern Copper's copper mines (first to second quartile), all according to CRU.
Nexa's forecasted 2024 leverage (3.1x gross leverage, 2.4x net leverage) has historically been better than that of its peer Volcan (4.2x and 2.8x). However, these metrics are higher than those of Minsur (1.4x and 0.9x), Penoles (1.9x and 0.7x), Teck (2.8x and 2.7x) or Southern Copper (1.2x and 0.6x).
Nexa's consolidated mine life of nine years is higher than Volcan's five years, similar to Penoles' 10 years in precious metals or Minsur's eight years in tin but much lower than Teck's 31 years or Southern Copper's 68 years, whose mine lives benefit from the larger scale of open pit copper operations.
Key Assumptions
Zinc prices of USD2,500/metric ton (MT) in 2024, USD2,400/MT in 2025, and USD2,300/MT in 2026;
Lead prices of USD2,100/MT in 2024, USD1,900/MT in 2025 and USD1,800/MT in 2026;
Silver prices of USD23.75/oz in 2024, USD22.5/oz in 2025, and USD20.0/oz in 2026;
5% increase in zinc (Zn) volumes mined to 351,000 MT, 19% rise in silver to 11.90 million oz and 13% in lead to 73,650 MT in 2024;
1% rise in zinc volumes, -1% in silver and -2% in lead output in 2025;
Partial ramp-up of Aripuana mine in 2024 (49,500 MT Zn), reaching capacity in 2025 (65,000 MT Zn) and remaining there in 2026;
Dividends of USD25 million in 2024 and in 2025;
Capex of USD310 million in 2024 and USD285 million in 2025.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improved cost metrics and profitability through the cycle;
Increased commodity or geographical diversification;
Expectations of total adjusted debt to EBITDA and net adjusted debt to EBITDA around 2.3x and 2.0x, respectively;
As Nexa's ratings are related to the ratings of VSA following Fitch's parent and subsidiary linkage criteria, a strengthening of the operational or legal ties between Nexa and VSA could lead to a positive rating action on Nexa.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weakening of the strategic and operational ties between Nexa and VSA could lead to a negative rating action on Nexa;
Nexa's ratings are linked to the ratings of VSA following Fitch's parent and subsidiary linkage criteria.
Negative Rating Actions on VSA would occur if:
Expectations of total adjusted debt to EBITDA and net adjusted debt to EBITDA around 4.0x and 3.0x, respectively;
Weakening long-term fundamentals for zinc and for cement.
Liquidity and Debt Structure
Adequate Liquidity: Nexa has a track record of robust/solid cash position and manageable refinancing needs within the next few years. It had USD457 million of cash and marketable securities and USD1.73 billion of Fitch defined total debt as of Dec. 31, 2023. The company faces debt amortizations of USD143 million in 2024, USD78 million in 2025. The current issuance is part of the company's proactive liability management strategy, aiming to refinance its next large maturity in 2027 and partially tender the 2028 maturity.
Nexa's financial flexibility is further enhanced by an undrawn USD320 million five-year revolving credit facility. As of Dec. 31, 2023, Nexa's debt was primarily composed of USD1,213 million of senior unsecured notes, USD209 million of loans with BNDES, and USD238 million of export credit notes. More than 80% of the company's debt was denominated in U.S. dollars at Dec. 31, 2023. Nexa's 5.375% USD700 million due in 2027 and 6.5% USD500 million due in 2028 senior unsecured notes are jointly guaranteed by Cajamarquilla S.A. and Nexa Peru, both incorporated under the laws of the Republic of Peru, and Votorantim Metais Zinco S.A., incorporated under the laws of the Federative Republic of Brazil. There are no upstream guarantees between Nexa Peru and Nexa to their ultimate parent, VSA.
Issuer Profile
Nexa Resources is the fifth largest zinc miner worldwide. It operates mines and smelting facilities in Brazil and Peru. It also produces copper, lead and silver. In addition, it produces byproducts, such as sulfuric acid, silver concentrate, copper cement and copper sulfate.
Date of Relevant Committee
28 September 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
NEXA RESOURCES S.A. 
