Aripuana Delays And Smelter Margin Pressures Will Sustain A Cautious Long Term Outlook

Catalysts

About Nexa Resources

Nexa Resources is a metals and mining company focused on zinc, with additional exposure to silver, lead and copper through its mining and smelting operations in Latin America.

What are the underlying business or industry changes driving this perspective?

• The plan for Aripuana to reach nameplate capacity only in the second half of 2026, after installation and commissioning of the fourth tailings filter, means any delay in construction, commissioning or workforce stabilization at this remote site could cap volumes and keep unit costs elevated for longer. This could weigh on revenue growth and segment EBITDA.
• The Cerro Pasco integration project depends on timely completion of Phase 1 tailings infrastructure and Phase 2 shaft and underground integration studies. Any execution slippage or technical setback in this long life district could postpone expected production uplift and pressure long term cash generation and margins.
• The reliance on an integrated mine smelter model in a market where treatment charges, smelter utilization and Chinese export flows remain in flux leaves Nexa exposed to periods of tight smelter margins. This could limit the benefit from zinc price strength and cap overall earnings even if mining volumes remain solid.
• The plan to reduce gross debt by about US$500 million to US$600 million over roughly four years, while maintaining CapEx of around US$347 million and exploration and evaluation spend of US$88 million for 2025 and a similar level indicated for 2026, could constrain financial flexibility if metal prices or working capital benefits soften. This could put pressure on free cash flow and net leverage improvement.
• The step down of the Cerro Lindo silver streaming burden only from around 65% to 25% after a 90 million ounce threshold is reached, expected toward the end of the second quarter of 2026, concentrates a large part of the future silver cash flow benefit into a period that still depends on stable mine plans and grade profiles. Any disruption or grade variability could limit the anticipated uplift in earnings and operating cash flow.

Assumptions

This narrative explores a more pessimistic perspective on Nexa Resources compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Nexa Resources's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -0.6% today to 5.4% in 3 years time.
• The bearish analysts expect earnings to reach $158.8 million (and earnings per share of $1.19) by about January 2029, up from $-16.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $201.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.6x on those 2029 earnings, up from -96.3x today. This future PE is lower than the current PE for the US Metals and Mining industry at 27.0x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.48%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Aripuana is progressing toward higher throughput, with a record quarter of 10,000 tons of zinc and commissioning of the fourth tailings filter planned for early 2026. If the mine continues to move closer to nameplate capacity and stabilizes workforce turnover, that could support higher production, better unit costs and stronger segment EBITDA than you expect.
• Cerro Pasco and Cerro Lindo both show long mine life potential and ongoing exploration success. If further drilling continues to extend mine lives and supports higher grade or higher volume mine plans, the company could see more resilient zinc, lead and silver volumes, which would underpin revenue and operating cash flow.
• The integrated mine smelter model is designed to smooth cycles, and management is targeting smelter margin recovery as treatment charge benchmarks for 2026 are currently trending around US$130 to US$180 per ton. If these market conditions persist or improve, smelting EBITDA margins and consolidated net margins could be stronger than a bearish share price view implies.
• Structural demand trends in zinc, copper and silver tied to galvanization, electrification, renewable energy and data centers, combined with constrained mine supply in the Western Hemisphere, could keep realized prices for Nexa’s products at supportive levels for longer. That would help revenue, adjusted EBITDA and free cash flow even if operating challenges recur.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Nexa Resources is $5.0, which represents up to two standard deviations below the consensus price target of $7.4. This valuation is based on what can be assumed as the expectations of Nexa Resources's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $3.0 billion, earnings will come to $158.8 million, and it would be trading on a PE ratio of 5.6x, assuming you use a discount rate of 10.5%.
  
• Given the current share price of $11.8, the analyst price target of $5.0 is 136.0% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.