Aripuana Ramp Up And Heavy CapEx Will Constrain Long Term Upside

Catalysts

About Nexa Resources

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

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

• The plan to reach Aripuana’s nameplate capacity only in the second half of 2026, with the fourth tailings filter still in installation and commissioning, concentrates a lot of future zinc volume and cash flow in a single asset. Any delay or underperformance could weigh on revenue growth and EBITDA.
• Persistent workforce turnover at Aripuana, even after efforts to reduce it from earlier peaks to roughly 18% to 20%, adds ongoing training and retention costs and raises execution risk around stable operations. This can pressure unit costs and operating margins.
• The Cerro Pasco integration project and ongoing exploration programs require sizable sustaining and project CapEx, with 2025 guidance of US$347 million and exploration and project evaluation guided at US$88 million. Heavy reinvestment needs may constrain free cash flow available for debt reduction or shareholder returns and affect future earnings growth.
• Exposure to zinc, copper and silver pricing, with management framing zinc assumptions conservatively and relying on byproduct metals to support the cash profile, means any normalization from current supportive price levels could compress revenue and EBITDA margins given the fixed cost base of long life assets.
• The plan to reduce gross debt by about US$500 million to US$600 million over roughly 4 years while keeping net leverage closer to 1x depends on continued strong operating results and constructive commodity prices. Any setback in volumes or pricing could limit deleveraging progress and keep interest costs and net income under pressure.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Nexa Resources's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $150.5 million (and earnings per share of $1.23) by about January 2029, up from $-16.2 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.6x on those 2029 earnings, up from -71.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 24.8x.
• 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 11.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A constructive backdrop for zinc, copper and silver, supported by low zinc inventories, robust galvanization demand for infrastructure and renewables, and structural supply constraints from declining ore grades and mine depletion, could help keep realized prices resilient and support Nexa's long term revenue and EBITDA.
• Aripuana is already contributing record zinc production with improving costs and is expected to reach nameplate capacity in the second half of 2026. A sustained ramp up and longer mine life, backed by new mineralized extensions, could support higher volumes and cash generation, lifting net margins and earnings.
• Cerro Pasco integration is progressing with Phase 1 spend on tailings systems and ongoing Phase 2 studies in a mineral district with over 15 years of potential mine life. Successful execution could support stable long term output and strengthen revenue and EBITDA margins.
• The move to reduce the Cerro Lindo silver streaming burden from 65% to 25% after the 90 million ounce threshold, expected around the end of the second quarter of 2026, could meaningfully increase retained silver cash flow at current price levels and support free cash flow, deleveraging and net income.
• Management is prioritizing deleveraging, with net leverage already at 2.2x, a long 10.4 year average debt maturity and liquidity of US$790 million including an undrawn US$320 million revolver. Continued free cash flow generation and disciplined CapEx could gradually lower interest costs and support earnings stability.

Valuation

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

• The analysts have a consensus price target of $7.03 for Nexa Resources based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2029, revenues will be $2.9 billion, earnings will come to $150.5 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 11.5%.
  
• Given the current share price of $8.79, the analyst price target of $7.03 is 25.1% 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.