Good morning and welcome to Nexa Resources' Conference Call. [Operator Instructions] Presenters in this call are Mr. Tito Martins, CEO of Nexa Resources; Mr. Mario Bertoncini, CFO of Nexa Resources. Also joining the call, Nexa's executive team and Mr. Leandro Cappa, 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.

Thank you. Good morning, everyone. And thank you for joining Nexa's Second Quarter Earnings Call. On Slide 3, right after the disclaimer page, you'll see the agenda for today's call. Today, we are going through the following topics: Second quarter main events and performance; then Nexa's CFO, Mario Bertoncini, will discuss our operational performance and consolidated results; closing the first part of the call, we will give you details about our mineral exploration campaigns, and remind you of our projects and priorities for 2018; then we'll open for a Q&A session. Please go to the Slide 4. We reached the end of the first half of the year committed to our priorities and in line with our plans. Here are some important events. Aripuanã, our main project, was 95% completed at the end of June and we are on track to the take it to the board approval in the next month. In July, we submit the construction permit request to environmental authorities of Mato Grosso state. We should have it granted some time along this semester. Mineral exploration. One of our priorities is to keep our exploration drilling campaigns to ensure the long-term sustainability of the business and also to increase our resources. In the last call, we had a light increase of reserves from June to December 2017. And today I would like to emphasize our continuous work on this. We have drilled 147,000 meters until June 18, and you can find all the details of these results in our earnings release. An important news on this front, the environmental authority in Peru have just authorized us to explore the northern part of Cerro Lindo, which is our largest mine. And we are planning to start the drilling activities during August 2018. Smelting. The smelting business kept operating…

Thank you, Tito. Turning to Page 8, we discussed our mining performance in the second quarter. As usual, let me remind you that we convert our production by metal to our zinc-equivalent basis using full year 2017 LME prices in order to present comparable figures. The zinc equivalent production in Nexa's mining operations totaled 135,000 tons in the second quarter of '18, in line with the first quarter of this year and 6% down when compared to second quarter of '17. A decrease of 4% in treated ore volumes and in copper grade were partially offset by the increase in zinc grade. You can observe on the top-left table on this page that our zinc contained in concentrate in the second quarter of this year was in line with the same quarter last year and 6% higher compared to the first quarter of this year. Allowing zinc equivalent production to reach 99% of the volume planned for the first half of this year. The [indiscernible] in Cerro Lindo, we have focused on developing new galleries and stopes as planned, which will enable us to grow production in the second semester. It's important to highlight that our efforts to extend Vazante mine life, assessing the new ore body there and to keep El Porvenir operating at capacity resulted in better performance on both mines when compared to previous year. These 2 mines, Vazante and El Porvenir, accounted for 44% of zinc equivalent production in this second quarter of the year. At the bottom-right part of the page, we have our mining cash cost after byproduct credits, which were on a consolidated basis, $0.04 per pound higher in the quarter, impacted by lower byproduct credits due to the decrease of copper, silver and gold content in concentrate and also impacted by higher…

Thank you, Mario. Let's go through the highlights regarding our mineral exploration. In our earnings release for this quarter, we prepared a comprehensive summary of our main achievements in mineral exploration. Here, we are going to talk about Cerro Lindo, and Aripuanã, but I strongly recommend you to look at our earnings release and read more about the developments in other projects. In Cerro Lindo we drilled approximately 30,800 meters in the first half of 2018. The drilling program has 2 main goals. One, to extend the mineralized zones within the mine. And the other one is to explore new massive sulphide deposits in the surrounding areas. In this regard, in May 2018, an agreement with the local community of Chavin was signed, which is part of the process to operate 20 diamond drilling platforms in the area of Topara North. The environmental permit has just been granted, and we should start the campaigns during August 2018. Let's move to the next Slide to talk about the Aripuanã on Slide 16. In Aripuanã we are drilling the southeastern region of the project, the main area called Babaçu. This region is additional to the project. We have already drilled 9 holes, totaling approximately 5,000 meters that are indicating good potential to expend the project toward that direction. The drilling program for this region is 11,000 meters for the year, and we expect to complete the remaining as planned. Please move to the next slide. Slide 17. Let's talk about our projects and operations. In Cerro Lindo, the construction license for the new waste disposal deposit was granted in early July. So construction will begin shortly. And we expect to start operations on the new deposit in the first quarter of 2019. Also in Cerro Lindo, we concluded procurement process for the…

[Operator Instructions] The first question comes from Thiago Lofiego with Bradesco BBI.

I have two questions. The first one on capital allocation. You guys have announced a potential buyback to be approved. But what else could we expect from the company? Do you think you guys could consider accelerating the acquisition of the minority stakes at Milpo in agriculture for instance? Or any other alternative in terms of capital allocation beyond the projects that you have already announced? And the second question on the zinc market. So we've seen other zinc producers reporting higher zinc concentrates volumes in the second quarter, which triggered an upward correction on the TC ratio, so do you think that the concentrate market right now is still in a tight situation? Or you're seeing some signs of the market loosening in the short-term?

Thiago, this is Tito. Thank you for your questions. Capital allocation, what we've got is, we are keeping our plans in terms of investments, as we mentioned during the presentation. And clearly, the decision about the buybacks -- the proposal to buy back is related to -- our confidence on the outlook for not only for Nexa performance but also looking at the performance of the commodities in the market. So we are confident that the zinc and copper should perform well along the next 2 years. Of course, we are still trying to negotiate with the minority shareholders in Peru to acquire those shares from Milpo, the previous Milpo, now we call it Nexa Peru. Of course, the volatility in the market in the last 3 months is not helping much. Just to remind you, we start to negotiate with them, Nexa's share price was around $18 or $19 per share and Nexa Peru shares were around 6 -- no, PEN 5 per share. So the volatility is not helping us to reach an agreement. In terms of the other minority shareholders we have in different business, in different projects, we are still with the -- we are still following the concept that we should try to buy them out. But it will depend on how those specific projects, we will [ drove ] along the time. And we feel that we are confident about the value of those projects for our company, for Nexa. The second question, and I understand that you are asking about how we feel about the market. Fundamentals have not changed, we are still seeing a very tight market for concentrate. An example of that is the -- that this year in China, we are seeing a very low level, I would say, it's around $30 per ton, just to give a reference, TC today is 147. I don't know if you heard but in the last 2 weeks, the big players like Teck are making some movements. They are saying that they want to rediscuss the way the contracts are set, which implies that they're also confident that the market is tight. So that's why we keep saying price of zinc when you compare with price of copper and other commodities has dropped more than them. But there is no structural reason to see it happening. And we are not foreseeing at least for the next year, a huge change, a significant change in the market. Once more, it seems to me that it happened with zinc because zinc is not very well known in the market.

The next question comes from Carlos De Alba with Morgan Stanley.

So I understand that the guidance for output has been reiterated and the big driver there is probably the recovery in ore grades or the improvement in ore grades in Cerro Lindo. But could you comment, Tito or Mario, perhaps, on what are the expectations of cash cost in the second half of the year? Typically when you see ore grades going up, cash costs come down. Is this something that we should also expect and should provide or would provide support to the EBITDA and cash generation of the company, despite your lower zinc prices, right now, already to what we saw averaging in the first half of the year? And then my second question has to do with management or the company's view and flexibility towards growth projects. I mean some of the concerns about Nexa's story is on the free cash flows in the coming years as the company starts to ramp up CapEx on the different projects in Aripuanã, Magistral, Shalipayco. To what extent is the company coming or seeing these projects with a flexible approach or mentality? Are these projects dependent on a specific zinc price? Would management defer these projects, if zinc prices go beyond, say, $0.90 or $1? What can you tell us as to how flexible the approach towards Capex is for the company?

Yes, maybe you want to mention about the cash cost management.

Carlos, Mario speaking. Thanks for your question. Regarding the cash cost. A fair assumption is to assume a stable cash cost in the second half of this year compared to the first half. You are right that we do expect as we have pointed out an increase on rates and also increase on our production particularly from Cerro Lindo. Also, we are expecting stable at cash costs in this regard. Regarding the other mines, we performed very well in Vazante and Aripuanã particularly this quarter. We do expect to keep this performance and also some increase in performance from the other mines, particularly Morro Agudo and Atacocha along with Cerro Lindo.

Just a reminder, you have to bear in mind that our cash cost has some influence from the byproducts as well, I mean the price of the byproduct. So one of the reasons why the price on the second quarter -- the cash cost of 17% went up a little bit has to do with the reduction, the drop in the copper price, right? Okay, with your other question...

' Sorry, Tito but before we go there. So I understand the cash cost after byproducts will be negatively affected by the lower metal prices. But what about the cost before byproducts? Are those also forecast to be stable? Or and if so, why would they remain stable if you have higher grades?

I mean, when I mentioned stable, yes, it's before byproducts, okay? Not considering the impact of the byproduct. Being stable because although the ore grades can be increased, we'll be also increasing the ore production. And in part of preparing the new mining fronts, and this brings some marginal cost, Carlos, to predict a stable cost, is a fair assumption for us.

However, we try to be fair here. Assume that we'll be spending more into mining development. Okay, in terms of growth, I would tell you we keep saying -- we have said that in the past and I think it's fair to say, we intend to grow, we will be approving Aripuanã. We have Shalipayco in the pipeline. We have Magistral in the pipeline. The idea here is, as the mining is a little -- much better than little -- the mining cycles are long cycles, we should keep the investments over the next 2 years but avoiding to stockpiling those projects. We want to sure that we are able, based on our financial structure and financial top position, to build Aripuanã, to move on with Shalipayco. Maybe by the end of Aripuanã, we start to develop Shalipayco. And when we are finishing the development of this first project, we should move on with the Magistral. Never having more than one project happening at the same time of other. So in fact the difference is very specific. One because of its size, right. We are assuming that what we spend in Shalipayco is more than the other projects because we are not planning to build a new plant. We will have only the mine. So we are confident that even if we have price not so attractive, we should be able to reach our targets in terms of return. We do have a hurdle rate of 15%, and we want to pursue that. Usually, when we work for those projects, we work with long-term consensus price. Exactly to avoid to be biased in our decision process, internal decision process, we need to work with what the market thinks about the future prices. So there's no specific price that will guide us. Actually, the return will be -- the minimum return of the project will be the main guidance for us to define if we're going to move or not with that. I hope that answers your question.

The next question comes from Timna Tanners with Bank of America Merrill Lynch.

I wanted to ask a little bit more about the last question, if I could. I think what I understood, I just want to clarify is that you're saying that it's not a specific price of zinc that determines your growth projects but more the returns on those projects. So is it fair to believe that you're continuing with the supply growth plans even at lower zinc prices? Is that a fair summary of what you'd say, as long as the project makes sense and those are your returns requirements?

Yes, it is. It is. You have to see that, we have been consistent with that along the last -- at least 10 years. I mean we never gave up to invest mostly in the brownfield growth, if you look at Cerro Lindo, that's a very good example. We managed to move from 5,000 tons per day to 21,000 tons per day in terms of ore used. And even when the prices were not so good. So we have to be consistent. As long as we feel that returns are proper ones, we should keep the investment. Of course, always looking at this, the parameters will follow, I mean strong cash flow, strong balance sheet, leverage not going beyond 2x and things like that.

Understood. So taking a step back and looking at the broader zinc market, our strategists' concerns on the zinc market have to do precisely with this supply building from not just you but other zinc producers adding capacity and so the balance is more to a surplus over the next couple of years. I guess since you said that you didn't see any reason for zinc price weakness, so I was wondering if you could share your opinion on if you think that's a valid concern. And if you think that there's anything different on the supply side or any discipline supply-wise that maybe we're missing?

Yes. What happens with the way we see it, not only us, but some of the analysts also. If you look back to the last 5 to 10 years, most of the additional supply, the additional concentrate in the market actually came from China, China production. And most of it was actually from small mines in China. What we've seen along the last 3 years is that China is not adding additional production in the market. So when you mention, there will be new mining projects around the work. We agree with that, we are following it, we believe that most of the parts that had been announced will be built. But the big question is, how much China actually will be able to build in the next few years in order to -- actually to add this additional production in the market and cope with the potential demand? We don't think that this will happen very fast. And why is that? As I said, the structure of the zinc production in China has, as a base case, small mines. And zinc production has been done by groups that are not only mining companies. So if you take all of this into consideration, it seems to us that -- I keep saying, I have no doubt in the long-term, China will be able to cope with the demand. But how long will they last the short-term, 1 year, 2 years, 3 years, we don't know. We may be seeing right now a major shift in the zinc market because of that.

So you think the Chinese -- the bearers in xenon, the zinc market are overly concerned about the supply-side from China, is that fair?

Yes, they are looking at -- they are assuming that, ask the guys to point out the names -- to give you the name of the new mines in China. Nobody knows. That's the point, that's the point. We keep saying that all the time, nobody knows. They just give you a number, 200,000 tons next year, 300,000 tons in the following one. But they never provide the real source of work -- of concentrate.

The next question comes from Petr Grishchenko with Barclays.

First, can you perhaps elaborate a little more on this [ $350 million ] CapEx for Aripuanã project. How does the time line look like? And how long do you think it would take to get to the first production?

Right now, the official number we have for the Aripuanã, it's around $360 million. We are finishing the FEL3, we should have the final numbers sometime in the next month. That's what we are expecting to have. And we have -- we need to -- in order to take it to our board approval, we need to be sure that we will have the installation permit, we're expecting to have it sometime along the semester. I'm considering that it could happen before November and we are working with that. And we would spend the $360 million along the next 2 years and start-up should be at the end of 2020. Most of the investment will be due -- I mean the SEMEC [ has announced ] for the project will actually happen in -- the end of 2019, the first half of 2020.

Another question I have, if you can maybe talk about the impact from minimal freight tariffs in Brazil? And how do you think this will affect your cost if the preliminary measure becomes a law or maybe even more directly if you can give us what percent of your operating cost is transportation, like truck transportation will get affected?

Okay, Petr. Thanks for these questions. Regarding the truck drivers first, as we mentioned before, that has not been an impact for us so far. Regarding the prices -- was established as up to date because as you know this is changing, anything is expected to change. But let's assume the price is established for today. The impact for the full year, 12 months, to date, it will be for us something around $5 million to $6 million, we are -- for the full year, 12 months. We are working in order to minimize and reduce these effects. And the trend from now on is downward. We would expect to reduce even more, that impact. Regarding logistics, the cost of inbound, if you add inbound and outbound, our logistics costs are something around 17% of our total costs, final costs.

That's very helpful. And last question, if I may. Can you perhaps elaborate a little more on the credit ratings? And specifically, do you consider getting to IG as your objective? And are you actively engaged with the agencies right now?

We keep talking with agencies all the time on a continuous basis, right? Regarding our -- the way we organized it, the capital structure, the leverage per se is a strong cash conversion of the firm. Here, we keep working hard with the rating agencies in order to be at [second point] revised. So far, we are relatively captive by even the Brazilian Republic according to their reports, and we are working hard in order to overcome potential blockers in our ratings, Petr.

[Operator Instructions] The next question comes from Terence Ortslan from TSO.

My question is actually on the smelting side. You announced that converting into Jarosite, you're going to be able to recover 3% more zinc at Cajamarquilla. Just given the [ world ] concentrate and metal balances, what are the next brownfield or greenfield projects you have on the smelting side? And if you obviously, consider brownfield, which is far more reasonable in cost in capital and timing, where would that be and how much more can you add to the smelting capacity?

Terence, thanks for your questions. And we don't have the intention to grow capacity -- to expand capacity in our smelting assets or in our smelting business. We keep debottlenecking. We keep investing automation in productivity gains all the time. And we'll keep doing so but it's not in our plans for these next years or even medium-term to increase capacity [ on it ] as well.

Just to add to that, I'll give an example. Cajamarquilla smelter, the expansion we did 2 years ago to get to the nominal capacity of 320,000 tons per year. We are already operating Cajamarquilla about 335,000 tons per year. How we did that? A lot of our small projects like the one you just mentioned, the Jarosite project, that debottlenecked the plant and helped us to increase some capacity. We know for sure that there are other things that can be done, not only in Cajamarquilla, but also in Três Marias and Juiz de Fora, and we are pursuing it. Unfortunately, I don't have with me today a number, that would say, how much we're going to spend actually to increase some capacity. But we will be doing this [ among them ] in 2 years for sure. With a much lower amount of resources and achieving better production and more productivity as well.

Because I was looking at the $80 million also that you have here in your slide, that talks some of that going into technology improvements and as well, recoveries [ except ] at the Jarosite. But I guess I'll take that. Tito, you also mentioned that one of the major producers, Teck, is trying to bring a new norm or it's about time new norm in the concentrate markets. Do you think that is overly aggressive or realistic given the circumstances?

I think they are a little bit aggressive. But it's part of the game, right? And they have to start to move, if they want to make it some change. I don't think that they actually will make a lot of change in this next negotiation. But we are seeing some signs and you know why? We want to see something changing in the next 2 years, right. The relationship between the concentrate producers and the smelters has been a very strong one along the years. If you look back, it took 4 to 6 months to have the new TC, the referenced TC, and everybody was saying that TC should drop dramatically. And when you compare the drop from 170 last year to 147 this year, it's not much, looking at the spot TCs, because of this, because of this long and very traditional relationship between the two sides. So there will be change in the future, but not so fast. Not like, for example, I don't see it happening like it's happened with the copper, which was, probably was faster than what we would see with zinc.

The next question comes from [Kyle Ribeiro] with JPMorgan.

So my first question is in regards to growth prospects other than the greenfield/brownfield alternatives that you have in your portfolio right now. And recently the company was looking at [indiscernible] project in Peru. I just wanted to see if you, at this point, are looking at any other projects externally to bid for or perhaps any M&A opportunities that you see right now. And then secondly, I just wanted to see if there are any labor contract negotiations that you are involved in, in the near future. This has been an important thing for copper with some major mines going through this negotiations right now. I just wanted to get your sense if you see anything on this front for zinc as well?

Thank you for questions. The first one, of course, we keep an eye on the market all the time. As you asked, now are you looking at anything specifically? If I were, I would not tell you today, for sure. But what happened is, we try to compare our greenfield projects with what's available in the market, okay. [indiscernible] was a good attempt because we knew well the project. So we had a chance. Actually, we have some relationship with [ them ] in the past and we were actually -- able to know better the project. We are confident that we could actually move ahead and have the social permits and then maybe attract someone, some other players to be with us in the project because the project, we were assuming was too big for a company of ourselves to be developed by ourselves. And I would say, if we find in the market an opportunity that actually can be comparable with the projects we have in our pipeline, we have to decide and probably go for that. It's not something that we are not paying attention to. The second question is labor. We just finished -- I would say that your cycle in negotiation, we finished -- we have an agreement with the El Porvenir mine employees, 10 days ago, I think, yes, it was 10 days ago. The next one, it's one of the mines that I can't remember, which one, remember during November, our negotiations are spread out along the year and if you look back, our track record, of course, there is a lot of noise during the negotiations. The unions mostly in Peru, they like to make noise through the press. They threat to go for a strike but it's not like what you see in Chile. There are different unions at the same site with different level of interests. So we haven't had any situation where our production was actually affected by a strike that lasted 1 or 2 days. You have to also know that we work with most of the labor force in our operations is provided by contractors. So -- and those contracts are not unionized. So the disruptions in our operations because of the labor disputes is not very usual. We haven't seen this for many, many years. And I think that -- in the case of Brazil, relationship with the labors and the unions -- the employees and the union is a very stable one. We haven't had a case of any strike or any major issue with them for decades actually.

Our next question comes from Orest Wowkodaw with Scotiabank.

Just another question on capital allocation. It's great to see the announcement of a share buyback program moving ahead and that makes total sense given your balance sheet and your free cash flow position but I'm just curious on how we should think about the balancing that with dividends or special dividends moving forward? Because the one downside about buying back your shares is just simply that you’re trading liquidity, which is already not the best, what could be impacted by just lower shares being in the market. Just curious on your thoughts.

Thanks, Orest, for your question. The decision regarding that share buyback program is on the top of our dividend policy in terms of capital allocation. The whole idea, as Tito pointed out before, right, is first, keep our investment, our growth strategy, the greenfields, the expansion of brownfields that we're seeing. At certain point, if it's advantageous to Nexa stakeholders, we should be ready, as Tito says, to repurchase minority stakes and also to serve the dividend policy as we already have served. On the top of that, without impacting our dividend policy, we decided for the share buyback program to be implemented from now on. This will not change our capital allocation strategy discussed so far.

This concludes our question-and-answer. session. I would now like to turn the conference back over to Mr. Tito Martins for any closing remarks.

Thank you. Before I finish, Mario has one comment to make.

Sure. Well, another important thing to reemphasize, it was pretty much presented and clarified in our financials and earnings release but is the impact to this quarter of the exchange rate variations, right. As everybody knows, we had a significant real devaluation, BRL devaluation during the quarter -- second quarter. And this impact, accounting-wise, this impact on the financial expenses, given the impact of the exchange rate on our intercompany loans, Nexa Luxembourg, of our holding company's creditor of Nexa Brazil in intercompany loans, in dollar terms will arise. Given the real devaluation, we do have to print financial expense, given the exchange rate variation in Brazil. That on the consolidation, on the consolidated financials this is not a set up. This is not compensated by gains in looks. This is printed, as expensed. Important to say, that first, this do not represent any impact on our EBITDA, this do not represent any impact on our cash flow. It's only an accounting number that will be basically addressed as we reduce the amount of these intercompany loans, as we are already doing throughout [ businesses ]. I would like to basically to provide the comfort to the market regarding this valuation.

Very good. Thank you. Just to finish this call. As most of the analysts who called with us today said -- I think the proposal for the buyback was well seen. And the maintenance of our guidance in the market was also very well seen. Both case shows that we are very structured in our plans. And I would want to give you this assurance that we are moving in the right direction, we are moving according to the plans we had since the IPO. And the company is actually performing very well. And hopefully, we are right about the market, we are confident that the knowledge we have about the zinc market today is among the best knowledge you can find around. And we have foreseen a very good future for our organization. I would like to thank you for being with us and we'll talk in the future. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.