Good morning and welcome to the 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 that this event is being recorded. I would 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 joining Nexa's third quarter earnings call. On Slide 3, right after the disclaimer page, you will see the agenda for today's call. Today we are going through the following topics: third 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 the data about the Aripuana project and its feasibility study. And then we'll be open for a Q&A session. Please go to Slide 4. Let's start with some corporate highlights. As it was informed to the market 2 weeks ago, the Aripuana Mine project, the first one in our pipeline of greenfield projects, was approved by Nexa's board. The feasibility study was concluded, and we are ready to start construction as soon as we have the construction permit. Just to remind you, in July, we submitted to the environmental authorities of Mato Grosso state the request for the permit, and we should have it granted sometime in the following weeks. I intend to guide you through the main details of the project in a few minutes. But before that, I just want to call your attention to some important specific results from the feasibility study. We estimate an average production of 150,000 tons of zinc equivalent for 13 years of mine life. Here we are considering only mineral reserves. Looking at the technical report, you will see that the project has the potential to expand its life of mine by at least 6 more years when we also consider inferred mineral resources -- really, a very promising amount in returns of investment. On October 27, we celebrated 1 year of Nexa as a listed company, 1 year of some volatility in…

Thank you, Tito. Turning to Page 7, we discuss our mining performance in the third quarter and year to date. As usual, let me remind you that we convert our production by metal to a zinc equivalent basis using full year '17 LME prices in order to present comparable figures. The zinc equivalent production in Nexa's mining operations totaled 137,000 tons in the third quarter of this year, 1.4% down compared to 139,000 tons produced in the same period of the previous year. When comparing our mining production throughout this year, we have consistently increased our zinc equivalent production since the first quarter of this year, and we are prepared to speed up this track in the last quarter of this year. Production totaled 407,000 tons in the first 9 months of '18, down 2.8% compared to 418,000 tons recorded in the same period of last year. Comparing our mines on the third quarter of this year against the same quarter last year, the decrease of 1.4% in treated ore volumes and the decrease in copper grades were partially offset by the increase in zinc grades. Decreasing production in Cerro Lindo and Atacocha were partially offset by a production increase in El Porvenir and Morro Agudo on a zinc equivalent basis. At the bottom right part of this page, we have our mining cash costs after byproduct credits that increased to $0.34 per pound in the third quarter of '18. This was a $0.14 increase, mainly due to 2 reasons: mainly due to lower credit of byproducts, accounting for an impact of approximately $0.11 per pound and an impact of about $0.07 per pound from higher operating costs, driven by higher maintenance, as anticipated, and mining development costs. And this last factor, the mining development, is the main driver to…

Thank you, Mario. Please move to Slide 14. Once again, we are pleased to announce that our Board of Directors approved the construction of the Aripuana project. This approval reinforced Nexa's commitment to develop our pipeline of greenfield projects, and it's important to mention the efforts the Nexa team made to have all the studies completed. And I want to assure you we are well prepared to build and to operate this project. We filed technical reports summarizing the results of the feasibility study and discovery for the first time the mineral reserves of Aripuana, comparing it with the previous studies. This middle one shows a significant increase in the expected average of production of the new mine. We are expecting the installation permit in the next 2 weeks and the operation permit by the end of 2020. The project expects to be operational and ramping up sometime in between fourth quarter of 2020 and first quarter of 2021. The basic project is a [indiscernible] mine, 70% owned by Nexa Resources. All figures presented here consider 100% of the project. The spec annual zinc equivalent production is 120,000 tons for 13 years, only producing from the mineral reserves. It includes 67,000 tons of zinc, 23,000 tons of lead, then the remaining copper, silver and gold. Zinc volumes represent 18% of Nexa's zinc total production and approximately 28% of the total concentrate we buy today from third parties. Based on the current inferred resource, the project has the potential to be extended at least for 6 additional years, and it's important to say we keep a very consistent drilling program to increase the life of the mine beyond its current 20 years' production. Regarding CapEx, the total investment will be $392 million with an estimated NPV of $129 million. So far…

[Operator Instructions.] And our first question comes from Arthur Sueletto from Bradesco.

So gentlemen, my first question is regarding Cerro Lindo. You just mentioned that zinc production is a bit down when compared to what you were expecting for the year. But even maintaining your zinc production forecast for 2018, so understand that maybe you're considering acceleration in terms of zinc production coming from Cerro Lindo in the fourth quarter. I want to understand if that's correct and what you're expecting in zinc volumes coming from this mine in the first quarter. And also, we saw cash costs in Cerro Lindo going up. Of course, it is related to the development costs that you are having there. But since you are maintaining your development costs in a more accelerate the pace and from the quarters, I want to understand what can you expect in terms of cash cost reductions? Even if we see consolidation in volumes coming from the mine, can we see also a drop in cash costs if you consider the high development costs? That will be my first question. And the second regarding Aripuana. I just want to understand you have the partnership with Karmin Exploration with the mine, and they have to decide now. I think it's 1 year to decide if they're going to continue with the CapEx for the development of the mine. Just want to understand in the case that they decide not to consider it, what happens there, and will Nexa try to find another partner, or Nexa would be responsible for this CapEx allocation? That will be it.

Let's address early in the first. Just to remind everybody, since the beginning of the year we've been saying that production in Cerro Lindo should actually move up in terms of volumes along the year. Our original plan already had considered that Cerro Lindo performance would improve along the year and would be higher in the second half. What happened specifically in the third quarter, it's due to some minor and actually out of our control events, small events. We had some delays in not only the development of the mine but also in the action. Production was a little bit affected. That's why the production of the quarter as a whole was lower than what we were expecting. But when you see that we are keeping the guidance for the year, we are actually sending the message that we are confident that, despite those events that happened along the second and third quarter, the full production for the year should be close to the original plan. So we are confident that we actually can, and actually are already in the fourth quarter, things are going much better than they were before. In terms of cost, Mario, do you want to mention this?

Yes. In terms of costs, Arthur, if we -- I would like to refer to Page 7 of our material, that on the bottom right part of the page we bring the cash costs and the costs on a consolidated basis and per mine. And there you see that increment of $0.34 per pound. Out of that, of this delta or $0.14 delta, as we mentioned, $0.11 is related to byproducts -- in this quarter, lower byproduct credits in this case. And the other $0.07, operating costs. Addressing your question, what we should expect is these operating costs to remain on the next quarters, around at least 3 quarters ahead. Why? Because they are related to maintenance and safety, and these will remain. It has to do with the higher standards of safety in particular that we adopted and we discussed in these last quarters, particularly in Peru, and mine development. In mine development, we are spending more, and this will remain for the next 2 or 3 quarters ahead. Then around $0.07 is kind of regular additional costs. The others are related to byproducts, Arthur. In parallel to that, we are working hard in efficiency, gains of productivity and correcting some other costs in order to partially offset the operating costs that I mentioned.

Thanks, Mario. Regarding Aripuana, what happens is as we have officially announced that we have the completed feasibility study, our partner there, Karmin, has a year, and now technically, they have 180 days to say if they are moving on or not with us. If they decide to move with us, they actually have to provide some sort of guarantees in order to, have to start to contribute with capital in 1 year time. Our position today, it's well known by the market that of course we would prefer to have the full control of the project because we are confident it's a good, robust project. But we are open to have Karmin with us. They have the right, we respect it and we have a very good relationship with them. If Karmin gives up the possibility or they do not follow us in the implementation of the project, we would move ahead by ourselves. We would not have an additional partnership in the project.

And our next question comes from Carlos De Alba from Morgan Stanley.

So I wanted to ask you, Tito or Mario, if you have any preliminary views on the production and CapEx for 2019. And also as to your plan, you just mentioned the evolution of cash costs for the mine, but if you can also provide a sense of how the cash costs for the smelting business would evolve, that would be great.

Thanks, Carlos. In terms of the production, as we are planning action to, as we did in 2018, to release the numbers about Nexa's production at the end of the next year. I cannot say much about it right now, but I'm assuming that we should have a stable production along the next year, hopefully more stable than the one we are having in 2018. As I said before, some unexpected factors actually delayed the production at Cerro Lindo. But as we announced in the release, you can see it, the developments have improved a lot, so the numbers, the 3,200 meters that we have, we think the foreman today, they give us much more comfort in terms of how much Cerro Lindo will be able to produce next year. I would -- the guidance now would be we have a more positive view about production for 2019. In terms of costs, Mario, do you want to say anything?

In terms of costs, it's exactly as we addressed it, Carlos. It's basically the whole thing is we do have some higher costs in mine development, safety and maintenance. And on the other hand, working hard in order to offset part of that next year with efficiency gains. I would expect something around, slightly up, the $0.20 reported before by part of that effect.

Just add one thing. It's important here to note that if we have this more stable production at Cerro Lindo in the next year, of course it will be a little bit higher than what we are having in 2018, as I kept telling you, I can say now. Thank you.

And our next question comes from Timna Tanners from Bank of America-Merrill Lynch.

I wanted to ask about, on the Aripuana project, I just wanted to make sure I understood. It says in the footnotes that this -- I assume the NPV is based on consensus forecasts. Is that correct and as of what date? If you could just detail what the components are for this NPV, and would it be changing, then, with the forecasts?

Yes, you are right. In terms of Aripuana, we have followed all the consensus market prices for zinc and all the other metals on that. It's not our own curve; it's the market consensus price curve for that and reported on the technical report. For the longer term, although we don't necessarily agree, the price considered for zinc there on the long term is $1.00, $1.01 per pound.

Have you looked at the NPV in the current spot place, or are you -- does the NPV really reflect more of the longer-term outlook, then?

Long-term, long-term. We follow the long-term.

Of course, okay.

We don't work with the spot price. And the reason why we prefer to work with the consensus is to avoid some kind of bias. We tend to be more optimistic about the market than the market, actually.

That's fair. That's understandable. And then just 2 more questions, then. Did you quantify the effect of the stronger Brazilian currency on your costs, just to get a sense of if we have an assumption about what the outlook will be on the currency. And then the second question along those lines, any guidance on the tax rate? Just because it's been moving around, wondering how to think about that going forward.

Yes, in terms of FX, FX effects on costs, Timna, we haven't guided the market in significant costs. What I can tell you is that on a full year basis, it's $0.10 of BRL. Let's assume Brazil for a while, because it's more impacted, then, by the FX effects. For 10 cents of the BRL per dollar, up or down, we would have a full impact on the EBITDA -- full year, 12 months -- in fact, of around $17 million. That's on the EBITDA directly. Sorry, your other question was on tax?

About that tax rate, how you're thinking.

Yes. Referring tax, on Page 32 -- let me check that, yes -- Page 32 of our earnings release provided to the market, we bring the tax assessment. And we are pretty confident that probably you're referring to that, if I'm not wrong. And we do have -- we list there at 3 cases. We are pretty much confident on that. We haven't provisioned because we don't see any needs for that. They are related to basically ICMF, the Brazilian VAT, on some sales of energy, also related to taxes applied to the value-added, value-added tax applied to energy sales and on income tax. Pretty confident on that. It's the Page 32 of our financial statement and not earnings release.

Okay, I'll take a look.

And our next question comes from Lucas Yang with JPMorgan.

I have just a quick one. Could you explain a little bit the FX impacts on your net financial results and consequentially to your EPS?

Luke, what happens is that the main effect of FX on our net profit and earnings per share is basically related, as anticipated, by intercompany loans that we do have, having Nexa Luxemburg as creditor and Nexa Brazil as debtor. These do have a significant impact yet. We have decreased a lot. At the beginning of this year, we had a balance of $1.1 billion in these intercompany loans. As we speak, this balance is $500 million, less than half of that, and we'll keep reducing this on the next quarters. If, just to simplify, if you take, for instance, the earnings per share of this quarter, third quarter of '18, the earnings per share is $0.06 per share, the net one, publicized. But the FX effect on this third quarter is $0.17 and the effects on these intercompany loans I mentioned. In other words, since these intercompany loans effect is not cash, does not represent cash disbursement or anything, our earnings release out of this effect would be more than $0.20. If you take the year-to-date in parallel, the year-to-date earnings per share, the last 9 months' earnings per share, it is $0.17, although we do have an embedded FX effect of $1.21 of these FX effects, again, on the intercompany loans. If we do not consider that or assume for a while directly a zero of this effect, our earnings per share would be something around $1.40 per share. That's the main effect on this.

And our next question comes from Orest Wowkodaw from Scotiabank.

I was wondering if we could get some more color on the EBITDA in the smelting business. We've seen a big pickup since -- really, I guess, started in Q2 that continued into Q3. I'm surprised to see the pickup this quickly, especially because I believe you hedge out the provisional pricing risk on the third-party concentrate that you buy. Can you maybe give us an idea of sort of what's driving that big increase in profitability there?

I would say it is basically because, first, we are operating at full capacity. We have actually managed to debottleneck some things, so production has been stable in all the 3 smelters. There's some support, also, for FX in Brazil, so productivity improves. The margins in the Brazilian smelters is a little bit higher than that. In the third quarter, we also have the backlog of the strike, the truck drivers' strike, that made us actually sell more in the third quarter when you compare to the second quarter. So there's a group of factors that are affecting positively. But in general terms, I think performance has been really good in all the 3 smelters, no interruptions at all, and actually with a little, some gains in volumes. And those are the facts I just mentioned. In terms of supply of concentrate, we haven't had any constraints. Our contracts are in place. We've been able to get all of the needed concentrate from the producers in Peru. And we are comfortable with that. We are already negotiating contracts for the next year. So that part that's not a long-term contract, we are already negotiating for the next year. It seems to us that situation will be pretty much the same.

Okay, but any third-party concentrate that you did buy earlier in the year, because the zinc price went down, normally you would, I guess, collect positive adjustments there from the miners. But am I correct in assuming that you hedge out that risk so you don't actually get that upfront?

Yes, we hedge what we buy from third parties. You're right about that. But the QP backed, we have some positive effect to the quarter. You're right as well. I don't have the number by heart. Do you know the number?

16.

$16 million in the third quarter, which actually affects positively the performance as well, the productivity as well, right? But $16 million.

Did you say $16 million?

Yes, $16 million here.

Okay. And so was that exposure that was not hedged, or just the hedging?

It was a result of the hedge.

Oh, I see. Okay.

It was exactly the opposite of what you're saying. Okay? Usually we hedge the QP, the contractual price. We have the contractual price. What we are buying from the market, we do not be exposed to that.

And our next question comes from Oscar Cabrera from CIBC Capital Markets

Tito, if I just -- staying with the smelting business, treatments, spot treatment charges have gone higher a and remain high. I know that you guys have a competitive advantage because of the smelting capacity you have in South America. Could you perhaps comment on the premium that you saw in the quarter compared to year-to-date and compared to last year?

Okay. The TCs, they are a little bit higher as we have, what you say, the brief contracts. The effects of any movement in the TCs up or down just affects one-third of the contracts we have. So when TCs, they come down as we saw from last year, the impact on our numbers is mitigated by the fact that just one-third of the contracts suffer from that. When the TCs goes up, the effect is exactly the opposite, which means that when you see that TCs is moving up, the effect on our numbers will be lower than they were supposed to be because impacting the one-third of the contracts. In the case of premiums, they've been very stable since last year. We haven't had any major change. I could tell you that because of the situation in Argentina, demand in Argentina is weaker than it was a year ago, we are sending more to other countries in LatAm, so premiums could go a little bit lower. But on the other hand, the market in Brazil is improving, so actually, I can assume that we will have stability in premiums because the market in Brazil will offset the loss of demand in Argentina. So at the end of the day, everything will be pretty much the same.

Pretty stable. Okay, no, great. If I may just follow up on the previous question, understand you hedging your -- the concentrate that you purchase. But how should we think about how the concentrate is moving through the smelter? Do you tend to keep a stockpile that you use, or how the stockpiles are looking right now, should we -- is there any seasonality to that stockpiling of concentrate or refined zinc production at all?

Our operating time period then, the smelting, is around 43 to 45 days in total. Then what we hedge is exactly this period for the working capital in progress there, for the inventories we buy and hedge. The hedge follows the same pattern. We're basically hedging that part of this inventory in process that comes from third party, not comes from our mines.

That's understood. Mario. And then lastly if I may, just getting back to the question on the costs for Cerro Lindo, just backing into on a per-pound basis before byproducts, you were about $1.26 per pound of zinc produced. Do you -- what sort of -- what do you expect over the next, say, year to year and a half? I'm assuming that with development improving and your production improving as well, that has to go backwards. Should we be thinking about inflationary pressures because of diesel or labor or other things?

Yes, and regarding Cerro Lindo specifically, Oscar, if we take into consideration the maintenance and development, mining development services, they together account for $0.11 per pound. These $0.11, I think it's fair to assume that will remain for some of the quarters ahead, around 2 to 3 quarters, at least, as we speed up the mining development there in order to keep producing more and more. Regarding inflation of other cost factors, no, we don't have seen that. In terms of labor, in terms of energy, contractors in general, we haven't seen any inflation in this regard. We do not expect any cost pickup on these others.

And our next question comes from Alex Hacking from Citi.

I just have one question on Aripuana. How are you thinking about the timing of potential conversion of resources to reserves? Is this a situation where once you develop the underground, we should expect to see reserves being replaced every year, or is it more of a long-term project to convert those over?

Straight answer: you should assume that at least we will be able to convert on a yearly basis what we will be consuming. And as we have stressed in our release, of course, we have a very strong drilling program there. Our target is for our operations, the minimum level of reserves, it's around 12 years' reserves. In Aripuana, we already have 13 years. But the situation looks so promising that we actually decided to move faster with Aripuana and see how much actually we can convert along the next 2 years. I would say we will be converting the year's production at least. But actually, we intend to increase the level of reserves for more years.

And the next question comes from Luis Pardo from Compass Group.

I just have a quick question about the timing of CapEx deployment for Aripuana. Are you thinking -- maybe if you could give us more color on how you plan to spend the CapEx. Is it front-end loaded? Back-end loaded?

Regarding CapEx, as we released on the technical report, and we have a lot of details there, Luis. We are investing around $20 million this year. That's in order of the finalization of the [indiscernible], and as soon as we get the installation license to start some of the investments for seeing galleries. In addition to that, next year our expected CapEx for Aripuana is $140 million and something around $160 million to $170 million the following year, meaning 2020.

And we expect all this to be funded with internal cash flow generation, right?

We have worked with some funding, particularly this incentivized funding between us and the region, but we are prepared to move ahead with our own cash to that risk.

Our next question comes from Terence Ortslan from TSO and Associates.

Just on the zinc markets, you answered some of the questions that Oscar had on the neighborhood and the area that looked domestic market. This morning inventories were down to a 10-year low, about 145,000 tons from like 1 million tons in 2012. It's a huge drop. Castle warrants have tripled the last few months. And I'm just wondering, in your view, being in the business, how synthetic is this market, or how real is the market that you would assess compared to what's happening to the price? What's your assessment?

I would say that what is happening in the market right now is pretty much what we said that it would happen more than a year ago. We are not seeing new mining production in China. The concentrate market in China has been supplied by concentrate coming from abroad, so just using China went up in the last few weeks because of that. But on the other hand, we are seeing, as I said, a drop in the cancellation of warrants and a drop in the physical stocks of metal. So if everything remains as it is today, and we are not seeing any reason at all to see a major change, not one you mentioned about new stock ops in the market, we may end up the year with the stocks officially now, future stocks we planned in 30 days dates of not available consumption of metal available. And besides that, price actually -- let me stress this -- price has been behaving very well when you compare with the other metals. Zinc price along the last 2 months, they have been much more resilient than the copper price and nickel prices. What's affecting the price of zinc today has much to do with the general perception about what's going to happen with China, if the trade war actually lasts longer. So if there is -- if the market reverses and starts to believe that the trade war will not be longer, we should see, actually, zinc prices going up faster than most of the other base metals. And that's what I do think. Thank you.

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

Oh, thank you very much. I would like to thank all of you for being with us this morning, or this afternoon for those who are in Europe. As said before, we are very confident about the Aripuana project. We are very excited and waiting for this permit, the installation permit, that should be granted soon. We're expecting to have that in the next few weeks. We are ready to start construction. We have the construction companies already hired, the equipment available. So we want to move as fast as possible in order to be able to end up 2020 with the operations ready to start to ramp up. So we're very confident about this. Another piece of information to you is the next 2 to 3 days, we should be releasing the information to the market about the share buyback. As you know, we are in the black period, should end up on November 6. So the share buyback probably should start next week, or potentially next week. Of course, we would not say that we would start to buy the first day. But anyways, the share buyback program will be in place next week. And that's it. Thank you very much for all of you. Have a good day.

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