Nexa Resources S.A. (NEXA) Q3 2022 Earnings Report, Transcript and Summary

Good morning and welcome to Nexa Resources Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] This event is being recorded and is also being broadcast via webcast and may be accessed through Nexa's Investor Relations website where the presentation is also available. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Remember that the participants of the webcast will be able to register via website questions, simply type your question in the box and click sent and that will be answered soon. I would now like to turn the conference over to Ms. Roberta Varella, Head of Investor Relations, for opening remarks. Please go ahead.

Good day and good afternoon, everyone, and welcome to Nexa Resources third quarter 2022 earnings conference call. Thanks for joining us today. During the call, we will be discussing the company's performance as per the earnings release that we issued yesterday. We encourage you to follow along with this on-screen presentation through the webcast. Before we begin, I'd like to draw your attention to Slide number 2, as you will be making forward-looking statements about our business, and we just ask that you refer to the disclaimer and the conditions surrounding those statements. It's now my pleasure to introduce our speakers. Joining us today is Ignacio Rosado, our CEO; José Carlos del Valle, our CFO; Leonardo Coelho, our Senior Vice President of Mining. So now I will turn the call over to Ignacio for his comments. Ignacio, please go ahead.

Thank you, Roberta, and thanks to everyone for joining us this morning. Please let's move now to a Slide number 3, where we will begin our presentation. Let me begin by saying that overall we experienced a challenging third quarter. A rapid deterioration of growth prospects coupled with rising inflation has resulted in tightening monetary policy, driving expectations of a global recession. The uncertainty of the macroeconomics affected the perspective of our industry as well as increased commodity prices volatility, which contributed to a significant pressure on base metal prices since the mid-second quarter of this year. Despite all these hurdles, we are delivering on production, costs and CapEx in line with our guidance. We believe the fundamental value of zinc will continue to be strong, giving low physical inventory levels and a lower supply of metal in smelters in Europe. Nonetheless, we are taking appropriate actions to maintain a healthy balance sheet through the execution of our cost reduction programs, CapEx optimization and improved cash flow generation strategy. Adjusted EBITDA decreased to $103 million in the third quarter of this year, mainly affected by the decreasing metal prices. José del Valle, our new CFO, will discuss all the effects influencing this number during his presentation. As part of our measures, we have also been working on reducing our corporate overhead. During July, we implemented actions to reduce our headcount and corporate costs that will generate annual savings in the range of $25 million to $30 million. In Aripuanã, we are focused on optimizing plant stability and recoveries while steadily increasing the plant throughput rate. The first batch of zinc, copper and lead was successfully produced in the quarter. We are on track to achieve commercial production by December. Additionally, in light of our successful exploration program, we are expecting for potential addition of new resources by the end of the year. Before going into details in the next slides, I would like to emphasize our strong balance sheet with a solid cash position almost $150 million and a net debt to EBITDA ratio of 1.5x. Now moving to Slide number 4. In the Slide number 4, regarding the operating performance of the mining segment, you can see that zinc production in the third quarter decreased to 76,000 tons because of the lower average grade in Cerro Lindo. This decrease was according to the mining plan for this period. At Cerro Lindo, we also had a scheduled maintenance at the plant to increase our reliability of thickeners and filter circuits, which reduced treated ore volume compared to the second quarter of this year. Following this lower treated ore, copper productions in the third quarter also decreased by 5% year-over-year. Lead on the other hand increased to 15,000 tons as we accessed higher average grade areas in this quarter and silver production remained relatively flat at 2.6 million ounces. For the fourth quarter, we expect zinc and corporate production to increase compared to the third quarter while total lead and silver production should be slightly lower. We want to emphasize that we are on track to achieve from the mid to the upper range of the production guidance for all metals for whole year 2022. Now moving to the next slide. In Slide number 5, run of mine mining cost in the third quarter was $43 per ton compared to $41 per ton in the third quarter of last year, reflecting inflationary pressures on costs. Compared to the second quarter of this year, run of mine mining cash cost was relatively flat. Mining cash cost in this quarter increased to $0.57 per pound compared with $0.22 per pound in the third quarter of last year and $0.16 per pound in the second quarter of this year. In both cases, the main drivers were the decreasing by product credits and lower zinc volume. Cash cost guidance for 2022 is expected to be close to our annual guidance. Now moving to the smelting segment in the Slide number 6. In the Slide number 6, regarding the operating performance of the smelting segment in the third quarter, metal sales totaled 162,000 tons, up 4% year-over-year, and up 7% quarter-over-quarter following higher production volumes and improvement in lead times compared to previous periods. In both Peru and Brazil, production increased due to the better performance and production stability. For the upcoming quarter, the smelter production is expected to remain stable compared to the third quarter of this year. Sales are expected to follow the same positive trend. Our smelting cash cost in the third quarter increased to $1.36 per pound compared to the same period of last year mainly driven by higher LME prices. Compared to the second quarter of this year, however, cash cost decreased by 6% due to lower operating costs and higher volumes. Conversion costs in this third quarter was $0.26 per pound compared to the $0.23 per pound a year ago, and this was mainly driven by higher energy prices. Compared to the second quarter of this year, conversion costs decreased by 10%, mainly driven by lower variable costs. Now moving to Slide number 7. I will now give an update on the redesign program we recently implemented. We have revised our organizational structure and our internal process to operate more efficiently. We made drastic changes in corporate headcounts and corporate overhead expenses and we expect to generate annual savings in the range of $25 million to $30 million. These actions not only look to optimize overhead, but also to improve organizational efficiency to focus more on supporting our operations and make more agile decisions. Now moving to Slide number 8, where we will just discuss progress around Aripuanã. Ramp up activities in Aripuanã mine are progressing and we are focusing on a steadily increasing the plant throughput rate and asset reliability. The milling utilization was expected to be between 30% to 40% in the third quarter and reached 32% at the end of the quarter. We expect to be between at 70% at the end of this year. We believe we are on track to commence commercial production in December. At the end of September, there were approximately 646,000 tons of ore available in its stockpiles, which is enough to cover five months of the estimated ramp up period. Furthermore, the mine is already fully operational and underground mining activities are focused on developing and preparing new areas and increasing mineral reserves with our infill drilling campaigns. In the third quarter, we invested $9 million in Aripuanã, totaling $63 million in CapEx, the first nine months of this year, which includes a negative impact of the Brazilian real appreciation against the U.S. dollar of $5.4 million. The cumulative CapEx of the project since the beginning of construction is $629 million and there are still minor investments to be made in this four quarter around $5 million as a result of additional contract expenses. Now moving to the next slide where I will give you an update on Aripuanã's exploration program. In Aripuanã over 12,000 meters infill drilling were completed at Ambrex and Babaçu exploration targets. The infill drilling campaign in Ambrex for 2022 has been completed in the third quarter and the drill rigs were moved to Babaçu exploratory campaign in order to be completed during the fourth quarter. The latest drill holes resulted indicated that the mineralization has been confirmed, which should support the conversion of Inferred to Indicated Mineral Resources. For the fourth quarter, that drilling campaign will focus on the exploratory program of the Babaçu target, for resource definition and resource expansion at the northwest extension. In light of our successful exploration program, we are expecting for potential addition of new resources by the end of this year. Now, I would like to turn over the call to José Carlos, who will present our financial results. José, please go ahead. José Carlos del Valle: Thank you, Ignacio. Good morning and good afternoon to everyone. I will continue on Slide 10. Although our operations perform as expected in terms of production and costs, financial results were affected by the decrease in LME base metal prices over the last few months. As you can see, beginning with a chart on your upper left, total consolidated net revenues for the third quarter increased by 7% year-over-year due to higher average zinc LME price, metal sales and lead volumes. However, compared to the second quarter of 2022, net revenues decreased by 15% as a result of the lower LME prices I mentioned a moment ago. Net revenues were also negatively impacted by a remeasurement adjustment in the silver streaming agreement we have for our Cerro Lindo mining unit registering a non-cash reduction of $11 million. Looking at the first nine months of this year, consolidated net revenues reached $2.2 billion versus $1.9 billion in the same period last year, an increase of 16%. In terms of EBITDA, during last quarter consolidated adjusted EBITDA decreased to $103 million. However, for the first nine months of this year, consolidated adjusted EBITDA increased by 5% to $598 million. It is important to highlight that this amount includes pre-operational expenses of $44 million related to Aripuanã. We now move to Slide 11, where I will explain in further detail. Adjusted EBITDA in the third quarter of 2022 was $103 million, 64% lower than in the previous quarter. This performance is mainly explained by $106 million related to lower LME prices and also to changes in market prices that result in mark-to-market adjustments. Second, the net negative hedge effect of $18 million, which is mainly due to hedge mark-to-market adjustments that results from lower LME prices in the second quarter of 2022. Here, accounting rules result and these adjustments being recognized in the company's P&L in advance of the physical sale of finished products. And third, lower by-products contributions due to the already mentioned decrease in prices and volumes. Moving to the next slide, I'm now on Slide number 12. In the mining segment, the third quarter of 2022 net revenues totaled $241 million, down 13% versus the same period of last year. This is explained mainly by lower zinc and copper volumes in addition to the decrease in average LME prices and copper and lead which were partially offset by higher zinc prices. Also in the first nine months of this year, net revenue for the mining segment totaled $933 million compared to the $842 million in the first nine months of 2021. This is mainly due to higher metal prices and lead volumes. Regarding EBITDA on your upper right, third quarter adjusted EBITDA for the mining segment was $45 million, a reduction of 51% year-over-year, mainly explained by lower prices of volumes, higher TCs and the negative variation of 11 million related to pre-operating expenses in Aripuanã. Compared to the second, quarter adjusted EBITDA decreased by 69%, mainly driven by lower prices and volumes, which were partially offset by a decrease in other variable cost and mineral exploration expenses. Finally, adjusted EBITDA for the mining segment in the nine months ended in September of 2022 was $318 million compared to $331 million last year, mainly due to Aripuanã pre-operating expenses of $44 million incurred this year. Switching over to the smelting segment, net revenues in the third quarter totaled $616 million, an increase of 18% versus the third quarter of 2021, supported by higher LME prices and volumes. Compared to second quarter of 2022, net revenues decreased 9% mainly due to lower prices. Now for the first nine months of this year, revenue for the smelting segment totaled $1.8 billion compared to $1.5 billion in the same period of last year, mainly due to higher metal prices. When we look at adjusted EBITDA for the third quarter of 2022, we see that smelting segment reported $59 million, down 9% from the third quarter of 2021, mainly explained by the negative price effect of $15 million related to higher zinc prices and positive changes in metal prices that resulted in mark-to-market adjustments, an increase in operating cost and the negative variation of $8 million related to the recognition of energy recovery costs that benefited the third quarter of 2021. This was partially offset by higher by-product contribution. Compared to the second quarter, adjusted EBITDA for the smelting segment decreased by 58% mainly explained by the net negative hedge effect of $18 million that I mentioned earlier and also by lower prices. Finally, the smelting segment's adjusted EBITDA for the nine months ended September 2022 totaled $282 million compared to $241 million a year ago. Now moving to Slide 13 to discuss our investments. On the top left of the slide, we can see that in the third quarter we invested $85 million in CapEx of which $9 million are directly associated with the construction of Aripuanã. And in the first nine months of this year, CapEx totaled $265 million of which $63 million was related to Aripuanã as well. During this period, we also invested $186 million in sustaining an HSE including $28 million of Aripuanã. Also it is important to mention that the Brazilian real appreciation against the U.S. dollar had a negative impact of $14 million in the first nine months of this year. Based on these results and our projections for the year, we believe we will achieve 2022 CapEx guidance of $385 million. With regards to mineral exploration and project evaluation, we invested a total of $24 million in the third quarter for a total of $64 million in the first nine months of the year. Now, I would like to emphasize that as part of our long-term strategy, we are focusing our efforts on replacing and increasing mineral reserves and resources supporting our organic growth, also important to mention that we're maintaining guidance on this expecting to finish 2022 at about $82 million. Now let's move on to the next slide in which I will discuss our cash flow generation in the first nine months of the year. I am now on Slide 14. So for the first nine months of 2022 and starting from the $641 million of adjusted EBITDA without Aripuanã expenses and investments, we can see that cash flow provided by operations before working capital changes was $605 million. We then had $194 million related to interest paid and taxes and $157 million invested in sustaining CapEx. We also paid dividends of $62 million including the amount distributed by our subsidiary Pollarix. Additionally, we invested $22 million in non-sustaining CapEx. Regarding Aripuanã, we invested approximately $200 million in the first nine months of the year including CapEx, pre-operating expenses and working capital. It is important to mention that we had a negative net effect of $69 million due to the early redemption of our 2023 notes partially offset by a new export credit facility also foreign exchange effects on cash and cash equivalent was positive in $12 million. Finally, there was a working capital variation of $133 million, mainly due to higher LME prices on inventories and lower outstanding amounts of accounts payable. With all the effects presented in this slide, free cash flow was negative in $226 million during the first nine months of 2022. We expect to reverse most of the increases in inventory during the coming months. Now moving to Slide 15. In this slide, you can see that our liquidity remains strong and we continue to report a healthy balance sheet with an extended debt profile. By the end of the third quarter, our current available liquidity was approximately $838 million including our undrawn revolving credit facility of $300 million. It is important to mention that as of September 30th, the average maturity of our total debt was 4.9 years with a 5.7% average cost of debt. Finally, our leverage measured by net debt to adjusted EBITDA ratio was 1.5x compared to 1.3x at the end of the second quarter and 1.2x a year ago. With that, I would like to turn over the call back to Ignacio for his final remarks. Thank you.

Thank you, José. I am now on the Slide 17. We recently announced our new targets and long-term commitments on our ESG strategy, which includes commitments across areas such as what their usage and disposal, safety and workplace and a reduction of CO2 equivalent emissions in line with the sustainable development goals of the United Nations. In addition, topics such as waste and dams management, local development, decommissioning and human rights are also included in Nexa's ESG strategy. Here you can see our ESG structure covering climate change, natural capital, health, safety and wellbeing and plurality with targets to be achieved by 2030, 2040 and 2050. Our determination to be assessed based on the strictest international standards is in line with our principles to operate with transparency and ethics while creating a positive impact on the environment. We also want to emphasize that we launch our new purpose mining that changes with the world, which will guide all our initiatives. For more information about our targets and commitments, please visit our new ESG page under the institutional website. Now turning to our last slide. I would like to close this presentation by briefly reinforcing our priorities not only for the rest of 2022, but for the next year. Aripuanã is our first greenfield project and we are very proud to have completed this project in a very challenging global environment. As I mentioned earlier, we are in the ramp up stage and we should achieve commercial production in the coming months. Our exploration strategy is focused on increasing mineral resources to rapidly extend the life of the mine. Despite a complex macro outlook, our focus on cost control, efficiency and cash flow generation is aimed to allow us to achieve a healthy balance sheet as we remain confident that the long-term dynamics of our industry are promising as fundamental value for zinc and other base metals is strong. Looking forward, we will continue to invest in our business for the long-term. We generate cash flow while increasing the life of the mine of our assets and to be focused on our people, our communities, and our sustainability agenda. Thank you all for attending this presentation. With that, we will be happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions]

So we have a question from the web. Could you please provide more color about the fourth quarter? What's your expectation in terms of zinc prices and demand?

Yes. I guess, first of all, I would like to mention that our third quarter in terms of a production cost and CapEx, we have been able to manage the business. And if you see our EBITDA that has a misexpectation has a lot of financial changes that we have been explaining in this report and in the presentation, but I would like to emphasize that has been influenced by $11 million of a silver stream update on our model. This is annual cash. The market doesn't have that we have $15 million in Aripuanã every month now that we are in the ramp up period and in pre-operation. We also have this difference of $18 million of the volatility of hedge that we have to update the mark-to-market every month and every quarter. And also in the smelter we have a difference in a buying price from our mines and selling our concentrate given that as you know we don't hedge our production from the mines. So based on that we have like between $60 million to 70 million in the third quarter that have influenced the EBITDA, so it should be higher on that amount in the third quarter, given that our operations have been right on track. In the fourth quarter, we don't see any of our operations performing in a different way. We see that we will achieve the budget and the guidance to the market, so that's going to be the case. In the case of prices, we don't know what could happen in prices. The market is now weak on prices and still we believe that the fundamental value of zinc in the short term should be strong. In terms of today we don't have - we have lower inventories of metal, three smelters in Europe, one has stopped, which are 700,000 tons of metal. So - and we see that on the thesis and we see that on the premiums that are present today. So we believe there is a fundamental price of zinc that will support the fourth quarter, but you never know. So from a company point of view, we are on track to achieve the guidance, as we said on production cost and CapEx, and we expect some recoveries on the price of zinc. So I would say that in terms of the year, the full year, we - as Nexa will achieve on all the variables that we control.

The next question comes from Lawson Winder of Bank of America. Please go ahead. Lawson, your line is open. Did you mute on your end?

Oh, I apologize. Hello, I am here. Good morning. Ignacio, thank you for the update and your comments today. I wanted to ask about the language around full operation in Q2 2023. So in Q2 there was some pretty clear language that you expected Aripuanã to be fully operational at some point in Q2 2023, and I couldn't find that language in today's release, and I'd like to get your thoughts on the implications of that, please. Thank you.

Yes, no problem. What we said, and the message we sent was that towards - when we finished the commissioning and we started the ramp up period, and we said that on the fourth quarter we were coming on a commercial production and we thought that the ramp up period was going to last between six to eight months. Okay? So that is still the case, but as you know in the ramp up period, you face some bottlenecks that sometimes you don't know because you are in the process of ramping up the plant. And this was the case. So at the end of September, we were supposed to be between 30% to 40% on our capacity on the plant and it was 32%, it was in the lower range, but we have been working on all of these bottlenecks, some drainage system, some pumping equipment, some other variables in the mine that have been affecting us and make us stop the mines from - the plant from time to time. But this is something that we are not facing fear of loss. So we are still aiming to have to start a commercial production in December. That is the case. If I were to tell you is we might be like, I don't know, 15 days to a month behind, but it's still Aripuanã is ramping up and, as I said, we are ready to - we are willing to declare commercial production in December.

Okay. That's fantastic color. And then also - so is achieving nameplate capacity in Q2 of 2023 still achievable?

Yes. Yes. No, that's for sure. I guess we said also in the press release that towards the end of this year, we should be at 70%. The way we define commercial production is at least 60% of the plant on a four week period has to be stable and that mean - the concentrate that goes - the quality of the concentrate that goes to the smelters have to be commercial. So that's the way we define that. That is starting in December. So towards the end of December, it's going to be at 70%. I would say in the first three months of the year should be close to 90%. And yes, we will be at the end of the quarter or beginning of the second quarter 100% of that.

Fantastic. Thank you for clarifying all that. I wanted to ask about the stream effect in the new mine plan. So, I mean, we haven't seen the documentation around the new mine plan. But is the implication of the stream effect that the negative impact of the stream is increased or reduced under the new mine plan?

No, I mean, this is for our - for the company that - that the stream is good news, but also for us, because you add more reserves and resources, and when you update a plan, you have to give up $11 million more based on an NAV analysis, so that you have to adjust from your part. But that said, you have also the zinc, the copper and the lead that comes with that and what comes with the extension of the life of the mine of Cerro Lindo. So this is mainly the case.

Okay. That's very clear. Thank you and then just one final question relating to Cerro Pasco and the CapEx around that. At the Investor Day in New York, you talked about investing $150 million in Cerro Pasco over the next few years. When do you expect that to start? And how much of that could end up in 2023?

Yes. We are still assessing that. And as I was saying, we have some upgrade of the shaft of El Porvenir. We have an expansion, a small expansion of the plant of El Porvenir. We have to build a pumping system, a tailings pumping system from El Porvenir to Atacocha and we have to develop Atacocha underground. The main objective of this debottleneck is that to access resources from the underground from Atacocha and to use all of these infrastructures that - to create more opportunities and produce more and create more cash flow. So we are working on that. Yes. And we are presenting this to our board during December during the budget season. So we will get back to you before the year end with investments that will come next year, but this is a four year investment period. So it will be clear for you at the beginning of next year that how much are we investing in this project going forward.

Okay. I look forward to that. Thank you very much.

Thank you. Thank you.

The next question comes from Carlos De Alba of Morgan Stanley. Please go ahead.

Great. Thank you. Good morning everyone. If I may ask - I have a few, just on the first one, it's just going through the release, there is a couple of things that we're struggling to reconcile. First on Aripuanã, the CapEx guidance for the year on expansion projects is $59 million. However, year to September, the nine - the first nine months according to the table in the release, you have already spent $63 million. So I wonder if you can help us to understand what if you're going to have negative CapEx in Aripuanã in the fourth quarter or what is taking place? And the second point where we're struggling to reconcile is in the reconciliation of realized prices for the smelting business or for metal, the realized price was $1.1 per pound, there was no price adjustment, at least it was close to zero, zero in that table. And that seems a little bit low based on the price - the price average that we have seen in the second quarter and in the third quarter. So if you could please help us to understand that would also be quite interesting. And then finally, regarding cost for the mining sector. So the guidance, I think, the guidance for the year has remained unchanged. However when we looked at the cash cost for the first nine months was $31 per pound, a net of byproducts. The guidance for the year continues to be $0.28, but in the third quarter it was significantly higher than that. So if you could help us understand what is going to drive, what seems to be a very dramatic implied decrease in cash costs for the mining division, so that you can meet your guidance? Thank you.

Sure. No, thank you for the questions, Carlos. I will start with the cost. Yes. The third quarter on the C1 cash cost has been influenced by Cerro Lindo mainly. So Cerro Lindo, as I was explaining, had a lower throughput. We have lower zinc rate as well because of the mine plan. And this lower throughput, this lower zinc grade and also lower copper grade because of the area of the mine that we were mining, yes. It will give you a higher cost per ton because of the lower throughput and will give you low by-products in terms of the copper, which is very significant, so that affected Cerro Lindo and that affected as an average the rest of our mines. Okay. In the fourth quarter, Cerro Lindo is recovering the throughput and is also recovering the rates. So Cerro Lindo and the cost per ton is flat as well. So Cerro Lindo is going back to what we have in our budget. So that's why we are confident that this is - we're going to be in the range of what we give as a guideline to the market. And the rest of the mines have been performing as - very well. So all that - all our cost per tons, which are the ones that we control in the mines towards the end of the year are in line with budget and in line with what we have presented to the market. And if prices do not change, the by-products contribution should be also something that won't affect the C1 cash flow. So that's why we are still informing the market that we will be in range with the - - what we have provided. So that's the first question. I don't know if that's clear.

Yeah, thanks. Thanks, Ignacio. Yes, that was clear. So the delta from the third quarter cash cost of $0.57 in the third quarter to get to the guidance of $0.29 for the year is basically driven by Cerro Lindo.

Exactly, exactly. Okay. Exactly.

That's…

So the - yes, the first question regarding Aripuanã, yes, Aripuanã, we spent a - the CapEx that we have spent in Aripuanã is in reais, is in Brazilian local currency. And there is an FX effect. So part of the FX effect was $5.4 million to close the product. Okay. So that's what influenced the difference that you have been mentioning. But having said that, yes, you know that in the commissioning period before the ramp up, we had some trouble in the thickeners in the zinc, zinc thickener, in the copper thickeners, yes. We were commissioning those and we had some trouble and we need to extend the contractors and we need to bring the equipment providers, and we needed to have more fixed cost. And that - and in Cerro Lindo, those contracts could be around $4 million to $5 million more. So that's more or less where the CapEx of Aripuanã is right now. And this is something that happen in June and we are - the high FX, I mean, it's something that we cannot manage, but the commission in part and we're finding this in the thickeners is something that will happen - will happen in June and July. So we're communicating that to the market.

So, sorry, I'm not sure that I understood that. So the issues with the thickeners and other parts of the equipment are increasing CapEx by around $4 million for 2022…

Yes.

…spent in Aripuanã in 2022.

Yes.

But that is more than offset by the currency effect in the fourth quarter that will therefore basically imply a reduction in CapEx in the fourth quarter in dollar terms.

Not necessarily, you know, because we don't know what that FX is going to be. So what I'm trying to say is that from the number we provide in June, it's $5 million more because of CapEx and from the number that we will close this quarter is $4 million more because of more expenses related to the thickeners. The FX effect I don't know what's going to play.

Understood. So what is the FX that is implicit then in your guidance of $59 million guidance for 2022?

Our budget was 5.5 reais per dollar and today it varies very much is 5.1, 5.2 depending on the week and depending on week and depending on the growth. So it's like, I don't know, it's like 2% or 3% less and that influence. And in the third quarter the FX was - - the budget from that we provide to the market with the value it was 5.5 and we end up at 5. So it was 2.5%. So - but we don't know what's going to be the FX. So that's mainly, I guess the assumption. Yes. Okay. So from a smelting point of view, I guess, what really influence the smelting, and this is something that we have been - we as a company have been - the policy on the company was that all the concentrates from the outside parties, not our mines were hedged, yes, and the concentrate from our own mines were unhedged. So if we - if you - if prices have variances, you translate that price to the mine, if it's positive - - I mean, and the mines are exposed to that, all the mines in the world are exposed to that, yes, because we were looking at the business it was in integration. We integrated the business, okay. So this sharp decrease in price really affected the smelter because let's say you paid a big - a good price on the concentrate to our own mines, yes, and you sold that metal at a lower price. So that has created a difference on the realized price that you are projecting and that's what explains the difference, yes. Going forward, and we are discussing this very closely with the board, the view that we have is that we - that the businesses have to be independent. So the mines will follow the quotation periods of the market as always and the smelter has to follow 100% of hedge in the concentrate they buy and in the metal we sell. We are aiming to create natural hedge in terms of a match all deposits that we buy with some of the positions that we sell. And this is a process and we are starting doing that in this quarter.

But - so it means that when you buy concentrate from your own mines, you don't do it on with a T plus 2 or 3, T plus 4 whatever the quotation appear is you do it on a spot basis and therefore you pay them a high zinc price embedded price in that concentrate that you bought say in - during the second quarter or early third quarter that you treated during the third quarter you pay high zinc prices to your own mines because you paid close to spot or a spot. And then when you sold that concentrate in the smelting business, you sold that at a lower revenue - at a lower price. Is that what happened?

Yes, that's happened, That's happened in the third quarter. And it was significant because the trend of the price was very negative. So that was the case in the third quarter.

And that was only for the mines, the concentrate that you buy from your own mines.

Exactly. The rest didn't happen because we were hedging 100% of the metal of the concentrate we buy that will match that the metal that you sell.

Now in the table that you provided in your release, you have current period sales 1.1 and you have price adjustments and it's basically zero. So wouldn't that impact that you mentioned that you referred to have to flow through that price adjustment line in your reconciliation table?

Yes, that's - to be honest that detail I don't have. I can get back to you, but what I can tell you is that the mechanism I've been explaining is what - is what really what affected the third quarter in terms of the adjustment on prices on the smelters.

Okay, Thank you very much.

Okay, Carlos.

So we have some questions here from the web. So you mentioned that Nexa could acquire a new mine in LATAM. We would like to know which percentage of that you could acquire and if this transaction could affect in the dividend payments.

Yes, well, I guess, as I was saying in the final remarks of this presentation, we're now focused on finishing Aripuanã. Aripuanã is a very good mine. And I mean we are in the ramping up period and next year we need to consolidate Aripuanã. So that's very important for us and it's our priority. In parallel on that we are always active in the market looking for some mines that are in the - in brownfield, at bounce brownfield or producing mines, I would say, that are similar to the ones that we have, Cerro Lindo, Vazante or Aripuanã, and we are active on that. Okay. But that doesn't mean that we are going to execute some transaction in the next few months because Aripuanã is the priority for us, but we are active on that. Regarding the capital allocation, the way we see it is that dividends is something that we will always pay and the policy is there and we have been paying dividends in the last four or five years in that policy. And the way we will finance our - this new growth is going to be between our cash flow and some debt. We have capacity of debt and I think that the cash flow that will come in the next two, three, four years is going to help us that with the debt to finance this new acquisition going forward. But for today Aripuanã is what we need to be focused on right now.

The next question comes from [indiscernible]. Do you expect EBITDA level in fourth quarter to be similar to third quarter? Do you expect you should distribute more dividends in fourth quarter, which is your net leverage expectations for year end and 2023?

Yes, I guess, the - for closing the year, what I can say is that - the - I don't know what's going to be the EBITDA because we don't know where the prices are going, but we are providing guidance on production costs and CapEx. So that is something that we control and we can - I can make sure that this is going to be the case towards the end of the year. Depending on prices, we will have EBITDA for the rest of the quarter. So I cannot provide any information. Regarding 2023, we're putting together the budget - conservative on prices because even if we believe that the thing could be a strong in the short term. This world is going through a lot of noise and different factors and volatility and we don't know where the price of zinc, copper and lead and silver is going to be. So we are cautious on that and we are trying to make sure that our operations with a low price perform. And that is something that we are going through right now. We will present to our board in December and we will provide the market - our outlook for 2023 at the end of December or in January. So that's mainly what I can tell in this question.

The next question come from [indiscernible]. So at which net debt to EBITDA ratio would you start to feel uncomfortable? In addition would you try to be more conservative with cash uses given the current risk of global recession and lower metal prices?

Yes. No - I - we run scenarios. We have a very detailed strategic plan and we have run scenarios on leverage. And I guess between 2.5 and 3x leverage is the limit for us. And the scenario that we have run are lower, yes, but still we have to be conservative in terms of leverage because you don't know that fluctuations on prices in the cycles, okay, so 2.5 or 3x is the limit. From as you were saying, we have to be conservative. We are working in with a tight budget because we believe that 2023 could reflect a very conservative price scenario and we are working on that. So we are putting all the measures not only at our mines and our smelters, but our corporate center and our initiatives to make sure that cash preservation is something that is very important. So that is the case. As I said, we are going to approve that with our board in December and we will provide the market with more color in this - at the end of December or in January.

We have one more question here from [indiscernible]. I'm glad to have some more color on your cost outlook for the next quarter. Thank you.

Yes, very similar to what I said, Cerro Lindo influenced the third quarter and in the fourth quarter giving the cost per ton of our mines and the conversion cost of our smelter that we control we believe that will be in line with what we control. And if prices do not change, the by-products that influence the C1 cash cost will be very similar. So that's why we are keeping our guidance on the fourth quarter. So if prices goes down, it might vary a little bit, but I mean, it should be in the range of what we believe it could be and that's why we are providing this guidance for the market. Okay.

This concludes our question-and-answer session. Now we will hand over to Ignacio for his final remarks. Mr. Rosado, please go ahead.

Thank you. Thank you everybody for attending our call and the Q&A session. I can only say that we are very committed to close the year from a production cost and capital perspective in a very discipline way. And I can tell you that the company is ready and prepared to be committed to a difficult 2023. And we will provide more color towards the end of January. So thank you very much for attending and we look forward to speaking to you soon.