Consolidated Earnings Release Second Quarter 2018
This report analyzes the most important operating and financial results related to the development of Compañía Minera Milpo S.A.A. and its Subsidiaries (Nexa Resources Perú), based on financial information included in the Unaudited Condensed Consolidated Interim Financial Statements and the notes thereto for the three (2Q18) and six-month (1S18) periods ended June 30, 2018, prepared in accordance to International Financial Reporting Standards ("IFRS") issued by the International Accounting Standard Board ("IASB"). On Shareholder s Meeting held on December 18 th 2017, it was approved to change the name of the Company to Nexa Resources Perú S.A.A., change that is still on the process of being registered in the Peruvian Public Registry. Therefore, in the report we will refer to Milpo as the Company or Nexa Perú. Corporate Strategy Summary The operational and financial results obtained during the 2Q18 are a consequence of the execution of Nexa Resources management strategy, which is mainly focused on achieving a sustainable and competitive growth in its operations, including those of Nexa Perú. The most important aspects of the strategy are based on three fundamental pillars: i) Growth, with a focus on zinc and copper mining guaranteeing the replacement of reserves and resources through sustainable, safe and efficient operations while leveraging on regional expertise; ii) Operational Excellence, to guarantee stability and promote ongoing costs and productivity improvements driven by technology and automation, through adequate risk management policies, logistics optimization and a financial structure that allows for proper project execution; and iii) Market Development, targeting local market leadership as well as a wider client network across international markets with the objective of building a solid global presence. 2
Mining Operations: In the case of Cerro Lindo and El Porvenir, more development labors were carried out inside the mine in order to enable more galleries and pits for exploitation, with the aim to access mineralized areas with higher head grades. In Cerro Lindo, the construction of the new waste disposal (Botadero Pahuaypite) aims the continuity of operations in the Cerro Lindo Unit according with the mine plan. The project was approved by Nexa in 2Q18, to move forward to construction with a total CAPEX of US$9.4 million. With the Environmental Impact Assessment (EIA) permit obtained in March 2018, selection of the civil works contractor took place during 2Q18. The construction license was approved by the local agencies in early July, entitling Nexa to initiate construction immediately. Nexa estimates the start of operation of the new deposit in 1Q19. On the other hand, the project for the replacement of the seawater pipeline, from the desalination plant on the coast to the mine, is on course and is estimated at US$11.8 million. The goal of this project is to provide the unit with a reliable water supply, by replacing the original pipeline, which shows natural wear after more than a decade of operation. The new pipeline will have a larger diameter that will reduce the working pressure improving the reliability of the system. The pipeline acquisition process took place during 2Q18, finishing with vendor selection. Contractor selection will be undertaken during 3Q18 to prepare for pipeline arrival in late 2018. Coordination with Peru LNG and TGP has been done for two points where the seawater pipeline crosses gas pipes from these two companies. It s important to highlight that in May 2018, an agreement with the local Community of Chavin was signed, by which legal surface rights were granted for the development of 20 diamond drilling platforms in the area of Topará North in Cerro Lindo. The environmental authorities authorised us to explore this region and we are planning to start the drilling activities in early August 2018. In the Pasco Mining Complex, the project for the elevation of El Porvenir tailings dam level is on course. This project ensures the sustainability of the operations in Atacocha and El Porvenir Units. The feasibility study (FEL3) was finished in 2Q18, comprising two new dam raisings (levels 4060 and 4064), and a total CAPEX of US$ 28.9 million. The internal approval process for the raise to level 4060 will be undertaken in 3Q18, following Nexa s governance policies. The Environmental Impact Assessment (EIA) modification to allow these raising stages is already approved by the government since the early stages. To complement this project, a rain water diversion channel is in its final study stage (FEL3), and will follow the internal approval process in 3Q18. The aim is to meet the environmental requirements aligned with the best sustainability standards of our organization. Also in Atacocha, the construction of the new waste disposal to allow continuity for San Gerardo's open pit in Atacocha has reached a physical progress of 92% for the project s first phase, in 2Q18. CAPEX is estimated at US$8.4MM, and completion scheduled for early 3Q18. The second phase is under feasibility study (FEL3), and is 3
more than 90% completed. Construction of the second phase is now expected to be approved in 1Q19 and completion by 1Q20, due to modifications in the mining plan and license requirements. Finally, regarding drilling and explorations activities in all Mining Units, 106.4 thousand meters of diamond drilling were carried out during 1S18, focusing on the identification of new Ore Bodies at all mining units in order to guarantee the long-term sustainability of the business through the increase in mineral resources. Greenfield Projects: Shalipayco A bidding process to select the company to develop a scoping study (FEL1) was finished in 2Q18. Wood (formerly Amec) was selected for this task. This is in compliance with Nexa s strategy to temptatively rotate consultants for its Greenfield projects in order to have different approaches to identify any possible gap, and correct it in early stages of the project. An EIAsd is in course to allow Nexa to start a hydrogeological campaign during the second half of 2018. In terms of exploration and drilling campaigns, from April 2017 to January 2018, a total of 37,239 meters of diamond drilling were performed at the Shalipayco project, confirming the mineralization continuity in Resurgidora and Intermedio mantles, having intercepted significant lengths of zinc mineralization. Magistral The drilling campaign was finished in June 2018 and allowed the start of samples selection to initiate metallurgical testwork. In accordance with the work plan developed during the scoping study, several pre-feasibility study (PFS) trade off were developed by Ausenco during 2Q18, including the potential for a future underground mine. Selection of the best alternative for the project is forecasted to take place during 3Q18, which will allow Nexa to continue with the PFS for the selected best alternative. Pukaqaqa Social license to initiate the drilling campaign was obtained in 2Q18. This campaign is in course and it is expected to finish at the beginning of 2019. Meanwhile, some PFS studies either have been finished or have been started by JRI, to provide a basis to finally select the best alternative for the project. 4
Selected Operational, Economic and Financial Data Given that Compañia Minera Milpo s separated unaudited condensed financial statements only include information regarding the Cerro Lindo Mining Unit and that of Lima s corporate office, this Consolidated Earnings Release contains data regarding Compañia Minera Milpo and its subsidiaries based on Unaudited Condensed Consolidated Interim Financial Statements. The main highlights are as follows. Metal Unit 1Q18 2Q18 Treated Ore ton 2,615,438 2,558,205 2,669,796-4% 5,173,643 5,115,996 1% Zinc grade % 2.03 2.25 2.25-1 bp 2.14 2.32-19 bp Lead grade % 0.52 0.53 0.52 1 bp 0.53 0.52 0 bp Copper grade % 0.50 0.44 0.55-10 bp 0.47 0.52-4 bp Silver grade (oz/t) 0.99 1.01 1.06-5 bp 1.00 1.03-2 bp Gold grade (oz/t) 0.01 0.02 0.01 1 bp 0.01 0.01 0 bp Zinc Production fmt 47,247 51,474 53,739-4% 98,721 106,279-7% Lead Production fmt 10,906 10,990 11,146-1% 21,896 21,210 3% Copper Production fmt 10,657 8,968 11,996-25% 19,625 21,397-8% Silver Contents oz 1,808,854 1,754,843 1,934,967-9% 3,563,697 3,567,042 0% Gold Contents (Pasco) oz 6,511 6,426 8,449-24% 12,937 15,370-16% Zn Eq production * kton 92.5 92.8 103.7-11% 185.3 197.4-6% Cash Cost US$/t 37.7 39.2 35.0 12% 38.5 35.4 9% Revenues US$ MM 230.0 218.3 210.5 4% 448.3 403.9 11% EBITDA US$ MM 108.4 78.2 89.2-12% 186.6 167.1 12% Net Profit US$ MM 64.3 40.5 51.0-21% 104.8 87.2 20% EBITDA Margin % 47% 36% 42% 42% 41% CAPEX US$ MM 7.2 12.1 10.8 12% 19.3 16.7 16% FCF US$ MM 8.6 87.5 37.6 n.a. 95.8 (3.2) n.a. Net Debt / EBITDA x times (0.43) (0.65) (1.20) (0.65) (1.2) ** Comparison between grades refers to a difference in basic points, while others refer to a percentual variation. 1S18 1S18 vs. ** * Production in kton of Zinc Equivalent calculated by converting copper, lead, silver and gold contents to a zinc equivalent grade at 2Q18 average benchmark prices (Zn: US$/t 3,112; Cu: US$/t 6,872; Pb: US$/t 2,388; Ag: US$/oz 16.53; and Au: US$/oz 1,306). 2Q17 2Q18 vs. 2Q17 ** Highlights 2Q18 Revenues of US$ 218.3 million and EBITDA of US$ 78.2 million during the 2Q18, with revenues +4% higher than in 2Q17, mainly due to higher metal prices on the LME (London Metal Exchange), that helped offset the lower zinc and copper production, and by-products contents. Additionally, a +9% higher zinc production with respect to 1Q18 was seen, mainly due to the higher head grades for this metal in Cerro Lindo during the recent quarter. 5 Similarly, during 1S18 revenues of US$ 448.3 million and EBITDA of US$ 186.6 million were registered, higher in +11% and +12%, respectively, than those in the. EBITDA margin of 36% and 42% in the 2Q18 and 1S18, respectively. Consolidated Net Income of US$ 40.5 million in 2Q18 and US$ 104.8 million in 1S18, obtaining a YoY growth of +20% with respect to the same period of last year, mainly due to higher metal prices. 92.8 thousand tons were produced during 2Q18, in terms of zinc equivalent, -11% lower than those produced in 2Q17, mainly due to the lower zinc production associated to the lower ore grades of zinc, copper and silver in Cerro Lindo. The lower levels of zinc production mentioned before were partially offset by an increase in fine zinc and lead production in El Porvenir due to the
higher treated ore, higher zinc head grades and higher lead recovery levels. Moreover, during 2Q18, zinc equivalent production in thousands of tons increased in comparison to 1Q18 (92.8 vs. 92.5), mainly due to the higher zinc production in Cerro Lindo associated to higher head grades for this metal. More than 106 thousand meters of DDH diamond drilling executed in our operations as of June 2018, focused on identification of new Ore Bodies. Cash balance of US$ 621.7 million by the end of June 2018. In terms of leverage, the Net Debt / EBITDA ratio remained negative at -0.65x by the end of June 2018 (-0.43x by the end of March 2018). 1. General Aspects Market Overview Zinc Market Fundamentals In recent years, constraints in zinc mine supply have caused a lack of availability of concentrate in the market, limiting the growth of global total output. Global concentrate output (kton Zn content) 12,831 12,903 12,988 13,120 4,588 4,738 4,901 4,768 12,131 12,789 4,695 4,854 RoW 8,242 8,165 8,087 8,352 7,436 7,935 China 2012 2013 2014 2015 2016 2017-157 kt -199 kt Source: WoodMackenzie China +313 kt China -47 kt RoW -155 kt RoW -152 kt China the world s biggest zinc concentrate producer (accounting for 38% of the total in 2017) had been the source of zinc concentrate growth until 2014, while the Rest of the World (RoW) was unable to increase its output (see chart above). However, environmental regulation became stricter in China, causing various mine closures and impacting the global zinc concentrate output. 6
In addition, in 2015, large mine curtailments were announced due to an unfavorable zinc price scenario, contributing even further to the already tight concentrate market. Consequently, global inventories of zinc concentrate have been in a rapid drawdown since 2014 and hit critical levels since the second half of 2016. Zinc concentrate stocks (Million tons of Zn Content) 47 57 60 53 28 26 1.55 1.97 2.11 1.93 1.01 0.92 2012 2013 2014 2015 2016 2017 Zn Conc stocks (Mt) Zn Conc stocks - days of requirement Source: WoodMackenzie As a result of the constraints in mine supply, refined zinc output have been impacted by the lack of zinc concentrate availability and consequently the constant zinc demand growth due to a rebound in global economy after the 2008 crisis resulted in a zinc refined market deficit since 2012. In the Eurozone, the implementation of quantitative easing program by the European Central Bank boosted the bloc s economy. Similarly, economic stimulus in the U.S. helped leverage the economy s performance and ensure a healthier job market, supporting interest rate hikes by the Federal Reserve since late 2015. Furthermore, China surprisingly has maintained better-than-expected economic growth. Global Refined Zinc Balance (Million tons) -0.3-0.2-0.4-0.1-0.5-0.9 12.5 12.7 12.9 13.2 13.2 13.7 13.7 13.8 14.1 13.6 13.5 14.4 2012 2013 2014 2015 2016 2017 Source: WoodMackenzie Supply Demand As a consequence of a tightening zinc market, with constant growth in zinc demand and restricted refined zinc production, metal stocks have been in drawdown since 2012, reaching critical low levels in days of consumption. 7
8 7 6 5 4 3 2 1 0 113 3.95 3.73 103 88 85 2012 2013 2014 2015 2016 2017 Source: WoodMackenzie Zinc Metal Stocks (million tons) Zn implied stocks (Mt) SHFE 3.30 3.21 2.71 LME 70 46 1.79 120 100 80 60 40 20 Zn stocks - days of requirement 0 Wood Mackenzie still forecasts a deficit in the zinc balance market in 2018, reaching the 8th consecutive year of market deficit and a reduction in zinc metal stocks to ~30 days of consumption. The consulting firm expects this trend to continue in 2019, with stocks still at critical levels. Zinc 2Q18 Overview The average LME 1 price for zinc during the 2Q18 was of US$3,112/ton, +19.9% higher than the average price in the same quarter of 2017. The price by the end of June 2018 was US$2,948/ton, -11.5% lower when compared to US$3,332/ton by the end of the 1Q18. Source: Bloomberg Zinc prices have been very volatile since the end of March. An influx of 28kton at LME stocks in April, following a 77kton influx in the first quarter - which specialists believe that came from shadow stocks the concerns for the global economy regarding the rising fears of trade war, sanctions against Russia and political tension among US 1 The London Metal Exchange (LME) publishes a set of daily reference prices that are used by industrial and financial participants for referencing, hedging, physical settlement, contract negotiations, margining and portfolio evaluations. As they are based on some of the most liquid trading sessions of the day, we believe LME prices are good indicators of where the market is at any point in time. Source: LME. 8
and Iran brought negative sentiment to the market and put a downward pressure at LME prices. Despite the price weakness that persisted through July, we saw no changes to fundamentals of the zinc market which is expected to remain in deficit by 2020 in our view. The widely expected increase in concentrate output in the 2H18 should happen as operations in Oceania ramp-up production or restart part of its closed sites. Global economy remains supportive to the demand as China reported a better-thanexpected first quarter growth of +6.8%, US and Eurozone GDP increased in +2.0% and +2.5%, respectively. However, trade uncertainty caused by the United States imposed tariffs on US$ 34 billion of imported goods from China and Donald Trump tariff threats on imported Eurozone cars could interrupt the expansion pace of global growth. Copper 2Q18 Overview The average LME price for copper during the 2Q18 was of US$6,872/ton, up +21.4% when compared to the same quarter of 2017. The price by the end of June 2018 was of US$6,646/ton, down by -0.6% when compared to US$6,685/ton by the end of 1Q18. Source: Bloomberg A weaker dollar, ongoing labor negotiations in the biggest mine in the world creating the risk of supply disruption and suspension of a smelting operation in India made copper LME price to leap to 4 years high in the beginning of June. Another factor contributing to higher-than-expected copper prices was the fact that after LME stocks had a significant increase of 201kt in the first three months of the year, reaching a high of 388kt, the warehouses begun to reduce its metal content, reaching a low of 281kt in 2Q (reduction of -28%), suggesting that demand isn t something to worry about. 9
However, copper was also impacted by trade conflicts created by the US administration, which continues to upset the prices in the commodity market. At the same time, news that additional environmental checks in China threatened to dampen copper output, with reports that some primary copper smelting capacity had been partly suspended in Jiangxi province, puts an additional upward pressure over copper prices. Lead 2Q18 Overview The average LME price for lead during the 2Q18 was of US$2,388/ton, +10.5% higher when compared to the same quarter of 2017. The price by the end of June 2018 was of US$2,432/ton, higher by +0.9% when compared to US$2,411/ton by the end of the 1Q18. Source: Bloomberg During the 2Q18, shortages of lead concentrates in the metal market due to limited mine output growth caused higher fine lead prices in comparison with the same period of last year. Meanwhile, stronger vehicle output rate at China with a 3.8% growth until May, compared with the same period last year remained supportive to a healthy lead demand, and therefore imposing an upward pressure on prices. At the same time, lead market supply side remained supportive to higher prices as shortage of feed and Beijing s goal to clean up pollution in major cities with a renewed and intensifying environmental crackdown on the Chinese lead smelting industry is likely to continue impacting lead prices as inspection teams remained ordering suspension of operations at Chinese smelters. However, United States threat to raise tariffs over car imports from Europe could lower production therefore reducing demand for copper. As in zinc and other commodities, the fundamentals weren t enough to hold the LME prices, as the trade war generates a great amount of speculation in the market, directly impacting the industry. 10
Metal Prices Metal * Unit 1Q18 2Q18 2Q17 2Q18 vs. 2Q17 1S18 1S18 vs. Zinc (US$ / t) 3,421 3,112 2,596 19.9% 3,268 2,690 21.5% Copper (US$ / t) 6,961 6,872 5,662 21.4% 6,917 5,749 20.3% Lead (US$ / t) 2,523 2,388 2,161 10.5% 2,456 2,221 10.6% Silver (US$ / oz) 16.8 16.5 17.2-3.9% 16.7 17-3.9% Gold (US$ / oz) 1,329 1,306 1,257 3.9% 1,318 1,238 6.4% * Average LME (London Metal Exchange) prices - Settlement price MACROECONOMIC FACTORS Exchange Rate The average exchange rate during the 2Q18 was S/ 3.26 per US$, same as 2Q17. During 1S18, the average rate was S/ 3.25 per US$, showing a -0.8% appreciation with respect to the S/ 3.28 per US$ rate in. (Source: BCRP). It is worth mentioning that the Company maintains a low exposure to exchange rate fluctuations since its functional currency is the US$ Dollar. Additionally, much of its production costs and revenues are denominated in that currency, maintaining a proper fit with currencies in the balance sheet, income statement and cash flow. Inflation Annual Inflation increased to 1.43% as of June 2018, higher than registered by the end of March 2018, where it reached 0.36%. (Source: BCRP). Oil Brent oil price was situated at 79.4 US$/barrel by the end of 2Q18, higher than the 70.3 US$/barrel registered towards the end of 1Q18. (Source: Bloomberg). 11
2. Consolidated Financial Performance Consolidated Income Statement Revenues 230.0 218.3 210.5 4% 448.3 403.9 11% Cost of Sales (101.7) (110.3) (108.2) 2% (212.0) (208.8) 2% Depreciation (16.5) (16.2) (18.0) -10% (32.7) (36.3) -10% Amortization (0.8) (0.4) (0.9) -54% (1.2) (1.7) -28% Gross Profit 111.0 91.4 83.5 9% 202.4 157.2 29% Selling Expenses (0.3) (0.4) (0.2) 140% (0.7) (1.1) -40% Administrative Expenses (7.5) (7.8) (6.7) 17% (15.4) (13.7) 12% Exploration and Project Development Expenses (10.3) (16.6) (7.7) 117% (26.9) (10.6) 154% Mineral Exploration (9.7) (12.5) (7.1) 77% (22.2) (9.8) 126% Project Development (0.6) (4.1) (0.6) 607% (4.7) (0.8) 498% Other Operating Results, net (1.8) (5.0) 1.4 n.a. (6.7) (2.6) 161% Operational Profit 91.1 61.6 70.4-12% 152.7 129.2 18% Financial Expenses, net (4.2) (2.3) (4.0) -42% (6.5) (10.6) -38% Income Tax ** (22.6) (18.7) (15.4) 22% (41.3) (31.4) 31% Net Profit 64.3 40.5 51.0-21% 104.8 87.2 20% Owners of the Controlling entity 63.5 40.9 49.6-17% 104.4 85.9 22% Non-controlling interest 0.8 (0.4) 1.4 n.a. 0.4 1.3-72% EBITDA 108.4 78.2 89.2-12% 186.6 167.1 12% EBITDA Margin (%) 47% 36% 42% 42% 41% ** Includes all the mining taxes. US$ Million 1Q18 * 2Q18 2Q17 2Q18 vs. 2Q17 * 1Q18 shows realocations from Administrative Expenses to Mineral Exploration, for personnel expenses related to exploration proje 1S18 1S18 vs. REVENUES During the 2Q18, revenues was US$ 218.3 million, representing an increase of approximately 4% when compared to 2Q17, mainly associated to the increase in the average LME price of zinc (19.9%), copper (21.4%) and lead (1.5%), which was partially offset by lower production volumes of zinc (-4%) and copper (-25%) fines due to a decrease in ore grades and lower treated ore in Cerro Lindo. For the same reason described above, during the 1S18, sales revenues was US$ 448.3 million, approximately +11% higher when compared to the same period of 2017. During the second quarter, zinc represented 49% of total sales, followed by copper with 25%, silver with 14%, lead with 8%, and gold with 3%. On the other hand, as for the mining unit s sales breakdown, Cerro Lindo represented 67% of consolidated sales, followed by El Porvenir with 22% and Atacocha with 11%. Regarding commercial matters, Nexa Peru s main customer for zinc concentrates is Nexa Resources Cajamarquilla S.A. (formerly Votorantim Metais Cajamarquilla S.A.). As for the copper and lead production, the main customers are Glencore, Trafigura and Louis Dreyfus. Furthermore, all sales regarding zinc concentrates to Nexa Cajamarquilla zinc refinery are set upon regular market conditions, as in the case of transactions with other related parties. These transactions are subject to evaluation through transfer price studies regularly commissioned to external professional audits. 12
Revenues Breakdown 2Q18 REVENUES BY METAL REVENUES BY MINING UNIT Lead 8% Atacocha 11% Zinc 49% Gold 4% Silver 14% Copper 25% El Porvenir 22% Cerro Lindo 67% Consolidated Sales by Metal (FMT) Metal Unit 1Q18 2Q18 2Q17 2Q18 vs. 2Q17 1S18 1S18 vs. Zinc fmt 46,754 48,958 52,995-8% 95,711 106,348-10% Lead fmt 9,777 10,565 12,256-14% 20,342 20,920-3% Copper fmt 10,641 9,012 12,097-26% 19,652 21,526-9% Total Nexa Perú fmt 67,172 68,534 77,348-11% 135,706 148,793-9% OPERATING COSTS During 2Q18, the cost of sales rose obtaining a consolidated cash cost of US$/t 39.2, +12% higher than that obtained in 2Q17 (US$/t 35.0). This increase was mainly associated with higher sustaining and underground development costs in Cerro Lindo and El Porvenir, as well as higher maintenance and blasting costs in Atacocha, in order to enable more pits for exploitation. Additionally, lower treated ore (-4%) also affects the cash cost, mainly associated with lower treated ore in Cerro Lindo (-8%). Development labors inside the mine in Cerro Lindo were carried out in order to enable more pits for exploitation, with the aim of stabilizing the average levels of treated ore, and accessing mineralized areas with higher head grades. OPERATING EXPENSES During 2Q18, operational expenses increased by +127% compared to those of 2Q17, mainly as a result of higher investments destined to Mining Operations and Greenfield 13
projects. Therefore, mineral exploration expenses rose to US$ 12.5 million during 2Q18, in line with the re-categorization of resources and exploration of new ore bodies to ensure our operation s sustainability. Similarly, during 1S18, mineral exploration expenses reached US$ 22.2 million. These higher levels of Brownfield and Greenfield expenses show the Company s ongoing efforts to increase the life of its mines by replenishing the reserves and resources. PROFITABILITY During 2Q18, an EBITDA of US$ 78.2 million was obtained, -12% lower than 2Q17, as a result of a lower production volume, which was partially offset by the increase in base metal prices during this period. In consolidated terms, a net income of US$ 40.5 million was obtained, -21% lower than registered on the same period of last year, mainly because of the lower EBITDA. Regarding 1S18, an EBITDA of US$ 186.6 million and a net income of US$ 104.8 million were obtained, +12% and +20% higher than those in, mainly due to the higher LME prices. INVESTMENTS Throughout the 2Q18, investments totaled US$ 12.1 million, +12% higher than those in 2Q17. Main investments include: (i) development labors associated with the underground operational integration between El Porvenir and Atacocha mines (US$ 4.4 MM), (ii) expansion of the waste dam at Atacocha (US$ 2.5 MM), and (iii) mobile equipment replacements along all mining units (US$ 2.0 MM). CAPEX US$ Million 1Q18 2Q18 2Q17 2Q18 vs. 2Q17 1S18 1S18 vs. Expansion - 0.1 0.0 n.a. 0.1 0.3-82% Sustaining and Others 7.2 12.1 10.8 12% 19.3 16.5 17% Total Nexa Perú 7.2 12.1 10.8 12% 19.3 16.7 16% LIQUIDITY AND CONSOLIDATED INDEBTEDNESS As of June 2018, the Company closed with a cash balance of US$ 621.7 million. During 2Q18, the free cash flow was positive at US$ 87.5 million, mainly due to lower investments in working capital associated with an increase in accounts receivable collections during this period. 14
Free Cash Flow Bridge 2Q18 (US$ million) At the end of the 2Q18, positive net cash was obtained, reaching US$ 276 million, maintaining a solid financial position. In terms of leverage, the Net Debt/EBITDA ratio remained negative at -0.65x as of June 2018 (-0.43x as of March 2018), and the average maturity term of the financial debt was set at 4.8 years, having no relevant debt maturities in the short term. Regarding risk ratings, the Company has a credit risk rating of BBB- with stable outlook by Fitch Ratings, and BB+ with stable outlook granted by Standard & Poor s. Nexa Peru's credit rating is aligned to that of Nexa Resources S.A. (formerly Votorantim Metais Holding) and Votorantim S.A., which in turn reflect the Brazilian sovereign debt s rating. Both agencies highlight the Company s robust financial and liquidity position, which allow the Company to develop its future plans and adequately address the volatile environment of the metal prices. Liquidity and Indebtedness Position US$ Million June 2018 December 2017 Cash 621.7 527.6 Financial Debt 345.6 345.5 0-100 -200-300 -400-500 -600-700 Net Debt/EBITDA (US$ million) 2Q17 3Q17 4Q17 1Q18 2Q18 2.50 2.00 1.50-182 -189 1.00-276 0.50 - -397-454 (0.50) -0.45x -0.43x (1.00) -0.65x (1.50) -1.20x -1.36x 15
3. Operational Performance Analysis by Unit CERRO LINDO MINING UNIT Production by Metal and Cash Cost Metal Unit 1Q18 2Q18 2Q17 Treated Ore ton 1,712,451 1,635,371 1,785,194-8% 3,347,822 3,497,797-4% Zinc grade % 1.79 2.21 2.28-7 bp 2.00 2.39-40 bp Lead grade % 0.21 0.24 0.24 0 bp 0.23 0.26-4 bp Copper grade % 0.69 0.62 0.76-14 bp 0.66 0.70-5 bp Silver grade (oz/t) 0.63 0.62 0.72-10 bp 0.62 0.71-8 bp Zinc fmt 27,760 33,188 37,048-10% 60,948 76,313-20% Lead fmt 2,683 2,987 3,210-7% 5,670 7,012-19% Copper fmt 10,478 8,776 11,785-26% 19,254 21,003-8% Silver Contents oz 769,760 700,146 879,761-20% 1,469,906 1,682,363-13% Zn Eq production * kton 57.1 58.7 70.3-17% 115.8 137.4-16% Cash Cost US$/t 30.9 33.3 29.5 13% 32.1 29.4 9% Revenues US$ MM 149.7 143.8 137.4 5% 293.5 271.7 8% EBITDA US$ MM 84.4 77.8 73.2 6% 162.2 147.8 10% Net Profit US$ MM 58.7 55.3 49.9 11% 114.0 99.6 14% EBITDA Margin % 56% 54% 53% 55% 54% ** Comparison between grades refers to a difference in basic points, while others refer to a percentual variation. 2Q18 vs. 2Q17 ** 1S18 1S18 vs. ** * Production in kton of Zinc Equivalent calculated by converting copper, lead, silver and gold contents to a zinc equivalent grade at 2Q18 average benchmark prices (Zn: US$/t 3,112; Cu: US$/t 6,872; Pb: US$/t 2,388; Ag: US$/oz 16.53; and Au: US$/oz 1,306). During 2Q18, a lower production of zinc (-10%), copper (-26%), and lead (-7%) fines was registered in comparison to that of 2Q17, due to the lower treated ore (- 8%) and lower head grades for these metals that were already expected in the mining plan, but was partially offset, in terms of profitability, by the increase in metal prices. Regarding 1Q18, zinc fines production recovered by +20% due to the higher head grades for this metal in Cerro Lindo. In terms of zinc equivalent, during 2Q18, 58.7 thousand tons were produced, -17% lower than those produced in the 2Q17 due to the lower production mentioned before, but +3% higher than those produced in 1Q18 due to higher zinc head grades. The cash cost for 2Q18 reached US$/t 33.3, higher by +13% than that of 2Q17 (US$/t 29.5), mainly because of higher sustaining and development costs, and also because of the lower treated ore. During 1S18, treated ore and cash costs also were impacted by scheduled mill components replacements in the concentrator plant, and also by low ore supply from the mine related to development labors in order to enable more pits for exploitation. Revenues and EBITDA reached US$ 143.8 million and US$ 77.8 million each during 2Q18, higher by +5% and +6%, accordingly, compared to those of 2Q17. With respect to 1S18, revenues and EBITDA increased by +8% and +10%, respectively, in relation to the same period of the previous year. Revenue growth is related to the higher metal prices, especially zinc and copper, which compensated for the lower production volumes mentioned before. Additionally, the EBITDA margin for the Cerro Lindo unit stood at 54% for 2Q18, aligned with that of 2Q17. Regarding strategic exploration activities, as of June 2018, 30,770 meters of diamond drilling were executed, focusing primarily on the identification of new Ore Bodies 16
(OB s), and another 18,148 meters of diamond drilling were executed, focusing on the re-categorization and validation of mineral resources (infill program). The drilling program in Cerro Lindo aims to explore the extensions of mineralized zones within the mine and in addition to explore for new massive sulphide Zn/Cu deposits in surrounding areas near the mine. PASCO MINING COMPLEX EL PORVENIR MINING UNIT Production by Metal and Cash Cost Metal Unit 1Q18 2Q18 2Q17 Treated Ore ton 535,211 539,048 497,403 8% 1,074,259 878,319 22% Zinc grade % 3.20 2.94 2.76 18 bp 3.07 2.80 27 bp Lead grade % 0.96 1.00 1.01-1 bp 0.98 0.99-1 bp Copper grade % 0.16 0.16 0.14 2 bp 0.16 0.14 2 bp Silver grade (oz/t) 1.82 1.91 2.05-14 bp 1.87 2.02-15 bp Zinc fmt 15,428 13,992 12,087 16% 29,421 21,599 36% Lead fmt 4,149 4,358 3,903 12% 8,507 6,717 27% Copper fmt 160 165 181-9% 325 340-5% Silver Contents oz 614,269 648,365 643,489 1% 1,262,634 1,118,536 13% Zn Eq production * kton 23.8 22.7 20.5 11% 46.5 36.1 29% Cash Cost US$/t 53.4 52.3 50.1 4% 52.8 53.9-2% Revenues US$ MM 55.2 47.4 43.3 9% 102.6 73.0 40% EBITDA US$ MM 23.0 16.2 11.8 37% 39.1 20.4 92% Net Profit US$ MM 12.9 7.9 6.5 23% 20.8 8.5 146% EBITDA Margin % 41% 34% 27% 38% 28% ** Comparison between grades refers to a difference in basic points, while others refer to a percentual variation. 2Q18 vs. 2Q17 ** 1S18 1S18 vs. ** * Production in kton of Zinc Equivalent calculated by converting copper, lead, silver and gold contents to a zinc equivalent grade at 2Q18 average benchmark prices (Zn: US$/t 3,112; Cu: US$/t 6,872; Pb: US$/t 2,388; Ag: US$/oz 16.53; and Au: US$/oz 1,306). During the 2Q18, fine zinc and lead production increased compared to that of 2Q17 by +16% and +12%, respectively, mainly due to the higher treated ore (+8%), as well as higher head grades for the zinc and higher lead recovery levels. Additionally, a +6% higher silver content in concentrates was registered in relation to 1Q18 due to higher head grades for this metal in El Porvenir. In terms of zinc equivalent, during 2Q18, 22.7 thousand tons were produced, +11% higher than those produced in 2Q17 because of the higher treated ore and higher production levels for zinc and lead mentioned before. Cash cost placed at US$/t 52.3 for 2Q18, increasing by +4% with respect to 2Q17 (US$/t 50.1), as a result of higher sustaining and underground development costs. In 2Q18, sales revenues and EBITDA reached US$ 47.4 million and US$ 16.2 million, increasing by +9% and +37%, respectively, in comparison to the same period of last year. Regarding 1S18, revenues and EBITDA increased by +40% and +92% with respect to. This was related to the higher metal prices and the increase in production mentioned before. At the same time, the EBITDA margin resulted in 34%, higher than the 2Q17 margin of 27%. Regarding strategic exploration activities, as of June 2018, 38,400 meters of diamond drilling were executed, focusing on confirming mineralization at depth (levels 3630 to 3800) and also in the Porvenir vein, and another 13,394 meters of diamond drilling 17
were executed, focusing on the validation and re-categorization of mineral resources (infill program). ATACOCHA MINING UNIT Production by Metal and Cash Cost Metal Unit 1Q18 2Q18 2Q17 Treated Ore ton 367,776 383,787 387,199-1% 751,562 739,880 2% Zinc grade % 1.42 1.42 1.49-7 bp 1.42 1.43-1 bp Lead grade % 1.28 1.11 1.21-10 bp 1.19 1.18 2 bp Copper grade % 0.10 0.10 0.09 1 bp 0.10 0.08 2 bp Silver grade (oz/t) 1.49 1.40 1.38 1.5% 1.44 1.35 6.8% Gold grade (oz/t) 0.017 0.016 0.021-21.6% 0.016 0.020-18.2% Zinc fmt 4,058 4,294 4,604-7% 8,352 8,367 0% Lead fmt 4,074 3,645 4,032-10% 7,719 7,481 3% Copper fmt 19 27 30-10% 46 53-14% Silver Contents oz 424,826 406,332 411,717-1% 831,158 766,144 8% Gold Contents oz 4,096 3,918 5,968-34% 8,013 11,075-28% Zn Eq production * kton 11.6 11.4 12.9-12% 23.0 23.8-3% Cash Cost US$ / t 46.6 46.2 41.4 12% 46.4 42.5 9% Revenues US$ MM 28.1 22.5 30.7-27% 50.6 51.5-2% EBITDA US$ MM 7.8 0.8 8.2-90% 8.6 11.9-27% Utilidad Neta US$ MM 2.3-1.2 4.1 n.a. 1.1 3.9-72% EBITDA Margin % 28% 4% 27% 17% 23% ** Comparison between grades refers to a difference in basic points, while others refer to a percentual variation. 2Q18 vs. 2Q17 ** * Production in kton of Zinc Equivalent calculated by converting copper, lead, silver and gold contents to a zinc equivalent grade at 2Q18 average benchmark prices (Zn: US$/t 3,112; Cu: US$/t 6,872; Pb: US$/t 2,388; Ag: US$/oz 16.53; and Au: US$/oz 1,306). 1S18 1S18 vs. ** During the 2Q18, fine zinc and lead production volumes decreased by 7% and - 10%, respectively, and also gold contents by -34% with regards to the 2Q17, due to the lower head grades for these metals, but was partially offset, in terms of profitability, by the increase in metal prices. Lower treated ore is explained by a scheduled maintenance stop and component replacements in the secondary crusher. On the other hand, fine zinc production increased by +6% with respect to the 1Q18, mainly due to higher treated ore (+4%) in comparison to last period. In terms of zinc equivalent, during 2Q18, 11.4 thousand tons were produced, -12% lower than those produced in 2Q17, due to the lower zinc, lead and gold head grades mentioned before. In terms of the unit s cash cost, an increase of +12% was observed compared to the 2Q17 (US$/t 46.2 vs US$/t 41.4) associated with higher maintenance and blasting costs in Atacocha, in order to enable more pits for exploitation. Regarding results, during 2Q18, sales revenues reached US$ 22.5 million and EBITDA US$ 0.8 million, decreasing by -27% and -90%, respectively, in relation to those in 2Q17. It should be noted that these results were impacted by the lower production of lead mainly, and copper in Atacocha, which in turn meant lower silver and gold contents, by-products that are relevant to the financial result of Atacocha Unit. Regarding strategic exploration activities, as of June 2018, 37,200 meters of diamond drilling were executed. The mineral exploration program is focused on confirming targets at level 3340 and on Tajo San Gerardo (open pit) mineralization extension, and another 19,633 meters of diamond drilling were executed, focusing on the validation and re-categorization of mineral resources (infill program). 18
4. Final Comments As of June 2018, The Company registered positive financial results mainly due to the higher metal prices seen during the 1S18. The Company remains focused on the development of new mining galleries, mainly in Cerro Lindo, to access mineralized areas with higher head grades. The Pasco Complex operational integration process continue as scheduled, in line with the objective of achieving a competitive growth through sustainable operations through capture synergies of both operations. Higher levels of drilling and explorations have been registered for all Mining Units during the 1S18 in line with the exploration of new ore bodies to ensure our operation s sustainability and the re-categorization of resources and reserves. Regarding financials, the Company maintains an adequate financial position through its cash generation, high liquidity and low indebtedness, taking advantage of the international price recovery, especially zinc and copper, supported by market fundamentals. San Borja, July 31 st, 2018 19
About Milpo (now Nexa Resources Peru) Compañía Minera Milpo S.A.A. (now Nexa Peru) is a Peruvian mining company of regional scale dedicated to the exploration, extraction, processing and commercialization of zinc, copper and lead concentrates with contents of silver and gold, and is currently one of the main polymetallic producers in Peru. Nexa Peru develops its operations with a clear commitment to social and environmental responsibility. The Company belongs to Nexa Resources S.A., the metals and mining division of Votorantim S.A., a strong, private and diversified conglomerate that has over 100 years of history and a global presence in key sectors of the economy in more than 23 countries. Nexa Peru currently holds three underground polymetallic mining units in operation: Cerro Lindo (Ica), El Porvenir (Pasco) and Atacocha (Pasco). It also features a portfolio of polymetallic and copper Greenfield projects with advanced exploration. For further information: Visit our website: www.milpo.com or ri.milpo.com or email us: milpoir@nexaresources.com About Nexa Resources S.A. Nexa Resources is a large-scale, low-cost integrated zinc producer with over 60 years of experience developing and operating mining and smelting assets in Latin America. The Company owns and operates five long-life underground polymetallic mines, three located in the Central Andes of Peru (Cerro Lindo, El Porvenir and Atacocha) and two located in the state of Minas Gerais in Brazil (Vazante and Morro Agudo). Two of the Company s mines, Cerro Lindo and Vazante, are among the 10 largest zinc mines in the world, and combined with the Company s other mining operations, place the Company among the top five producers of mined zinc globally in 2017, according to Wood Mackenzie. Nexa also operates three smelting assets, two in Brazil located in the state of Minas Gerais (Três Marias and Juiz de Fora) and one in Peru (Cajamarquilla). Nexa produces substantial amounts of copper, lead, silver and gold as by-products, which reduce our overall cost to produce mined zinc. Nexa Resources (NYSE: NEXA, TSX: NEXA) (formerly VM Holding S.A.) started to trade its common shares on the New York Stock Exchange ( NYSE ) and the Toronto Stock Exchange ( TSX ) under the ticker symbol NEXA on October 27, 2017. For further information: Visit our website: www.nexaresources.com 20
Exhibit I: Compañía Minera Milpo and Subsidiaries (now Nexa Resources Perú) Consolidated Income Statement (Amounts expressed in thousands of US dollars, unless otherwise stated) 21
Exhibit II: Compañía Minera Milpo and Subsidiaries (now Nexa Resources Perú) Consolidated Statement of Financial Position (Amounts expressed in thousands of US dollars, unless otherwise stated) 22
Exhibit III: Compañía Minera Milpo and Subsidiaries (now Nexa Resources Perú) Consolidated Statement of Cash Flows (Amounts expressed in thousands of US dollars, unless otherwise stated) 23