Nexa Resources S.A. (NEXA)

Executive Summary / Key Takeaways

• Nexa's vertically integrated mining-smelting model is a structural hedge that delivered a 26% consolidated EBITDA margin in 2025 despite volatile zinc markets, with mining cash costs turning negative (-$0.58/lb in Q4) due to polymetallic by-product credits.

• The completion of Aripuanã's ramp-up and the Cerro Pasco Integration Project represent immediate catalysts: Aripuanã's fourth tailings filter (commissioning H1 2026) unlocks full production capacity, while Cerro Pasco extends mine life by 15+ years and captures synergies between two Peruvian operations, addressing reserve depletion risks.

• Geographic concentration in Peru and Brazil creates political and operational risks, but management's ability to navigate 2025's presidential instability and community protests—while maintaining production—suggests these risks are manageable, given the mining sector's importance to both economies.

• The balance sheet is positioned with 1.7x net leverage, $515.9 million in cash, and an undrawn $320 million credit facility, providing capacity to execute the $381 million 2026 capex plan focused on high-return mine development.

• Treatment charges are poised to rebound from 2025 lows ($80/tonne vs. $165/tonne in 2024), which will expand smelting segment margins from their current 6% baseline while the integrated model naturally offsets concentrate cost pressures.

Setting the Scene: The Integrated Polymetallic Advantage

Nexa Resources S.A., tracing its origins to 1956 as Companhia Mineira de Metais in Minas Gerais, Brazil, has evolved into a leading large-scale, low-cost, integrated polymetallic producer with zinc as its primary product. The company operates five underground mines—three in Peru's Central Andes (Cerro Lindo, El Porvenir, Atacocha) and two in Brazil (Vazante, Aripuanã)—feeding three smelters that produce refined zinc, alloys, and valuable by-products including copper, lead, silver, gold, and sulfuric acid. This integration is the foundation of Nexa's competitive moat. While most zinc producers are either pure-play miners or smelters, Nexa's model captures value across the entire production chain, creating natural hedges that stabilize profitability through commodity cycles.

The industry structure reveals the significance of this model. Global zinc mine production increased 4.7% in 2025 to 12.8 million tonnes, creating a concentrate surplus of 263,000 tonnes that pressured treatment charges to historic lows. Long-term contract TCs fell 51.5% to $80 per dry metric tonne, squeezing smelter margins worldwide. Yet Nexa's integrated structure means that when TCs are low—hurting smelters—its mining segment retains more value from concentrate sales. Conversely, when TCs rise—benefiting smelters—the mining segment's realized prices adjust accordingly. This dynamic delivered a 42% EBITDA margin in mining and a stable 6% margin in smelting during 2025, resulting in consolidated adjusted EBITDA of $772 million with a 26% margin. Nexa's earnings power is less volatile than single-segment peers, reducing downside risk while maintaining upside exposure to zinc price appreciation.

Nexa's position among the top six global zinc producers and sixth-largest refined zinc producer (Wood Mackenzie 2025) is amplified by its regional dominance. Cajamarquilla is the only operating zinc smelter in Peru and the fifth-largest globally, while the company holds an estimated 82.3% market share in Latin America (excluding Mexico) for refined zinc products. This regional concentration provides logistical advantages and supports long-term customer relationships, but it also creates vulnerability to local disruptions. The company's history of navigating Brazil's and Peru's political cycles—most recently the impeachment of Peru's president in 2026—demonstrates operational resilience.

Technology, Products, and Strategic Differentiation: The Polymetallic Edge

Nexa's core technological advantage lies in its polymetallic extraction and processing capabilities. While zinc accounts for 46.9% of mined metal production on a zinc-equivalent basis, the company generates substantial revenue from copper, lead, silver, and gold by-products. By-product credits directly reduce the effective cash cost of zinc production. In Q4 2025, mining cash cost net of by-products reached -$0.58 per pound, meaning the company was effectively paid to produce zinc after accounting for by-product revenues. Full-year cash cost was -$0.30 per pound, placing Nexa in the second quartile of the global cost curve.

The strategic implication is that during periods of low zinc prices, Nexa's margins are protected by precious metals exposure—silver and gold prices surged 41.6% and 43.8% respectively in 2025, contributing approximately $175.1 million to net revenues. This natural hedge allows Nexa to maintain profitability and continue investing in growth projects while higher-cost pure-play zinc producers curtail production. This translates to lower earnings volatility and more predictable free cash flow generation, supporting the company's deleveraging strategy and dividend policy.

The Cerro Pasco Integration Project exemplifies Nexa's project execution capability. Phase 1, approved in 2024 and under construction since July 2025, involves a tailings pumping and piping system designed to consolidate El Porvenir and Atacocha into a single integrated complex. This extends the combined mine life by over 15 years, reduces the environmental footprint, and unlocks high-grade underground resources at Atacocha that were previously uneconomic to develop. Management estimates Phase 2 will require $31.7 million in investments from 2027-2032, with peak spending in 2031. The project directly addresses reserve replacement; with major Western zinc mines approaching depletion, Nexa's ability to extend mine life through technical innovation is a differentiator.

Aripuanã represents the company's most significant near-term catalyst. The ramp-up phase completed in June 2024 transitioned the asset to full operational status, but production has been constrained by tailings filter capacity. The commissioning of a fourth filter in H1 2026 will unlock full production capacity, with unit costs expected to decline as volumes increase. Exploration at Massaranduba has confirmed new mineralized extensions, reinforcing confidence in geological upside. Aripuanã's trajectory is notable: it is positioned in the second quartile of the all-in sustaining cost curve, and its full ramp-up could add meaningful EBITDA leverage in 2026-2027, particularly as the silver streaming agreement steps down from 65% to 25% in Q2 2026, potentially adding $70-75 million in annual cash flow at current prices.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

Nexa's 2025 financial results provide evidence that its integrated strategy is delivering. Net revenues increased 8.5% to $3.0 billion, driven by higher metal prices that contributed $256.2 million partially offset by lower smelting volumes. The segment performance divergence—Mining segment net revenues surging 16.3% to $1.57 billion with 42% EBITDA margins, while Smelting segment revenues grew 3% to $2.06 billion with 6% EBITDA margins—is the integrated model working as designed. When concentrate supply is tight and TCs are low, mining captures value; when TCs recover, smelting margins will expand.

The consolidated adjusted EBITDA of $772 million (up 8% year-over-year) with a 26% margin demonstrates resilience. Net income swung to $223.1 million from a $187.4 million loss in 2024, driven by increased operating income, a $91.7 million impairment reversal at Cerro Pasco, and foreign exchange gains. The impairment reversal signals confidence in long-term asset values and validates the Cerro Pasco project's economic viability.

Cash flow generation underscores the strategy's durability. Net cash from operating activities was $365.0 million in 2025, up 3.9% despite working capital headwinds. Free cash flow was negative $105 million due to debt reduction and dividends, reflecting proactive liability management. The company issued $500 million of 6.60% senior notes due 2037 in April 2025, using proceeds to tender for 2027 and 2028 notes, extending average debt maturity from 5.6 to 7.6 years. This locks in financing for the development pipeline, reducing refinancing risk. With $515.9 million in cash and an undrawn $320 million sustainability-linked credit facility, Nexa has $842 million in total liquidity.

Capital allocation discipline is evident in the 2025 capex of $351.9 million, with 99.7% allocated to non-expansion investments. The 2026 capex guidance of $381 million increases mine development investments to improve flexibility, a decision intended to enhance operational resilience and support higher sustained production rates.

Outlook, Management Guidance, and Execution Risk

Management's 2026 guidance reveals an investment phase designed to unlock multi-year earnings growth. Zinc production is expected to increase 6.1%, with Aripuanã as the primary driver. The commissioning of the fourth tailings filter in H1 2026 is projected to enable full capacity in the second half, with unit costs expected to decline as volumes increase. This provides a timeline for margin expansion: sequential improvement in mining cash costs and EBITDA contribution from Aripuanã beginning in Q3 2026.

The Cerro Pasco Integration Project remains on schedule for Phase 1 commissioning in 2026. Management has emphasized that drilling in the intersection of the two mines is yielding high-grade resources, supporting the case for underground integration. Nexa is not just extending mine life but improving ore grades and operational flexibility, which should drive higher margins and lower unit costs over the 15+ year extended mine life.

Treatment charge assumptions underpin the smelting segment outlook. Management expects increasing global mine supply to lift TCs, supporting a gradual margin rebound. If TCs recover to historical norms ($165-223/tonne), smelting EBITDA margins could expand from 6% toward 10-12%, adding $50-80 million in annual EBITDA based on current volumes. This creates a potential earnings tailwind independent of metal prices.

The silver streaming agreement step-down in Q2 2026 is a structural catalyst quantified at $70-75 million in additional annual cash flow at current prices. This provides a non-operational boost to EBITDA and free cash flow. Combined with the Cerro Pasco impairment reversal, it suggests that Nexa's asset base is undervalued in the current market.

Execution risks are acknowledged. The 2025 operational challenges—heavy rainfall in Peru, geotechnical issues at Vazante, and community protests at Atacocha—resulted in production guidance revisions but did not derail full-year targets. Management's response, including the fourth filter at Aripuanã and enhanced community engagement programs, demonstrates adaptive capacity.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is geographic concentration. With 100% of operations in Peru and Brazil, the company is exposed to political instability and social opposition. The 2026 impeachment of Peru's president and subsequent interim election created uncertainty, yet the sector's economic importance provides a level of mitigation. However, the four-week partial suspension at Atacocha in January 2026 due to community protests demonstrates that operational disruptions can occur.

Environmental and tailings management risks are critical. Nexa's migration to dry stacking —filtering 34.7% of tailings and disposing only 38.6% in dams in 2025—reduces failure risk but requires significant capital. The $89 million allocated to tailings storage facilities in 2026 guidance represents 23% of total capex. While Nexa's approach is advanced, the risk cannot be eliminated.

The Magistral Project's MEIA rejection and the $323 million unexecuted investment commitment with $97 million penalty exposure if not completed by August 2028 represents a contingent liability. While the Peruvian government acknowledged the rejection as force majeure and suspended the obligation, the ultimate resolution remains uncertain.

Currency and inflation risks are structural. With revenues in U.S. dollars but costs in Brazilian reais and Peruvian soles, an appreciation of local currencies compresses margins. The 20.2% increase in mineral exploration expenses in 2025 reflects both drilling programs and local cost inflation.

On the upside, the silver streaming step-down and treatment charge recovery represent asymmetric catalysts. The streaming agreement provides $70-75 million in incremental cash flow, while TC recovery could add $50-80 million in smelting EBITDA. Exploration success at Aripuanã (Massaranduba target) and Cerro Lindo (ore body 8C) could extend mine lives beyond current reserves.

Valuation Context

Trading at $11.07 per share, Nexa carries a market capitalization of $1.47 billion and an enterprise value of $2.77 billion. The stock trades at 4.20x EV/EBITDA and 0.49x price-to-sales, both representing discounts to historical mid-cycle multiples for integrated zinc producers. The P/E ratio of 11.07x reflects the market's view of cyclical commodity exposure, yet this multiple appears conservative given the company's 18.99% return on equity and 5.25% return on assets.

The price-to-operating cash flow ratio of 4.02x is attractive relative to peers. While the price-to-free-cash-flow ratio of 132.14x appears elevated due to 2025 debt reduction activities, underlying free cash flow generation remains robust at approximately $400 million from operations, suggesting a normalized FCF multiple closer to 7-8x.

Balance sheet strength is a key support. Net leverage of 1.7x is below the 2.5-3.0x typical for mining companies. The debt-to-equity ratio of 1.42x is manageable, with average debt maturity extended to 7.6 years and an average cost of debt at 6.49%.

Relative to peers, Nexa's valuation appears discounted. Glencore (GLEN) trades at 11.08x EV/EBITDA but with minimal growth and 0.15% profit margins. Teck Resources (TECK) commands 10.10x EV/EBITDA with stronger margins but faces declining zinc guidance. Boliden's (BOL) 64.66x EV/EBITDA reflects its European ESG premium but limited growth. Nexa's 4.20x EV/EBITDA multiple suggests the market is pricing in significant cyclical downside.

The dividend proposal of $17.5 million implies a 1.18% yield, demonstrating capital discipline while retaining flexibility for debt reduction and project funding.

Conclusion

Nexa Resources has evolved into a structurally advantaged integrated polymetallic company positioned to generate resilient cash flows through commodity cycles while unlocking growth from its project pipeline. The 2025 results validate the integrated model's ability to deliver 26% EBITDA margins despite historic treatment charge lows, while the mining segment's negative cash costs demonstrate the power of by-product leverage.

The investment thesis hinges on two variables: successful execution of Aripuanã's full capacity ramp-up in H2 2026 and treatment charge recovery supporting smelting margin expansion. Both catalysts appear well-calibrated, with management providing clear milestones and the balance sheet positioned to fund development. The Cerro Pasco Integration Project adds a 15-year mine life extension, while the silver streaming step-down provides a $70-75 million annual cash flow boost starting Q2 2026.

Risks around geographic concentration and political instability are real but appear manageable given management's operational track record. The valuation at 4.20x EV/EBITDA and 11.07x P/E appears to discount these risks excessively. If Aripuanã achieves full capacity and treatment charges normalize toward $150/tonne, Nexa's EBITDA could approach $900 million in 2027, suggesting upside from current levels while the integrated model provides downside resilience.