Nexa Resources SA (NEXA) 2022 Q3 法說會逐字稿

Good morning, and welcome to Nexa Resources' Third Quarter 2022 Conference Call. (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 send 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, you'll be discussing the company's performance as per the earnings release that we issued yesterday. We encourage you to follow along with the Dison screening presentation through the webcast. Before we begin, I'd like to draw your attention to Slide #2, as we 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 Slide #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, given 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 decrease in metal prices. Jose 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 Aripuana, we are focused on optimizing process plant stability and recoveries, while steadily increasing the planned 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 a 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 $850 million and a net debt-to-EBITDA ratio of 1.5x. Now moving to Slide #4. In Slide #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 the reliability of thickeners and filter circuits, which reduced tier 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.

Led, 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 copper 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 all year 2022.

Now moving to the next slide. In Slide #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 decrease in byproduct 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 Slide #6. In Slide #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 coming quarter, 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 #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 headcount 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 overheads, but also to improve organizational efficiency to focus more on supporting our operations and make more agile decisions.

Now moving to Slide #8, where we will discuss progress around Aripuana. Ramp-up activities in Aripuana mine are progressing, and we are focusing on steadily increasing the plant throughput rates and asset reliability. (inaudible) 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 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 increase in mineral reserves with our infill drilling campaigns. In the third quarter, we invested $9 million in Aripuana, 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 fourth 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 Aripuana's exploration program. In Aripuana, over 12,000 meters of infill drilling were completed at Ambrex and Babacu exploration targets. The infill drilling campaign in Ambrex for 2022 has been completed in the third quarter and the drill rigs were moved to Babacu exploratory campaign in order to be completed during the fourth quarter. The latest drillholes resulted indicated that the mineralization has been confirmed, which should support the conversion of inferred to indicated mineral resources. For the fourth quarter, the drilling campaign will focus on the exploratory program of the Babacu target for resource definition and resource expansion at the Northwest exchange. 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 Jose Carlos, who will present our financial results. Jose, please go ahead.

Thank you, Ignacio. Good morning and good afternoon to everyone. I will continue on Slide 10. Although our operations performed 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 the 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 the remeasurement adjustment in the silver streaming agreement we have for our Cerro Lindo mining unit, registering a noncash 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 EUR 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 preoperational expenses of $44 million related to Aripuana.

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 negative hedge effect of $18 million, which is mainly due to hedge mark-to-market adjustments that result from lower LME prices in the second quarter of 2022. Here, accounting rules result in these adjustments being recognized in the company's P&L in advance of the physical sale of finished products; and third, lower byproduct contributions due to the already mentioned decrease in prices and volumes.

Moving to the next slide. I'm now on Slide #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 was 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 and volumes, higher TCs and the negative variation of $11 million related to pre-operating expenses in Aripuana.

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 costs 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 EUR 331 million last year, mainly due to Aripuana 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 and increase in operating costs and a 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 byproduct 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 Aripuana. And in the first nine months of this year, CapEx totaled 265 million, of which 63 million was related to Aripuana as well. During this period, we also invested 186 million in sustaining and HSE, including 28 million of Aripuana. 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. 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 expected 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'm now on Slide 14. So, for the first nine months of 2022 and starting from the $641 million of adjusted EBITDA without 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, Polarix. Additionally, we invested $22 million in non-sustaining CapEx. Regarding Aripuana, we invested approximately $200 million in the first nine months of the year, including CapEx, pre-operating expenses and working capital.

It's 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 equivalents 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 sale. 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 30, 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, Jose. I am now on Slide 17. We recently announced our new targets and long-term commitments on our ESG strategy, which includes commitments across areas such as weather usage and disposal, safety and workplace and the reduction of CO2 equivalent emissions in line with the sustainable development goals of the United Nations. In addition, topics such as waste and dam 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 well-being 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 launched 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. Aripuana 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 order 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 so ask a question. (Operator Instructions) At this time, we will pause momentarily to assemble our roster.

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 production cost and CapEx, we have been able to manage the business. And if you see our EBITDA that has missed expectations has a lot of financial changes that we have been explaining in the -- 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 a noncash -- the market doesn't have that we have $15 million in Aripuana 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 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 not weak on prices. 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 of Trafigura and two of Glencore has stopped, which are 700,000 tons of metal.

And we see that on the TCs and we see that on the premiums that are present with it. So, we believe there is a fundamental price of ink 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 Nexa will achieve on all the variables that we control.

The next question comes from Lawson Winder of Bank of America. (Operator Instructions)

Lawson, your line is open. Did you meet on your end?

I apologize. I am here. Ignacio, thank you for the update and your comments today. I wanted to ask about the language around full operation in Q2 '23. So, in Q2, there was some pretty clear language that you expected ripe to be fully operational at some point in Q2 '23, 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.

Yes, no problem. What we said -- and the message we said was that towards quarter one 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, we -- 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 systems, 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 far of loss. So, we are still aiming to start the 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 still Aripuana is ramping up, and we are -- 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 '23 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 the -- 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 product.

Fantastic. I wanted to ask about the stream effect on 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 (inaudible) the stream is good news, but also for us because mines evolve and given that mines evolve, you add more reserves and resources. And when you update the plan, you have to give up 11 million more (inaudible) 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 it comes with the extension of the life of the mine of Cerro Lindo. So, this is mainly the case.

Okay. That's very clear. 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 for (inaudible). We have an expansion -- small expansion of the plant of (inaudible). We have to build a pumping system -- tailings pumping system from Encore 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 this infrastructure 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 the investments that will come next year, but this is a 4-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.

The next question comes from Carlos De Alba of Morgan Stanley. (Operator Instructions)

Great. If I may ask -- I have a few. Just on the first one, just going through the release, there is a couple of things that were struggling to reconcile. First on Aripuana, the CapEx guidance for the year on expansion projects is $59 million. However, year to September, 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 understand what -- if you're going to have negative CapEx in Aripuana in the fourth quarter? Or what is taking place there. The second point where we are 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 adjustments, at least was close to 0 in that table. And that seems a little bit low based on the price average that we have seen in the second quarter and in the third quarter so if you could please help us 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 -- you remained unchanged. However, when we looked at the cash cost for the first nine months was $31 per pound 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 cost for the mining division so that you can meet your guidance.

Sure. No, thank you for the question, Carlos. I will start with the cost. 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 grade as well because of the mine plant. And this lower throughput, this lower zinc grade and also a lower copper rate because of the area of the mine that we were mining, yes. We'll give you a higher cost per ton because of the lower throughput and will give you a low byproduct in terms of the copper, which is very significant. So that affected Cerro Lindo and that affected as an average the rest of our minds, okay? In the fourth quarter, Cerro Lindo is recovering the throughput and is also recovering the rates. So, Cerro Lindo under 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 very well.

So, all our cost per ton, 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 byproducts 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 what we have provided. So that's the first question. I don't know if that's clear.

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 29% for the year is basically driven by Cerro Lindo.

Exactly. Yes. The first question regarding Aripuana, yes. Aripuana, we spend -- the CapEx that we expend in Aripuana is in reals. It's in Brazil and local currency. And there is an FX effect. So, part of the FX effect was $5.4 million to close the from, okay? So that's what influenced the difference that you have been mentioning. But having said that, you know that in the commissioning period before the ramp-up, we had some trouble in the thickeners, in the zinc thickener, in the copper thickeners, yes, we were commissioning those and we have 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 in us and settling those contracts could be around $4 million to $5 million more. So that's more or less where the CapEx of Aripuana is right now. And this is something that happened in June, and we are -- the FX, I mean, it's something that we cannot manage. But the commissioning part and finding this in the thickeners is something that we have happened in June and July. So, we are communicating that to the market.

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 2009 in 2022. 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 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 provided in June is $5 million more because of FX. 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 or...

Budget was BRL 5.5 per dollar. And today, it varies very much is 5.1, 5.2, depending on the week and depending on -- 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%. But we don't know what's going to be the FX. So that's mainly, I guess, the assumption... Okay, so from a smelting point of view, I guess what really influences melting and this is something that we have been -- we as a company, have been -- the policy of the company was that all the concentrates from the outside parties, not our mines were hedged, and the concentrates for our own mines were unhedged.

So, if we -- 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 that was in integration. We integrated the business, okay? So, this sharp decrease in price really affected this Melter because, let's say, you pay a big -- a good price on the concentrate to our own mines, yes. And you saw that met 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. Going forward, and we are discussing this very body with the Board, the view that we have is 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 match all the positions 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.

So, it means that when you buy concentrate from your own mines, you don't do it on with a T+2 or T+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 saying during the second quarter or early third quarter that you treated during the third quarter and you pay high zinc prices to your own mines because you pay close to spot or a spot. And then when you sold that concentrate in the smelting business, you saw that at a lower revenue -- at a lower price? Is that what happens?

Yes. That happened in the third quarter, and it was significant because the trend of the price was very negative. So that's one 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 the metal that you saw.

Now in the table that you provided in your release, you have current period sales of 1.1%, and you have price adjustments and is basically 0. 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 will have, I can get back to you. But what I can tell you is that the mechanism I've been explaining is what really what affected the third quarter in terms of the adjustment on prices on these matters.

We have some questions here from the web. So, one from (inaudible) in the legal group. Ignacio, 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 payment as the interview that you had with Hipers.

Yes. No, I guess the -- as I was saying in the final remarks of this presentation, we are now focused on finishing Aripuana. Aripuana is a very good mine. And we are -- I mean, we are in the ramping up period. And next year, we need to consolidate Aripuana. So that's very important for us and is our priority. In parallel on that we are always active in the market, looking for some mines that are in brownfield, advanced brownfield for producing mines, I would say, that are similar to the ones that we have, Cerro Lindo, Vazante or Aripuana 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 Aripuana is the priority for us, but we are active on that. But 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 that. 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, Aripuana is what we need to be focused on right now.

The next question comes from Joseline. Do you expect EBITDA level in fourth quarter to be similar to third quarter? Do we expect to 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 an EBITDA for the rest of the quarter. So, I cannot provide any information. Regarding 2023, we are putting to wear the budget. We are being conservative on prices because even if we believe that the zinc could be 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 comes from Orlando Bahia from CrediCorp. So, at which net debt-to-EBITDA ratio would you start to feel comfortable. 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, 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 a 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 the fluctuations on prices in the cycles, okay? So, 2.5 or 3x is the limit. 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're 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 Mattel Bradesco. I'd like to have some more color on your cost outlook for the next quarter.

Yes, very similar to what I said, Cerro Lindo influenced the third quarter and in the fourth quarter, given the cost per ton of our mines and the conversion cost of our smelt that we control, we believe that we'll be in line with what we control. And the -- if prices do not change, the byproducts that influenced the C1 cash cost will be very similar. So that's why we are keeping our guidance on the fourth quarter. So, if prices go 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. No, 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 CapEx perspective in a very disciplined way. And I can tell you that the company is ready and prepared to be committed to a difficult to 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.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.