Latin American miner Nexa Resources – which recently rebranded from Votorantim Metais – has in the past year completed its dual stock exchange listing, weathered a period of low commodity prices and mining sector strikes in Latin America, and maintained strong fundamentals to step confidently into the new financial year. We speak with Mario Bertoncini, the company’s Senior VP and CFO, about its prospects in 2018.
Last autumn, Votorantim Metais rebranded to Nexa Resources following a USD570mn initial public offering in New York and Toronto. What were the key drivers behind the listing? How successful was it?
Over the past years we have been introducing significant changes into our operations, including rearranging the business to focus on zinc and copper, integration of Peruvian and Brazilian businesses, advances on governance, cost management, productivity gains and capital structure. Those processes are somehow interconnected and the IPO was an integral part of this movement. Now we are setting ourselves up to make the next steps of growth. We have a diversified board of directors, from different countries and geographies, with four independents out of the nine board members, all relevant committees and managerial policies in place.
The purpose of the IPO was to access a strategic source of funding in the equity market and be prepared to rebalance the capital structure when needed to keep growing at an adequate leverage. The debt capital markets are very important for our strategy as 75% of our gross debt is in USD bonds. Most of our debt and cash positions is in foreign currency, namely USD, given the nature of our business - including revenues, major costs and cash flow generation.
So the IPO was a success; it was a dual listing, as planned, and we are working hard on the investor relations side to present ourselves to the broadest possible investors base, doing roadshows, conferences and attending other types of events. These efforts are already bearing fruit: we are seeing growing liquidity in the stocks and a wider and more diversified investor base.
Nexa, the new entity, is part of the Votorantim group. Can you elaborate on Nexa’s new role within the broader corporate structure, particularly in terms of its funding strategy? What kind of queries and concerns do you face when chatting to current and prospective investors?
In terms of risk management, leverage, minimum cash requirements and other capital structure elements – all those policies have been outlined, established and working for years now.
For instance, our financial policy indicates, under a base case scenario, that we should not leverage the company more than two times net debt to EBITDA – currently our leverage is 0.3 times debt to EBITDA – and that we should keep our average debt tenor above five years – it is current around seven – among several other parameters.
The IPO provided us with a broader source of funding and even greater capacity to rebalance capital structure when needed, to keep going in compliance with our drivers as mentioned.
Commodity prices and the mining industry have shown a robust recovery in 2017, how has this benefited Brazil’s mining sector? What’s behind the recent slump on some metals like zinc?
Regarding zinc market, we are facing a very typical supply constraint story. In our view, based on our research and analysis, it seems that this supply constraint will remain for a while. One of the reasons is the inertia needed to put new mines in place. As new ones emerge, the supply seems still not sufficient enough to curb the demand growth, which is quite steady at around 2.5% annually.
Looking at the sector in Latin America more broadly, has this recovery manifested itself equally across the continent, or have some countries benefited more?
I think that the Brazilian economy has been a positive story, seeing more growth in some sectors than others; it’s not completely homogenous, but it is an important market for us, especially because of galvanization of steel. In recent years, even during the recession, zinc demand has not really declined in Brazil, because the steelmakers have continuous need for it, in the local market or, if unavailable, for exports.
Peru is also performing well and from there we target external markets. Latin America is the main market for our products, accounting for 52% of our sales, where all economies in the region, in general, are also performing well. After Latin America, Europe and US are the next relevant markets for us, and we are always looking for new geographies, segments and clients. In Asia, also a new market for us, we are slowly learning to understand the nuances of that market to increase our presence there. We serve direct clients around 93% of our sales and the other 7% are trading companies. It is important for us to know and understand our end users.
Do you have any concerns about further US protectionism and tariffs on metal imports?
We haven’t been impacted by these tariffs. Were the US to start bumping up its steel production, and buying less from abroad, the need for zinc in galvanization will remain broadly the same. Ultimately, the demand for zinc will remain regardless of whether steel is galvanized inside US or abroad. We are very well positioned to serve zinc consumers both in US and outside.
In terms of funding, does your expansion into Asia mean that you might look to tap new pockets of liquidity there for your funding needs? Do you plan to tap the bond markets this year?
At the moment we have no such plans, although we are monitoring the debt capital markets closely, including in Asia. We have two outstanding bonds: one in Nexa Peru (former Milpo) and one in Nexa Luxembourg, and these bonds account for three quarters of our overall debt. Our average tenor is seven years, above the five years threshold required by our internal policies. When we do come to market, it would be to tap familiar investors – US, Europe, some Asian – with conventional instruments.
It is true that Latin American corporates have been refinancing heavily over the past year, and at certain point in the future we may choose to do so too, but, seeing as our next big maturity date is 2023, we have plenty of time.
What other challenges or risks are you anticipating, both for the sector and for Nexa itself?
We monitor our potential risks and react in a timely fashion. Regarding market risks, monitoring relevant economies such as US and China, geopolitical implications and potential demand-supply imbalances, for instance, is part of our job. Nexa is fairly well established and stable in Peru and Brazil, where mining is a relevant industry, and where we have a reliable and mature legal framework for mining companies to operate in.
What are some of the core objectives for Nexa going into 2018 and how do you plan to achieve them?
I would list three core objectives.
Firstly, making sure that we keep advancing on our safety standards and Nexa be a benchmark in this regard.
Additionally, we’d like to move forward with our growth strategy. We have some important projects in the pipeline, both brownfield and greenfield, and a top priority is to deliver them as planned.
Another priority is to keep working hard on the cost management side, productivity gains, automation, digital mining and other areas that can make us more efficient. In commodity markets, one of the key priorities is cost control –as you don’t control the prices – so that’s one of our objectives.
In terms of funding those projects and initiatives, we will look to cover most of the costs by investing our internal resources. The company is well capitalized with a significant cash position.
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