Executive Summary / Key Takeaways

• Aripuanã's Transformation: After two years of painful commissioning and $14 million invested in a fourth tailings filter, Nexa's cornerstone mine delivered its best quarterly performance in Q3 2025, with zinc production up 14% sequentially and cash costs improving to -$0.49/lb, signaling the long-awaited shift from cash drain to cash generator.

• Integrated Model as Natural Hedge: While pure-play smelters suffer from the 52% collapse in treatment charges to $80/ton in 2025, Nexa's mine-smelter integration captures value across the zinc chain, with mining segment EBITDA margins reaching 44% in Q3, offsetting smelting margin pressure and providing structural resilience competitors lack.

• Operational Recovery Underway: Q3 2025 demonstrated strong recovery from H1 challenges, with consolidated mining cash costs year-to-date beating guidance at -$0.18/lb and both Aripuanã and Vazante showing solid sequential improvements, positioning the company for mid-range guidance achievement.

• Financial Discipline Provides Flexibility: With $790 million in liquidity, net leverage at 2.2x, and a clear path to reduce gross debt by $500-600 million over four years, Nexa has the balance sheet strength to fund its strategic catalysts while maintaining investment-grade ratings.

• Critical Execution Variables: The investment thesis hinges on successful commissioning of Aripuanã's fourth filter by early 2026 to reach nameplate capacity, sustained political stability in Peru where 12-15% of GDP depends on mining, and recovery of treatment charges toward the $130-180/ton range in 2026.

Setting the Scene

Nexa Resources, founded in 1956 as VM Holding in Brazil and domiciled in Luxembourg, has evolved into a top-five global zinc producer with an integrated mining and smelting footprint across Latin America. The company's current strategic position reflects decades of operational experience, punctuated by a transformative 2017 rebranding and a 2024 portfolio optimization that shed non-core assets like the Morro Agudo complex and Chapi mine to focus on high-return opportunities.

The zinc industry structure presents a tale of two markets. Mine supply faces structural headwinds from depleting Western Hemisphere reserves and declining ore grades, supporting prices near $3,000/ton. Yet smelting margins have been decimated by a treatment charge collapse from $166/ton in 2024 to $80/ton in 2025, forcing less competitive smelters to reduce output. This bifurcation creates a challenging environment for pure-play operators but favors integrated producers who can capture margin at different stages of the value chain.

Nexa sits uniquely positioned among global peers. Unlike Glencore 's trading-driven model or Teck 's mining-centric approach, Nexa's integrated mine-smelter operations in the Americas provide regional supply security and lower-carbon logistics that appeal to ESG-conscious customers. The company's five strategic catalysts—Aripuanã ramp-up, Cerro Pasco integration, integrated model optimization, exploration, and M&A in mining-friendly jurisdictions—form a cohesive strategy for sustainable cash generation. This positioning matters because it transforms Nexa from a commodity price taker into a value chain optimizer, with multiple levers to pull across different market cycles.

Technology, Products, and Strategic Differentiation

Nexa's core technological advantage lies not in proprietary software but in operational excellence across polymetallic extraction and integrated processing. The Aripuanã project exemplifies this differentiation. After commissioning challenges revealed tailings filter capacity constraints during rainy seasons, management invested $14 million in a fourth filter rather than accept suboptimal utilization. This decision reflects a technical understanding that three filters created a bottleneck limiting throughput to 80-85% of nameplate capacity. The fourth filter, arriving in Q4 2025 for commissioning in early 2026, will enable full production by H2 2026, transforming a $0.11/lb cash cost operation into a -$0.49/lb cash cost leader.

The integrated mine-smelter model functions as a natural hedge that pure-play competitors cannot replicate. When treatment charges collapsed 52% in 2025, Nexa's mining segment generated 44% EBITDA margins while smelting margins compressed. This offset matters because it stabilizes consolidated cash flows across cycles. Glencore and Vedanta lack this integration depth in Latin America, while Teck 's smelting exposure is minimal. The model also enhances value retention across the zinc chain, allowing Nexa to optimize concentrate sales versus internal processing based on prevailing TCs and metal prices.

Cerro Pasco integration represents another technical moat. The $140 million project extends El Porvenir's tailings dam life by pumping to Atacocha, unlocking over 15 years of potential mine life. Phase 1's $85 million tailings system investment is progressing on plan, while Phase 2 studies on underground integration and shaft upgrades could materially increase production flexibility. This isn't just capacity expansion—it's strategic asset life extension in a high-potential district where competitors face depletion.

Financial Performance & Segment Dynamics

Q3 2025 results provide compelling evidence that Nexa's operational turnaround is gaining traction. Consolidated net revenues of $764 million and adjusted EBITDA of $186 million improved across all comparable periods, driven by higher volumes and stronger byproduct prices. The mining segment's $372 million revenue and $164 million EBITDA at 44% margins demonstrate the power of the integrated model, particularly when byproduct credits drive cash costs to -$0.49/lb.

The segment performance tells a nuanced story. Mining production reached 84,000 tons of zinc, up 14% sequentially, with Aripuanã delivering record throughput and Vazante recovering from earlier geotechnical issues. Year-to-date mining cash costs of -$0.18/lb beat guidance, showing operational leverage as fixed costs spread over higher volumes. This demonstrates that the painful commissioning period is ending and the asset is approaching its low-cost potential.

Smelting segment performance reflects market realities. While $541 million revenue and 150,000 tons sales showed sequential improvement, EBITDA of $23 million reveals margin compression from low TCs. Cash costs at $1.32/lb reflect higher zinc prices and lower treatment charges, but conversion costs held stable at $0.35/lb. The segment's resilience is significant as it maintains processing capacity and customer relationships while awaiting TC recovery, which management forecasts at $130-180/ton for 2026.

Balance sheet strength provides strategic optionality. The $790 million liquidity position includes an undrawn $320 million sustainability-linked revolving credit facility, with average debt maturity of 10.4 years at 6.2% cost. Available liquidity excluding the RCF covers all financial commitments through 2026. This financial flexibility enables Nexa to fund the $347 million 2025 CapEx program and similar 2026 spending without equity dilution, while executing the $500-600 million debt reduction plan over four years to reach target net leverage of 1.0x.

Outlook, Management Guidance, and Execution Risk

Management's guidance reveals a company at an inflection point. The fourth Aripuanã filter commissioning in early 2026 is the critical path to reaching nameplate capacity by H2 2026. This $14 million investment will enable full production and positive cash flow generation that management projects will exceed 2024 levels. The "so what" is substantial: Aripuanã's transformation from a commissioning headache to a cash cow de-risks the entire investment thesis and provides a growth engine independent of commodity prices.

2025 production guidance appears achievable at mid-range levels. Aripuanã will likely hit the lower end due to filter constraints, but Vazante's recovery and Cerro Lindo's strong performance should offset this. The company's ability to maintain $347 million CapEx while generating free cash flow demonstrates capital discipline. For 2026, management indicates spending will remain in the "same neighborhood," suggesting no major project blowouts that could strain the balance sheet.

The silver streaming agreement provides a near-term catalyst. When Cerro Lindo reaches 90 million ounces in Q2 2026, the streamer's share drops from 65% to 25%, releasing approximately 1.6 million ounces or $70-75 million in additional cash flow at current prices. This provides a guaranteed cash flow boost unrelated to operational performance, offering additional funding for debt reduction or growth investments.

Treatment charge recovery remains the key external variable. The 2025 benchmark of $80/ton represents a 52% decline that severely impacts smelting margins. Management's forecast of $130-180/ton for 2026, while still below historical norms, would provide meaningful margin relief. This recovery is plausible because current levels are forcing marginal smelters to close, reducing refined supply and eventually supporting higher TCs. Nexa's integrated model mitigates this risk while positioning it to benefit from recovery more than pure-play smelters.

Risks and Asymmetries

Peruvian political risk represents the most significant external threat. While management emphasizes that 12-15% of Peru's GDP depends on mining and community relationships have historically prevailed over political instability, the August 2025 illegal blockades at Atacocha and El Porvenir demonstrate ongoing vulnerability. The estimated 1.2kt production loss was recoverable, but future disruptions could be more severe. This risk is amplified by Nexa's geographic concentration, with roughly 80% of assets in Peru and Brazil, compared to Glencore 's global diversification.

Aripuanã execution risk remains material despite Q3 progress. Workforce turnover, while improved from 35-40% to 18-20%, remains elevated. The isolated location requires ongoing community investment in schools, health programs, and family housing. If the fourth filter commissioning encounters delays or turnover spikes again, the H2 2026 full capacity target could slip, deferring the anticipated cash flow inflection. The market has likely priced in successful execution, leaving little margin for error, which is a critical consideration.

Treatment charge recovery may prove slower than management's $130-180/ton forecast. Chinese concentrate availability has increased, and domestic TCs are easing. If the 2026 benchmark settles below $130/ton, smelting segment margins will remain compressed longer than expected. While the integrated model provides a hedge, sustained low TCs would limit consolidated EBITDA growth and delay deleveraging. This risk is more acute for Nexa than for mining-focused peers like Teck , which have minimal smelting exposure.

Commodity price volatility presents ongoing cyclical risk. While zinc prices near $3,000/ton are supported by supply constraints, a global economic slowdown could reduce galvanizing demand from infrastructure and automotive sectors. Copper and silver byproduct prices, which significantly improve mining cash costs, could also decline. The "so what" is that Nexa's -$0.49/lb cash cost in Q3 included substantial byproduct credits; without these, margins compress dramatically even if operations remain stable.

Valuation Context

Trading at $8.18 per share, Nexa carries a market capitalization of $1.08 billion and enterprise value of $2.57 billion. The EV/EBITDA multiple of 4.3x based on trailing twelve-month performance sits well below integrated peers like Glencore (GLNCY) at 11.4x and Teck (TECK) at 10.6x. This discount reflects Nexa's smaller scale and recent operational challenges, but also suggests potential re-rating as Aripuanã reaches full capacity.

Cash flow metrics provide a more compelling valuation story. The price-to-operating cash flow ratio of 3.3x and price-to-free cash flow of 36.5x (the latter inflated by recent investment phase) compare favorably to peers once normalized. The company's $790 million liquidity position represents 73% of market cap, providing substantial downside protection. For a business generating $472 million in adjusted EBITDA over nine months with improving operational metrics, the valuation appears to price in execution risk without fully crediting the integrated model's resilience.

Debt metrics show prudent management. The debt-to-equity ratio of 1.56x and net leverage of 2.2x are reasonable for a capital-intensive mining business, particularly with 10.4-year average maturity and 6.2% average cost. The company's commitment to reduce gross debt by $500-600 million over four years to reach 1.0x net leverage would significantly lower interest expense and improve financial flexibility, potentially justifying a multiple expansion toward peer levels.

Relative to pure-play zinc producers, Nexa's integrated model deserves a premium rather than discount. While Boliden (BDNNY) trades at 81.4x EV/EBITDA (distorted by European energy costs) and Vedanta (VEDL) shows higher leverage at 2.57x debt-to-equity, Nexa's regional integration and operational improvements position it for margin expansion. The key valuation question is whether the market will award a 7-8x EV/EBITDA multiple (still below diversified miners) as Aripuanã demonstrates consistent cash generation in 2026.

Conclusion

Nexa Resources stands at an operational and financial inflection point where execution on Aripuanã's final commissioning and Cerro Pasco's integration will determine whether the company achieves its target of sustainable cash generation and 1.0x net leverage. The Q3 2025 recovery provides compelling evidence that management's disciplined approach to resolving tailings capacity and workforce turnover is working, while the integrated mine-smelter model continues to deliver margin resilience despite industry headwinds.

The investment thesis hinges on two variables: successful ramp-up to nameplate capacity at Aripuanã by H2 2026, and maintenance of stable operating conditions in Peru where community relationships remain the key to uninterrupted production. If both execute as guided, Nexa's combination of operational leverage, byproduct credits, and treatment charge recovery should drive EBITDA margins toward the mid-20% range, supporting debt reduction and potential re-rating toward peer valuation levels. The current valuation appears to offer asymmetric upside for investors willing to underwrite the final stages of Aripuanã's transformation while benefiting from a structurally advantaged integrated model that pure-play competitors cannot replicate.