Nexa Resources S.A.

Condensed consolidated interim financial statements (Unaudited) at and for the three and nine-month periods ended on September 30, 2022

 

Contents

Condensed consolidated financial interim statements

Notes to the condensed consolidated interim financial statements

Table of Contents

Nexa Resources S.A.

 

Condensed consolidated interim income statement

Unaudited

Periods ended on September 30

All amounts in thousands of US dollars, unless otherwise stated

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Nexa Resources S.A.

 

Condensed consolidated interim statement of comprehensive income

Unaudited

Periods ended on September 30

All amounts in thousands of US dollars, unless otherwise stated

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Nexa Resources S.A.

 

Condensed consolidated interim balance sheet

All amounts in thousands of US Dollars, unless otherwise stated

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Nexa Resources S.A.

 

Condensed consolidated interim statement of cash flows

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

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Nexa Resources S.A.

 

Condensed consolidated interim statement of changes in shareholders’ equity

Unaudited

At and for the three-month periods ended on September 30

All amounts in thousands of US dollars, unless otherwise stated

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Nexa Resources S.A.

 

Condensed consolidated interim statement of changes in shareholders’ equity

Unaudited

At and for the nine-month periods ended on September 30

All amounts in thousands of US dollars, unless otherwise stated

Table of Contents

Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

Nexa Resources S.A. (“NEXA”) is a public limited liability company (société anonyme) incorporated and domiciled in the Grand Duchy of Luxembourg. Its shares are publicly traded on the New York Stock Exchange (“NYSE”).

The Company’s registered office is located at 37A, Avenue J. F. Kennedy in the city of Luxembourg in the Grand Duchy of Luxembourg.

NEXA and its subsidiaries (the “Company”) have operations that include large-scale, mechanized underground and open pit mines and smelters. The Company owns and operates three polymetallic mines in Peru, and two polymetallic mines in Brazil and currently continues the ramp-up process at its third polymetallic mine in Aripuanã, Brazil, focused on steadily increasing the plant throughput rate, while the mine is already fully operational. The Company also owns and operates a zinc smelter in Peru and two zinc smelters in Brazil.

NEXA’s majority shareholder is Votorantim S.A. (“VSA”), which holds 64.68% of its equity. VSA is a Brazilian privately-owned industrial conglomerate that holds ownership interests in metal, steel, cement, and energy companies, among others.

Main events for the three and nine-month periods ended on September 30, 2022

The invasion of Ukraine by Russia, the resulting conflict, and retaliatory measures by the global community have created global security concerns and economic uncertainty, including the possibility of expanded regional or global conflict, which have had, and are likely to continue to have, adverse impacts around the globe. Potential ramifications include disruption of the supply chain, which may impact production, investment, and demand for the Company’s products, higher and more volatile prices for oil and gas, volatility in commodity prices, and disruption of global financial markets, further exacerbating overall macroeconomic trends including inflation and rising interest rates. As of the date of this report, we have not identified any material impacts on the Company´s operations, financial condition, or cash flows related to this war. However, NEXA cannot predict any future impact that this war could have on its business and operations and continues to closely monitor the developments related to it.

On January 25, 2022, the Company signed an offtake agreement with an international offtaker (the “Offtaker”) a subsidiary of a BBB rated company, in which it agreed to sell 100% of the copper concentrate to be produced by Aripuanã for a 5-year period starting in October 2022 up to a total of 30,810 tons, at the lower of current spot market prices or a price cap.

The offtake agreement resulted from negotiations with the Offtaker to sell the copper concentrate in lieu of paying future royalties related to the previous acquisition of the Aripuana project mining rights from the Offtaker. The amount of USD 46,100, representing the fair value of the agreement at its inception date, was recognized as an intangible asset and will be amortized over the life of the mine.

Additionally, the Company opted to voluntarily and irrevocably designate the entire offtake agreement at fair value through profit and loss (“FVTPL”) within the scope of IFRS 9, rather than separate the value of the embedded derivative associated with the price cap, recognizing a non-cash gain of USD 16,559 in the income statement for the nine-month period ended on September 30, 2022. Refer to note 10 (d) and 13 for additional information about the offtake agreement accounting treatment.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

On February 15, 2022, the Company’s Board of Directors approved, subject to ratification by the Company’s shareholders at the 2023 annual shareholders’ meeting in accordance with Luxembourg laws, a cash distribution to the Company’s shareholders of USD 50,000. From this amount, USD 43,874 were distributed as dividends (cash dividend) and USD 6,126, as share premium (special cash dividend). This cash distribution was paid on March 25, 2022.

Additionally, on April 29, 2022, the Company’s subsidiary, Pollarix S.A., declared dividends to non controlling interests, owned by Auren Energia S.A. (formerly Votorantim Geração de Energia S.A.), which is a related party, in the amount of USD 14,951 (BRL 73,515). From this amount and from dividends declared in previous periods, payments of USD 9,449 (BRL 46,458) and USD 2,996 (BRL 15,714) were made in May and September of 2022, respectively. As of, September 30, 2022, there still was an outstanding amount of USD 8,731 (BRL 47,203) of dividends expected to be paid until the rest of 2022.

On March 18, 2022, the Company entered into an Export Credit Note agreement in the total principal amount of USD 90,000 (equivalent to BRL 459,468 thousand) with maturity in 2027, and an interest rate of 2.5% plus the 6-month TERM SOFR (Secured Overnight Financing Rate).

On March 28, 2022, the Company completed the early redemption and cancellation of all the outstanding 4.625% Senior Notes due 2023 in the principal amount of USD 128,470. Refer to note 14 (b) for additional information.

In 2021, the Company acquired 9.0% of the issued and outstanding common shares of Tinka Resources Limited (“Tinka”), an exploration and development company which holds 100% of the Ayawilca zinc-silver project in Peru. On May 31, 2022, the Company subscribed to an additional 40,792,541 common shares in a private transaction at a price of CAD 0.22 per share (approximately USD 0.17) for a total consideration of CAD 8,974 thousand (USD 7,000). After this subscription, the Company holds 18.23% of the issued and outstanding common shares of Tinka. Similar to the original acquisitions made in 2021, this transaction has been accounted for as an investment in equity instruments at its acquisition cost and all are being subsequently measured at fair value through other comprehensive income.

On October 6, 2022, the Company announced long-term environmental, social and governance (“ESG”) commitments. Aligned with the Paris Agreement and focused on reducing the impacts of climate change, NEXA plans to reach net-zero greenhouse gas emissions (“GHG”) by 2050, and net neutrality – the balance between carbon emissions and absorption – by 2040.

NEXA’s ESG strategy includes commitments across different areas, such as water usage and disposal, safety and workplace, reduction of CO2 equivalent emissions, in line with the Sustainable Development Goals of the United Nations, actions to promote plurality (diversity, equity, and inclusion), among others. The estimated investments for these actions have been considered in NEXA´s annual strategic plan used to update several accounting estimates, assumptions and judgments.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

The presentation of segments results and reconciliation to income before income tax in the condensed consolidated interim income statement is as follows:

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

(i) As more fully described in NEXA’s audited consolidated financial statements for the year ended on December 31, 2021, all revenues from products or services transferred to customers are recognized at a point in time.

(ii) The internal information used for making decisions is prepared using International Financial Reporting Standards (“IFRS”) based accounting measurements and management reclassifications between income statement lines items, which are reconciled to the condensed consolidated interim financial statements in the column “Adjustments”. These adjustments include reclassifications of certain overhead costs and revenues from Other income and expenses, net to Net Revenues, Cost of sales and/or Selling, general and administrative expenses.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

In 2022, the Company decided to stop reclassifying certain accounts to better approximate business segment information to the financial statements. These reclassifications included the effects of derivative financial instruments from Other income and expenses, net to Net revenues and Cost of sales. Managerial amounts for 2021 have been updated to be comparable with these adjustments made in 2022.

Additionally, in 2022, the Company reviewed the classification of certain overhead costs resulting in their reclassification from Selling, general and administrative expenses to Cost of sales. For comparative purposes, the related 2021 amounts have also been reclassified.

(iii) This amount represents the change in the fair value of the offtake agreement described in note 1 (b), which is being measured at FVTPL. This change in the fair value is a non-cash item and has been adjusted from the Company’s EBITDA.

These condensed consolidated interim financial statements as at and for the three and nine-month periods ended on September 30, 2022 have been prepared in accordance with the International Accounting Standard 34 Interim Financial Reporting (“IAS 34”) using the accounting principles consistent with the IFRS as issued by the International Accounting Standards Board (“IASB”).

The Company made a voluntary election to present the condensed consolidated interim statement of cash flows for the three-month periods ended on September 30, 2022 and 2021.

The Company is also presenting a condensed consolidated interim statement of changes in shareholders’ equity for the three-month periods ended on September 30, 2022 and 2021 in accordance with SEC Final Rule Release No. 33-10532, Disclosure Update and Simplification.

These condensed consolidated interim financial statements do not include all disclosures required by IFRS for annual consolidated financial statements and accordingly, should be read in conjunction with the Company’s audited consolidated financial statements for the year ended on December 31, 2021 prepared in accordance with IFRS as issued by the IASB.

These condensed consolidated interim financial statements have been prepared on the basis of, and using the accounting policies, methods of computation and presentation consistent with those applied and disclosed in the Company’s audited consolidated financial statements for the year ended on December 31, 2021.

The preparation of these condensed consolidated interim financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses for the period end. Such estimates and assumptions mainly affect the carrying amounts of the Company’s goodwill, contractual obligations, non-current assets, indefinite-lived intangible assets, inventory, deferred income taxes, and the allowance for doubtful accounts. These critical accounting estimates and assumptions represent approximations that are uncertain and changes in those estimates and assumptions could materially impact the Company’s condensed consolidated interim financial statements.

The critical judgments, estimates and assumptions in the application of accounting principles during the three and nine-month periods ended on September 30, 2022 are the same as those disclosed in the Company’s audited consolidated financial statements for the year ended on December 31, 2021.

These condensed consolidated interim financial statements for the three and nine-month periods ended on September 30, 2022 were approved on October 27, 2022 to be issued in accordance with a resolution of the Board of Directors.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

(i) Billing from products increased in the three and nine-month periods ended on September 30, 2022, mainly because of the higher zinc price during 2022 compared to that registered in the same periods of 2021.

Additionally, in September 2022, the Company recognized a reduction of USD 10,565 as a remeasurement adjustment of its silver stream revenues previously recognized considering the higher long-term prices and the updated mining plan for its Cerro Lindo mining unit. According to the Company’s silver streaming accounting policy, prices and changes in the life of mine (“LOM”) given an update in mining plans are variable considerations and revenue recognized under the streaming agreement should be adjusted to reflect the updated variables.

(ii) Refer to note 6 for an explanation of the increase in Taxes on sales in the three and nine-month periods ended on September 30, 2022.

(i) Raw materials and consumables used increased in the nine-month period ended on September 30, 2022, because of the higher volumes and price of the zinc concentrates acquired from third-parties and used in the Company’s smelting segment.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

(i) In December 2021, the Company adhered to a Brazilian Law that states that government grants of ICMS tax incentives are considered investment subsidies and should be excluded from taxable income for the purpose of calculating the corporate income taxes IRPJ and CSLL. During the nine-month period ended on September 30, 2022, the Company received USD 56,697 of ICMS tax incentives, which were excluded from the corporate income taxes basis for the period, and were considered a permanent difference reducing the income tax to pay in the amount of USD 19,285 as shown in note 8 (a). Additionally, based on this, the Company stopped presenting the expenses and revenues of the received ICMS tax incentives on a net basis and started to separate the expenses in Taxes on Sales and the corresponding revenues in Other income and expenses, net. The presentation on a gross basis became necessary to demonstrate the taxes on sales for Brazilian corporate tax deduction purposes.

(i) The amounts for the three-month periods ended on September 30, 2022 and 2021 include: (i) USD (3,127) and USD (14,082), respectively, which are related to the outstanding USD denominated intercompany debt of Nexa Recursos Minerais S.A. (“NEXA BR”) with NEXA; and (ii) USD (7,642) and USD (23,555), respectively, related to the accounts payables of NEXA BR with related parties. The exchange variation of NEXA BR’s loans and account payables with its related parties are not eliminated in the consolidation process and both transactions were impacted by the volatility of the Brazilian Real (“BRL”), which depreciated against the USD during the three-month period ended on September 30, 2022.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

(i) On July 13, 2022, NEXA and the other shareholders of Nexa Resources Cajamarquilla S.A. (“NEXA CJM”) approved a capital reduction of USD 105,350 (2021: USD 210,703), which was paid on August 30, 2022. Given this capital reduction, the Company recognized USD 5,264 of tax expenses (2021: USD 10,526) given that the tax withheld by NEXA CJM on the corresponding participation of NEXA in its capital was considered as not recoverable.

(ii) NEXA’s subsidiaries had a higher taxable profit in 2022 which explains their higher income tax for the first nine months of the year.

There are uncertainties and legal proceedings for which it is not probable that an outflow of resources will be required. In such cases, a provision is not recognized. As of September 30, 2022, the main legal proceedings are related to: (i) the interpretation of the application of Cerro Lindo´s stability agreement; (ii) the carryforward calculation of net operating losses. The estimated amount of these contingent liabilities on September 30, 2022 is USD 237,231 which increased compared to that estimated on December 31, 2021 of USD 134,804, mainly due to the administrative proceeding filed in 2022 regarding the tax stability agreement of Cerro Lindo and the result of the Nexa CJM tax audit regarding fiscal year 2016, for which the Company filed its administrative defense on September 30, 2022.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

The Company classifies its financial assets and liabilities under the following categories: amortized cost, FVTPL and fair value through other comprehensive income. The classification by category and the corresponding accounting policies of each financial instrument in these condensed consolidated interim financial statements are consistent with those applied and disclosed in the Company’s audited consolidated financial statements for the year ended on December 31, 2021.

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Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated

 

(i) Classified as Other assets in the condensed consolidated interim balance sheet.

(ii) Classified as Other liabilities in the condensed consolidated interim balance sheet.

(i) To determine the fair value of the investments in equity instruments, the Company uses the share’s quotation as of the last day of the reporting period.

(ii) The methodology to determine the level 2 fair value amounts is the same as disclosed in the Company’s audited consolidated financial statements for the year ended on December 31, 2021.

(iii) Loans and financings are measured at amortized cost, except for certain contracts for which the Company has elected the fair value option.

Table of Contents

Nexa Resources S.A.

 

Notes to the condensed consolidated interim financial statements

Unaudited

Periods ended on September 30

All amounts in thousands of US Dollars, unless otherwise stated