Nexa Resources: Balancing Operational Triumph with Financial Headwinds

The recent resumption of operations at Nexa Resources' Cajamarquilla smelter—a critical facility for the company's zinc production—highlights the miner's ability to navigate short-term disruptions. However, lingering concerns about cash flow, debt, and project execution risks cast a shadow over its long-term prospects. For investors weighing Nexa's stock (NYSE: NEXA), the question remains: Does operational resilience outweigh financial fragility?

The Cajamarquilla Smelter: A Test of Operational Strength

Nexa's Cajamarquilla smelter, the largest in the Americas, briefly halted operations in late June 2025 due to labor negotiations with its operator's union. Yet, the three-day suspension proved fleeting, with full capacity resumption achieved by June 30. This swift resolution allowed Nexa to reaffirm its 2025 sales guidance, which targets zinc production of 326–381kt and smelting sales of 580–605kt.

The smelter's importance cannot be understated. In 2024, Cajamarquilla alone contributed 327kt of zinc sales—over 55% of Nexa's total zinc output—underpinning its position as one of the world's top five zinc producers. Its rapid rebound underscores the company's operational discipline, particularly in resolving labor disputes without derailing production.

Financial Challenges: Cash Flow Strains and Debt Pressures

While Cajamarquilla's stability is a bright spot, Nexa faces significant headwinds. BMO Capital and other analysts have flagged concerns over cash flow generation and debt reduction. As of late 2024, Nexa's net leverage stood at 1.7x, with $1 billion in liquidity, including a $320 million undrawn credit facility. However, free cash flow remains constrained by weak smelting margins and delays in the Aripuanã project's full ramp-up.

Key Financial Metrics:
- Cash Costs: Smelting conversion costs for 2024 averaged $0.27/lb at Cajamarquilla, supporting C1 cash costs of $1.12–1.13/lb.
- CAPEX Allocation: Nexa spent $311 million in 2024, with $103 million dedicated to underground development and $39 million to Aripuanã.
- Debt Priorities: The company aims to reduce leverage but faces hurdles from smelting margins pressured by falling treatment charges (TCs) and rising variable costs like energy.

Project Execution Risks: A Double-Edged Sword

Nexa's long-term growth hinges on projects like Aripuanã, a Brazilian mine expected to reach full capacity by 2027–2028. This project, once online, could boost adjusted EBITDA and operating cash flow. However, execution risks loom large:
- Operational Delays: Aripuanã's ramp-up has faced technical challenges, delaying cost savings.
- Environmental Costs: Nexa allocated $24 million in 2024 to Health, Safety, and Environmental (HS&E) projects, including tailings storage upgrades at El Porvenir and Atacocha.
- Geopolitical Risks: Conflicts in regions like the Russia-Ukraine war and regulatory shifts in Peru and Brazil could disrupt supply chains and operations.

The Investment Case: Cautious Optimism with Caveats

Nexa's resilience in resolving the Cajamarquilla labor dispute and maintaining sales guidance suggests operational competence. Its position as a top zinc producer also benefits from strong global demand for the metal, used in construction and EV batteries.

However, investors must weigh these positives against financial vulnerabilities:
1. Debt Reduction Uncertainty: Nexa's leverage remains elevated, and free cash flow struggles could prolong repayment timelines.
2. Smelting Margin Pressures: Lower TCs and rising input costs may squeeze profitability, even as Cajamarquilla operates efficiently.
3. Project Execution Timeline: Delays at Aripuanã or environmental compliance costs could further strain liquidity.

Final Analysis: Proceed with Caution

Nexa Resources presents a compelling yet nuanced investment opportunity. Its operational strength at Cajamarquilla and zinc's favorable market dynamics justify optimism, but financial risks—including debt and project execution—demand vigilance.

For income-oriented investors, Nexa's dividend yield of ~4% (as of June 2025) offers some appeal, though sustainability hinges on cash flow improvements. Growth investors may find potential in Aripuanã's eventual payoff, but patience will be required.

Investment Advice:
- Hold for Now: Maintain a neutral stance while monitoring Nexa's ability to reduce debt and execute projects.
- Watch for Catalysts: Positive developments in Aripuanã's ramp-up or smelting margin stabilization could shift the risk-reward balance.
- Avoid Overextension: High leverage and execution risks make Nexa a speculative bet for all but the most risk-tolerant investors.

In conclusion, Nexa Resources embodies the tension between operational resilience and financial fragility. Its short-term stability is commendable, but long-term success depends on navigating cash flow constraints and executing projects in an uncertain global landscape. Investors would be wise to tread carefully here.