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As filed with the Securities and Exchange Commission on March 17, 2022.

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2021
Commission file number: 001-38256

 

NEXA RESOURCES S.A.

(Exact name of Registrant as specified in its charter)

 

Grand Duchy of Luxembourg

(Jurisdiction of incorporation or organization)

 

Rodrigo Menck

Senior Vice President Finance and Group Chief Financial Officer
Phone: +352 28 26 37 27

37A, Avenue J.F. Kennedy
L-1855, Luxembourg
Grand Duchy of Luxembourg
(Address of principal registered office)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common shares, each with par value of US$1.00   NEXA   New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
The number of outstanding shares of each class of stock of Nexa Resources S.A. as of December 31, 2021 was:

132,438,611 common shares, each with par value of US$1.00

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No þ

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐ Accelerated filer þ Non-accelerated filer ☐ Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: 

U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board þ Other

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ☐ Item 18 ☐

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No þ

 

 

 

Table of contents

Page

 

 

  Form 20-F cross reference guide iii
  Forward-looking statements 1
  About the Company 3
  Presentation of financial and other information 4
  Risk factors 6
I. Information on the Company 22
  Business overview 22
  Mining operations 27
  Smelting operations 62
  Other operations 65
  Mineral Reserves and Resources 70
  Capital expenditures 82
  Environmental, social and governance (“ESG”) 83
  Regulatory matters 89
     
II. Operating and financial review and prospects 95
  Overview 95
  Results of operations 107
  Liquidity and capital resources 120
  Critical accounting estimates 126
  Risk management 129
     
III. Share ownership and trading 132
  Major shareholders 132
  Related party transactions 133
  Distributions 135
  Trading markets 137
  Purchases of equity securities by the issuer and affiliated purchasers 138
     
 IV. Corporate governance, management and employees 139
  Corporate governance 139
  Board of directors 144
  Executive officers and management committee 154
  Executive and director compensation 158
  Employees 162
     
V. Additional information 163
  Legal proceedings 163
  Articles of association 164
  Taxation 168
  Exchange controls and other limitations affecting security holders 176
  Evaluation of disclosure controls and procedures 177
  Internal control over financial reporting 178
  Principal accountant fees and services 179
  Information filed with securities regulators 180
  Glossary 181
  Exhibits 184
  Signatures 185
  Nexa Resources S.A. Financial Statements 186

 

 
ii 

Form 20-F Cross Reference Guide

Form 20-F cross reference guide

Item Form 20-F caption Location in this report Page
1 Identity of directors, senior management and advisers Not applicable
2 Offer statistics and expected timetable Not applicable
3 Key information    
  3A Reserved Not applicable
  3B Capitalization and indebtedness Not applicable
  3C Reasons for the offer and use of proceeds Not applicable
  3D Risk factors Risk factors 6
4 Information on the Company    
  4A History and development of the Company About the Company, Business overview, Capital expenditures 3, 22, 82
  4B Business overview Business overview, Mining operations, Smelting operations, Other operations, Mineral Reserves and Resources, Regulatory matters 22, 27, 62, 65, 70, 89
  4C Organizational structure Business overview, List of Subsidiaries 22, Exhibit 8
  4D Property, plants and equipment Mining operations, Smelting operations, Other operations, Capital expenditures, Regulatory matters 27, 62, 65, 82, 89
4A Unresolved staff comments None
5 Operating and financial review and prospects    
  5A Operating results Results of operations 107
  5B Liquidity and capital resources Liquidity and capital resources 120
  5C Research and development, patents and licenses, etc. Business overview 22
  5D Trend information Results of operations 107
  5E Critical Accounting Estimates Critical Accounting Estimates 126
6 Directors, senior management and employees    
  6A Directors and senior management Board of directors, Executive officers and management committee 144, 154
  6B Compensation Executive and director compensation 158
  6C Board practices Corporate governance, Board of directors 139, 144
  6D Employees Employees 162
  6E Share ownership Board of directors—Share ownership 153
7 Major shareholders and related party transactions    
  7A Major shareholders Major shareholders 132
  7B Related party transactions Related party transactions 133
  7C Interests of experts and counsel Not applicable
8 Financial information    
  8A Consolidated statements and other financial information Nexa Resources S.A. Financial statements, Distributions, Legal proceedings 186, 135, 163
  8B Significant changes Not applicable
9 The offer and listing    
  9A. Offer and listing details Trading markets 137
  9B Plan of distribution Not applicable
  9C Markets Trading markets 137
  9D Selling shareholders Not applicable
  9E Dilution Not applicable
 
iii 

Form 20-F Cross Reference Guide

 

  9F Expenses of the issue Not applicable
10 Additional information    
  10A Share capital Not applicable
  10B Memorandum and articles of association Articles of association 164
  10C Material contracts Business overview, Results of operations, Related party transactions 22, 107, 133
  10D Exchange controls Exchange controls and other limitations affecting security holders 176
  10E Taxation Taxation 168
  10F Dividends and paying agents Not applicable
  10G Statement by experts Not applicable
  10H Documents on display Information filed with securities regulators 180
  10I Subsidiary information Not applicable
11 Quantitative and qualitative disclosures about market risk Risk management 129
12 Description of securities other than equity securities Not applicable  
13 Defaults, dividend arrearages and delinquencies Not applicable
14 Material modifications to the rights of security holders and use of proceeds Not applicable
15 Controls and procedures Evaluation of disclosure controls and procedures, Internal control over financial reporting 177, 178
16A Audit committee financial expert Board of directors—Committees of our board of directors—Audit committee 149
16B Code of ethics Corporate governance—Code of conduct 139
16C Principal accountant fees and services Principal accountant fees and services 179
16D Exemptions from the listing standards for audit committees Not applicable
16E Purchases of equity securities by the issuer and affiliated purchasers Purchases of equity securities by the issuer and affiliated purchasers 138
16F Change in registrant’s certifying accountant Not applicable
16G Corporate governance Corporate governance 139
16H Mine safety disclosure Not applicable
17 Financial statements Not applicable
18 Financial statements Nexa Resources S.A. Financial statements 186
19 Exhibits Exhibits 184

 

 
iv 

Forward-Looking Statements

Forward-looking statements

This annual report includes statements that constitute estimates and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act, as amended, or Exchange Act. The words “believe,” “will,” “may,” “may have,” “would,” “estimate,” “continues,” “anticipates,” “intends,” “plans,” “expects,” “budget,” “scheduled,” “forecasts” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements refer only to the date when they were made, and we do not undertake any obligation to update or revise any estimate or forward-looking statement due to new information, future events or otherwise, except as required by law. Estimates and forward-looking statements involve risks and uncertainties and do not guarantee future performance, as actual results or developments may be substantially different from the expectations described in the forward-looking statements.

These statements appear in a number of places in this report and include statements regarding our intent, belief or current expectations, and those of our officers and employees, with respect to, among other things: (i) our future financial or operating performance; (ii) our growth strategy; (iii) future trends that may affect our business and results of operations; (iv) the impact of competition and applicable laws and regulations on our results; (v) planned capital investments; (vi) future of zinc or other metal prices; (vii) estimation of mineral reserves; (viii) mine life; and (ix) our financial liquidity.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results and developments may be substantially different from the expectations described in the forward-looking statements for several reasons, many of which are not under our control, among them the activities of our competition, the future global economic situation, weather conditions, market prices and conditions, exchange rates, and operational and financial risks. The unexpected occurrence of one or more of the abovementioned events may significantly change the results of our operations on which we have based our estimates and forward-looking statements. Our estimates and forward-looking statements may be influenced by the following factors, including, among others:

·the cyclical and volatile prices of commodities;
·the changes in the expected level of supply and demand for commodities;
·foreign exchange rates and inflation;
·the risks and uncertainties relating to economic and political conditions in the countries in which we operate;
·changes in global market conditions;
·outbreaks of contagious diseases or health crises impacting overall economic activity regionally or globally, including the duration and scope of, and uncertainties associated with, the coronavirus and its variants (“COVID-19”) pandemic and the continued impact thereof on commodity prices, our business and the global economy and any related actions taken by government and businesses in response to the COVID-19 pandemic, as well as our ability to contain and mitigate the risk of spread or major outbreak of COVID-19 at our operating sites;
·increasing demand and evolving expectations from stakeholders with respect to our environmental, social and governance (“ESG”) practices, performance and disclosures;
·the impact of climate change on our operations, workforce and value chain;
·environmental, safety and engineering challenges and risks inherent to mining;
·the ability to meet energy requirements while complying with greenhouse gas emissions regulations and other energy transition policy changes and laws in the countries in which we operate;
 
1

Forward-Looking Statements

·severe natural disasters, such as, storms and earthquakes, disrupting our operations;
·operational risks, such as operator errors, mechanical failures and other accidents;
·the availability of materials, supplies, insurance coverage, equipment, required permits or approvals and financing;
·supply-chain and logistic related interruptions, including impacts to international freight and transportation networks;
·the implementation of our growth strategy, the availability of capital and the risks associated with related capital expenditures;
·failure to obtain financial assurance to meet closure and remediation obligations;
·the possible material differences between our estimates of Mineral Reserves and Mineral Resources and the mineral quantities we actually recover;
·the possibility that our concessions may be terminated or not renewed by governmental authorities in the countries in which we operate;
·the impact of political and government changes in the countries in which we operate, and the effects of potential new legislation and changes in taxation;
·labor disputes or disagreements with local communities in the countries in which we operate;
·loss of reputation due to unanticipated operational failures or significant occupational incidents;
·failure or outage of our digital infrastructure or information and operating technology systems;
·cyber events or attacks (including ransomware, state-sponsored and other cyberattacks) due to negligence or IT security failures;
·the future impact of competition and changes in domestic and international governmental and regulatory policies that apply to our operations; and
·other factors discussed under “Risk Factors.”

Considering the risks and uncertainties described above, the events referred to in the estimates and forward-looking statements included in this report may or may not occur, and our business performance and results of operation may differ materially from those expressed in our estimates and forward-looking statements, due to factors that include but are not limited to those mentioned above.

These forward-looking statements are made as of the date of this annual report, and we assume no obligation to update them or revise them to reflect new events or circumstances. There can be no assurance that the forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.

 

 
2

About the Company

About the Company

We are a large-scale, low-cost, integrated zinc producer with over 60 years of experience developing and operating mining and smelting assets in Latin America. We currently own and operate five long-life underground polymetallic mines—three located in the Central Andes of Peru and two located in the state of Minas Gerais in Brazil—and we expect to complete construction at the Aripuanã Project, our sixth underground mine in Mato Grosso, Brazil, and ramp up is scheduled for the third quarter of 2022.

Nexa Resources S.A. is a public limited liability company (société anonyme) incorporated under the laws of Luxembourg on February 26, 2014. Our registered office is located at 37A, Avenue J.F. Kennedy, L-1855, Luxembourg, Grand Duchy of Luxembourg, and we are registered with the Luxembourg Trade and Companies Register under number B185489. Our telephone number at this address is +352 28 26 37 27. Our main office outside of Luxembourg is located at Avenida Engenheiro Luís Carlos Berrini, n° 105, 6th floor, São Paulo, State of São Paulo, Brazil. Our website is www.nexaresources.com. None of the information available on our website is incorporated in this annual report and it should not be relied upon in deciding to invest in our common shares.

 

 
3

Presentation of Financial and Other Information

Presentation of financial and other information

Certain definitions

Unless otherwise indicated or the context otherwise requires, the terms below are defined in the following manner.

·“Nexa,” “we,” “us” and “our” or similar terms refer to Nexa Resources and, unless the context otherwise requires, its consolidated subsidiaries;
·“Nexa Resources” refers to Nexa Resources S.A., a Luxembourg public limited liability company (société anonyme);
·“Nexa CJM” refers to our subsidiary Nexa Resources Cajamarquilla S.A. (previously known as Votorantim Metais—Cajamarquilla S.A.), a corporation organized as a sociedad anónima under the laws of Peru;
·“Nexa Brazil” refers to our subsidiary Nexa Recursos Minerais S.A. (previously known as Votorantim Metais Zinco S.A.), a corporation organized as a sociedade anônima under the laws of Brazil;
·“Nexa Peru” refers to our subsidiary Nexa Resources Peru S.A.A. (previously known as Compañía Minera Milpo S.A.A.), a corporation organized as a sociedad anónima abierta under the laws of Peru and publicly traded on the Lima Stock Exchange;
·“Enercan” refers to our subsidiary Campos Novos Energia S.A., a corporation organized as a sociedade anônima under the laws of Brazil;
·“VSA” refers to our controlling shareholder Votorantim S.A., a corporation organized as a sociedade anônima under the laws of Brazil;
·the “Votorantim Group” refers to our controlling shareholder VSA and, unless the context otherwise requires, its consolidated subsidiaries;
·the “real,” “reais” or “R$” refers to the Brazilian real, the official currency of Brazil;
·sol,” “soles” or “S/.” refers to the Peruvian sol, the official currency of Peru; and

In addition, the meaning of other defined terms used in this report are set out in “Glossary.”

Financial information

Our consolidated financial statements as of December 31, 2021 and 2020 and for each of the three years ended December 31, 2021 are included in this annual report. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). References in this report to “our consolidated financial statements” are to our consolidated financial statements as of December 31, 2021 and 2020 and for each of the three years ended December 31, 2021, and the related notes thereto included elsewhere in this report.

The financial information presented in this report should be read in conjunction with our consolidated financial statements, including the related notes, and the section of this report titled “Operating and financial review and prospects.”

The main consolidated companies included in our consolidated financial statements are:

·Nexa CJM – a Peruvian company that is 99.997% directly and indirectly owned by Nexa Resources and is mainly engaged in smelting zinc contained in concentrate. Nexa CJM’s functional currency is the U.S. dollar.
·Nexa Peru – a Peruvian company that is 83.554% directly and indirectly owned by Nexa Resources and is mainly engaged in exploring, extracting, producing and trading zinc, copper and lead concentrates, extracted from its own three mining sites. Nexa Peru’s functional currency is the U.S. dollar. Nexa Peru is a public company with its shares listed on the Lima Stock Exchange.
 
4

Presentation of Financial and Other Information

·Nexa Brazil – a Brazilian company that is 100% owned by Nexa Resources and is mainly engaged in exploring, extracting and producing zinc, copper and lead concentrates, and smelting zinc contained in concentrate with operations in the state of Minas Gerais. Nexa Brazil’s functional currency is the real.

Non-IFRS measures

Our management uses non-IFRS measures such as Adjusted EBITDA and cash cost, among other measures, for internal planning and performance measurement purposes. We believe these measures provide useful information about the financial performance of our operations that facilitates period-to-period comparisons on a consistent basis. Management uses Adjusted EBITDA internally to evaluate our underlying operating performance for the reporting periods presented and to assist with the planning and forecasting of future operating results. Management believes that Adjusted EBITDA is a useful measure of our performance because it reflects our cash generation potential from our operational activities excluding impairment of non-current assets and other miscellaneous adjustments, if any, for the period. These measures should not be considered individually or as a substitute for net income or operating income, as indicators of operating performance, or as alternatives to cash flow as measures of liquidity. Additionally, our calculation of Adjusted EBITDA and other non-IFRS measures may be different from the calculation used by other companies, including our competitors in the mining industry, so our measures may not be comparable to those of other companies. See “Results of Operations” for a discussion of our use of non-IFRS measures in this report, including the reasons why we believe this information is useful to management and to investors, and a reconciliation to the comparable IFRS measures.

All forward-looking non-IFRS financial measures in this document, including cash cost guidance, are provided only on a non-IFRS basis. This is due to the inherent difficulty of forecasting the timing or number of items that would be included in the most directly comparable forward-looking IFRS financial measures. As a result, reconciliation of the forward-looking non-IFRS financial measures to IFRS financial measures is not available without unreasonable effort and we are unable to assess the probable significance of the unavailable information.

Country, market and industry information

This report contains and refers to information and statistics regarding the countries in which we operate and the markets for the metals we produce. This data is obtained from independent public sources, including publications and materials from participants in the industry, such as Wood Mackenzie and from governmental entities such as the Brazilian Central Bank, Bloomberg Finance L.P., London Metal Exchange (“LME”), London Bullion Market Association (“LBMA”), Brazilian Ministry of Treasury (Ministério da Fazenda), Brazilian Ministry of Mines and Energy (Ministério de Minas e Energia, or “MME”), National Mining Agency (Agência Nacional de Mineração, or “ANM”), Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or “IBGE”), the Getulio Vargas Foundation (Fundação Getúlio Vargas, or “FGV”), the Peruvian Stock Market Superintendency (Superintendencia del Mercado de Valores), the Peruvian Central Bank, the Peruvian Ministry of Economy and Finance (Ministerio de Economía y Finanzas) and the Peruvian National Institute of Statistics and Informatics (Instituto Nacional de Estadística e Informática). Some data is also based on our estimates, which are derived from our review of internal reports, as well as independent sources.

Volume information

All tonnage information in this report is expressed in metric tonnes, unless stated otherwise, and all references to ounces are to troy ounces, in each case, unless otherwise specified.

 

 
5

Risk Factors

 

Risk factors

Nexa and its operations are exposed to several inherent risks and uncertainties, including those described below.

Business risks

Our business is highly dependent on the international market prices of the metals we produce, which are both cyclical and volatile.

Our business and financial performance is significantly affected by the market prices of the metals we produce, particularly the market prices of zinc, copper, silver, lead and, to a lesser extent, gold. Historically, prices of such metals have been subject to wide fluctuations and are affected by numerous factors beyond our control, including international economic and political conditions, the cyclicality of consumption, actual or perceived changes in levels of supply and demand, the availability and costs of substitutes, inventory levels maintained by users, actions of participants in the commodities markets and currency exchange rates. We cannot predict whether, and to what extent, metal prices will rise or fall in the future.

The COVID-19 pandemic has had a material impact on the global economy. In 2021, demand and international market prices in the metals we produce rebounded from the low levels reached in the first half of 2020, as progress has been made in containing the COVID-19 pandemic. The emergence of new variants of COVID-19 and further outbreaks of the pandemic, however, continue to affect global macroeconomic conditions, contributing to increased volatility in metal prices and demand for our products.

The recent invasion of Ukraine by Russia, the resulting conflict, and retaliatory measures by the global community have created global security concerns, 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 and prices for our 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. However, as of the date of this report, we cannot predict the impact that this conflict will have on our business and operations. We continue to monitor developments related to this conflict as of the day of this report.

Future declines in metal prices, whether related to the ongoing impact of the COVID-19 pandemic or otherwise, and especially with respect to zinc, copper, silver and lead prices, could have an adverse impact on our results of operations and financial position, and we might consider curtailing or modifying certain operations or not proceeding with our sustaining and/or growth strategy. In addition, we may not be able to adjust production volume in a timely or cost-efficient manner in response to changes in metal prices. Lower utilization of capacity during periods of weak prices may expose us to higher unit production costs since a significant portion of our cost structure is fixed in the short-term due to the high capital intensity of mining operations. Conversely, during periods of high prices, our ability to rapidly increase production capacity may be limited, which could prevent us from selling more products. Moreover, we may be unable to complete expansions and greenfield projects in time to take advantage of rising prices for zinc, copper, lead or other products.

Changes in the demand for the metals we produce, including as a result of the cyclicality of global economic activity, could adversely affect our sales volume and revenues.

Our revenues depend on the volume of metals we sell (and, to a lesser extent, the volume of metals produced by others that are smelted in our facilities), which in turn depend on the level of industrial and consumer demand for these metals. An increase in the production of zinc, copper, silver and lead worldwide, along with a reduction in demand for these metals due to changes in technology, industrial processes or consumer habits, including increased demand for substitute materials, economic slow-downs or other factors, may have the potential to impact these metal prices. The impact of price decreases may also compromise the profitability of smelters, as we might consider reducing the volume of metals we sell and therefore materially adversely impact our operational results and financial position. Even if our volumes are not affected by reduced prices, this decrease can impact our revenues.

 
6

Risk Factors

 

The mining industry has historically been highly volatile largely due to the cyclical nature of industrial production, which affects the demand for minerals and metals. Demand for minerals and metals thus generally correlates to macroeconomic fluctuations in the global economy. Changes in the demand for the metals we produce could adversely affect our sales volume and revenues.

Adverse economic developments in China could have a negative impact on our revenues, cash flow and profitability.

China has been the main source of global demand for commodities over the last few years. According to Wood Mackenzie, in 2021, Chinese demand represented 50% of global demand for zinc and 52% of global demand for copper. Any slowdown in China’s economic growth that is not offset by increased demand or reduced supply from other regions could have an adverse effect on demand for our products or commodity prices and result in lower revenues, cash flow and profitability.

The mining industry is highly competitive.

We face competition from other mining, processing, trading and industrial companies in Brazil, Peru and around the world. Competition principally involves the following factors: sales, supply and labor prices; contractual terms and conditions; attracting and retaining qualified personnel; and securing the services, supplies and technologies we need for our operations. Slower development in technology and innovation could impact costs, productivity and competitiveness. In addition, mines have limited lives and, as a result, we must seek to replace and expand our mineral reserves by acquiring new properties. Significant competition exists to acquire mining concessions, land and related assets. We cannot assure shareholders that competition will not adversely affect us in the future.

The international trade environment faces increasing uncertainty. Potential changes to international trade regulations and agreements, as well as other political and economic arrangements (including direct or indirect subsidies), may benefit competitors operating in countries other than where our mining operations are currently located. These changes could also adversely affect the prices we pay for the supplies we need and our export costs when we engage in international transactions. We cannot assure shareholders that we will be able to compete based on price or other factors with companies that in the future may benefit from favorable regulations, lower cost of capital, trading or other arrangements or that we will be able to maintain the cost of the supplies that we require as well as our export costs.

Operational risks

The mining business is subject to inherent risks, some of which are not insurable.

The business of mining zinc, copper, silver, lead and other minerals is generally subject to numerous risks and hazards. Hazards associated with underground mining operations include underground fires and explosions, including those caused by flammable gas, gas and coal outbursts, cave-ins or falls of ground, rock falls, openings collapse, lack of oxygen, air pollution, tailings dam failures or other discharges of tailings, hazardous substances and materials, gases and toxic chemicals, water ingress and flooding, sinkhole formation, ground subsidence, and other accidents and conditions resulting from underground mining activities, such as drilling, blasting, removing and processing material. In addition, we may encounter geotechnical challenges as we continue with and expand our mining activities, including the possibility of failure of underground openings. For example, see “Mining Operations—Vazante—Operations and infrastructure.” We could incur additional expenses in connection with preventive and remediating measures related to underground openings, which could materially adversely affect results of our operations and financial position.

Such occurrences could result in damage to, or destruction of, our properties or production facilities, third-party property, human exposure to pollution, personal injury or death, environmental and natural resource damage or contamination, delays in mining, monetary losses and legal liability. In addition, any such occurrences could adversely affect our reputation. Damages to our reputation could result in additional environmental and health and safety legal oversight, and authorities could impose more stringent conditions in connection with the licensing process of our projects and operations. In addition, our customers may be less willing to buy metals from us if we have been subject to significant adverse publicity. We maintain insurance typical in the mining industry, and in amounts that we believe to be adequate, but which may not provide complete coverage in certain circumstances. Insurance against certain risks (including certain liabilities for environmental contamination, tailings dam failures and other hazards as a result of exploration and production) may not be generally available or is uneconomical to afford. We could also incur additional expenses due to failures in our industrial drainage system or other environmental control equipment. Any such failures could also have adverse impacts on the environment, which could lead to adverse climate changes and further impact our reputation if we are found to contribute, or there is a perception that we have contributed, to adverse environmental impacts in the areas in which we operate.

 
7

Risk Factors

 

We may be materially adversely affected by challenges relating to slope and stability of underground openings.

Our underground mines get deeper, and our waste and tailings deposits increase in size as we continue with and expand our mining activities. This presents certain geotechnical challenges, including the possibility of failure of underground openings. If we are required to reinforce such openings or take additional actions to prevent such a failure, we could incur additional costs and expenses, and our operations and stated mineral reserves could be negatively affected. We have taken actions we consider appropriate to maintain the stability of underground openings, but additional actions may be required in the future. Unexpected failures or additional requirements to prevent such failures may materially adversely affect our costs and expose us to health, safety and other liabilities in the event of an accident, as well as adversely impact our reputation. These developments may in turn materially adversely affect the results of our operations and financial position, as well as potentially diminish our stated mineral reserves.

Our projects are subject to operational risks that may result in increased costs or delays that prevent their successful implementation.

We invest in sustaining and increasing our mine and metal production capacity and developing new operations. Our projects are subject to several risks that may materially adversely affect our growth prospects and profitability, including the following:

·we may encounter delays or higher than expected costs in completing technical and engineering studies and obtaining the necessary equipment, machinery, materials, supplies, labor or services, in project execution by third-party contractors and in implementing new technologies to develop and operate a project;
·we may experience delays in commencing the operations of a new project or the expansion of an existing operation;
·our efforts to develop projects according to schedule may be hampered by a lack of infrastructure, including a reliable power supply;
·we may fail to obtain, or experience delays or higher than expected costs in obtaining, the required agreements, authorizations, licenses, approvals and permits to develop a project, including the prior consultation procedure and agreements with local communities;
·changes in market conditions or regulations may make a project less profitable than expected at the time we initiated work on it;
·accidents, natural disasters, labor disputes, equipment failures, water shortages, logistical issues, interruption of energy supply and increase in energy costs;
·adverse mining conditions may delay and hamper our ability to produce the expected quantities and qualities of minerals upon which the project was budgeted;
·mineral reserves and resources are estimates based on the interpretation of limited sampling data and test work that may not be representative of the deposits as a whole, or the technical and economic assumptions used in the estimates may prove to be materially different when the deposits are mined, that could result in materially different economic outcomes; and
 
8

Risk Factors

 

·conflicts with local communities and/or strikes or other labor disputes may delay the implementation or the development of projects.

We may be adversely affected by the failure or unavailability of adequate infrastructure and skilled labor.

Our mining, smelting, processing, development and exploration activities depend to a large degree on adequate infrastructure. The regions where certain of our current operations, projects and prospects are located are sparsely populated and difficult to access. We require reliable roads, bridges, power sources and water supplies to access and properly conduct our operations. As a result, the availability and cost of this infrastructure affects capital and operating costs and our ability to maintain expected levels of production and sales. We could also experience an increase in transit-related accidents due to the need to transport employees to remote areas. Unusual weather, such as excessive rains and flooding, or other natural phenomena, sabotage, government or external interference (including protest activities from local communities that may lead to temporary suspensions of our projects) in the maintenance or provision of such infrastructure could impact the development of a project, reduce mining volumes, increase mining or exploration costs or delay the transportation of raw materials to the mines and projects or concentrates to the customers. See “Risk factors—Health, safety and environmental risks—Natural disasters and climate change could affect our business.”

In addition, the mining industry is labor intensive, and our success depends to a significant extent on our ability and our contractors’ ability to attract, hire, train and retain qualified employees, including our ability and our contractors’ ability to attract employees with the necessary skills in the regions in which we operate. We could experience increases in our recruiting and training costs and decreases in our operating efficiency, productivity and profit margins if we are unable to attract, hire and retain a sufficient number of skilled employees to support our operations.

The failure of a tailings dam could negatively impact our business, reputation and results of operations, and the implementation of associated regulations and decommissioning processes may be expensive.

Mining companies face inherent risks in their operations of tailings dams—structures built for the containment of the mining waste, known as tailings—that exposes us to certain risks. Our tailings dams include, in some cases, materials that could increase the hazard potential in the event of unexpected failure. If any such risks were to occur, this could lead to negative environmental effects and materially adversely affect our reputation and our ability to conduct our operations and could make us subject to liability and, as a result, have a material adverse effect on our business, financial position and results of operations.

In addition, the changes in regulation that occurred as a result of recent dam failures, like those that have occurred in Brazil, could increase the time and costs to build, operate, inspect, maintain and decommission tailings dams, obtain new licenses or renew existing licenses to build or expand tailings dams, or require the use of new technologies. New laws in Brazil include a requirement for obtaining an environmental license for new dams or for the raising of existing dams. As part of the process, companies must present a proposal for an environmental bond with the purpose of guaranteeing the socio-environmental recovery in the event of an accident or the deactivation of the dam. New regulations, such as those enacted in Brazil during 2020, may also impose more restrictive requirements that may exceed our current standards, including mandated compliance with emergency plans and increased insurance requirements and premiums, or require us to pay additional fees or royalties to operate tailings dams. We may also be required to facilitate the relocation of communities and facilities impacted by tailings dam failures. Moreover, insurance coverage for damages resulting from tailings dams’ failure may not be available. For more information see “Information on the Company—Mining operations—Tailings disposal.”

A disruption in zinc concentrate supply could have a material adverse effect on our production levels and financial results.

A portion of the zinc concentrate used by our smelters is obtained from third parties, and we may be adversely affected if we are not able to source adequate supplies of zinc for such operations. In 2021, 47.1% of the zinc concentrate used by our smelters was obtained from third parties, with the remainder supplied by our own mining operations. The availability and price of zinc concentrate used by our smelters may be negatively affected by several factors largely beyond our control, including interruptions in production in our mines or by our suppliers, decisions by suppliers to allocate supplies of concentrate to other purchasers, price fluctuations and increasing transport cost.

 
9

Risk Factors

 

In addition, the efficiency of a smelter’s production over time is affected by the mix of the zinc concentrate qualities it processes. In circumstances where we cannot source adequate supplies of the zinc concentrate qualities that comprise the most efficient mix for our smelters, alternative types of concentrate may be available, but the use thereof may increase our costs of production or reduce the productivity of our smelters and adversely affect our business, results of operations and financial position.

Inadequate supply of zinc secondary feed materials and zinc calcine could affect the results of our smelters.

Zinc sourced from suppliers of secondary feed materials represented approximately 19.3% of the zinc content used by our Juiz de Fora smelter in 2021. The use of zinc secondary feed material is a competitive advantage in relation to the use of zinc concentrate, mainly due to lower acquisition costs and, to a lesser extent, operational gains. In addition, we have recently incorporated zinc calcine processed by third parties into our operations to increase the production in our smelters. Our smelters then use this zinc calcine processed by third parties to produce additional refined zinc products that they would not produce were they to rely solely on other inputs. To the extent we are unable to obtain adequate supplies of zinc secondary feeds or zinc calcine, or if we must pay higher than anticipated prices of these inputs, our business, results of operations and financial position may be adversely affected. In 2021, one of our calcine suppliers in Peru shutdown its facility, which we expect to have a negative impact on production in 2022 due to long-term reduction in calcine availability. For more information, see “Information on the Company—Smelting Operations—Smelter sales”

Interruptions of energy supply or increases in energy costs may materially adversely affect our operations.

Energy is an important component of our production costs. In Peru, we obtain electric power for our operations from third parties through electricity supply contracts. Although we are party to a long-term power purchase agreement with Electroperú S.A., we cannot assure you that we will have secure access to energy sources in Peru at the same prices and conditions in the event of any interruption or failure of our sources of electricity, failures or congestion in any part of the Sistema Eléctrico Interconectado Nacional (“SEIN”) or any failure to renew or extend our other existing electricity supply contracts.

In Brazil, we obtain electric power for our operations from hydroelectric plants grouped into several legal entities—which are directly or indirectly jointly owned by us, our controlling shareholder and its affiliates—pursuant to long-term power purchase agreements. Self-production plants represent 92.7% of energy supply, in terms of energy acquired via energy purchase and sale contracts. Furthermore, our energy costs under these agreements could increase in the event of differences in the hydrology forecast due to these hydroelectric plants share the hydrological risk, in addition to payment of higher energy taxes. For more information, see “Information on the Company—Other operations—Power and energy supply.”

The prices for and availability of energy resources for our operations may be subject to change or curtailment due to, among other things, new laws or regulations, the imposition of new taxes or tariffs, supply interruptions, equipment damage, volatility and increase in worldwide price levels for energy and related components, market conditions and any inability to renew our existing supply contracts. Disruptions in energy supply or increases in costs of energy resources could increase our production costs and have a material adverse effect on our financial position and results of operations.

Shortages of water supply, explosives, critical spare parts, maintenance service and new equipment and machinery may materially adversely affect our operations and development projects.

Our mining operations require the use of significant quantities of water for extraction activities, processing and related auxiliary facilities. Water usage, including extraction, containment, and recycling requires appropriate permits, which are granted by regulatory authorities in Brazil and Peru. The available water supply may be adversely affected by shortages or changes in governmental regulations. We cannot assure shareholders that water will be available in sufficient quantities to meet our future production needs or will prove sufficient to meet our water supply needs. In addition, we cannot assure shareholders that we will maintain our existing licenses related to water rights, particularly if political changes lead to additional regulatory requirements or review of existing licenses. A reduction in our water supply could materially adversely affect our business, results of operations and financial position. In addition, we have not yet obtained the water rights to support some of our expansion projects, and our inability to obtain those rights could prevent us from pursuing those expansions.

 
10

Risk Factors

 

In addition to water, our mining operations require intensive use of equipment and machinery as well as explosives. To be able to acquire and use explosives, we must first obtain the corresponding authorizations, which are granted by the relevant regulatory authorities in Brazil and Peru. A shortage in the supply of key spare parts, adequate maintenance service, new equipment and machinery to replace old ones and cover expansion requirements, or explosives, including due to the inability to deliver such water, energy, supplies, critical spare parts, explosives, or equipment and machinery to our operations, or regulatory change impacting our ability to obtain authorization for the acquisition of such materials, could materially adversely affect our operations and development projects.

We may be adversely affected by labor disputes.

Mining is a labor-intensive industry. We depend on more than 13,000 workers, including employees and contractors, to carry out our operations. A portion of our employees are unionized. We cannot assure that we will not experience work slowdowns, work stoppages, strikes or other labor disputes in the future, particularly in the context of the annual renegotiation of our collective bargaining agreements.

We may also be affected by labor-related disputes that broadly develop in the countries in which we operate. Strikes and other labor disruptions at any of our operations could have a material adverse effect on our business, financial position and results of operations.

We may be liable for certain payments to individuals employed by third-party contractors.

Under Peruvian law, we may become responsible under certain circumstances to pay mandatory labor benefits or other obligations to personnel employed by our third-party contracts or sub-contractors. Although we believe that we are in substantial compliance with Peruvian labor laws, we cannot assure shareholders that any proceedings initiated by outsourced employees will be resolved in our favor and that we will not be liable for any mandatory labor benefits or for-profit sharing benefits. In addition, the Peruvian government is reviewing a new law that proposes to eliminate outsourcing of main operational activities, with the aim of contracting workers directly by the company. If passed, this law would affect the mining sector and other economic sectors in the country that have a significant percentage of outsourced workforce. The above-mentioned bill of law is under review by the Congress and the Executive Branch. See “Information on the Company—Regulatory matters—Peruvian regulatory framework—Regulation of other activities.”

Under Brazilian law, outsourcing is also permitted if certain requirements are met. In addition, Brazilian law provides that the contractor will be held liable on a secondary basis if the outsourced or subcontracted companies do not fulfill their labor obligations. In cases where the outsourced or subcontracted companies do not pay the workers the labor sums they are entitled to, the contractor is responsible for those payments. These payments may have an adverse effect on our results of operation and financial position.”

We may be subject to misconduct by our employees or third-party contractors.

We may be subject to misconduct by our employees or third-party contractors, such as theft, bribery, sabotage, fraud, insider trading, violation of laws, slander or other illegal actions. Any such misconduct may lead to fines or other penalties, slow-downs in production, increased costs, lost revenues, increased liabilities to third parties, impairment of assets or harmed reputation, any of which may have a material adverse effect on our business, results of operations or financial position.

The nature of our business includes risks related to litigation and administrative proceedings that could materially adversely affect our business and financial performance in the event of unfavorable rulings.

The nature of our business exposes us to various litigation matters, including civil liability claims, environmental matters, health and safety matters, regulatory and administrative proceedings, governmental investigations, tort claims, contract disputes, labor matters and tax matters, among others. We cannot assure shareholders that these or other legal proceedings will not have a material adverse effect on our ability to conduct our business or on our financial position and results of operations, through distraction of our management team, diversion of resources or otherwise. In addition, although we establish provisions as we deem necessary in accordance with IFRS as issued by the IASB, the level of provisions that we record could vary significantly from any amounts we actually pay, due to the inherent uncertainties in the estimation process.

 
11

Risk Factors

 

We could be harmed by a failure or interruption of our information technology systems or automated machinery, including system security breaches or other cybersecurity attacks.

We rely on our information technology systems and automated machinery to effectively manage our production processes and operate our business. Any failure of our information technology systems and automated machinery to perform as we anticipate could disrupt our business and result in production errors, processing inefficiencies and the loss of sales and customers, which in turn could result in decreased revenue, increased overhead costs and excess or out-of-stock inventory levels resulting in a material adverse effect on our business results.

In recent years, cyberattacks and other tactics designed to gain access to and exploit sensitive information by breaching mission critical systems of large organizations have increased in volume and sophistication. We are dependent on internal information systems, and we are vulnerable to failure of these systems, including through system security breaches, data protection breaches or other cybersecurity attacks. We could be exposed to a cyberattack through an internal breach from servers connected to our internal network or an external breach due to disruptions from unauthorized access to our systems, which could impact our ability to operate our existing systems. If these events occur, including a cyberattack causing a loss of critical data, unscheduled downtime/degradation of operations, or the disclosure or use of confidential information, these events could have a material adverse effect on our reputation and market value, which could adversely impact our results of operations.

In addition, data privacy is subject to frequently changing rules and regulations. The European Union’s General Data Protection Regulation (“GDPR”) took effect in 2018 and introduced increased regulations relating to personal data security. The GDPR requires companies to satisfy new requirements regarding the handling of personal and sensitive data, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. In 2011, Peru enacted the Law for Personal Data Protection No. 29,733, the Ley de Protección de Datos Personales (“LPDP”) and in 2018, the Brazilian president signed Law No. 13,709, the Lei Geral de Proteção de Dados (“LGPD”). Both the LGPD and LPDP represent comprehensive data protection laws, establishing detailed rules for the collection, use, processing and storage of personal data and affecting all economic sectors, including the relationship between customers and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical environment. Any noncompliance with the GDPR, the LGPD, the LPDP or any other cybersecurity and data privacy regulations could result in proceedings or actions against us by governmental entities, the imposition of fines or penalties and damage to our reputation, which could have an adverse effect on us and our business, reputation and results of operations.

Financial risks

Our financial position and results of operations may be materially adversely affected by currency exchange rate fluctuations.

Our revenues are primarily denominated in U.S. dollars, and certain portions of our operating costs, principally labor costs, are denominated in reais and soles. Accordingly, when inflation in Brazil and Peru increases without a corresponding devaluation of the real or sol, our financial position, results of operations and cash flows could be materially adversely affected. See “Operating and Financial Review and Prospects—Key factors affecting our business and results of operations—Macroeconomic conditions of the countries and regions where we operate” for a discussion of inflation in 2021.

Given the structure of our operations, a decrease in the value of the U.S. dollar relative to the foreign currencies in which we incur costs generally could have a negative impact on our results of operations or financial position. Our foreign currency exposures increase the risk of volatility in our financial position, results of operations and cash flows. We cannot assure shareholders that currency fluctuations, or costs associated with our hedging activities (including fluctuations in exchange rates contrary to our expectations), will not have an impact on our financial position and results of operations.

 
12

Risk Factors

 

Fluctuations in interest rates could increase the cost of servicing our debt, affect returns on our financial investments and negatively affect our overall financial performance.

Some of our indebtedness bears interest based on variable interest rates, including the London Interbank Offered Rate, or LIBOR. As of December 31, 2021, 21% of our debt was variable rate debt. Such variable rates have fluctuated in response to changes in economic growth, monetary policy and governmental regulation. A significant increase in underlying interest rates, particularly in LIBOR, could have a material adverse effect on our financial expenses and materially adversely affect our overall financial performance. In July 2017, the Financial Conduct Authority (“FCA”) announced its intention to phase out LIBOR by the end of 2021. However, on March 5, 2021, the FCA announced that most tenors of U.S. Dollar LIBOR would continue to be published through June 30, 2023, extending the previously announced deadline of December 2021. For more information on the potential impact of fallback rates on our relevant LIBOR-based debt, see “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Debt” and Note 5 (b) to our consolidated financial statements.

We may engage in hedging activity that may not be successful and may result in losses to us.

We may use foreign exchange and metal commodity non-deliverable forwards to reduce the risk associated with currency and metal price volatility. However, our hedging activities could cause us to lose the benefit of an increase in the prices of the metals we produce if they increase over the price level of hedge positions, or the benefit of an increase in the currency price. The cash flows and the mark-to-market values of our production hedges can be affected by factors such as the volatility of currency and the market price of metals, which are not under our control.

Our hedging agreements contain events of default and termination events that could lead to early close-outs of our hedges such as failure to pay, breach of the agreement, misrepresentation, default under our loans or other hedging agreements and bankruptcy. In the event of an early termination of our hedging agreements, the relevant hedge positions would be required to be settled at that time. In that event, there could be a lump sum payment to be made either to or by us. The magnitude and direction of such a payment would depend upon, among other things, the characteristics of the particular hedge instruments that were terminated and the relevant market prices at the time of termination. Any of the factors described above could have a material adverse effect on our financial position, results of operations or cash flows. See “Operating and financial review and prospects—Risk management—Financial risk—Metal price sensitivity.”

Our business requires substantial capital expenditures and is subject to financing risks.

Our business is capital intensive. Exploration for and exploitation of mineral deposits, maintenance of machinery and equipment and compliance with applicable laws and regulations require substantial capital expenditures. We must continue to invest capital to maintain and potentially expand our existing brownfield operations, develop our greenfield projects pipeline in order to sustain and grow production, in addition to carrying out investments in sustaining, health, safety and environment. In 2021, we invested US$507.9 million in capital expenditures, US$257.6 million of which was in relation to the Aripuanã project. We depend partially on our cash flows for maintenance of capital expenditures. See “Information on the Company—Capital expenditures.”

No assurance can be given that we will be able to maintain our production levels or generate sufficient cash flow, capitalize on a sufficient amount of our net income or have access to sufficient investments, loans or other financing alternatives to finance our capital expenditure program at a level necessary to sustain and grow our current exploration and exploitation activities. Any equity or debt financing, if available, may not be on terms that are favorable to us. If our access to external financing is limited, we may not be able to execute our strategy, which could adversely affect our business, financial position and results of operations.

We are exposed to credit risk in relation to our contractual and trading counterparties as well as to hedging and derivative counterparty risk.

We are subject to the risk that the counterparties with whom we conduct our business (in particular our customers) and who are required to make payments to us are unable to make such payment in a timely manner or at all. Credit risk is present in our hedging operations, customer operations and cash management operations. If amounts that are due to us are not paid or not paid in a timely manner, this may impact not only our current trading and cash-flow position but also our financial and business position. In addition, our derivatives, metals hedging, and foreign currency and energy risk management activities expose us to the risk of default by the counterparties to such arrangements. Any such default could have a material adverse effect on our business, financial position and results of operations.

 
13

Risk Factors

 

Any acquisitions we make may not be successful or achieve the expected benefits.

We regularly consider and evaluate opportunities to acquire assets, companies and operations. There can be no assurance that we will be able to successfully integrate any acquired assets, companies or operations. In addition, any additional debt we incur to finance an acquisition may materially adversely affect our financial position and results of operations. If future acquisitions are significant, they could change the scale of our business and expose us to new geographic, political, operating and financial risks.

Changes in the assumptions underlying the carrying amount of certain assets could result in impairment charges.

We periodically test whether our tangible and intangible assets have suffered any impairment, in accordance with the accounting policy stated in our consolidated financial statements. If our estimates of the recoverable amount of an asset change or are inaccurate, we may determine that impairment charges are necessary. While impairment does not affect reported cash flows, the decrease in the recoverable amount determined could have a material adverse effect on our results of operations. Assurances cannot be given as to the absence of significant impairment charges in future periods, particularly if market conditions deteriorate.

Risks related to our Mineral Reserves and Resources

Our estimates of Mineral Reserves and Resources may be materially different from the total mineral quantities we actually recover, and changes in metal prices, operating and capital costs, and other assumptions used to calculate these estimates may render certain Mineral Reserves and Resources uneconomical to mine.

 

There is a degree of uncertainty attributable to the estimation of mineral reserves and resources. Until mineral reserves and resources are actually mined and processed, the quantity of metal and grades must be considered as estimates only and no assurance can be given that the indicated levels of metals will be produced. In making determinations about whether to advance any of our projects to development, we must rely upon estimated calculations for the mineral reserves and mineral resources and grades of mineralization on our properties.

 

The estimation of mineral reserves and resources is a subjective process that is partially dependent upon the judgment of the qualified persons preparing such estimates. The process relies on the quantity and quality of available data and is based on knowledge, mining experience, statistical analysis of drilling results and industry practices. Valid estimates made at a given time may significantly change when new information becomes available.

 

Our estimates of Mineral Reserves and Resources are based on geological interpretation and statistical inferences or assumptions drawn from drilling and sampling analysis made as of the date of such estimates. We periodically update our mineral reserves and resources estimates based on the conclusions of the relevant qualified persons with respect to new data from exploratory and infill drilling, results from technical studies and the experience acquired during the operation of the mine and metallurgical processing, as well as changes to the assumptions used to calculate these estimates.

 

Several of the assumptions used to calculate these estimates, including the market prices of commodities, operating and capital costs and mining and metallurgical recovery rates, among others, can greatly fluctuate, which may result in significant changes to our current estimates. These changes may also render some or all of our proven and probable mineral reserves and measured and indicated mineral resources uneconomic to exploit and may ultimately result in a reduction of mineral reserves and resources.

 

In addition, inferred mineral resources have a great amount of uncertainty as to their existence and their economic and legal feasibility. You should not assume that any part of an Inferred Mineral Resource will be upgraded to a higher category or that any of the mineral resources not already classified as mineral reserves will be reclassified as mineral reserves.

 

 
14

Risk Factors

 

We depend on our ability to replenish our mineral reserves for our long-term viability.

 

Mineral reserves data is only indicative of future results of operations at the time the estimates are prepared and are depleted over time as we conduct our mining operations. We use several strategies to replenish and increase our Mineral Reserves that are depleted, including exploration activities and the acquisition of mining concessions. If we are unable to replenish our Mineral Reserves or develop our Mineral Resources, our business, results of operations and prospects would be materially adversely affected.

 

Our mineral exploration efforts are highly speculative in nature and may be unsuccessful.

 

Mineral exploration is highly speculative in nature, involves many uncertainties and risks and may be unsuccessful. It is performed to demonstrate the dimensions, position and mineral characteristics of mineral deposits, estimate mineral reserves and resources, assess amenability of the deposit to mining and processing scenarios and estimate potential deposit value.

 

Substantial expenditures are required to establish proven and probable mineral reserves, to determine processes to extract the metals and, if required, to construct mining and processing facilities and obtain permits to carry on mining activities. Therefore, once the mineralization is discovered, it may take several years from the initial exploration phases and mineral resources determination before production is possible, during which time the project’s feasibility may change adversely.

 

There are unique risks inherent to the development of underground mines, which may have a material adverse impact on our cash flows.

 

The development of underground mines is subject to other unique risks including, but not limited to, underground floods, issues relating to ventilating harmful gases, fall-of-ground accidents, and seismic activity resulting from unexpected or difficult geological conditions. While we anticipate taking all measures to safely operate, there is no assurance that the effect of these risks will not cause schedule delays, revised mine plans, injuries to persons and property, and/or increased capital costs, any of which may have a material adverse impact on our cash flows.

 

Health, safety and environmental risks

Health, safety and environmental laws and regulations, including regulations pertaining to climate change, may increase our costs of doing business, restrict our operations or result in the imposition of fines or revocation of permits.

Our mining activities are subject to Brazilian and Peruvian laws and regulations, including health and safety and environmental matters. Additional matters subject to legislation include, but are not limited to, transportation, mineral storage, water use and discharge, use of explosives, hazardous and other non-hazardous waste, and reclamation and remediation measures. Our operations are subject to periodic inspections and special inspections in certain circumstances by governmental authorities and consultation with local communities. Compliance with these laws and regulations and new or existing regulations that may be applicable to us in the future could increase our operating costs and adversely affect our financial results of operations and cash flows. In Peru, the Government is currently reviewing laws to prohibit economic activities in the headwaters of the basin, which are currently considered vulnerable areas that require protection and mitigation measures.

Regulatory and industry response to climate change or other controls on greenhouse gas emissions, including limits on emissions from the combustion of carbon-based fuels, controls on effluents and restrictions on the use of certain materials, could significantly increase our operating costs and affect our customers and suppliers. Ongoing international efforts to address greenhouse gas emissions consist of controlling activities that may increase the atmospheric concentration of greenhouse gases. International agreements, like the Paris Agreement, Kyoto Protocol and COP26, are in different stages of negotiation and implementation. The measures included in such agreements may result in an increase of costs related to the installation of new controls aimed at reducing greenhouse gas emissions, the purchase of credits or licenses for atmospheric emissions and the monitoring and registration of greenhouse gas emissions generated by our operations. These measures could adversely affect our business, financial position and results of operations.

 
15

Risk Factors

 

Pursuant to applicable environmental regulations and laws, we could be found liable for all or substantially all the damages caused by mining activities at our current or former facilities or those of our predecessors at disposal sites. We could also be found liable for all incidental damages due to the exposure of individuals to hazardous substances or other environmental damage, all of which could significantly and negatively affect our reputation. We cannot assure shareholders that our costs of complying with current and future environmental and health and safety laws and regulations, including decommissioning and remediation requirements, and any liabilities arising from past or future releases of, or exposure to, hazardous substances will not materially adversely affect our business, financial position and results of operations.

ESG issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.

There is an increasing focus from certain investors, customers, consumers, employees and other stakeholders concerning ESG matters. Additionally, public interest and legislative pressure related to public companies’ ESG practices continue to grow, particularly as the SEC considers new rulemaking related to ESG disclosure. If our ESG practices fail to meet regulatory requirements or investor, customer, consumer, employee or other stakeholders’ evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, corporate governance and transparency, our reputation, brand and employee retention may be negatively impacted, and our customers and suppliers may be unwilling to continue to do business with us.

Customers, consumers, investors and other stakeholders are increasingly focusing on environmental issues, including climate change, dams, energy and water use, and other sustainability concerns. Concern over climate change, in particular, may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment.

If we do not adapt to or comply with new regulations, or if we fail to comply with disclosure requirements and consequently fail to meet evolving regulatory, investor, industry or stakeholder expectations and concerns regarding ESG issues, investors may reconsider their capital investment in Nexa, and customers and consumers may choose to stop purchasing our products, which could have a material adverse effect on our reputation, business or financial condition.

Natural disasters and climate change could affect our business.

Natural disasters could significantly damage our mining and production facilities and infrastructure and may cause a contraction in sales to countries adversely affected due to, among other factors, power outages and the destruction of industrial facilities and infrastructure. In particular, the Central Andean region, where two of our mines are located, is prone to mudslides and earthquakes of varying magnitudes. Due to the El Niño weather phenomenon, Peru typically experiences extreme weather conditions that led to flooding and mudslides, and which could adversely affect our operations. In the past, extreme flooding and mudslides in Peru have interrupted the supply of metal concentrates from our mines and the supply of zinc products to our plants. The physical impact of climate change on our business remains uncertain, but we are likely to experience changes in rainfall patterns, increased temperatures, water shortages, rising sea and river levels, lower water levels in rivers due to natural or operational conditions, increased storm frequency and intensity as a result of climate change, which may adversely affect our operations. For example, in January 2022, the underground operation at the Vazante mine was partially flooded due to heavy rainfall levels in the state of Minas Gerais, which is expected to have a negative impact on zinc production. For additional information, see “Information on the Company—Mining Operations—Vazante.”. Although we have insurance covering damages caused by natural disasters, extensive damage to our facilities and staff casualties due to natural disasters could materially adversely affect our ability to conduct our operations and, as a result, reduce our future operating results.

In addition, the potential physical impact of climate change on our operations is highly uncertain and would be particular to the geographic circumstances of our facilities and operations. It may include changes in rainfall patterns, water shortages, rising sea and river levels, changing storm patterns and intensities and changing temperatures. These effects may materially adversely impact the cost, production and financial performance of our operations.

 
16

Risk Factors

 

Global or regional health considerations, including the outbreak of a pandemic or contagious disease, such as the ongoing COVID-19 pandemic, have impacted and could continue to impact our business, financial condition and results of operations.

The COVID-19 pandemic, including governmental measures enacted in response to the pandemic, has had a material effect on the global economy, disrupting the financial markets and creating increased volatility. In 2021, international prices for our metals have steadily increased since the lows reached in the second half of 2020 and demand for our products has recovered as vaccines and other treatments for COVID-19 have been developed, however our production and financial results may continue to be affected by disruptions to our operations and volatility in metal prices and its impact on demand, particularly as new variants of COVID-19 emerge and outbreaks of the pandemic continue to spread. See “—Our business, results and financial position are highly dependent on the demand for an international market price of the metals we produce, which are both cyclical and volatile” and “—Changes in the demand for the metal we produce could adversely affect our sales volume and revenues.” While vaccination rates have increased and effective treatments have been developed, the emergence of additional COVID-19 variants continues to present risks to our operations (including the ability of employees to be physically present at work), employee health and safety, and general macroeconomic activity. We cannot at this time forecast what policies will be implemented by governments to continue to address the pandemic, or the pandemic’s ultimate duration, severity or impact to our business, our customers, or our supply chain. This material impact could continue for an extended period of time or impact our financial condition and results of operations and continued weak or worsening economic conditions could negatively impact demand for our products. Future pandemics and public crises could impact our business in a similar or worse manner. For additional information, see “Operating and Financial Review and Prospects—Overview—Executive Summary,” “Operating and Financial Review and Prospects—Overview—Key factors affecting our business and results of operations—COVID-19” and Note 1 to our consolidated financial statements.

Political, economic, social and regulatory risks

Political, economic and social conditions in the countries in which we have operations or projects could adversely impact our business, financial condition results of operations and the trading price of our securities.

Political, economic and social conditions in the countries in which we have operations or projects may negatively affect our financial performance. Our business, financial position and results of operations may be affected by the general conditions of the Peruvian, Brazilian and other national political conditions, economies, economic recessions, price instability, exchange rate volatility, inflation, interest rates, and domestic regulatory and taxation policies. There can be no assurance that the countries in which we operate will not face political, economic or social problems in the future or that these problems will not increase the volatility of the price of securities of issuers with operations in those countries, like us, or interfere with our ability to operate and service our indebtedness. For additional information, see “Operating and Financial Review and Prospects—Overview—Key factors affecting our business and results of operations.”

In all these countries, we are exposed to various additional risks over which we have no control, such as social unrest, bribery, cyberattacks, extortion, corruption, robbery, sabotage, kidnapping, civil strife, terrorism, acts of war and guerilla activities. These issues may adversely affect the economic and other conditions under which we operate in ways that could have a materially negative effect on our business.

Recent and potential changes in commercial and mining laws may significantly impact our mining operations.

Changes to the Brazilian and Peruvian regulatory framework that could be enacted in the future may result in an increase in our expenses, particularly mining royalties. In addition, any changes in the interpretation of Brazilian or Peruvian mining laws and regulations, including changes to our concession agreement and changes in commercial rules and protections, may increase our compliance, operational or other costs. For additional information, see “Information on the Company—Regulatory matters—Brazilian regulatory framework—Mining rights and regulation of mining activities.”

 
17

Risk Factors

 

Our mineral rights may be terminated or not renewed by governmental authorities.

Our business is subject to extensive regulation in Brazil and Peru, including with respect to acquiring and renewing the required authorizations, permits, concessions and/or licenses from the relevant governmental regulatory bodies. We have obtained, or are in the process of obtaining, all material authorizations, permits, concessions and licenses required to conduct our mining and mining related operations.

In Brazil, we may need to renew exploration authorizations related to our Brazilian mining operations 60 days prior to their expiration date if we determine that we continue to have an economic or business interest in the area. If we fail to demonstrate the existence of technical and economically viable mineral deposits in an area covered by an exploration authorization, we may be required to return it to the federal government. The federal government may then grant exploration authorizations to other parties that may conduct other mineral prospecting activities at said area. With respect to mining concessions, there is no renewal requirement once we have obtained such concession. However, we must continue to assess the mineral potential of each mining concession to determine if the costs of maintaining the related exploration authorizations and mining concessions are justified by the results of operations to date. If such costs are not justified and we abandon the mine or suspend the mining activities without the formal consent of the regulatory authority for a period more than six months, we may lose the respective mining concessions. Alternatively, we may elect to withdraw or assign some of our exploration authorizations or mining concessions.

In Peru, once mineral concessions are granted, they may not be revoked if the titleholder complies with two obligations, (1) payment of an annual fee and (2) either achievement of the minimum annual production target or expenditure of the equivalent amount in exploration or investments before the statutory deadline. If the production, expenditure or investment targets are not met, a statutory penalty must be paid. Accordingly, mineral concessions will lapse automatically if any of these obligations are not met within the statutory period. Mining concessions in Peru may be terminated if the concessionaire does not comply with its obligations.

These authorizations, permits, concessions and environmental licenses are subject to our compliance with conditions imposed and regulations promulgated by the relevant governmental authorities. While we anticipate that all required authorizations, permits, concessions and environmental licenses or their renewals will be granted as and when sought, there is no assurance that these items will be granted as a matter of course, and there is no assurance that new conditions will not be imposed in connection with such renewals. If we were to violate any of the foregoing laws and regulations or the conditions of our concessions, authorizations, and environmental licenses, including the failure to remove all residents who are within the self-rescue zone, we may be subjected to substantial fines or criminal sanctions, revocations of operating permits or licenses and possible closings of certain of our facilities.

 

Our operations depend on our relations and agreements with local communities, and new projects require carrying out a prior consultation procedure.

There are several local communities that surround our operations in Brazil and Peru, most of which we have entered into agreements with that provide for the use of their land for our operations. We also interact with regional and local governments and depend on our close relations with local communities and such governments to carry out our operations. From time to time, we may experience disputes with local communities and if our relations with the local communities and such governments were to deteriorate, or the local communities do not comply with the existing agreements or renew them upon expiration, it could have a material adverse effect on our business, reputation, properties, operating results, financial position or prospects. In addition, a disruption in the relations between the local communities, governments and other parties may affect us indirectly. For additional information, see “Mining Operations—Cerro Lindo—Production” and “Mining Operations—Atacocha—Production.”

We also may face certain risks in relation to artisanal mining near the areas in which we operate. The increase of artisanal mining activity or the failure of these artisanal miners to abide with our existent agreement may have an adverse effect on the development of our operations. For example, see “Mining Operations—Aripuanã—History.”

Furthermore, to develop new projects in the countries in which we operate on land owned by, or in the possession of, third parties, we need to reach an agreement with such third parties to use that land. Any delay or failure to reach such agreements or obtain governmental approvals for our new projects could result in a material adverse effect on our business, properties, operating results, financial position or prospects.

 
18

Risk Factors

 

Changes in tax laws may increase our tax burden and, as a result, could adversely affect our business, financial position and results of operations.

The Brazilian, Peruvian and Luxembourg governments from time to time implement changes to tax laws and regulations. Any such changes, as well as changes in the interpretation of such laws and regulations, may result in increases to our overall tax burden, which would negatively affect our profitability. Moreover, some tax laws may be subject to controversial interpretation by tax authorities, including, but not limited to, the regulation applicable to corporate restructurings. In the event an interpretation different than the one on which we based our transactions prevails, we may be adversely affected. The Brazilian, Peruvian or Luxembourg governments may implement additional changes to tax regulations in the future, which could adversely affect our business, financial position, and results of operations. Our business, financial position and results of operations may be adversely affected by inflation.

Certain of the countries in which we operate have in the past experienced high levels of inflation and may experience high levels of inflation in the future, which may impact domestic demand for our products. Inflationary pressures, which have increased during 2021 and which we expect to continue in 2022, may curtail our ability to access international financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may materially adversely affect the overall performance of the national economy of the countries in which we operate, which in turn may materially adversely affect us. We may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure. In addition, although the functional currency for our Peruvian operations is the U.S. dollar, high rates of inflation could increase our operating costs and adversely impact our operating margins if we are not able to pass the increased costs on to consumers.

Beginning in the second half of 2021, rising inflation has impacted our operational, logistics, oil, and third-party contractor costs, and we expect these inflationary pressures to persist through 2022.

We are subject to anti-corruption, anti-bribery and anti-money laundering laws and regulations in various jurisdictions. Any violations of any such laws or regulations could have a material adverse impact on our reputation and results of operations and financial position.

We are subject to anti-corruption, anti-bribery, anti-money laundering and other international laws and regulations and are required to comply with the applicable laws and regulations of Brazil, Peru, Luxembourg, Canada and the United States, among others. In addition, we are subject to economic sanctions regulations that restrict our dealings with certain sanctioned countries, individuals and entities. Our governance and compliance processes may not timely identify or prevent future breaches of legal, accounting or governance standards. We may be subject to instances of fraudulent behavior, corrupt practices and dishonesty by our affiliates, employees, directors, officers, partners, agents and service providers. Any violations by us of anti-bribery and anti-corruption laws, sanctions regulations or other standards could have a material adverse effect on our business, reputation, results of operations and financial position.

Political and social opposition to mining activities generally in the regions where we operate could adversely impact our business and reputation.

Disputes with communities where we operate may arise from time to time. In some instances, our operations and mineral reserves are located on or near lands owned or used by indigenous people or other groups of stakeholders. Some of our mining and other operations are in territories where title may be subject to disputes or uncertainties, or in areas claimed for agriculture or land reform purposes, which may lead to disagreements with organized social movements, local communities and the government, and recent political changes, particularly in Peru, may increase the potential for these claims. We may be required to consult and negotiate with these groups as part of the process to obtain licenses required to operate, to mitigate impact on our operations or to obtain access to their lands. Disagreements or disputes with local groups, including indigenous groups, organized social movements and local communities, could cause delays or interruptions to our operations, adversely affect our reputation or otherwise hamper our ability to develop our reserves and conduct our operations. Protesters have taken actions to disrupt our operations and projects, and they may continue to do so in the future, which may harm our operations and could adversely affect our business. In recent years, Peru has experienced protests against mining projects in several regions. On several occasions, local communities have opposed these operations and accused them of polluting the environment and hurting agricultural and other traditional economic activities. For additional information, see “Mining Operations—Cerro Lindo—Production” and “Mining Operations—Atacocha—Production.” Social demands and conflicts could have a material adverse effect on our business and results of operations and the economy in general of the countries in which we operate.

 
19

Risk Factors

 

Uncertainty in governmental agency interpretation or court interpretation and the application of such laws and regulations could result in unintended non-compliance.

The courts in some of the jurisdictions in which we operate may offer less certainty as to the judicial outcome of legal proceedings or a more protracted judicial process than is the case in more established economies. Businesses can become involved in lengthy court cases over simple issues when rulings are not clearly defined, and the poor drafting of laws and excessive delays in the legal process for resolving issues or disputes compound such problems. In addition, there may be limited or no relevant case law providing guidance on how courts would interpret such laws and the application of such laws to our contracts, joint ventures, licenses, license applications or other legal arrangements. Accordingly, there can be no assurance that contracts, joint ventures, licenses, license applications or other legal arrangements will not be adversely affected by the actions of government authorities and the effectiveness of and enforcement of such arrangements in these jurisdictions. Moreover, the commitment of local businesses, government officials and agencies and the judicial system in these jurisdictions to abide by legal requirements and negotiated agreements may be more uncertain and may be susceptible to revision or cancellation, and legal redress may be uncertain or delayed. These uncertainties and delays could have a material adverse effect on our business and results of operations.

Regulation of other activities.

We are subject to mining and environmental regulation related to, among other activities, the use of explosives, fuel storage, controlled substances, telecommunications, archeological remains and electricity concessions. We are also subject to more general legislation on data privacy, labor, occupational health and safety, and peasant and indigenous communities, among others, that may adversely affect our business. See “Information on the Company—Regulatory matters—Brazilian regulatory framework” and “Information on the Company—Regulatory matters—Peruvian regulatory framework.”

Risks relating to our corporate structure

VSA has substantial control over us, which could limit our shareholders’ ability to influence the outcome of important corporate decisions.

As of March 17, 2022, VSA owns 64.68% of our issued and outstanding common shares. As a result, VSA can influence or control matters requiring approval by our shareholders, including the election of directors, the allocation of profits, the appointment of external auditors and the approval of mergers, acquisitions or other extraordinary transactions. VSA may also have interests that differ from our other investors and may vote in a way with which our other shareholders disagree, and which may be adverse to the interests of our other investors.

In addition, we have entered into several shared services contracts and similar agreements with other entities in the Votorantim Group in order to achieve operational economies of scale. Since we rely on the Votorantim Group for negotiation, renewal and extension of these agreements, there can be no assurances that we will always have access to the services procured pursuant to these agreements at the same prices and conditions. See “Share ownership and trading—Related Party Transactions.”

Dividends or other distributions paid by us on our common shares will generally be subject to Luxembourg withholding tax.

Any dividends or other distributions paid by us on our common shares will be subject to a Luxembourg withholding tax at a rate of 15.0% unless an exemption or reduction in rate applies. The withholding tax must be withheld from the gross distribution and paid to the Luxembourg tax authorities. Under certain circumstances, distributions as share capital reductions or share premium reimbursements may not be subject to withholding tax, but there are no assurances that we will be able to make such distributions in the future. See “Additional Information—Taxation—Luxembourg tax considerations—Shareholders.”

 
20

Risk Factors

 

The rights of our shareholders, and the responsibilities of VSA as our controlling shareholder, are governed by Luxembourg law and differ in some respects from the rights and responsibilities of shareholders under the laws of other jurisdictions, including the United States and Canada, and shareholders may have more difficulty protecting their interests than they would as shareholders of a U.S. corporation.

Our corporate affairs are governed by our articles of association and by the laws governing limited liability companies organized under the laws of Luxembourg, as well as such other applicable local law, rules and regulations. The rights of our shareholders and the responsibilities of VSA as our controlling shareholder and of our directors and officers under Luxembourg law are different from those applicable to a corporation incorporated in the United States or Canada. There may be less publicly available information about us than is regularly published by or about U.S. or Canadian issuers. Also, Luxembourg regulations governing the securities of Luxembourg companies may not be as extensive as those in effect in the United States or Canada, and Luxembourg law and regulations in respect of corporate governance matters may not be as protective of non-controlling shareholders as corporation laws in the United States or Canada. Therefore, shareholders may have more difficulty protecting their interests in connection with actions taken by us, our directors and officers or our principal shareholders than they would as shareholders of a corporation incorporated in the United States or Canada.

Our ability to make distributions on our common shares is subject to several factors and conditions.

The determination to pay dividends and the payment of dividends or other distributions (including reimbursements of share premium) will be subject to the approval of our board of directors and/or our shareholders, as applicable, and will depend on a number of factors, including, but not limited to, our cash balance, cash flow, earnings, capital investment plans, expected future cash flows from operations, our strategic plans and cash dividend distributions from our subsidiaries, as well as restrictions imposed by applicable law and contractual restrictions (although as of the date of this annual report there are no contractual restrictions on our ability to pay dividends or other distributions to our shareholders), and other factors our board of directors may deem relevant at the time. Luxembourg law also imposes certain requirements regarding distributions. For additional information, see “Share ownership and trading—Distributions.”

We are a holding company and have no material assets other than our ownership of shares in our subsidiaries. When we pay a dividend or other distribution on our common shares in the future, we generally cause our operating subsidiaries to make distributions to us in an amount sufficient to fund any such dividends or distributions. Although as of December 31, 2021, there are no material contractual restrictions on our subsidiaries’ ability to make distributions to us, their ability to do so is subject to their capacity to generate sufficient earnings and cash flow and may also be affected by statutory accounting and tax rules in Brazil and Peru.

It could be difficult for investors to enforce any judgment obtained outside Luxembourg against us or any of our associates.

We are organized under the laws of Luxembourg. Furthermore, certain of our directors and officers reside outside the United States and Canada and most of their assets are located outside the United States and Canada. Most of our assets are located outside the United States or Canada. As a result, it may not be possible for investors to effect service of process upon us or our directors and officers within the United States, Canada or other jurisdictions outside Luxembourg or to enforce against us or our directors and officers, judgments obtained in the United States, Canada or other jurisdictions outside Luxembourg. Because judgments of United States or Canadian courts for civil liabilities based upon the U.S. federal securities laws or Canadian securities laws may only be enforced in Luxembourg if certain requirements are met, investors may face greater difficulties in protecting their interest in actions against us or our directors and officers than would investors in a corporation incorporated in a state or other jurisdiction of the United States or Canada.

 

 
21

Business Overview

 

I.Information on the Company

Business overview

Overview

We are a leading large-scale, low-cost integrated zinc producer with over 60 years of experience developing and operating mining and smelting assets in Latin America.

We operate and own five long life polymetallic mines, three located in the Central Andes of Peru and two located in the state of Minas Gerais in Brazil. In 2022, we expect to complete construction at our sixth underground mine in Brazil, the Aripuanã project, which is scheduled to ramp up in the third quarter of 2022.

Our operations are large-scale, modern, mechanized underground and open pit mines. Our mines are proximately located to one another, which creates efficiencies. Two of our mines, Cerro Lindo in Peru and Vazante in Brazil, are among the top 30 largest zinc-producing mines in the world and, combined with our other mining operations, placed us among the top five producers of mined zinc globally in 2021, according to Wood Mackenzie. In addition to zinc, which accounted for 59.6% of our mined metal production in 2021 measured on a zinc equivalent basis, we produce substantial amounts of copper, lead, silver and gold as by-products, which reduce our overall costs to produce mined zinc. At Aripuanã, which is an underground polymetallic project containing zinc, lead and copper, located in the state of Mato Grosso, we estimate annual average production of approximately 70kt of zinc, 24kt of lead, 4kt of copper, 1.8Moz of silver and 14.5koz of gold, considering the current mine life of 11 years.

We also own a zinc smelter in Peru (Cajamarquilla) and two zinc smelters in Brazil (Três Marias and Juiz de Fora), which produce metallic zinc, zinc oxide and several by-products. We were the fifth largest producer of refined zinc globally in 2021, according to Wood Mackenzie. Our smelters are the only units in Latin America (excluding Mexico), resulting in benefits from higher premiums. Cajamarquilla is the only operating zinc smelter in Peru and was the fifth largest globally in 2021 by production volume, according to Wood Mackenzie. Peru is the second largest producer of mined zinc in the world, assuring long-term supply of zinc concentrates to Cajamarquilla. Given our proximity to concentrate producers (our own mines and third-party producers), we also benefit from freight parity.

In 2020, government authorities in the countries in which we operate implemented policies in response to the COVID-19 pandemic that negatively affected our financial position, results of operations and cash flows. In particular, the state of emergency declared by the Peruvian government in the first half of 2020 led to the temporary suspension of our Peruvian operations through May 2020 as restrictions were imposed on non-essential industries, which included the mining sector. While conditions improved in the second half of 2020 and throughout 2021, COVID-19 and related government measures enacted to contain the spread of the virus and emerging variants have affected, and are expected to continue to affect, our results of operations. For additional information, see “Risk Factors—Global or regional health considerations, including the outbreak of a pandemic or contagious disease, such as the ongoing COVID-19 pandemic, have had and could continue to have adverse effects on our business, financial condition and results of operations” and “Operating and Financial Review and Prospects—Overview—Key factors affecting our business and results of operations—COVID-19.”

We safely operated our mining and smelting businesses throughout 2021 and production in both segments increased from 2020.

In Peru, although production at Atacocha was temporarily suspended in March and September, and at Cerro Lindo in December due to communities’ blockades, we were able to operate at high levels of capacity utilization rates throughout the year.

In Brazil, during a regular inspection it was identified that the Extremo Norte underground mine presented above-normal ground displacements at the main ramp area and, as a preventive measure, production was suspended in mid-March. We were able to partially mitigate the decrease in production in Extremo Norte by increasing throughput at the Vazante mine and reaching ore sorter circuit at maximum capacity to offset the grade drop. Extremo Norte underground mine production was resumed in December 2021 and is currently operating at normal utilization rates.

 
22

Business Overview

 

In 2021, our mining operations produced 319.9 thousand tonnes of zinc contained in concentrates, 29.6 thousand tonnes of copper contained in concentrates, 45.6 thousand tonnes of lead contained in concentrates, 8,808.3 thousand ounces of silver and 25.5 thousand ounces of gold, for a total of 537.0 thousand tonnes of metal on a zinc equivalent basis.

In March 2021, one of our third-party raw material suppliers shut down its facility. We were able to partially offset this reduction in calcine, as well as the supply reduction from Extremo Norte by sourcing raw materials from other suppliers. Metal production in 2021 increased 3.4% compared to 2020. Our smelters produced 607.6 thousand tonnes of zinc metal available for sale in different formats and sizes during 2021, along with by-products, including sulfuric acid, silver concentrate, copper cement and copper sulfate.

Our smelters process mostly zinc concentrate, 50.5% of which was sourced from our mines during 2021, and 49.5% purchased from third parties or obtained as secondary raw material. Approximately 100% of the total volume of the contained zinc in concentrates produced by our mines was processed by our own smelters in 2021, with the remainder and all our copper and lead concentrates sold to third parties. We market our products in Latin America and globally, through our commercial offices in Luxembourg, the United States, Brazil and Peru. We also own energy assets (hydroelectric power plants) in both Brazil and Peru, which provide access to a reliable and competitive power supply.

In 2021, we also made significant progress on the Aripuanã project. In October 2021, we obtained the operating license and overall progress reached 99.3% at the end of December 2021. Nevertheless, the emergence of new variants of COVID-19 and related health protocols, along with heavy levels of rainfall experienced in the region, impacted our productivity (lower-than-anticipated workforce), which added additional pressure on costs and timeline. The Aripuanã ramp-up is now scheduled for 3Q22 and the total CAPEX was revised from US$575-595 million to US$625 million.

In response to the global COVID-19 pandemic, in 2020 we created a Crisis Committee, which includes all executive officers, certain key general managers and personnel to carry out preventive safety and health procedures in our operations and offices. The Crisis Committee remains in place and in 2021 met regularly to discuss the proper measures to be implemented and the ongoing impact of the COVID-19 pandemic in our operations and projects. Our COVID-19 associated costs during 2021 amounted to US$18 million. For more information, see “Operating and Financial Review and Prospects—Overview—Executive Summary—COVID-19” below.

History

We commenced operating in 1956 under the name “Companhia Mineira de Metais”, in the state of Minas Gerais, Brazil. After a series of restructurings in the subsequent fifty-eight years, in 2014, a new corporate governance model was implemented by our controlling shareholder VSA in the corporate group. VSA took on the roles of providing guidance and portfolio management, while its subsidiaries (including us) gained autonomy. The main consequence of this new corporate model was that the new governance structure demanded a higher level of empowerment and accountability of senior management, and the establishment of a board of directors at each company. In addition, in connection with the implementation of the new corporate governance model, VSA’s equity participations in Nexa CJM (formerly Votorantim Metais – Cajamarquilla S.A.) and Nexa Brazil (formerly Votorantim Metais Zinco S.A.) were transferred to Nexa Resources on June 18, 2014 and July 1, 2014, respectively.

In 2016, VSA reorganized the zinc, copper, aluminum and nickel businesses previously managed under the name Votorantim Metais S.A. The aluminum and nickel businesses of Votorantim Metais S.A. were consolidated under Companhia Brasileira de Alumínio, or CBA. The zinc and copper production units in Brazil and Peru were transferred to Nexa Resources. Following this reorganization, Nexa Resources became the holding entity solely responsible for the zinc and copper business and CBA became responsible for the aluminum and nickel businesses.

In October 2017, we completed our initial public offering and listed our common shares on the New York Stock Exchange (“NYSE”) and on the Toronto Stock Exchange (“TSX”) under the ticker symbol NEXA. In connection with becoming a public company, VM Holding S.A. changed its corporate name to Nexa Resources S.A. and our subsidiaries Votorantim Metais—Cajamarquilla S.A., Votorantim Metais Zinco S.A. and Compañía Minera Milpo S.A.A. changed their corporate names to Nexa CJM, Nexa Brazil and Nexa Peru, respectively.

 
23

Business Overview

 

During the first half of 2021, Nexa acquired 30,550,512 common shares of Tinka Resources Limited and owns approximately 9% of the issued and outstanding common shares of the company. Tinka Resources is progressing towards development of the Ayawilca project (100% owned), one of the largest zinc projects in Peru with excellent resource expansion potential.

On November 9, 2021, following an internal assessment of the relative advantages and disadvantages associated with our listing on the TSX in Canada, we announced Nexa’s intention to voluntarily delist its common shares from the TSX. In deciding to delist, we considered, among other things, the regulatory reporting burdens associated with the listing, the minimal trading volumes on the TSX and the availability of an alternative market for the common shares on the NYSE. Nexa subsequently announced that it received approval for a voluntary delisting from the TSX and the common shares were delisted from the TSX as of the close of trading on November 30, 2021. Nexa will remain a reporting issuer in each of the provinces and territories of Canada following the delisting and continue to file in Canada and disseminate to Canadian resident holders of the common shares its continuous and periodic disclosure documents until such time as it ceases to be obligated to do so. Furthermore, in 2022, Nexa intends to apply to cease to be a reporting issuer in Canada under Canadian securities laws, subject to the satisfaction of applicable regulatory requirements.

Corporate structure and principal subsidiaries

Nexa CJM

Currently, Nexa Resources is the beneficial owner of 99.92% of the outstanding shares of Nexa CJM, and the remaining outstanding shares are owned by Nexa Recursos Minerais S.A. with 0.08% and by other minority shareholders holding 0.003% in aggregate.

Nexa Peru

Currently, Nexa Peru’s share capital consists of 1,257,754,353 common shares. In addition to common shares, Nexa Peru has issued investment shares that represent a participation in its net worth (patrimonio). Although the investment shares do not represent a participation in the capital of Nexa nor grant any voting rights, they grant their holders the right, among others, to participate in any dividend distributions and liquidation proceeds, pro rata to the percentage they represent in the total net worth of Nexa Peru; as well as to participate in any capital increases (in order to maintain the participation they represent in the total net worth) and the right to have their shares redeemed in certain circumstances. As of December 31, 2021, approximately 67.02% of the investment shares are free float and 32.98% are treasury shares.

Both the common shares and the investment shares of Nexa Peru are registered with the Peruvian Public Registry of Securities (Registro Público del Mercado de Valores) and listed on the Lima Stock Exchange. As a result, Nexa Peru is required to comply with certain disclosure obligations such as filing quarterly and annual financial statements, reporting on material events (hechos de importancia) and disclosing information regarding the economic group to which it belongs.

The following table sets forth information concerning the ownership of the capital stock of Nexa Peru, excluding the investment shares.

Shareholder

Number

Share Capital (%)

Nexa CJM 1,048,621,896 83.37%
Nexa Resources 2,277,601 0.18%
Public float

206,854,856

16.45%

Total

1,257,754,353

100.0%

 

 
24

Business Overview

 

Nexa Brazil

Nexa Brazil, which is 100% owned by Nexa Resources, holds directly and indirectly 100% of Mineração Dardanelos Ltda., which owns 100% of the Aripuanã project.

 

Producing mines and smelters

Our mines are:

·Cerro Lindo. Our Cerro Lindo mine is an underground mine located in Peru wholly-owned by Nexa Peru. Operations began in 2007 and, in 2021, the Cerro Lindo mine produced approximately 102.3 thousand tonnes of zinc contained in concentrates, 29.1 thousand tonnes of copper contained in concentrates, 12.8 thousand tonnes of lead contained in concentrates, 3,813.7 thousand ounces of silver contained in concentrates and 4.8 thousand ounces of gold contained in concentrates. The ore is treated at a concentrate plant that has a processing capacity to 21.0 thousand tonnes of ore per day.
·Vazante. Our Vazante mine is an underground and open pit mine located in Brazil wholly-owned by Nexa Brazil. Operations began in 1969 and, in 2021, the Vazante mine produced approximately 140.5 thousand tonnes of zinc contained in concentrates, 1.6 thousand tonnes of lead contained in concentrates and 500.5 thousand ounces of silver contained in concentrates. The ore is treated at a concentrate plant that has a processing capacity of 4.6 thousand tonnes of ore per day.
·El Porvenir. Our El Porvenir mine is an underground mine located in Peru wholly-owned by Nexa Resources El Porvenir S.A.C. Operations began in 1949 and, in 2021, the El Porvenir mine produced approximately 51.4 thousand tonnes of zinc contained in concentrates, 0.5 thousand tonnes of copper contained in concentrates, 17.7 thousand tonnes of lead contained in concentrates, 3,467.2 thousand ounces of silver contained in concentrates and 8.7 thousand ounces of gold contained in concentrates. The ore is treated at a concentrate plant that has a processing capacity of 6.5 thousand tonnes of ore per day.
·Atacocha. Our Atacocha mine is an underground and open pit mine located in Peru wholly-owned by Nexa Resources Atacocha S.A.A. (formerly Compañía Minera Atacocha). Operations began in 1938 and, in 2021, the Atacocha mine produced approximately 8.5 thousand tonnes of zinc contained in concentrates, 8.7 thousand tonnes of lead contained in concentrates, 1,026.8 thousand ounces of silver contained in concentrates and 11.9 thousand ounces of gold contained in concentrates. The ore is treated at a concentrate plant that has a processing capacity of 4.3 thousand tonnes of ore per day. In 2020, in response to COVID-19 and the uncertain macroeconomic scenario and our efforts to reduce costs and improve operational efficiency, we decided to not resume the higher-cost Atacocha underground mine after the mandatory temporary suspension of our operations in Peru and placed it under care and maintenance, which it remains to date.
·Morro Agudo. Our Morro Agudo mine is an underground and open pit mine located in Brazil wholly-owned by Nexa Brazil. Operations began in 1988 and, in 2021, the Morro Agudo mine produced approximately 17.3 thousand tonnes of zinc contained in concentrates and 4.7 thousand tonnes of lead contained in concentrates. The ore mill feed material is treated at a concentrate plant that has a processing capacity of 3.4 thousand tonnes per day.

Our smelters are:

·Cajamarquilla. Our Cajamarquilla smelter, which is wholly-owned by Nexa CJM, is located in Peru and began operating in 1981. It is currently the largest zinc smelter in Latin America and was the fifth largest zinc smelter in the world in 2021, according to Wood Mackenzie. Cajamarquilla uses Roast-Leach-Electrowinning technology. With a nominal production capacity of 344.4 thousand tonnes of contained zinc per year, Cajamarquilla produced 328.1 thousand tonnes of zinc metal available for sales in 2021 and 305.4 thousand tonnes in 2020. In 2021, 36.9% of the zinc contained in raw material used by Cajamarquilla was sourced from our mines in Peru and 63.1% was purchased from third parties or obtained from secondary feed materials.
 
25

Business Overview

 

·Três Marias. Our Três Marias smelter, which is wholly-owned by Nexa Brazil, is located in Brazil and began operating in 1969. Três Marias processes zinc silicate concentrate from our Vazante mine and zinc sulfide concentrate from our Morro Agudo mine and uses Roast-Leach-Electrowinning technology. With a nominal production capacity of 192.2 thousand tonnes of refined metal per year, Três Marias produced 198.4 thousand tonnes of zinc metal and oxide available for sale in 2021 and 202.8 thousand tonnes in 2020. In 2021, 82.8% of the zinc contained in raw materials used by Três Marias was sourced from our mining operations in Brazil and Peru and 17.2% was purchased from third parties or obtained from secondary feed materials.
·Juiz de Fora. Our Juiz de Fora smelter, which is wholly-owned by Nexa Brazil, is located in Brazil and began operating in 1980. This smelter uses Roast-Leach-Electrowinning and Waelz Furnace technologies. With a nominal production capacity of 96.9 thousand tonnes per year, Juiz de Fora produced 81.1 thousand tonnes of zinc metal available for sale in 2021 and 79.4 thousand tonnes in 2020. In 2021, 32.8% of the zinc raw material used by Juiz de Fora was zinc concentrate sourced from our mining operations, 47.9% was purchased from third parties and 19.3% was obtained from secondary feed materials from electric arc furnace (“EAF”) and brass oxide.

In addition to our operating mines and smelters, we have interests in five greenfield mining projects in Peru (Shalipayco, Magistral, Hilarión, Pukaqaqa and Florida Canyon Zinc) and two in Brazil (Aripuanã, which is currently nearing completion with production expected to begin in 3Q22 and is considered a development stage property under subpart 1300 of Regulation S-K (“S-K 1300”), and Caçapava do Sul). For more information about these projects, please see “Information on the Company—Mining operations—Growth projects.”

 
26

Mining Operations

 

Mining operations

Map 1. Mines, Projects and Prospects in Peru

Source: Nexa Resources.

 
27

Mining Operations

 

Map 2. Mines, Projects and Prospects in Brazil

Source: Nexa Resources.

The following table summarizes our concentrate production, metal contained in concentrate production in each metal and zinc equivalent production in each of our operating mines.

To calculate the zinc equivalent production for the years ended December 31, 2021, 2020 and 2019, we convert the relevant metal contained in concentrate production used in the zinc equivalent grade based on the average benchmark prices for 2021, namely, US$3,007.4 per tonne (US$1.36 per pound) for zinc, US$9,317.5 per tonne (US$4.23 per pound) for copper, US$2,206.2 per tonne (US$1.00 per pound) for lead, US$25.1 per ounce for silver and US$1,798.6 per ounce for gold.

 
28

Mining Operations

 

 

For the Year Ended December 31,

 

2021

2020

2019

Treated Ore (in tonnes) 12,330,469 10,853,740 13,001,535
Mining Production—Metal Contained in Concentrate      
Zinc (in tonnes) 319,950 313,074 361,061
Copper (in tonnes) 29,607 28,154 38,184
Lead (in tonnes) 45,565 38,009 51,349
Silver (in oz) (1) 8,808,291 6,825,882 8,900,995
Gold (in oz) 25,501 16,179 24,955
Mining Production—Zinc Equivalent Production      
Cerro Lindo (in tonnes of zinc equivalent) 236,629 217,090 281,870
El Porvenir (in tonnes of zinc equivalent) 100,121 66,744 103,755
Atacocha (in tonnes of zinc equivalent) 30,638 30,750 50,168
Vazante (in tonnes of zinc equivalent) 145,869 152,173 142,571
Morro Agudo (in tonnes of zinc equivalent) 23,780 31,209 30,435
Total 537,038 497,965 608,799

 

(1)Silver volumes include silver in lead concentrate produced in Vazante.

The following table summarizes the average ore grade for the periods indicated.

 

For the Year Ended December 31,

 

2021

2020

2019

Average Ore Grade      
Zinc (%) 2.98 3.28 3.16
Copper (%) 0.31 0.33 0.37
Lead (%) 0.51 0.49 0.52
Silver (in ounces per tonne) 0.95 0.90 0.94
Gold (in ounces per tonne) 0.005 0.004 0.005

 

Each mine consists of one mine, one treatment plant and related infrastructure. We summarize below information as of December 31, 2021 for each of our five mines. For further information about our greenfield projects, including the Aripuanã project, for which mechanical construction is nearly completed and production is expected to commence in the third quarter of 2022, see “Greenfield projects—Aripuanã.” For an overview of our reserves and resources, see “Mineral Reserves and Resources—Disclosure of Mineral Reserves and Resources”, “Mineral Reserves and Resources—Mineral Reserves” and “Mineral Reserves and Resources—Mineral Resources.”

Cerro Lindo

Location and means of access

The Cerro Lindo mine is an underground, polymetallic mine located in the Chavín District, Chincha Province, Peru, approximately 268 km southeast of Lima and 60 km from the coast. Access from Lima is available via the paved Pan American Highway south to Chincha, and then via an unpaved road up the Topara River valley to the mine site. Internal roadways connect the various mine site components. The approximate coordinates of the mine are 392,780m East and 8,554,165m North, using the Universal Transverse Mercator WGS84 datum and the project site is located at an average elevation of 2,000 meters above sea level.

History

Several companies have held interests in the Cerro Lindo mine area, including BTX, Phelps Dodge, and Nexa Peru. Exploration work completed to date includes geological mapping, rock chip and soil sampling, trenching, ground geophysical surveys, and exploration, definition and underground operational core drilling. Feasibility studies were completed in 2002 and 2005, with mine construction commencing in 2006. Formal production started in 2007, and the mine has been operational since that date.

 
29

Mining Operations

 

Title, leases and options

All mineral concessions are held in the name of Nexa Peru. The tenure consists of 68 mining concessions totaling approximately 43,750.2 hectares and one beneficiation concession, covering an area of 518.8 hectares.

Nexa Peru currently holds surface rights or easements for the following infrastructure at Cerro Lindo: mine site, access roads, power transmission line and water pipeline for the mine, old and new power transmission lines to Cerro Lindo, desalination plant, water process plant, and the water pipeline from the desalination plant to the mine site. There is sufficient suitable land available within the mineral tenure held by Nexa Peru for tailings disposal, mine waste disposal and installations such as the process plant and related mine infrastructure.

Cerro Lindo is currently subject to payment of royalties. The tax stability agreement expired on December 31, 2021. As of January 2022, Nexa Peru is required to pay royalties and special mining tax to the Peruvian government. For more information, see “Information on the Company—Regulatory matters—Peruvian regulatory framework.” As of December 31, 2021, Nexa Peru had a total of six water licenses, one for use of seawater, and the remaining five for ground water extraction.

Cerro Lindo holds a number of permits in support of the current operations. The permits are Directorial Resolutions issued by the Peruvian authorities upon approval of mining environmental impact assessments filed by the mining companies. Nexa Peru maintains an up-to-date record of the legal permits obtained to date.

Mineralization

Cerro Lindo is classified as a volcanogenic massive sulfide (“VMS”) deposit. The Cerro Lindo deposit is 1,500 meters long, 1,000 meters wide, and has a current vertical development of 470 meters below the surface. Mineralization consists of at least 10 discrete mineralized zones. The Cerro Lindo deposit comprises lens-shaped massive bodies, composed of pyrite (50.0% to 90.0%), yellow sphalerite, brown sphalerite, chalcopyrite, and minor galena. Significant barite is present mainly in the upper portions of the deposit. A secondary-enrichment zone, composed of chalcocite and covellite, has formed near the surface where massive sulfides have oxidized. Silver-rich powdery barite remains at the surface as a relic of sulfide oxidation and leaching.

During 2021, we completed approximately 90.0 km of diamond drilling, divided between exploration and infill drilling. By the end of 2021, we drilled in our exploration program, 19.0 km in 26 drill holes from surface in Pucasalla target, 4.2 km northwest from Cerro Lindo from March 2021, confirming sulfide lens of sphalerite, galena and chalcopyrite in a dacite host rock with gangue of barite. In underground, we drilled 14.2 km in 33 drill holes, confirming the continuity of the east extension of the orebody OB-9 and the southeast extension of the orebody OB-5B. Pucasalla superficial bodies are located north of Topará River and near mine ore bodies are located to the south of the Topará River.

During 2022, we expect to complete a total of 38.7 km of exploratory drilling. Our objective in surface is to continue the exploratory drilling program to the northwest and east extension of Pucasalla, construction of new access and platforms to test Pucasalla Sur and Festejo targets. In underground exploration we will drill towards the OB-9, OB-8, OB-6 extensions and Festejo, Festejo West and Pucasalla Sur targets. In 2021, we spent US$7.7 million in exploration expenses for Cerro Lindo, primarily associated with diamond drilling, geochemistry analysis and geological research works. We have budgeted US$8.9 million for the project during 2022 to maintenance office, data interpretations and exploratory drilling campaign.

Operations and infrastructure

The Cerro Lindo mine is completely mechanized, using rubber-tired equipment for all development and production operations. There is no shaft; all access is through 15 portals servicing adits, drifts and declines. Ore is extracted from nine separate ore bodies and delivered to the process plant via a series of conveyors. All ore is commingled during transport to the concentrator stockpile; ore from different ore bodies is not segregated.

 
30

Mining Operations

 

We have completed construction of all key infrastructure required for mining and processing operations, including the underground mine, access roads, power lines, water pipelines, the desalination plant, offices and warehouses, accommodations, the process plant/concentrator, conveyor systems, waste rock facilities, temporary ore stockpiles, the paste-fill plant and the dry-stack tailings storage facilities. A new freshwater pipeline from the desalination plant on the coast to the mine was completed in February 2020 and is operational. The national grid supplies electrical power for the mine site.

In 2021, we spent US$36.6 million on sustaining capital expenditures for Cerro Lindo, primarily associated with mine development, equipment replacement and other major infrastructure projects.

Production

The Cerro Lindo mine is in the production stage and has a treatment plant capacity of 21,000 tonnes of ore per day. The Cerro Lindo unit has an authorized capacity of 20,000 tonnes of ore per day, but Peruvian law allows units to operate at a capacity 5.0% higher than their authorized capacity.

In December 2021, the road access to the mine was disrupted by a local community group’s protest activity and production was suspended, consequently reducing ore throughput for four days.

The table below summarizes the Cerro Lindo mine’s concentrate production, metal contained in concentrates produced and average grades for the periods indicated. Production in 2021 was significantly higher than 2020 due to higher ore treated, since in 2020 operations were temporarily suspended due to the impact of mandatory government measures related to COVID-19.

 

For the Year Ended December 31,

 

2021

2020

2019

Treatment ore (in tonnes) 6,369,044 5,482,211 6,799,747
Average ore grade      
Zinc (%) 1.79 1.93 2.05
Copper (%) 0.54 0.59 0.64
Lead (%) 0.28 0.29 0.25
Silver (ounces per tonne) 0.79 0.78 0.69
Gold (ounces per tonne) 0.002 0.003 0.002
Metal contained in concentrates production      
Zinc (in tonnes) 102,275 95,426 126,310
Copper (in tonnes) 29,102 27,820 37,678
Lead (in tonnes) 12,849 11,590 12,256
Silver (in oz) 3,813,731 2,938,985 3,250,479
Gold (in oz) 4,829 4,020 4,458
Cash Cost, net of by-product credits (in US$/t) (525.0) (8.7) 356.0
Cash Cost, net of by-product credits (in US$/lb) (0.24) (0.00) 0.16
Capital Expenditures (in millions of US$) 40.6 27.7 50.5

 

Mineral Reserves and Mineral Resources

The Cerro Lindo Mineral Reserves estimates are based on the definitions for Mineral Reserves in SK-1300 and the tables below are based on costs and modifying factors from the Cerro Lindo mine.

 

 
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Mining Operations

 

 

Cerro Lindo – Year End Mineral Reserves as of December 31, 2021 (on an 83.48% Nexa attributable ownership basis) (1)

 

Ownership Class Tonnage(2) Grade Contained Metal
Zinc Copper Silver Lead Gold Zinc Copper Silver Lead Gold
(Mt) (%) (%) (g/t) (%) (g/t) (kt) (kt) (koz) (kt) (koz)
83.48% Proven 20.29 1.61 0.65 21.8 0.21 - 327.4 132.1 14,217 42.3 -
Probable 16.48 1.21 0.59 22.9 0.20 - 198.7 97.0 12,120 32.6 -
Subtotal 36.76 1.43 0.62 22.3 0.20 - 526.1 229.1 26,337 74.9 -

Notes:

1.Subpart 1300 of Regulation S-K definitions were followed for Mineral Reserves, which also are consistent with the CIM (2014) definitions.
2.Mineral Reserves data presented in this table are reported on 83.48% Nexa attributable ownership.
3.Numbers may not add due to rounding.
4.The qualified person for the Mineral Reserves estimate is SLR Consulting Ltd., an independent mining consulting firm.

 

Cerro Lindo – Year End Mineral Reserves as of December 31, 2021 (on a 100% ownership basis) (1)

 

Ownership Class Tonnage(2) Grade Contained Metal
Zinc Copper Silver Lead Gold Zinc Copper Silver Lead Gold
(Mt) (%) (%) (g/t) (%) (g/t) (kt) (kt) (koz) (kt) (koz)
83.48% Proven 24.30 1.61 0.65 21.8 0.21 - 392.2 158.3 17,030 50.6 -
Probable 19.74 1.21 0.59 22.9 0.20 - 238.0 116.2 14,519 39.1 -
Subtotal 44.04 1.43 0.62 22.3 0.20 - 630.3 274.4 31,549 89.7 -

 

Notes:

1.Subpart 1300 of Regulation S-K definitions were followed for Mineral Reserves, which also are consistent with the CIM (2014) definitions.
2.Mineral Reserves data presented in this table represents 100% of the Mineral Reserves estimates for the property. Nexa owns 83.48%
3.Numbers may not add due to rounding.
4.The qualified person for the Mineral Reserves estimate is SLR Consulting Ltd., an independent mining consulting firm.

 

The Cerro Lindo Mineral Reserves are estimated at an NSR cut-off value of US$38.43/t processed. A number of incremental material (with values between US$29.13/t and US$38.84/t was included in estimate. A minimum mining width of 5.0m was used, inclusive of extraction factors and dilution are applied based on stope type and location. The net smelter return (“NSR”) cut-off value is determined using the mineral reserve metal prices, metal recoveries, concentrate transport, treatment and refining costs, as well as mine operating costs. Metal prices used for Mineral Reserves are based on consensus, long term forecasts from banks, financial institutions and other sources. Mineral Reserves are estimated using average long-term metal prices of zinc: US$2,722.20/t (US$1.23/lb); lead: US$1,997.21/t (US$0.91/lb); copper: Cu: US$7,288.26/t (US$3.31/lb) and silver: US$19.68/oz. Metallurgical recoveries are accounted for in NSR calculations based on historical processing data and are variable as a function of head grade. Recoveries at Life of Mine average head grade are 88.1% for Zn, 68.9% for Pb, are 86.6% for Cu, and 68.8% for Ag. The current life of mine (“LOM”) plan continues to 2029.

 
32

Mining Operations

 

 

Cerro Lindo – Net Difference in Mineral Reserves between December 31, 2021 versus December 31, 2020

 

Class Tonnage Contained Metal
Zinc Copper Silver Lead Gold
(Mt) (kt) (kt) (koz) (kt) (koz)
Proven (3.26) (74.6) (10.0) (1,576) (10.7) -
Probable (1.74) 1.2 (16.7) (521) 0.5 -
Subtotal (5.00) (73.4) (26.7) (2,097) (10.2) -

Notes:

1.The total Mineral Reserves dated from December 31, 2020 considered an ownership basis of 80.16%.
2.The total Mineral Reserves dated from December 31, 2021 considered an ownership basis of 83.48%.

 

 

Cerro Lindo – Net Difference in Mineral Reserves between December 31, 2021 versus December 31, 2020

 

Class Tonnage(1) Contained Metal
Zinc Copper Silver Lead Gold
(Mt) (kt) (kt) (koz) (kt) (koz)
Proven (5.07) (109.2) (19.0) (2,672) (15.5) -
Probable (2.99) (8.4) (25.7) (1,251) (1.0) -
Subtotal (8.06) (117.6) (44.7) (3,923) (16.4) -

Notes:

1.The total Mineral Reserves data presented in this table are calculated on 100% basis. Nexa owns 83.48%.

 

In comparison to 2020, Cerro Lindo’s Mineral Reserves have decreased mainly due depletion from mining, increase in NSR cut-off values and geotechnical issues related to deteriorating ground conditions.

 

Cerro Lindo – Year End Mineral Resources as of December 31, 2021 (on an 83.48% Nexa attributable ownership basis) (1)

 

Ownership Class Tonnage(2) Grade Contained Metal
Zinc Copper Silver Lead Gold Zinc Copper Silver Lead Gold
(Mt) (%) (%) (g/t) (%) (g/t) (kt) (kt) (koz) (kt) (koz)
83.48% Measured 3.24 1.93 0.61 21.6 0.23 - 62.5 19.8 2,249 7.4 -
Indicated 2.97 1.04 0.48 28.1 0.26 - 30.9 14.3 2,685 7.8 -
Subtotal 6.21 1.50 0.55 24.7 0.24 - 93.4 34.1 4,934 15.2 -
Inferred 6.87 1.40 0.29 39.2 0.46 - 96.2 19.9 8,659 31.6 -

Notes:

1.Subpart 1300 of Regulation S-K definitions were followed for Mineral Resources, which also are consistent with the CIM (2014) definitions.
2.Mineral Resources Tonnes and Contained Metal presented in this table are reported on 83.48% Nexa attributable ownership.
3.Mineral Resources are reported exclusive of those Mineral Resources that were converted to Mineral Reserves, and Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability.
4.Numbers may not add due to rounding.
5.The qualified person for the Mineral Resources estimate is José Antonio Lopes, B.Geo., FAusIMM (CP) Geo, a Nexa Resources employee.

 

 
33

Mining Operations

 

 

Cerro Lindo – Year End Mineral Resources as of December 31, 2021 (on a 100% Nexa ownership basis) (1)

 

Ownership Class Tonnage Grade Contained Metal
Zinc Copper Silver Lead Gold Zinc Copper Silver Lead Gold
(Mt) (%) (%) (g/t) (%) (g/t) (kt) (kt) (koz) (kt) (koz)
83.48% Measured 3.88 1.93 0.61 21.6 0.23 - 74.9 23.7 2,694 8.9 -
Indicated 3.56 1.04 0.48 28.1 0.26 - 37.0 17.1 3,216 9.3 -
Subtotal 7.44 1.50 0.55 24.7 0.24 - 111.9 40.8 5,910 18.2 -
Inferred 8.23 1.40 0.29 39.2 0.46 - 115.2 23.9 10,372 37.9 -

Notes:

1.Subpart 1300 of Regulation S-K definitions were followed for Mineral Resources, which also are consistent with the CIM (2014) definitions.
2.Mineral Resources data presented in this table represents 100% of the Mineral Resources estimates for the property. Nexa owns 83.48%.
3.Mineral Resources are reported exclusive of those Mineral Resources that were converted to Mineral Reserves, and Mineral Resources are not Mineral Reserves and do not have demonstrated economic viability.
4.Numbers may not add due to rounding.
5.The qualified person for the Mineral Resources estimate is José Antonio Lopes, B.Geo., FAusIMM (CP) Geo, a Nexa Resources employee.

 

The Cerro Lindo Mineral Resources estimates in the table above were completed using Datamine Studio RM (“Datamine”) and Seequent’s Leapfrog Geo (“Leapfrog”) software. Wireframes for geology and mineralization were constructed in Leapfrog based on geology sections, assay results, lithological information, underground mapping and structural data. Assays were capped to various levels based on exploratory data analysis and then composited to 2.5 m lengths. Wireframes were filled with blocks sub-celled at wireframe boundaries. Blocks were interpolated with grade using the ordinary kriging (“OK”) and inverse distance cubed (“ID3”) interpolation algorithms. Block estimates were validated using industry standard validation techniques. Classification of blocks used distance-based and other criteria. The Cerro Lindo Mineral Resources estimates were reported using all the material within resource shapes generated in Deswik Stope Optimizer (“DSO”) software. The estimate satisfied the minimum mining width of 4.0 m for resource shapes, and used NSR cut-off value of US$38.84/t. NSR cut-off values for Cerro Lindo’s Mineral Resources estimate are based on an average long-term zinc price of US$3,130.52/t (US$1.42/lb), a lead price of US$2,296.79/t (US$1.04/lb), a copper price of US$8,381.50/t (US$3.80/lb) and a silver price of US$22.63/oz. Metallurgical recoveries are accounted for in NSR calculations based on historical processing data, and are variable as a function of head grade. Recoveries at Life of Mine average head grade are 88.1% for Zn, 68.9% for Pb, are 86.6% for Cu, and 68.8% for Ag.

Cerro Lindo – Net Difference in Mineral Resources between December 31, 2021 versus December 31, 2020

 

Class Tonnage Contained Metal
Zinc Copper Silver Lead Gold
(Mt) (kt) (kt) (koz) (kt) (koz)
Measured (0.29) (7.9) (3.8) 25 0.3 -
Indicated (0.56) (7.0) 1.8 460 0.8 -
Subtotal 2.68 (14.9) (1.9) 486 1.1 -
Inferred 3.34 7.1 (3.4) 1,647 7.1 -

Notes:

1.The total Mineral Reserves dated from December 31, 2020 considered an ownership basis of 80.16%.
2.The total Mineral Reserves dated from December 31, 2021 considered an ownership basis of 83.48%.

 

 
34

Mining Operations

 

 

Cerro Lindo – Net Difference in Mineral Resources between December 31, 2021 versus December 31, 2020

 

Class Tonnage Contained Metal
Zinc Copper Silver Lead Gold
(Mt) (kt) (kt) (koz) (kt) (koz)
Measured (0.52) (12.9) (5.7) (80) 0.0 -
Indicated 0.10 (10.3) 1.6 440 0.5 -
Subtotal (0.42) (23.2) (4.1) 360 0.6 -
Inferred (0.48) 4.1 (5.2) 1,624 7.3 -

Notes:

1.Mineral Resources data presented in this table are calculated on 100% basis. Nexa owns 83.48%.

 

In comparison to 2020, Cerro Lindo’s Mineral Resources have slightly decreased, mainly due to changes in mining constrains and stope optimization.

Vazante

Location and means of access

The Vazante mine is an underground and open pit, polymetallic mine located about 8.5 km from the municipality of Vazante, in the state of Minas Gerais, Brazil. The approximate coordinates of the mine are 17 57’ 33” S and a longitude of approximately 46° 49’ 42” W, within Zone 23S of the Universal Transverse Mercator coordinate system (Corrego Alegre Datum) at approximately 306,000m E and 8,016,000m N and the project area has elevations ranging from 690 to 970 meters above sea level. Access from Brasilia is via federal highway BR-040 toward Paracatu. Internal roadways connect the various mine-site components. Concentrates are trucked about 250 km to the Três Marias smelter. The closest commercial airport is located in Brasilia. The Vazante municipal airport for light aircraft is adjacent to the mine site.

History

Mineralization was initially exploited by artisanal miners during the 1950s. Mechanized open pit mining and underground mining commenced in 1969 and 1983, respectively. The current primary ore types mined are hydrothermal zinc silicates and willemite. Initial mining operations exploited supergene calamine ores and a mixture of the zinc secondary minerals hemimorphite and smithsonite, which are derived from the weathering of silicate ore.

Title, leases and options

Nexa Brazil owns 100.0% of the Vazante project. Mineral concessions are divided into core tenements, where the known mineral deposits are located and where we have active mining operations, and the surrounding exploration concessions. Nexa Brazil holds one mining concession application, two mining concessions and one group of mining concessions in the core area that have a total area of 2,120.8 hectares. The group of mining concessions comprises six mining concessions, totaling an area of 819.5 hectares. The Mineral Reserves and Resources are located within the limits of one mining concession application and seven mining concessions with a total area of 1,894.3 hectares, which host the active mining operations. One mining concession (tenement # 14.840/1967), which is part of the group of mining concessions, has a potential to host zinc and lead mineralization, however it does not yet have associated mineral reserves and resources.

Nearby the main area, Nexa Brazil also holds 4 exploration applications totaling 1,287.2 hectares, 60 exploration authorizations totaling 47,050.5 hectares, one right to apply for mining concession totaling 344.5 hectares, one mining concession application totaling 190.0 hectares and one mining concession totaling 52.5 hectares, in addition to the core tenements.

Nexa Brazil holds surface rights sufficient to support the current operations. Some surface rights agreements require annual payments to the owners. Three easements have been granted in support of the mining activities. There is sufficient suitable land available within the mineral tenure held by Nexa Brazil for tailings disposal, mine waste disposal, and installations such as the process plant and related mine infrastructure.

 
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Mining Operations

 

Brazilian companies that hold mining concessions are subject to a royalty payment imposed by the National Mining Agency. For more information, see “Information on the Company—Regulatory matters—Brazilian regulatory framework—Royalties and other taxes on mining activities.”

Nexa Brazil holds nine licenses for water management and water use in the operations. Nexa Brazil has lodged renewal applications, where applicable, for the water management.

The Vazante Operation holds several permits in support of the current operations. The main instrument to regulate the Vazante Operation is a set of operating licenses issued by the COPAM from the state of Minas Gerais. The licenses are active, some of them under renewal process.

Mineralization

The Vazante and Extremo Norte zinc deposits are epigenetic zinc silicate deposits, and Vazante is one of the largest deposits of its type worldwide. Mineralization exists within a sequence of pelitic carbonate rocks belonging to the Serra do Poço Verde formation of the Vazante group. The major structural control is the Vazante fault.

We are conducting ongoing tests to explore extensions of known mineralization, infilling areas where no data are currently available, and identifying other areas where mineralization may be present. Examples of exploration successes using these methods within the Vazante mine area include our projects Lumiadeira, Ramp 29, and Deep Exploration.

In 2021, we completed approximately 73.5 km of diamond drilling, divided between exploratory (7.5 km) and infill (66.0 km) drilling. The focus of the exploratory drilling was on the extension of the Vazante mine ore bodies, exploring the targets Lumiadeira, Extremo Norte and Sucuri Norte. In addition, exploratory drilling at Varginha Norte and Vazante Sul targets confirmed the presence of a hydrothermal breccia with moderate Fe-rich carbonation alteration and punctual occurrences of willemite.

In 2021, we spent US$1.3 million on brownfield projects for life of mine extension, including exploration project maintenance and geological activities. In 2021, we drilled 16 exploration drill holes, totaling 7.547,5 meters. We have budgeted US$2.0 million for the project during 2022 and we expect to drill 7.000,0 meters.

 

Operations and infrastructure

The Vazante operation consists of two mechanized underground mines, the Vazante Mine and Extremo Norte Mine, currently operating at a rate of approximately 1.5 Mtpy. Production drilling operations have been performed by company personnel using a variety of drilling machines throughout the history of the Vazante mine.

The Vazante underground mine has been in operation since 1983 and is a fully mechanized mine using rubber-tired diesel equipment for development and production activities. Access is through two portals for Vazante and one portal for Extremo Norte. As development progresses at Extremo Norte, a connecting drift will be established from Vazante to Extremo Norte.

All infrastructure required for the current mining and processing operations has been constructed and is operational. This includes the underground mines, access roads, power lines, water pipelines, offices and warehouses, a process plant/concentrator, conveyor systems, waste rock facilities, temporary ore stockpiles, paste-fill plants, and tailings storage facilities.

The power supply to the Vazante operation is provided by one independent 138 kV transmission lines that feed the site and that can provide up to 55 MW. There are two 30/40 MVA and one 18/23 MVA transformers in the surface substation at the Vazante Operation and power is distributed to other areas of the mine at 13.8 kV and 440 V via transformer secondaries to power mine equipment. The power demand by 2026 is expected to reach approximately 46 MW as dewatering demands continue to grow. Companhia Energética de Minas Gerais S.A (“CEMIG”) is building a new transmission line from Paracatu to Vazante of 60 MW capacity, which is expected to be concluded in 2022. There are two 700 kVA diesel generators on site to provide backup power in case of main line interruption. The price of electrical energy is budgeted at R$0.339/kWh for 2022.

 
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Mining Operations

 

In 2021, we spent US$28.6 million on sustaining capital expenditures for this property, primarily associated with mine development, equipment replacement and other major infrastructure. In addition, we invested US$3.4 million in capital expenditures related to the Vazante mine deepening, focusing on expansion. For more information, see “Information on the Company—Mining Operations—Growth Projects—Vazante mine deepening project.”

In March 2021, during a regular inspection of the Extremo Norte mine in Vazante, we identified that the area around the main access and the escape route of the mine presented above-normal ground displacements. The Extremo Norte mine requires dewatering of the aquifer for its operations, which leads to depressurization and may cause local disturbances in the rock mass around the mine. As a preventive measure, activities in this area were temporarily suspended. Mine activities restarted in the third quarter of 2021 and the rehabilitation plan was concluded ahead of schedule, allowing us to resume mine production during the fourth quarter of 2021.

In January 2022, the daily production of the underground operations at Vazante was reduced to 60% of its capacity due to heavy rainfall levels in the state of Minas Gerais. As a result of the heavy rainfall, Vazante’s underground mine received more water than it could pump to the surface, partially flooding the lower levels of the mine. The Extremo Norte underground mine was not affected and continued to operate at full capacity. Nexa took all necessary measures to support the mine, focused on precautions to ensure the safety of its employees and the host communities, and continued to monitor the rainfall scenario in Minas Gerais in order to ensure the safety of workers and the resumption of mine activities. As of the date of this report, dewatering process is still in progress and we expect operations to resume at full capacity in early April 2022.

 

Production

The Vazante mine is in the production stage and has a treatment plant with a nominal design processing capacity of approximately 4,600 tonnes of ore per day. The table below summarizes the Vazante mine’s concentrate production, metal contained in concentrates produced and average grades for the periods indicated.

 

For the Year Ended December 31,

 

2021

2020

2019

Treatment ore (in tonnes) 1,630,690 1,622,927 1,407,199
Average ore grade      
Zinc (%) 9.98 10.43 11.45
Lead (%) 0.35 0.36 0,31
Silver (ounces per tonne) 0.67 0.63 0.57
Metal contained in concentrate production      
Zinc (in tonnes) 140,500 147,990 139,041
Lead (in tonnes) 1,616 1,333 1,015
Silver (in oz) 500,549 383,509 333,141
Cash cost, net of by-product credits (in US$/t) 893.1 1,180.6 1,138.5
Cash cost, net of by-product credits (in US$/lb) 0.41 0.54 0.52
Capital Expenditures (in millions of US$) 45.4 37.6 70.0

 

Mineral Reserves and Mineral Resources

The Vazante Mineral Reserves estimates are based on the definitions for Mineral Reserves in SK-1300 and the tables below are based on costs and modifying factors from the Vazante mine.

Vazante – Year End Mineral Reserves as of December 31, 2021 (on a 100% ownership basis) (1)

Ownership Class Tonnage(2) Grade Contained Metal
Zinc Copper Silver Lead Gold Zinc Copper Silver Lead Gold
(Mt) (%) (%) (g/t) (%) (g/t) (kt) (kt) (koz) (kt) (koz)
100% Proven 7.39 8.90  - 17.2 0.25 - 657.6 - 4,097 18.8 -
Probable 8.52 8.66  - 10.6 0.19 - 737.6 - 2,896 16.4 -
Subtotal 15.91 8.77  - 13.7 0.22 - 1,395.2 - 6,992 35.3 -

Notes:

1.Subpart 1300 of Regulation S-K definitions were followed for Mineral Reserves, which also are consistent with the CIM (2014) definitions.
2.Mineral Reserves data presented in this table represents 100% of the Mineral Reserves estimates for the property. Nexa owns 100%.
3.Numbers may not add due to rounding.
4.The qualified person for the Mineral Reserves estimate is SLR Consulting Ltd., an independent mining consulting firm.

 

 
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Mining Operations

 

The Vazante Mineral Reserves estimates in the table above consider actual costs and modifying factors from the Vazante mine, as well as operational level mine planning and budgeting. The dilution that has been applied is related to the selected mining method. The Vazante Mineral Reserves are estimated at a NSR cut-off grade of 4% Zn. The NSR cut-off value was determined using the mineral reserve metal prices, metal recoveries, transport, treatment and refining costs, as well as mine operating costs. A minimum mining width of 4.0 m was applied and average bulk density of 3.1 t/m3. Mineral Reserves are estimated using average long-term metal prices of zinc: Zn: US2,722.20/t (US$1.23/lb); lead: Pb: US$1,997.21/t (US$0.91/lb); and silver: US$19.68/oz (using an average long term Brazilian Real (R$) to U.S. dollar exchange rate of 4.98). Long-term metal prices used for Mineral Reserves are based on consensus and long-term forecasts from banks, financial institutions and other sources. Metallurgical recoveries are accounted for in NSR calculations based on historical processing data, and are variable as a function of head grade. Recoveries at Life of Mine average head grade are 84.7% for Zn, 22.1% for Pb, and 42.0% for Ag. The current LOM plan continues to 2032.

Vazante – Net Difference in Mineral Reserves between December 31, 2021 versus December 31, 2020

 

Class Tonnage (1) Contained Metal