Boliden AB (publ) (NEXA) Earnings Call Transcript & Summary

Ladies and gentlemen, I'd like to welcome you to this webcast based on today's press release. My name is Olof Grenmark, and I'm Head of Investor Relations. Today, we will have a presentation led by our President and CEO, Mikael Staffas; and our CFO, Håkan Gabrielsson. Mikael, welcome.

Good morning, everybody, and welcome to this webcast regarding the announcement we just made this morning about the acquisition of a majority stake in Nexa Resources. We will go through -- I will go through some of the key features of the -- both the target and of the deal, and then we will open up for questions and answers. So if you look at this from a Boliden point of view, Boliden is clearly ready for -- to take a next step. We've had a strong financial position for a long time, and we have a good balance sheet. We built a leading position in Europe that we already have with strong ESG potentials. We've shown a continuous organic growth based on profitable investments and successful exploration. We have a well-developed portfolio of projects, robust and efficient productivity and seamless integration of recent acquisitions. So we clearly feel ready for taking a next step. So what are the rationale for this transaction? Well, number one, it's an excellent fit, and it provides an entry point into Latin America for Boliden on a very low risk compared to any other alternative. We are getting good operating cash flow generating assets with an existing management that will largely stay around to be able to manage this. We will also have one of the more important financial and industrial partners in South America to help us as they become a shareholder in Boliden. And Latin America, of course, is attractive mining jurisdictions and also fits well with a low carbon profile that is well known to Boliden. This also gives us access to Nexa's local sourcing. As you know, we today need to source about half of the concentrate for our smelters on the international market, which is basically a lot of South America, and this will make us better in those procurements. And as I said, we will become -- get Votorantim, one of the biggest industrial groups in South America, to come in and partner with us and become a shareholder in Boliden. This is creating a globally diversified and resilient operations. We're getting a significantly increase and become a significant player of zinc globally across both mining and smelting, a highly relevant portfolio of base metals and precious metals that will come with us, and we will continue to focus on the operations as we've done historically as well as focus on safety. And here, the culture of the 2 organizations are quite similar. The transaction is immediately accretive to the Boliden shareholders. This is -- as I said, this is a company that has positive cash flows and positive results coming in from day 1. And it's about an 8% or better contribution to EPS. So what about Nexa? Well, Nexa is a mining and smelting, actually long smelting just as Boliden, although with a slightly higher degree of integration. It has assets across Brazil and Peru, and we'll come into the actual assets as we go forward. It is mainly a zinc producer, as you can see here in terms of zinc metal, it's the zinc metal from the zinc smelters. In terms of mine production, it does, as always, you get by credits coming from copper, from silver and from gold. If you look at then the mining operations of Nexa, puts altogether 5 mines with a variety of history, Aripuanã is the youngest and newest operations. It's a long life of mine that's coming into play, about 2 million tonnes per year. Production has been ramping up and is now producing well since a while back. Vazante is a little bit of a specialty miner in the sense that it produces a specialty concentrate that is very well integrated with the Três Marias smelter, and we'll see on the next page, about 2 million tonnes per year as well in terms of size, and it's been producing for a long time. If you move over to Peru, there is the Atacocha mine up in the Cerro Pasco area. It's been in production a long time. It's had its ups and downs, but it has a concentrate plant capacity of 1.6 million tonnes, and moving on. It is very close geographically to El Porvenir, which is the last one here on the slide, which are going to, as we move forward, going to be operating more and more in combination. And then there's the Cerro Lindo operation, which is the biggest underground mine in Peru. Annual concentrate goes around 7 million tonnes, I should say, but also with a good long historic development. On the smelting side, there are 3 smelters. In Brazil, there are 2 smelters, Três Marias, which is a somewhat of a specialty smelter specializing on the concentrate quality that comes out of the Vazante mine, but can also take other sources and is producing around -- well, more 150,000 tonnes in a good year. Juiz de Fora is smaller, more specialized smelter doing lots of zinc products, not just pure zinc, but zinc specialty products and also using on top of virgin feed also quite a lot of recycling of zinc. And then there's Cajamarquilla, which is the big smelter, which is located in Peru. It's the largest zinc smelter in South America, production around 350,000 tonnes per year, very similar in many of the technology choices to our Kokkola smelter in Boliden and in size also similar to the Odda expansion that's where we're working our way forward. So if you look at Boliden on a stand-alone and with Nexa consolidated in, we see that zinc increases a lot up to -- if you account for 100% of the Nexa production up to well over 650,000 tonnes per year. There's also an increase in copper and in lead production. Precious metals as well, especially silver comes up significantly, whereas gold has a marginal increase. And we will also see that zinc resources and reserves come up quite a lot in line basically with production. And we also see the zinc metal production coming up and the combined will be over 1 million tonnes of zinc per year. This will make the Boliden-Nexa combination one of the largest zinc miners in the world together with Hindustan Zinc and Glencore, with a variety of assets, basically in second and third and fourth quartile assets, where, as you can see, again, the Nexa assets fit well in within the Boliden assets, and that's not a surprise given that they're very similar in many senses in terms of geology, in terms of technology and so on moving forward. And if you look over to the smelter side, this will also pro forma put us over 1 million tonnes, similar to Glencore and Korea zinc in terms of size, with cash margins once again spread over the large part of the cost curve. So with that, Håkan, I'll leave it over to you to talk a little bit about the financials.

So thank you, Mikael, and good morning. As Mikael pointed out, the financials in these transactions are attractive. The assets we're looking at, the assets involved are good assets that generate cash flow. We also see from the combined entity, a strong consolidated EBITDA with limited additional CapEx. For the 2 units -- for the 2 companies combined, consolidated rolling 12 months EBITDA amounted to about USD 4 billion, whereas the CapEx amounted to roughly USD 2.1 billion. Mikael also pointed out that it is an accretive transaction with an immediate contribution of about 8% to EPS based on broker consensus. And looking at Nexa Resources, they have been generating a strong return on capital employed with about 20% in the most recent quarter. Going into a little bit more details about the transactions as such. The consideration is that Votorantim will receive 0.25 Boliden shares for each Nexa share. And that means that they will own about 7% in Boliden. That puts the equity value of Nexa of about USD 2 billion on a 100% basis. Regarding the structure of the acquisition of Votorantim shares, that represents just shy of 65% of Nexa's capital will be paid by newly issued Boliden shares. It has also been agreed that following closing, Boliden has agreed with Nexa to launch a voluntary tender offer to purchase for cash any Nexa shares not acquired at closing at a cash price determined by reference to the fixed exchange ratio agreed with Votorantim &im and the 20-day volume weighted average price of Boliden shares prior to closing. Following the closing, Boliden will also launch a mandatory tender offer to minority shareholders of Nexa's listed Peruvian subsidiaries. Regarding approvals and conditions, this is subject to Boliden shareholder approval where a simple majority is required. There is also the customary regulatory approvals needed and certain other closing conditions that are customary for a transaction of this kind. This slide doesn't change. Anyone can help change the slide for me. Take the next slide. Sorry, it seems to be in the slide here. Let's see. Sorry about this. So the key transaction milestones is that we are expecting closing in Q1 of 2027. That's the best estimate as of now. And before closing, we will need Boliden EGM for the shareholder vote. Nexa will also need an EGM, and then we have the regulatory approvals. And after closing, we've talked about the voluntary tender offer to remaining shareholders in Nexa Resources as well as the mandatory tender offer to minority shareholders in Peru. So Mikael, with that...

Well, thank you, Håkan, and I will not really say anything more than just summarize this, that we will be able to put a strategic fit and to put a new entity into our working, which is very similar and familiar to us with a metal and mining jurisdictions that we like and providing also portfolio diversification to us. We will continue with integrated mining to smelting model, which is an excellent fit with Boliden's existing operations. There will be additional cash flow generated to this for the mining and smelting units, significant growth opportunities with development upside, and the transaction is expected to be immediately accretive to Bolin shareholders. So with that, I will turn it over to the operator and start the questions and answers.

[Operator Instructions] The next question comes from Alain Gabriel from Morgan Stanley.

I have 2 questions from my side. I'll take them one at a time. Firstly, on the capital structure, Mikael, you have arranged for $2 billion of financing, which is much greater than what you could possibly need to acquire the minority shareholders. Firstly, why was this financing arrangement needed? And then second, on a pro forma basis, your potential acquisition of minorities could push your gearing towards the high 30s or low 40s, which is much higher than what your target is. How does that feed into how you are thinking about your capital structure? That's my first question.

Yes. And just to put in perspective on this, the minority, we have agreed to extend an offer to the minority, which is similar to the one that we have for the majority. It is a cash-based offer and that has to do with legal basis around that. We do not know, just to be very frank, what the uptake will be. But as always, when you do things like this, you want to make sure that you do not stand without liquidity. So yes, you could argue that the backstop facility that we have arranged is more than covering this more than ever needed. But as I said, you don't want to stand dry in a situation like this. So that's a lot of extra liquidity. Regarding the kind of balance sheet numbers, as you pointed out, yes, if we get 100% uptake, we will get up to the numbers that you mentioned. On the other hand, if we do get 100% uptake, we will also get 100% of the cash flow that comes out. And we're pretty certain that we will be able to work down the debt levels very quickly in that situation. And we -- just to kind of put on the obvious, we do not intend to change any of our capital structure goals over time because of this transaction.

That's very clear. And the second question is on the synergies. This deal could be somewhat transformative to the Boliden investment case. However, there was no synergy number attached to the slides or to the communication earlier today. How should we think about the synergistic value of this deal? What value do you bring to the table by combining the 2 assets? Are there some numbers you can just share with us?

No. And well, number one, we have not, and that's on purpose, you have said there is no synergy numbers out there. There are potential synergies that we will look at over time. It depends a little bit also on what uptake we will have. But the fields of synergies are that there is clearly a synergy of technical sharing. There's a potential synergy of procuring concentrates in South America. And then the other synergies are more in line with having a wider portfolio and thus a less risky portfolio over time. But we have, on purpose, not put a number to these, and this is not a deal that is dependent on a high synergy number.

The next question comes from Adrian Gilani from ABG Sundal Collier.

Two questions from my end. I guess, first of all, can you talk a bit about the sort of investment needs of the new assets? And if you were to sort of put any potential bigger investments like mine life extensions into the current CapEx pipeline that we're familiar with for you guys?

Just on investments in general, these assets are today cash flow positive or excess cash flow positive with ongoing maintenance CapEx as it stands. There are not foreseen in the short-term foreseeable future, any major investment for prolongations. There are prolongation kind of projects, but they will not be of a major CapEx extent. Then there's a whole set of potential in the portfolio of Nexa that will require CapEx, but those are, number one, voluntary and number two, probably a few years out. So there should not be any cash flow -- any need to provide cash flow into the Nexa system.

Understand. And I guess as a follow-up, can you walk us through sort of what underpins the cash cost position of the mines? They are all above the median and especially considering the significant silver byproduct, what is pushing them above the median cash cost? And are there clear improvements here that can be made fairly soon?

You always have to be careful with these cash cost curves that you get and you have to look into detail what silver price they have assumed the consultants when they make these assumptions. I don't think the silver price was really that high when they did these assumptions. So that's one thing that could be improved. Otherwise, it's fairly clear that these assets operate roughly at the level where they are. There is always somewhat of an improvement potential, but it's not a step change that would require CapEx as well, but we are -- these assets operate relatively well on regular operating maintenance CapEx.

The next question comes from Liam Fitzpatrick from DB.

First question is just on the timing and a bit more on the rationale. I guess on timing, why now? You do have some challenges within your current business in terms of Garpenberg, ramping up Odda, Rönnskär, et cetera. And this deal is clearly going to add another layer of complexity following a deal that you did not that long ago for Lundin's assets. So yes, anything -- any color around the timing? And then in terms of the fit, I mean, I understand the scale argument, but the assets are geographically very far apart. So is there anything that's going to be flowing out of this in terms of concentrate between the different groups where there are some potential benefits?

As I said on the previous question, if you start with #2 here, the synergies in that sense are not very big. Even though that you can potentially at certain times, have some concentrate going between the different continents, in essence, both Nexa and Boliden net buyers. So Nexa doesn't really have that much concentrate to sell. They might have some odd quality sometimes. But it's all about buying in South America from independent mines, both for Nexa and for Boliden. And Nexa is, of course, being a local South American company quite used to this and have a well-established procurement resources. So that's on the -- the first question was...

The timing of...

The timing, yes. Well, timing, you can argue a million times about timing. And also as a buyer, you don't really choose the timing always yourself. But having said that, we feel that the timing is actually quite good. We feel that we are actually through, even though you can argue we're not quite done, but we're through a major part of our investment programs. We're getting lots of things up and running slowly. So in that sense, the timing is relatively good for us as well. The integration of the Lundin assets, you can never say that it's behind you, but it's very well advanced. And we, of course, feel strengthened by the relative ease that we've seen in integrating those 2 assets into the Boliden operating model.

If I could just ask 2 more as well. The release mentions post-closing mandatory tender offers for some of the subsidiaries in Peru. Can you quantify that for us in any kind of way? And the second question, I guess, is just around your views on zinc smelting. Nexa is also net long smelting capacity. We've seen TC terms or spot terms plummet into negative territory. So is this deal -- is your long-term fundamental view that we are ultimately going to see a rebalancing and the economics for smelters improve from where we are currently?

Well, I'll start with the second one and saying that economic terms for smelters is not that bad. Even though TCs are very low, the free metals that you get out of it and including sulfuric acid actually makes smelting a pretty good place to be in. you could always get better, but it's not a bad place just to kind of get that established first. The other one was around...

The quantification of the minorities in Peru.

Yes, the minorities. We don't know exactly how much it's going to cost because it will be Lima Stock Exchange rules that set exactly the level of the offer price as it will have to go transparent through this. But we have estimated that if we get 100% uptake, that will be about SEK 3 billion.

The next question comes from Kaleb Solomon from SEB.

Just 2 for me. You said the sort of ability to realize synergies partly depend on the tender offer take-up. Can you maybe give some color on what sort of initiatives would be harder to implement if Boliden only retains a sort of sizable portion in Nexa?

If there is a minority in Nexa that remains, of course, any kind of commercial transaction between Boliden and Nexa will have to be done on arm's length relationships, and it's not going to be possible, for example, to integrate the trading activities as Nexa has trading activity and we have trading activity today. So there are certain limitations if we don't get up to 100% shareholding. Having said that, we will be able to do things already with the majority position but it will be a little bit cumbersome as we always need to make sure that we don't mistreat the minority in Nexa.

Okay. That's clear. And can you just clarify if the sort of expected EPS accretion of 8% include any contribution from synergies or operational improvement? And if not, can you give some color on what those could be?

It does not because those -- that 8%, as mentioned, there is based purely on analyst estimates, so prior to the deal. And as I said, we have not and we will not give a number on synergies, but it's going to be a relatively small number, at least initially. So the 8% is based purely on existing operations.

The next question comes from Jason Fairclough from Bank of America.

Congrats on the deal. Look, a couple for me. First, maybe you could talk a little bit about how you see the increased risk for Boliden from the exposure to these LatAm countries versus the potential benefit from having a bigger footprint and ultimately running more assets.

Jason, of course, we've had lots of discussion about risks of entering South America in different ways, given that that's an interesting place to be given geology and everything else. We have concluded that what we're doing right now is the lowest risk that we've ever been able to establish around doing this. We get well operating existing positive cash flow assets with management. And we also get a partner in the Votorantim Group that is local in South America to help us. Regarding Sweden and Brazil, there is a long history around that with defense or cooperation, in very tricky sectors, including defense and aerospace. So from that relationship, we feel quite confident around the geopolitical risk. Peru, it's a little bit more risky. But once again, we also feel relatively confident. And Peru has been through lots of political turmoil in the last 10 years, but relatively stable operating conditions for mining companies anyway, although there is a higher risk there, but we feel that we are relatively well positioned to handle those.

Okay. Second question, if I could. And look, maybe my information is out of date, Mikael, but my understanding was that at least one of the mines had been loss-making and was being effectively run at a loss, but to keep the smelter running. Is that true? Or has that situation evolved?

I think that that's not true, but there's partial truth to what you said. The Aripuanã mine, which is a relatively new mine, was clearly behind schedule in its ramp-up and was losing money initially. It will still continue to ramp up because ultimately it was going to make money, which it is right now, and I would say it's more or less fully ramped up. I would argue, even though you have to ask an excellent management of that, but that was not done in order to feed any smelter. It was done in order for -- to get the mine up and running. There has not been any kind of other cross operation. There is a trick on how you manage things between the Vazante mine and the Tres Marias smelter because the Vazante concentrate is of such a quality that is not really sellable on to anybody else. Only Tres Marias has a special equipment to handle that. And it's the same way Tres Marias can take in external concentrate, but not to a big extent. So those 2 have to be looked into in combination, and it's always been profitable in combination. Then you can argue a little bit about the transfer pricing between those units because the classical benchmark TCs that are used is not really relevant because of the concentrate quality.

Okay. Just to come back to a point that a few people have asked, you long smelting. This group is long smelting. And obviously, the group has a history of procuring concentrates to keep the smelters full. Is there actually room here to think about rationalizing some of the smelting footprint between the 2 businesses?

Well, lots of things can be done over time. But as I said, as long as we have a minority, we cannot really look across the 2 units. We have to look at the individual units. And I think that there -- we have to see what can be done in Nexa over time. It's a little bit of a difference here between Peru and Brazil, where Peru, it's pretty easy to be long smelting. There's lots of mining capacity in the area, lots of concentrate to buy. Brazil is a little bit more challenged situation, but I think this will evolve over time, and we'll see what we can do.

The next question comes from Matt Greene from Goldman Sachs.

Mikael, you mentioned there's limited synergies at the moment. And I guess it is accretive because Nexa is cheaper and possibly because this company has faced a number of challenges on several fronts in recent years. So I guess, at this point in the cycle, do you see better risk-adjusted returns in Nexa versus your existing organic growth pipeline?

Well, you're saying the word risk-adjusted, and it, of course, depends on which risk you use. But I will say that short term, the risks in Nexa, we feel are quite limited. The technology risks are more or less behind them. There is always a geopolitical risk. But as I said before, we don't think it's too much. And everything else equal, Nexa has good cash flows. Now we haven't really talked too much about this, but also Nexa has a higher debt level than we're used to. So we will bring up our consolidated debt level, not immensely, but to some extent. And we would, of course, also be quite happy to run down the debt level in Nexa to some extent as we now start getting good cash flows.

Got it. Okay. I guess in your due diligence, what were the top areas of risk that you see? Is it more around technical? Is it more around cultural? I mean, obviously, Peru is they faced some social issues there as well. Can you just flag where do you see the key risk here on the execution front?

Well, I mean, you mentioned a whole set of them, and we've looked into technological and geological situation that we feel very comfortable. We also feel comfortable with geopolitics. Another area which you haven't asked yet, but if those who read the Nexa annual report, we figure out that Nexa has had quite some tax issues, which are well known to us, and we have looked into them, and we have spent quite some time in the due diligence understanding the tax situation, especially in Peru, which has been a little bit tricky to them. Yes, those have been -- we've also looked into the people side. We looked into the health and safety area. Nexa has worse numbers than we do, but we have a sense that they have a program already in place and that we could probably enhance a little bit to get health and safety culture to an even better level.

The next question comes from Richard Hatch from Berenberg.

Just a few questions from me. I'm still going to follow up on this bridge funding. So 35% of the company you don't own is $715 million in value. And then the minorities in Peru are guided to SEK 3 billion or about USD 315 million. That gives me about USD 1 billion. So again, like why do we need to have a bridge facility of $2 billion? Is that just purely conservatism? Or is there something else that I'm missing there? That's the first one.