Nexa Resources SA

Executive summary

The following is an overview of 2023, compared to 2022. For an overview of 2022 compared to 2021, please refer to “Operating and financial review and prospects” in our Annual Report on Form 20-F for the year ended December 31, 2022, filed with the SEC on March 20, 2023, as amended by our Annual Report on Form 20-F/A, filed with the SEC on October 27, 2023. During 2023, we safely operated our assets and delivered a solid operational performance.

In 2023, we had net revenues of US$2,573.2 million, a 15.2% decrease from 2022, mainly due to lower zinc and copper prices and lower smelting sales volume, which was partially offset by higher mining production volumes. We also had net loss of US$289.2 million, a US$365.6 million decrease as compared to 2022, as a result of the decrease in operating income, mainly due to the aforementioned reasons.

Despite rising inflation, high interest rates, aggressive monetary policy tightening, increasing commodity price volatility, and social and political instability, including the ongoing conflict in Russia-Ukraine and the Israel-Hamas conflict, supported by a solid operational performance, we delivered an Adjusted EBITDA of US$391.2 million in 2023, down 48.6% compared to 2022, negatively impacted by the decline in base metal prices, especially the strong decline in zinc prices, and lower smelting sales volume. We use Adjusted EBITDA as an additional measure of operational performance of the Company’s business (used in addition to, and not as substitute for, net income) without the impact of (i) share in the results of associates, depreciation, amortization, net financial results and income taxes, (ii) non-cash events and non-cash gains or losses that do not specifically reflect our operational performance for the specific period, and (iii) the impact of pre-operating and ramp-up expenses incurred during the commissioning and ramp-up phases of greenfield projects (currently, Aripuanã). For a discussion of our Adjusted EBITDA, reconciliation with most comparable IFRS Accounting Standards figures and changes made in 2023, see “Operating and financial review and prospects—Results of operations—Non-IFRS Accounting Standards measures and reconciliation.”

We measure our liquidity by cash flows. For a description of our cash flows, see “Operating and financial review and prospects—Liquidity and Capital Resources—Source of funds.”

Although we believe we are well-positioned, benefitting from our unique position in Latin America, in addition to the strong fundamentals of our business in the long-term, with flagship assets and a strong balance sheet, it is anticipated that challenges such as difficult macroeconomic conditions are likely to continue in 2024, which may affect our operations.

In January and June 2023, as well as in February 2024, protest activities by local communities in Peru temporarily suspended operations at Atacocha. In each of these instances, Nexa complied with all existing agreements, pursued an active dialogue with the communities and authorities, and remained committed to the social development of all its host communities. During the protests, mining activities were limited to critical operations with a minimal workforce to ensure appropriate maintenance, safety, and security. Even though production was temporally suspended during these periods, we were able to operate at high levels of capacity utilization rates throughout the year, but zinc production in Atacocha decreased by 14.2% compared to 2022. There was no material impact of these temporary suspensions, and the Company achieved its full consolidated production guidance for all metals in 2023.

In March 2023, production at the Cerro Lindo mine was suspended due to heavy rainfall levels and overflowing rivers caused by cyclone Yaku, resulting in the partial flooding of some lower levels of the mine. In April 2023, Cerro Lindo resumed its operations, and road access was restored. During the temporary suspension, Nexa remained focused on the security and reparation of the mine and took measures to ensure the safety and well-being of its employees, contractors and host communities. Despite the temporary suspension of the mine, there was no material impact on 2023 production, with Cerro Lindo achieving the upper range of our 2023 production guidance for all metals.

Overview

Aripuanã’s ramp-up activities began in July 2022, and the mine remained in the ramp-up phase throughout 2023. In 3Q23, Aripuanã’s guidance production range was revised downwards for the year, as a result of design limitations in the capacity of the flotation pumping system, identified during the detection of bottlenecks, which required resizing and updating certain plant processing facilities and systems, as well as the clean-up and upgrading of water treatment facilities. In 4Q23, we achieved an average of 61% capacity utilization level and we expect to reach nameplate capacity in mid-2024. The mine is fully operational, and underground activities in 2023 were focused on developing and preparing areas for a ramp-up in mining operations, commissioning the paste back-fill plant and transitioning out a mine development contractor. Our priority in 2023 was, and for the first half of 2024 is to continue improving metal recovery and concentrate quality and grades, aiming to achieve a stable operation. At the end of February 2024, the average capacity utilization rate was around 61%, maintaining similar levels as in 4Q23, given the usual rainy season period in the region, which impacted our dry disposal capacity. However, during this period the operational focus was to maintain concentrate quality and grades, as well as the metallurgical recovery rates.

Regarding our exploration activities, in 2023 we continued to focus our investments on projects around the mines we operate. We believe that our exploration program and disciplined approach on project evaluation, will contribute to replace and increase mineral reserves and resources of our current assets, and define the materiality of exploration stage projects. We will continue to seek new regional targets to identify prospective areas and define materiality for new projects.

In terms of our brownfield projects, our objective is to extend the life of mine, therefore, most of the mineral exploration budget in 2023 was allocated to drilling activities in these projects, with emphasis on Cerro Lindo, Vazante and Aripuanã. In terms of greenfield projects, we direct continuous efforts to define the expansion of the known mineralization and identify new mineralized zones in regional prospective trends, with emphasis on Hilarión and Namibia, as well as focusing on expanding the mineral inventory of Aripuanã.

Our 2023 financial results were affected by factors including: (i) lower LME metal prices, especially zinc; (ii) higher operational costs mainly in Aripuanã during the ramp-up phase related to concentrate and stockpile costs; (iii) lower zinc metal and oxide sales volumes; (iv) lower by-products contribution; and (v) the negative impact of FX variation.

In 2023, we had an 8.2% increase in our zinc equivalent (mine production), from 564.7 thousand tonnes in 2022 to 611.1 thousand tonnes in 2023, mainly driven by the increase in production for all metals, specifically zinc and lead production increasing by 12.4% and 13.5%, respectively, mainly due to the increase in production at Aripuanã. Our total zinc metal (metallic zinc and zinc oxide) sales decreased by 4.3% in our smelting operations, from 616.2 thousand tonnes in 2022 to 589.8 thousand tonnes in 2023.

In 2023, our net revenues were 15.2% lower compared to 2022, reaching US$2,573.2 million, primarily driven by lower LME zinc and copper prices and lower smelting sales volume, which was partially offset by higher zinc mining production. See “Overview—Results of operations—Net revenues” for more information.

Our capital expenditures totaled US$309.0 million in 2023, a 18.9% decrease compared to 2022, mainly due to the decrease in expansion investments with the conclusion of construction at Aripuanã. In 2023, 94.7% of our capital expenditures was allocated to sustaining investments, including US$79.4 million invested in the Aripuanã mine.

Outlook

In 2024, we estimate that we will produce (i) between 323.0 thousand tonnes and 381.0 thousand tonnes of zinc contained in concentrate, (ii) between 30.0 thousand tonnes and 35.0 thousand tonnes of copper contained in concentrate, (iii) between 66.0 thousand tonnes and 82.0 thousand tonnes of lead contained in concentrate and (iv) between 11.0 million ounces to 13.0 million ounces of silver contained in concentrate.

In 2024, zinc production at the mid-range of the guidance is estimated to increase 5.6% over 2023 (18.6kt) mainly driven by the Aripuanã mine. For 2025 and 2026, zinc production is estimated to be similar over 2024. For the forecasted period, zinc head grade is expected to be in the range of 2.86% and 3.18%, copper head grade is expected to be in the range of 0.26% and 0.32% and lead head grade is expected to be in the range of 0.67% and 0.77%.

Overview

In 2024, we expect to sell between 545.0 thousand tonnes and 565.0 thousand tonnes of metallic zinc product volume and between 35.0 thousand tonnes and 40.0 thousand tonnes of zinc oxide product volume.

Metal sales volume at the midpoint of the guidance range of 580.0 to 605.0 thousand tonnes in 2024 is estimated to be similar compared to 2023, as these estimates do not assume the resale of material from third parties. For 2025 and 2026, metal sales volume is forecasted to remain unchanged over 2024 (ranging from 580.0 to 605.0 thousand tonnes).

These estimates are based on several assumptions, including but not limited to metal prices, operational performance, grades, maintenance, input costs, exchange rates, political and social situation in the countries where we operate.

Regarding our cash cost net of by-products credits estimates for 2024, for our mining segment, we estimate cash cost after by-products credits to be between US$0.23-0.42 per pound of zinc sold in 2024. This cost does not include Aripuanã, which is in the ramp-up phase, which is expected to be concluded in mid-2024. The estimated decrease of 19.4% compared to 2023 is mainly driven by higher by-products contribution and lower TCs. For our smelting segment, cash cost after by-products credits in 2024, is estimated to be between US$1.07-1.18 per pound of zinc sold. The estimated cost increase compared to 2023 is mainly driven by lower TCs.

Our estimated capital expenditures for 2024 is US$311.0 million, sustaining investments are expected to total US$261.0 million, with mining accounting for US$200.0 million, including US$39.0 million at Aripuanã, and smelting accounting for US$61.0 million. In 2024, we also expect to incur US$72.0 million in mineral exploration and project evaluation expenses, with US$58.0 million allocated to exploration (including brownfields, greenfields, mineral rights, mine development, business development and administrative issues) and US$14.0 million allocated to project evaluation. In mineral exploration, we plan to continue our efforts to replace and increase mineral reserves and resources in our operating assets and define and expand the mineralized zones in exploration phase projects, focusing on Cerro Lindo, Aripuanã, Vazante and El Porvenir (brownfields) and copper opportunities (exploration phase), respectively.

These estimates should be considered preliminary, subject to change and are based on several assumptions that management believes to be reasonable as of the date of this annual report, which are subject to change based on internal and external developments. As of the date of this annual report, we continue to monitor developments related to the socio-political environment in the countries we operate and the impacts of global conflicts, including the Ukraine-Russia conflict and the Israel-Hamas conflict, on the economy, supply and demand for commodities, global security concerns, and market volatility. We cannot predict how and to what extent global conflicts, any protest activities or other operational issues may impact our current plans and objectives for 2024, including with respect to our consolidated production guidance and our current capital expenditure, mineral exploration, and project evaluation disbursements. See “Forward-looking statements.” For cash cost guidance, see “Presentation of financial and other information—Non-IFRS Accounting Standards measures.”

Key factors affecting our business and results of operations

Reporting segments

We have two reportable segments: mining and smelting. A major part of our zinc mining production, representing approximately 94.5% of production in 2023, is processed in our own smelters. Similarly, a major part of the zinc raw material consumption for our smelting operations, representing approximately 47.9% of zinc contained in raw material (excluding oxide) in 2023, comes from our own mines. As a result, the revenues of our mining segment include sales to the smelting segment, and the costs of our smelting segment include purchases from the mining segment. We calculate internal transfer prices from our mines to the smelters on an arm’s length basis to evaluate the performance of our mining and smelting segments individually. These revenues and costs are eliminated in our consolidated financial statements.

The profitability of our mining segment depends primarily on world prices of the metals we produce, and on our costs to produce concentrates. It is also affected by treatment charges, which are amounts representing the cost of further processing that are applied to reduce the price of concentrate. Other factors affecting pricing are discussed below.

Overview

The profitability of our smelting segment does not depend directly on market prices for metals because they have a similar impact on our revenues and our costs. It is affected primarily by treatment charges (which reduce our costs to acquire concentrates), by the premium over the market price of metals that we can charge for our products, and by the operating costs of our smelters and their efficiency in recovering the metal content of the concentrates we purchase.

Segments are reported in accordance with IFRS Accounting Standards 8 “Operating Segments,” and the information is presented to the chief executive officer, who is the chief operating decision maker in accordance with IFRS Accounting Standards 8. Segment results are derived from the accounting records and are adjusted for reallocations between segments, depreciation and amortization and miscellaneous adjustments, if any, for the period. For more information, see “Operating and Financial Review and Prospects—Results of Operations—Non-IFRS Accounting Standards measures and reconciliation” in this report. See also Note 2 to our consolidated financial statements.

Metal prices

Our financial performance is significantly affected by the market prices of zinc, copper and lead, and, to a lesser extent, silver, gold and the other by-products of our smelting operations. Metal prices have historically been subject to wide fluctuations and are affected by numerous factors beyond our control, including the impact such factors have on industries representing first-uses and end-uses of our products. These factors, which affect each metal to varying degrees, include international economic and political conditions, levels of supply and demand, the availability and cost of substitutes, inventory levels and, to a lesser degree, inventory carrying costs and currency exchange rates. In addition, market prices have on occasion been subject to rapid short-term changes due to speculative activities.

The market prices for zinc, copper and lead are typically quoted as the daily cash seller and settlement price established by the LME. LME zinc prices are influenced by global supply and demand for concentrate and metallic zinc. The supply of metallic zinc depends on the amount of zinc concentrates and secondary feed materials produced and the availability of smelting capacity to convert them into refined metal. This also applies to copper and lead.

The table below sets forth the average published market prices for the metals and periods indicated:

The key drivers and recent trends of each of the metals that we produce are discussed below.

Zinc

Zinc is a major material for the construction, transport and infrastructure industries, which represent approximately 50%, 21% and 16% of the zinc end-use, respectively, according to Wood Mackenzie.

The annual average price of zinc on the LME as of December 31, 2023, was 23.9% lower when compared to the corresponding period in 2022. In 2023, the main factor contributing to the decrease in price of zinc as compared to 2022 was the lack of demand from traditional sectors such as construction in most of the consuming regions. In China, after the peak in zinc prices in the 1Q23 with expectations of the country’s recovery after the end of lockdowns, disappointing data from the real estate sector caused the steep drop in prices going into 2Q23. In the US and Europe, the high level of inflation and tax rates discouraged the real estate sector. The sectors that had increases in demand were those connected to the energy transition, such as solar power generation and electric vehicles.

Overview

From the supply side, 2022 was a year of smelter closures with the increase in power prices, especially in Europe, but production levels were normalized by the first half of 2023, with some production that remained offline (Nordenham, for example) as demand was weak. On the other hand, as zinc prices came down during 2Q23, reaching a minimum price of US$2,224/t by May 25, many mines ceased production as the continuing high level of costs caused some assets to operate with negative margins. At the end of 2023, approximately 5% of the world’s zinc concentrate production was offline.

Spot treatment charges for imported concentrates in China decreased from US$275 per tonne in January 2023 to US$80 per tonne in December 2023, as reported by Wood Mackenzie, while long-term contract treatment charges increased from US$230 per tonne in 2022 to US$274 per tonne in 2023. The benchmark for long-term treatment charges was set in April reflecting the surplus of concentrate at the time, after Europe’s smelters closures, although this scenario changed rapidly throughout the year, as smelter production declined due to a reduction in concentrate supply, as mines ceased production. Energy prices also presented a major concern throughout the year, with smelters in China and Europe ceasing or reducing production.

According to Wood Mackenzie’s December 2023 report, in 2023, the zinc metal market closed with a surplus of 260 thousand tonnes resulting from a metal production of 13.7 million tonnes and consumption of 13.4 million tonnes (1.6% lower than 2022). Mine supply presented a decrease of 2.3% in 2023, with a total of 12.5 million tonnes, leading to a concentrate deficit of 107 thousand tonnes, which is expected to drive benchmark treatment charges down during the negotiation of contracts in 2024.

Refined zinc supply presented an increase in 2023, mainly because of Europe’s smelters coming back online and an increase in China’s smelter production.

Copper

Copper is used for building construction, power generation and transmission, electronic product manufacturing and the production of industrial machinery and transportation vehicles. The annual average price of copper on the LME as of December 31, 2023 was 3.6% lower than in the corresponding period in 2022. This was mainly a net result of positive effects related to mine disruptions, a falling US dollar value and demand from sectors related to the energy transition, while traditional demand, such as civil construction and real estate, failed to grow at a faster pace. On balance, total mine production, refined production, as well as global demand for refined copper increased in 2023 compared to 2022 according to Wood Mackenzie.

Lead

Lead is used in batteries as energy storage and in other products such as ammunition, oxides in glass and ceramics, casting metals and sheet lead. The annual average price of lead on the LME as of December 31, 2023 was 0.6% lower than in the corresponding period in 2022. This decrease reflects the market moving into surplus during the last year despite only a modest recovery in mine, and therefore primary smelter, output, while secondary output is suffering with raw material supply.

Silver

Silver is considered a precious metal and generally seen as a store of value, so its price tends to be resilient in times of economic uncertainty. In addition, applications in electronics and solar cells have added to the already broad range of uses of silver in currency, jewelry, and silverware. The annual average LBMA silver price for the year ended December 31, 2023 was 7.5% higher than in the corresponding period in 2022. Silver prices hit the highest level of the year on April 14, 2023, US$26.03 per ounce, which was 0.6% below the highest point of the previous year reached on March 09, 2022, but failed to maintain a similar level over the remainder of 2023, nearing US$21 per ounce in October and recovering by the end of December with US$22.73 per ounce. This performance was mainly due to the volatility of the US dollar and geopolitical risks.

Overview

Production volumes, ore grade and metal mix

Our production volumes, the ore grade from our mines and the mix of metals in our product portfolio affect our business performance. For more details, see “Information on the Company—Mining operations.” Our zinc production increased by 12.4%, while copper and lead increased by 0.5%, and 13.5%, respectively, in 2023. Production of silver contained in concentrates increased by 3.3% in 2023.

Commercial terms

We sell our concentrates and metallic zinc and zinc oxide products mostly through supply contracts with terms between one and three years, and only a small portion is sold on the spot market. The agreements with our customers include customary international commercial terms, such as cost, insurance and freight, or CIF; free on board, or FOB; free carrier, or FCA; and cost and freight, or CFR; pursuant to Incoterms 2010/2020, as published by the International Chamber of Commerce. For concentrates, revenues are recorded at provisional prices and, typically, an adjustment is then made after delivery, based on the pricing terms provided for under the relevant contract.

Sales prices for our products are based on LME and/or LBMA quotations. Concentrates are typically sold at the LME price reference minus a discount (treatment charge for zinc and lead; treatment charge and refining charge for copper). Metallic zinc and zinc oxide are typically sold at the LME quotation averaged during a quotation period, such as the month after shipment, the month prior to shipment or another agreed period, plus a negotiable premium that varies based on quality, shape, origin, and delivery terms and also according to the market where metal will be sold. In 2023, 47.1% of the total zinc raw material consumption in our smelters was produced by our mines and 52.9% was purchased from third parties or was obtained from secondary raw materials (including oxide). We buy zinc concentrates from different suppliers in the market to meet our raw material requirements. We sell all our copper and lead concentrates production to metal producers and international traders, on international market terms.

Our sales of metallic zinc are highly diversified. Our customer base is composed mainly of end users. Our products reach the following end use industries: transport, construction, infrastructure, consumer goods and industrial machinery. In 2023, 71.5% of our total sales were to customers in the continuous galvanizing, general galvanizing, die casting, transformers and alloy segments, and 28.5% were to international traders. Our ten largest customers represented approximately 58.0% of our total sales volume in 2023. In 2023, we sold to more than 330 customers across 45 different countries.

Free zinc, treatment charges, premiums and smelter by-products

Smelters are processing businesses that achieve a margin on the concentrates and other feedstocks they process; in large part, the price for the underlying metal is effectively passed through from the miner supplying the concentrate, or the supplier of the secondary feed material, to the smelter’s customer. Our smelters use zinc concentrate as feedstock, which is supplied from our mines and from third-party suppliers. The smelter earns revenue from (i) the treatment charge reflected as a discount in the purchase price it pays, (ii) the refined metal it can produce and sell over and above the metal content it has paid for in concentrates purchased from the miner (free metal) and (iii) any premium it can earn on the refined products it sells to its customers. By-products can also contribute to a smelter’s revenue. By-products from our smelting operations include, among others, silver, gold, copper, cement, sulfuric acid, lead concentrate, lead-silver concentrate, silver concentrates, limestone and copper sulfate.

Free zinc and treatment charges

Free zinc is the difference between the amount of zinc that is paid for in the concentrates and the total zinc recovered for sale by the smelter. The value of the zinc that is paid for corresponds to 85.0% of zinc content, which has historically been the industry standard, multiplied by the LME price of zinc. The zinc content which is not paid for is considered “free zinc.” The margin of a zinc smelter improves as the amount of metal in zinc concentrates that it can recover increases.

The treatment charge (“TC”) is a discount per tonne of concentrates, which is determined by negotiation between the seller (a mine or a trading company) and the buyer (a smelter). Treatment charges can be benchmark TC (negotiated by the major miners and buyers), spot or negotiated.

Overview

We apply a Benchmark TC for our integrated mining and smelter operations in Peru. For our other purchases of zinc concentrate from third-party miners and trading companies, the treatment charge is based on the Benchmark TC, spot treatment charges or treatment charges negotiated annually with miners or trading companies.

In order to reduce volatility, for most of our third-party contracts, which are renewed throughout different periods during the year, we consider the 3-years average TC. The reference (average benchmark TC of 2023, 2022 and 2021) for 2023 stood at US$221/t concentrate, down 3.7% from the previous reference (average benchmark TC of 2022, 2021 and 2020).

The market trend for treatment charges reflects the supply and demand for concentrates in the market. Treatment charges tend to fall when concentrate demand increases relative to supply, and they tend to rise when demand falls. In other words, when there is an excess of concentrate compared to the smelting processing capacity, treatment charges tend to rise and when there is a deficit of concentrate in the market, treatment charges tend to fall. For information regarding our actual treatment charges, see “Information on the Company—Smelting operations.”

The following table sets forth, for the periods indicated, the zinc realized Benchmark TC, expressed in dollars per dry metric tonne (“dmt”) of concentrate.

Source: Wood Mackenzie.

Premiums

Like other smelters, we sell metallic zinc and zinc oxide products at a premium over the base LME price. The premium reflects a combination of factors, including the service provided by the smelter in delivering zinc of a certain size, shape or quality specified by its customers and transportation costs, as well as the conditions of supply and demand prevailing in the regional or local market where the metal is sold.

Premiums tend to vary from region to region, as transportation costs and the value attributable to customer specifications tend to be influenced by regional or local customs rather than being a function of global market dynamics.

The following table sets forth, for the periods indicated, information on premiums for the markets indicated, expressed in U.S. dollars per tonne.

Source: Wood Mackenzie.

The following table sets forth, for the periods indicated, the gross premium over the base LME price for zinc oxide realized by our smelting operations in Brazil, expressed in dollars per tonne.

Smelter by-products

The quantity of by-products produced in our smelters depends on several factors, including the chemical composition of the concentrate and the recovery rates achieved. Concentrates from some mines contain higher levels of by-product metals than concentrates from other mines. In addition, the higher rate of by-product recovery increases the number and volume of by-products that can be produced and sold.

Overview

Sulfuric acid is the principal by-product we sell. It is manufactured from the sulfur dioxide gas generated from roasting zinc concentrates. While the zinc smelters use sulfuric acid in their leach plants, almost all this requirement is generated in each zinc smelter’s electrolysis plant, and only small amounts of the sulfuric acid produced are used in its facilities, leaving the rest available for sale. We sell sulfuric acid under annual or multi-year contracts and spot sales.

Silver concentrate is another relevant by-product that we produce at our Cajamarquilla and Juiz de Fora smelters. Silver concentrate is one of the components of zinc concentrate and is obtained during the zinc metallurgical flotation process. Recovered silver is sold primarily to international traders and local customers.

Operating costs and expenses

Our ability to manage our operating costs and expenses is a significant driver of our business performance. We focus on controlling and limiting our costs and expenses so that we are better prepared to overcome less favorable pricing conditions.

Energy costs

Our total cost of energy is composed of the operating costs of our own hydroelectric power plants, long-term energy supply contracts, transmission and distribution charges and fees.

In Peru, the energy market is more stable in terms of generation (hydrology forecast) and prices. We obtain 2.6% of the energy for our operations from our own hydroelectric power plants and 97.4% from third party contracts with the SEIN.

In Brazil, the energy for our operations comes from five hydroelectric plants in which our subsidiary Pollarix has directly or indirectly the following interests as of December 31, 2023: a 22.4% participation in the consortium Enercan (Campos Novos hydroelectric power plant), 100% ownership of a hydroelectric power plant (Picada) located in Minas Gerais, a 12.6% participation in the consortium Amador Aguiar I, a 12.6% participation in the consortium Amador Aguiar II and a 23.9% participation in the consortium Igarapava. We account for the consortiums as joint operations, as discussed in Note 4(b) to our consolidated financial statements. On a consolidated basis, our costs for energy in Brazil reflect the operating costs of the hydroelectric facilities and are sensitive to a variety of factors, including hydrologic variables.

The only activity of Pollarix is to own our energy assets, and it sells energy to our Brazilian operating subsidiaries at market prices. We own all the common shares of Pollarix, which represents 33.3% of its total share capital and/or its affiliates. The remaining shares are preferred shares with limited voting rights, which are owned by Auren. Under the terms of the preferred shares, Auren is entitled to dividends per share equal to 1.93 times the dividends per share payable on the common shares. See “Information on the Company—Other operations—Power and energy supply—Brazil.” As a result, a substantial part of the profits recognized by Pollarix from selling energy to our Brazilian operating subsidiaries will represent non-controlling interest in our income statement.

Environmental expenses

Our mines and smelters operate under licenses issued by governmental authorities that control, among other things, air emissions and water discharges and are subject to stringent laws and regulations relating to waste materials and various other environmental matters. Additionally, each operation, when it ultimately ceases operations permanently, will need to be rehabilitated.

We have made significant investments to reduce our environmental impact in the areas in which we operate and to ensure that we are able to comply with environmental standards. All our operational units have environmental improvement initiatives relating to reducing emissions and waste and improving the efficiency of use of natural resources and energy.

Overview

Where appropriate, we establish environmental provisions for restoration or remediation of existing contamination and disturbance, with all material issues being reviewed annually. Provisions associated with smelter and mining operations sites primarily relate to soil and groundwater contamination.

Since 2016, we have conducted an extensive study and update of our decommissioning plans, including potential environmental obligations. During this period, we also modified our internal policies for decommissioning and environmental issues, which require frequent updates of environmental studies to reflect the best international practices. As a result of these adjustments, we recorded additional environmental provisions of US$12.6 million and US$6.9 million in 2022 and 2023, respectively. Although not expected in the near future, changes in legislation and adjustments to our internal policies after the ongoing evaluations could require additional provisions.

Macroeconomic conditions of the countries and regions where we operate

Peru

The following table sets forth Peruvian inflation rates, interest rates and exchange rates for the dates and periods indicated.

Sources: Central Reserve Bank of Perú, Peruvian Ministry of Economy and Finance.

(1) Preview: Bloomberg consensus rate.

(2) Accumulated during each period.

(3) Official offer exchange rates.

Brazil

The following table sets forth Brazilian inflation rates, interest rates and exchange rates for the dates and periods indicated.

Sources: IBGE, the Central Bank, Cetip, and FGV.

(1) Preview published by the Central Bank official report (Focus) as of December 31, 2023.

(2) Accumulated during each period.

(3) Official offer exchange rates.

Overview

Effects of exchange rate fluctuations

Prices for our products are based on international indices, such as LME prices, and denominated in U.S. dollars. A portion of our production costs, however, is denominated inreais, so there is a mismatch of currencies between our revenue and costs. In 2023, 20.5% of our production costs and operational expenses were denominated inreaisand 16.1% of our production costs and operational expenses were denominated insoles, a smaller portion compared toreais,since most of our costs in Peru are in U.S. dollars. As a result, our results of operations are affected by changes in exchange rates betweenreais and, to a lesser extent,soles, and the U.S. dollar.

The following table sets forth for the periods indicated (i) the high and low exchange rates, (ii) the average of the exchange rates on the last day of each month for each year and daily for each month and (iii) the exchange rate at the end of each period, expressed insoles per U.S. dollar (sol/US$) andreais per U.S. dollar (real/US$) as reported by the Peruvian Central Bank and the Brazilian Central Bank, respectively.

Source: Central Reserve Bank of Peru, Brazilian Central Bank, official offer exchange rates.

(1) Annually, represents the average of the daily exchange rates during the periods presented.

Income taxes

Income taxes in Luxembourg, Peru and Brazil have a significant impact on our results. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant changes. Our future effective tax rates could be affected by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities and changes in tax laws or their interpretation.

Luxembourg

The combined applicable income tax rate (including an unemployment fund contribution) is 24.94% from 2019 onwards for entities having their statutory seat in Luxembourg City.

Brazil

Our Brazilian subsidiaries are subject to corporate income tax on their Brazilian and non-Brazilian income. In addition to corporate income tax, a social contribution tax is imposed on their worldwide income, and the combined applicable rate is 34.0%.

Peru

Our Peruvian subsidiaries are subject to Peruvian income tax on their worldwide income and are eligible for a potential credit for foreign taxes paid on income derived from foreign sources. The general income tax rate is 29.5 % from 2017 onwards.

To promote investments in Peru, investors and Peruvian companies may enter into an agreement with the Peruvian government, a Legal Stability Agreement, to provide a stable legal and tax regime for a specified period. In March 2002, Nexa Peru entered a guarantee and investment protection contract, or the stability agreement. Pursuant to the stability agreement, Nexa Peru applied a special income tax rate of 20.0% from 2007 through 2021. The 29.5% income tax rate is applicable to Nexa Peru from January 1, 2022 onwards. For more information, see “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.”

Overview

Our Peruvian subsidiaries Nexa Resources El Porvenir S.A.C. and Nexa Resources Atacocha S.A.A., do not have stability agreements with the Peruvian government and are therefore subject to a special mining tax (Impuesto Especial a la Minería, or “IEM”), with marginal rates from 2.00% and 8.40% of operating income, depending on the operating margin. In addition, these companies are subject to a mining levy (regalia minera). In 2022, Nexa Peru became subject to an IEM and mining royalties’ tax following the expiration of its tax stability agreement with the Peruvian government on December 31, 2021, and to date remains subject to the IEM and mining royalties tax.

Dividends distributed to us by our Peruvian subsidiaries are subject to withholding tax, at a rate of 5.0 % for profits earned beginning in 2017 and onwards.

Results of Operations