Nexa's Zinc Business Has Room To Grow, But RBC Says Sentiment Remains Negative

Although Nexa Resources SA’s NEXA has an integrated and low cost zinc business, with room for growth and competitive advantages in South America, investor sentiment towards zinc is negative and there is low trading liquidity, according to RBC Capital Markets.

The Analyst

RBC's Sam Crittenden initiated coverage of Nexa Resources with a Sector Perform rating and a price target of $12.

The Thesis

As Nexa Resources operates all three zinc smelters in South America, ample concentrate supply and lower freight costs allow the company to command premium prices for refined zinc products, Crittenden said in the note.

The analyst added that fluctuations in treatment charges are negatively correlated to zinc prices, which smooths out any earnings volatility.

Nexa Resources is constructing the Aripuana project, which is estimated to provide 60kt of annual zinc production by 2021, in addition to the current run rate of 370kt.

Since the zinc business has low cost operations and Nexa Resources’ balance sheet is robust, the company is well positioned to build Aripuana, while also returning capital to shareholders, Crittenden mentioned.

“The main reasons for our Sector Perform rating are the negative sentiment towards zinc and limited trading liquidity that could make it hard for Nexa to find incremental buyers and outperform base metals peers,” the analyst wrote.

Price Action

Shares of Nexa Resources traded lower by 1.51% to $9.06 at time of publication.

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