Nexa Resources, the global zinc mining and smelting giant, presented its Q1 2024 earnings, and while analysts focused on the expected ramp-up of the Aripuanã project and debt reduction strategies, something else caught our eye - a potential shift in Nexa's long-term vision. Buried beneath the headlines, a subtle yet significant change in capital allocation priorities hints at a bolder copper-focused future.

Nexa's CEO, <a href="https://www.linkedin.com/in/ignacio-rosado-38447315/" alt="Ignacio Rosado LinkedIn" target="_blank">Ignacio Rosado</a>, openly acknowledged the company's "active" pursuit of copper acquisitions, focusing on projects in the $600 million to $800 million range, a sweet spot below the radar of larger mining companies. This isn't simply about diversification. Rosado specifically highlighted a preference for "brownfield projects close to production" or those "starting production", requiring Nexa's expertise to "unlock more value".

This is a critical detail that seems to have flown under the radar. Nexa isn't merely dabbling in copper; they are strategically targeting assets ripe for optimization, leveraging their proven operational prowess to transform promising prospects into high-performing copper mines.

Consider the context: global copper demand is projected to surge in the coming years, fueled by the green energy transition and infrastructure development. Nexa, primarily a zinc player, is positioning itself to capitalize on this copper boom by acquiring undervalued assets and applying its operational expertise to maximize their output.

The implications are profound. First, this strategy allows Nexa to enter the copper market at a potentially lower cost than developing greenfield projects, mitigating development risk and accelerating their entry into a high-growth sector.

Second, by targeting assets needing optimization, Nexa can create significant value, driving higher production and profitability, ultimately leading to a much stronger financial position.

But here's the twist: this copper ambition might be the reason behind Nexa's cautious approach to dividends. While analysts questioned the delay in dividend increases, Jose Carlos del Valle, Nexa's CFO, stated that the company will evaluate market conditions and company performance in the second half of 2024 to make a decision.

Reading between the lines, it's plausible that Nexa is preserving capital for a potential copper acquisition, prioritizing long-term growth and value creation over immediate shareholder returns.

Let's crunch some numbers: Nexa's current net debt to EBITDA ratio is 3.7x. Their target is 1.5x, a level they deem necessary for comfortably weathering price cycles and pursuing acquisitions. Reaching this target, while simultaneously funding the Cerro Pasco project (estimated at $140 million - $160 million over three years) and sustaining CapEx, requires substantial cash flow generation.

Adding a potential copper acquisition to the mix further underscores the need for capital preservation. A $600 million to $800 million acquisition, even partially funded by debt, would demand significant upfront cash.

This brings us back to the dividend question. By delaying dividend increases, Nexa can accumulate cash, strengthen its balance sheet, and position itself for a strategic copper acquisition, ultimately unlocking a potentially far greater return for shareholders in the long run.

Nexa Resources: Key Financial Data

Reference: Seeking Alpha (As of June 17, 2024)

Zinc Production vs. Capacity Utilization at Aripuanã

This chart, based on data from the Q1 2024 earnings call transcript, illustrates the progress of Nexa's Aripuanã project, showing a clear trend of increasing zinc production and capacity utilization.

The clues are all there: a targeted copper acquisition strategy, a cautious approach to dividends, and a strong focus on achieving a lower net debt to EBITDA ratio.

Nexa's Q1 earnings might not have screamed "copper revolution", but for those who listen closely, the message is clear - a copper treasure awaits, and Nexa is meticulously charting the course to claim it.

"Fun Fact: Did you know Nexa is a leader in sustainable zinc production? Their zinc production boasts one of the lowest carbon footprints in the industry, positioning them as a frontrunner in the global push for responsible mining practices. This commitment to sustainability extends to their copper acquisition strategy, prioritizing assets that align with their environmental and social responsibility values."