CONSOLIDATED EARNINGS RELEASE COMPAÑÍA MINERA MILPO S.A.A SECOND QUARTER

Transcription

1 CONSOLIDATED EARNINGS RELEASE COMPAÑÍA MINERA MILPO S.A.A SECOND QUARTER.

2 This report analyzes the most important operating and financial results related to Companía Minera Milpo S.A.A. and Subsidiaries, on the basis of accounting data included in the individual and Consolidated Financial Statements for the Second Quarter 2016 ( "2Q16" ), according to International Financial Reporting Standards (IFRS). Corporate Strategy Summary During the 2Q16, Milpo continued implementing its five-pillar corporate strategy: 1. Mining Operations and Brownfields: At Cerro Lindo studies and activities to increase the Unit s capacity to 20,000 tpd continue after stabilizing the Unit s treatment at 18,000 tpd. On the other hand, at El Porvenir and Atacocha, their operational integration process continues with the development of the third stage, focused on a new energy transmission line (138Kv) for both processing plants. 2. Corporate office: The Human Development Program continues and the feedback and development of personnel plans stage began. 3. Copper projects: In the case of Magistral, the feasibility study for a 10,000 tpd capacity was recently approved by PROINVERSION and the Environmental Impact Assessment (EIA) of the project is in its final approving phase for a 30,000 tpd capacity. With regards to Pukaqaqa, engineering studies continue for the execution of the project s first stage at a 10,000 tpd capacity, thus taking into consideration a smaller footprint and reducing the project s development risk. For Shalipayco, based on its prefeasibility study to operate initially at a 3,000 tpd capacity, Milpo continues analyzing the best alternative for the project s commissioning sooner, creating synergies with the Pasco operations, including possible tolling activities. In the case of Bongará, the road construction continues and will help reduce logistic costs. 5. M&A: During the 2Q16, a 75% stake in the Shalipayco project was consolidated as part of the Group's strategy of acquiring assets in base metals, with advanced exploration and that could generate synergy with its operations (in this case, the units of Pasco). Regarding the Private Initiative presented by Milpo in 2015 for the option to buy the Michiquillay Copper project located in Cajamarca, Milpo is waiting for the definition of the next steps related to this process. 4. Polymetallic projects: For Aripuaná, Whorley Parsons is still undertaking an engineering study for an operation at a 5,000 tpd capacity. 1 1

3 Selected Operational and Financial Data 1S16 - Highlights Unit 1Q16 2Q16 2Q16 vs. Fine Metal in Concentrate Production Zinc t 66,520 61,851 62,273-1% 128, ,983-7% Copper t 10,344 10,558 9,723 9% 20,902 18,615 12% Lead t 12,492 12,544 11,474 9% 25,036 23,419 7% Silver Content oz 2,037,421 2,138,085 1,946,303 10% 4,175,507 3,781,907 10% Cash Cost US$/t % % Cash Cost Zn Eq. US$/t Zn eq 1,198 1,205 1,269-5% 1,201 1,225-2% Revenues US$ MM % % EBITDA US$ MM % % Net Profit US$ MM % % EBITDA Margin % 35% 37% 38% 36% 36% CAPEX US$ MM % % FCF US$ MM % % Net Debt / EBITDA x times S16 1S16 vs. US$ million revenues and US$ million EBITDA during the 1S16, only 5% and 4% below those figures obtained in the, despite lower metal prices and due to the higher production of copper, lead and silver during the semester. 36% EBITDA Margin during the 1S16 and 37% during the 2Q16. Cash cost of US$/t 32.5 in the 1S16 (1,201 US$/t Zn eq), 4% below the cash cost obtained during the mainly due to the increase in treated ore at Cerro Lindo along with cost optimization initiatives in the Unit. Cash balance above US$ 430 million at the end of June 2016, with a negative leverage ratio (Net debt/ebitda) of -0.46x. Treated ore exceeded 5.4 million tons in the 1S16, 6% above the amount obtained in, mainly due to increased treatment capacity at the Cerro Lindo unit. Higher lead content in concentrates production (+7%) when compared to that of, associated with the higher production at El Porvenir and Atacocha mainly due to higher ore grades. Moreover there was higher copper content in the concentrates production compared to that of and up by 12%, mainly due to the higher treatment at Cerro Lindo. Increased silver content by 10%, when compared to that of the, reaching 4.2 million ounces in the 1S16, mainly due to the higher production of lead and the higher grades at El Porvenir and Atacocha. Consolidated Net income of US$ 54.9 million in 1S16 (US$ 39.9 million in 2Q16), 36% higher than that obtained in the. 2 2

4 I. GENERAL ASPECTS MARKET CONTEXT The 2Q16 market was followed by a scenario of uncertainty, which holds inauspicious prospects for the performance of the Chinese economy, and was added with more volatility due to the referendum held in the United Kingdom with respect to its permanency in the European Union, better known as the Brexit effect. Thus, the international price of zinc in the period did not exceed the levels of However, since June this metal has been showing an important recovery due to its market fundamentals and the narrowness of its global inventories. On the other hand, in the case of copper, Peruvian production growth increased due to the startup of major new projects such as Las Bambas and the decision to expand the capacity of existing operations, particularly Cerro Verde, which have had a strong influence on copper pricing performance. In the case of lead, average prices in the 2Q16 remained lower than those recorded in the same period of 2015, in line with other industrial metals (1,947 US$/t vs.1,719 US$/t). Although the lead concentrates supply has reduced along with zinc mine cutbacks, demand for lead in developed countries has stalled, for example, due to increased recycled metal usage and lower demand from electric bicycles in China. As for precious metals, such as gold and silver, the scenario of uncertainty caused by the Brexit effect and the decision of the FED to postpone the increase in the referenced interest rate, allowed a rise in the prices of those metals to partially recover its "mineral shelter" characteristic. Metal Prices Metal * Unit MACROECONOMIC FACTORS 1Q16 2Q16 vs. 2Q16 1S16 1S16 vs. Zinc (US$ / t) 1,676 1,915 2, % 1,796 2, % Copper (US$ / t) 4,669 4,730 6, % 4,699 5, % Lead (US$ / t) 1,742 1,719 1, % 1,731 1, % Silver (US$ / oz) % % * Average LME (London Metal Exchange) prices - Settlement price Exchange Rate The average exchange rate during 1S16 was S/ per US$ while in the similar period of 2015, it was S/. 3.09, which represented a 9% depreciation of the Nuevo Sol (Source: BCRP). Note that the Company maintains a low exposure to exchange rates fluctuation since its functional currency is the US$ Dollar. Additionally, much of its production costs and revenues are denominated in that currency, maintaining a proper fit of the currencies in the balance sheet, income statement and cash flow. Inflation The annualized inflation during 1S16 was 3.34%, lower than that obtained in the same 2015 period where it reached 3.54% (Source: BCRP) Oil At the end of June 2016, Brent oil price was at 47.1 US$/barrel, slightly higher than the 36.0 US$/barrel price recorded at the end of (Source: Thomson Reuters). 3 3

5 II. FINANCIAL PERFORMANCE Income Statement US$ Million 2Q16 vs. 1Q16 2Q16 1S16 Revenues % % Cost of Sales (90.7) (90.9) (93.0) -2% (181.6) (183.8) -1% Depreciation (18.4) (18.1) (21.3) -15% (36.5) (44.4) -18% Gross Profit % % Amortization (0.8) (0.8) (2.2) -62% (1.6) (4.4) -63% Selling Expenses (5.2) (5.0) (5.1) -3% (10.1) (13.1) -23% Administrative Expenses (6.9) (5.8) (6.4) -10% (12.7) (13.0) -2% Other Operating Results, net 3.3 (8.7) (5.9) 47% (5.4) (13.2) -59% Operational Profit % % Financial Expenses, net (5.3) (4.4) (4.3) 2% (9.7) (8.5) 14% Income Tax 1 (15.1) (2.8) (18.9) -85% (17.9) (27.5) -35% Net Profit % % EBITDA % % EBITDA Margin (%) 35% 37% 38% 36% 36% 1S16 vs. REVENUES Revenues in 1S16 were US$ million, 5% lower than those of the same 2015 period, which is mainly explained by a negative price effect of US$ 20 million partially compensated by a positive volume effect associated to the higher production of lead, copper and silver, and a higher payable value of the concentrates (mainly due to the higher content of silver and gold). It is worth mentioning that during the 2Q16, revenues were US$ million, 14% higher compared to those of 1Q16, mainly due to the recovery of price metals and the higher volume produced. During 1S16, the level of fine tonnes sold of lead and copper increased by 6% and 12%, respectively, compared to those sold in due to the higher production of lead at El Porvenir and Atacocha and copper at Cerro Lindo, which allowed the partial offsetting of the lower prices and zinc produced. It is worth mentioning that the main customers for Milpo s zinc concentrates are Votorantim Metais Cajamarquilla S.A. and internationally renowned traders which export to major refineries in the world, such as Glencore and Trafigura. As for the production of copper and lead, the main customers are Glencore, Trafigura, Transamine and Louis Dreyfus. Like other transactions with related parties, the sale of zinc concentrates to the zinc refinery of Cajamarquilla is negotiated under market conditions, which are all subject to evaluation through a transfer prices study regularly commissioned to external professionals. 4 4

6 Revenues Distribution Revenues by Mining Unit Revenues by Metal El Porvenir 22% Atacocha 13% Cerro Lindo 65% Zinc 44% Gold 4% Silver 17% Copper 25% Lead 10% Consolidated Sales by Metal (fmt) Metal Unit 1Q16 2Q16 Zinc fmt 67,034 60,867 63,268-4% 127, ,967-8% Copper fmt 10,260 10,508 9,760 8% 20,768 18,607 12% Lead fmt 12,616 12,135 11,574 5% 24,751 23,375 6% Total Milpo fmt 89,910 83,509 84,602-1% 173, ,949-4% 2Q16 vs. 1S16 1S16 vs. OPERATING COSTS In spite of the higher treated ore during the semester, the cost of sales was 1% lower than that of the same period of 2015, mainly due to cost optimization initiatives in the three mining units and the higher treated volume in Cerro Lindo. Thus, the result was a lower cash cost of 4% compared to that of (US$/t 32.5 vs. US$/t 33.8). It is worth mentioning the downward trend in the cash cost evolution, which has been showing a constant reduction since the end of 2015 due to the benefits of the operational integration between the Pasco Units and the increased treatment capacity of Cerro Lindo, which allows the Company to address the current price environment. OPERATING EXPENSES In terms of operating expenses, during 2016 a significant decrease with respect to 2015 was observed, due to activities focused on their optimization. As for sales expenses, a 23% reduction with respect to those of was obtained, due to lower transport and storage costs. As for the administrative expenses, a 2% reduction with respect to those of was obtained, as the result of the optimization cost plan at the corporate office and the strategy to reach for a more efficient and reduced staff organization Also, the expenses related to Greenfields and Prospects projects were optimized, giving priority to those with more maturity, which allowed a 59% decrease in Other Expenses in the 1S16, compared to those of the same period of

7 PERFORMANCE As a result of the described operational performance and costs control, the EBITDA generated during the 2Q16 was US$ 66 million, similar to that generated in the period, despite lower prices (negative price effect of US$ 7 million in the quarter), and 21% above that of the 1Q16. Also, during the 1S16 an EBITDA of US$ million was reached, 4% lower when compared to that of the same period of 2015 given the negative price effect of US$ 20 million already mentioned. However, it is worth mentioning that the EBITDA margin remained at similar levels to those of June 2015 (36%). In terms of consolidated net income, it reached US$ 54.9 million in the 1S16, an increase of 36% over the same period last year. The similar level of EBITDA along with lower deferred income tax (given the increase in deferred tax assets of the Group associated with the anticipation of further recoveries of temporary tax differences in the future) explains this result. INVESTMENTS Regarding Capex, investments in sustaining projects and others was US$ 28.1 million in the 1S16, which corresponded mainly to the tailings dam elevation at El Porvenir, investments related to the new transmission line for the Pasco Units and the deepening of the shaft at El Porvenir, all related to the operational integration process that began in 2014 and continues in 2016 as planned. Additionally, the sustaining Capex included the acquisition of new equipment for loading and hauling inside the mine for all operating units; and the modernization of the desalination plant infrastructure in Cerro Lindo. Additionally, within the framework of its strategy to acquire assets in base metals, with advanced exploration and that could generate synergy with its operations (in this case Pasco Units), Milpo consolidated a 75% share in the Shalipayco zinc project. Capex US$ (million) 1Q16 2Q16 2Q16 vs. 1S16 vs. Expansion* % % Sustaining and Others % % Total Milpo % % (*) Includes acquisition of Shalipayco 1S16 Capex distribution 60 Capex -26% 37% Expansion 44 63% Sustaining and others 1S16 6 6

8 LIQUIDITY AND INDEBTEDNESS During 1S16, the company generated a free cash flow of US$ 4 million acumulating a cash balance of US$ million at the end of June It is worth mentioning that the investment in working capital during the 1S16 is a result of the increase in metal prices, mainly zinc, in relation to December 2015, thereby raising the amount of accounts receivable, effect that will be offset during the year. 1S16 Free Cash Flow Generation At the end of the first half of 2016, the level of Net Cash was positive and totaled US$ 85.5 million maintaining a solid financial position to deal with the current position. In terms of leverage, the ratio net debt / EBITDA remained negative at -0.46x as of June 2016 (-0.50x at the end of December 2015), and the average maturity term of the financial debt is 6.8 years, having no relevant debt maturity in the short term. As for credit ratings, on March 31, 2016, Fitch Ratings downgraded the credit rating granted to Milpo from BBB to BBB-, with a negative outlook. On the other hand, on February 19, 2016, Standard & Poor's changed MILPO s credit rating from BB+ to BB with a stable outlook. In both cases, changes in rating were the result of the Votorantim downgrade, also due to Brazil s sovereign debt ratings reduction. However, in both cases, the aforementioned risk rating agencies mentioned the robust financial and liquidity position of Milpo, which allow the Company to develop its future plans and address adequately the environment of volatile metal prices. Finally, as part of the shares repurchase program, approved by the General Meeting of Shareholders on July 23, 2015, at the end of June 2016, the Company acquired 15'406,048 shares for an amount of US $ 8 million. 7 7

9 Liquidity and Indebtedness Position Net Debt/EBITDA (US$ million) US$ million June 2016 December 2015 Total Cash Financial Debt Q15 4Q15 1Q16 2Q x x x x x Financial Debt Financial Sources Debt Maturity 1% 2% 99% 98% Bonds Financial Leases LT Debt LT Debt (Current Portion) Milpo's financial debt mainly consists of the issued corporate bonds, which represent 99% of total debt and have a 2023 maturity. On the other hand, financial leases, which only represent 2% of the debt, are related to the acquisition of machinery and equipment, with a July 2017 maturity. III. BUSINESS AND OPERATIONAL PERFORMANCE CERRO LINDO UNIT Production by Metal and Cash Cost Metal Unit 2Q16 vs. 1Q16 2Q16 1S16 1S16 vs. Fine Metal in Concentrate Production Zinc t 43,980 39,931 40,084 0% 83,911 90,863-8% Copper t 10,093 10,359 9,210 12% 20,452 17,577 16% Lead t 3,901 3,440 4,038-15% 7,341 8,297-12% Silver Content oz 814, , ,117-1% 1,715,061 1,703,833 1% Cash Cost US$/t % % Revenues US$ MM % % EBITDA US$ MM % % EBITDA Margin % 47% 48% 55% 47% 52% 8 8

10 During the 2Q16 and 1S16, copper production increased by 12% and 16%, respectively, over the same period of 2015, due to the greater treated ore and the higher ore grades. These results helped offset the lower production of zinc and lead. On the other hand, the volume of treated ore increased by 8% and 9% compared to that of and, respectively, which allowed for diminishing cash costs through economies of scale achieved by the largest treatment capacity. This has resulted in a reduction in the average cash cost of 3% compared to that of (US$/t 27.5 vs. US$/t 28.4) and 7% compared to that (US$/t 27.3 vs. US$/t 29.4). With regard to the exploration activities performed at Cerro Lindo, continuing with those accomplished in 2015, during 1S16 around 39,500 meters of diamond drilling was executed, focused on explorations to identify new bodies on the surface, re-categorization and validation of resources, geomechanics and services. PASCO MINING COMPLEX El Porvenir Unit Production by Metal and Cash Cost Metal Unit 2Q16 vs. 1Q16 2Q16 1S16 1S16 vs. Fine Metal in Concentrate Production Zinc t 15,794 16,273 14,870 9% 32,067 30,472 5% Copper t % % Lead t 4,284 4,767 3,965 20% 9,051 7,519 20% Silver Content oz 681, , ,566 15% 1,417,577 1,203,452 18% Cash Cost US$/t % % Revenues US$ MM % % EBITDA US$ MM % % EBITDA Margin % 28% 38% 28% 34% 25% At El Porvenir Mining Unit, the fine metal content in concentrates production increased by 10% and 7% compared to that of the and, respectively, due to the higher production of zinc and lead due to the higher treated ore and the higher ore grades. Regarding strategic exploration activities at El Porvenir, continuing with those carried out in 2015, during the 1S16 the unit performed around 37,700 meters of diamond drilling to re-categorize resources and explore new mineralized ore bodies. In terms of the cash cost, it remained in line compared to that of (US$/t 40.2 vs. US$/t 39.5). Atacocha Unit Production by Metal and Cash Cost Metal Unit 2Q16 vs. 1Q16 2Q16 1S16 1S16 vs. Fine Metal in Concentrate Production Zinc t 6,746 5,647 7,320-23% 12,393 16,648-26% Copper t % % Lead t 4,308 4,337 3,471 25% 8,645 7,602 14% Silver Content oz 541, , ,620 26% 1,042, ,622 19% Gold Content oz 2,158 3,625 1, % 5,783 3,516 64% Cash Cost US$ / t % % Revenues US$ MM % % EBITDA US$ MM % % EBITDA Margin % -3% 23% 7% 11% 12% 9 9

11 During 1S16, the implementation of the small open pit San Gerardo continued, which allowed access to mineral with higher content of lead-silver and lower mining costs. Therefore, during the semester an increase in the production volume of lead and silver content of 14% and 19% was obtained, respectively, compared to that of the same period of These results helped offset the lower zinc production. It is worth mentioning, that while the 1S16 fine metal production was lower than that of, the volume effect was positive due to the higher lead value when compared to that of the other metals due to the silver content in the concentrate and the gold content, which showed a 64% increase during the semester, which made more valuable the lead concentrate in the unit. In terms of cash cost, an increase of 6% with respect to the (US$/t 47.4 vs US$/t 44.9) was obtained. However, during the 2Q16 a reduction of 2% was achieved compared to that of (US$/t 46.3 vs US$/t 47.3) and of 4% compared to that of 1Q16 (US$/t 48.4) confirming a trend of lower costs during the last months. The 2Q16 results already show the effects of rescheduling the operations in 2015 with access to the open pit San Gerardo showing better results in production and cost when compared to that of 1Q16. In relation to exploration activities, during 1S16, 38,200 meters of diamond drilling were executed to improve the surface knowledge of geological and intermediate site zones, in the lateral extension of intermediate and depth areas of mineralized bodies, as well as to increase inventory levels of reserves and resources

12 About Milpo Compañía Minera Milpo S.A.A. (Milpo) is a Peruvian mining company dedicated to the exploration, extraction, processing and marketing of zinc, copper and lead concentrates, with silver and gold content; it is currently one of the main polymetallic producers in Peru. Milpo develops its operations with a clear social responsibility and environmental commitment. Since 2010, Milpo is part of Votorantim Metais Holding (VMH), the metal and mining company of the Votorantim Group, a strong global industrial diversified conglomerate that has over 90 years of history and a presence in key sectors of the economy, in more than 20 countries. Currently, Milpo maintains three polymetallic underground mining units in operation, Cerro Lindo (Ica), El Porvenir (Pasco) and Atacocha (Pasco). It also has a portfolio of copper and polymetallic Greenfield projects with advanced exploration. For further information: Visit our website at: or ri.milpo.com or contact: investorrelations@milpo.com 11 11

13 2Q16 Global Conference Call 2Q16 Results Global Conference Call will be held on Wednesday, August 11, 2016 at 9 a.m. (Lima) / 10 a.m. (New York) / 3 p.m. (London). To access the call, please dial: Participants calling from USA : +1 (844) International Participants : +1 (412) Conference ID Code : Minera Milpo The Global Conference Call will be broadcast live on our Investor Relations website (ir.milpo.com). A slideshow will also be available on the same website. If for some reason you can t access the website, please use the following address: To access the replay of the 2Q16 Global Conference Call audio, please dial: Participants calling from USA : +1 (877) International Participants : +1 (412) Passcode :

14 EXHIBIT I: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME For the six-month period ended June 30, US$ 000 US$ 000 Unaudited Unaudited Revenue 330, ,171 Cost of Sales (218,117) (228,207) Gross Profit 112, ,964 Selling expenses (10,142) (13,141) Administrative expenses (12,666) (12,968) Other Income (expenses),net (7,044) (17,611) Operating Profit 82,498 76,244 Finance income 2,119 1,478 Finance expenses (9,565) (9,854) Exchange differences, net (2,259) -113 Profit before income tax 72,793 67,755 Income tax (17,930) (27,549) Profit for the period 54,863 40,206 Profit Attributable to: Owners of the Company 55,523 41,613 Non-controlling interest (660) (1,407) 54,836 40,

15 EXHIBIT II: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM BALANCE SHEET ASSETS At June 30, At December 31, LIABILITIES AND EQUITY At June 30, At December 31, US$ 000 US$ 000 US$ 000 US$ 000 Unaudited Audited Unaudited Audited CURRENT ASSETS CURRENT LIABILITIES Cash and cash equivalents 432, ,204 Borrowings 5,828 7,622 Trade and other receivables 116,869 93,434 Trade payables 111, ,561 Derivative financial instruments - 4,821 Derivative financial Instruments Inventories 48,356 50,791 Income and mining taxes 2,396 1,719 Other non-financial assets 8,833 10,129 Other provisions 18,141 18,558 Total current assets 606, ,379 Other payables 20,058 17,745 Total current liabilities 159, ,205 NON-CURRENT ASSETS Other receivables 3,544 3,544 NON CURRENT LIABILITIES Deferred income tax 17,658 16,688 Borrowings 340, ,478 Investments 18,018 58,018 Deferred income tax 365 1,878 Property, plant and equipment 408, ,722 Other provisions 103,876 99,749 Intangible assets 232, ,288 Total non-current liabilities 445, ,105 Total non-current assets 679, ,260 TOTAL LIABILITIES 604, ,310 EQUITY Capital 423, ,830 Treasury shares (4,600) (4,543) Investment shares 4,551 4,551 Other capital reserves 86,022 79,347 Other equity reserves (1,197) 4,769 Retained earnings 153, ,249 Total equity attributable to owners of the Company 662, ,203 Non-controlling interest 18,965 22,126 TOTAL EQUITY 681, ,329 TOTAL ASSETS 1,285,964 1,270,639 TOTAL LIABILITIES AND EQUITY 1,285,964 1,270,

16 EXHIBIT III: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED INTERIM CONSOLIDATED CASH FLOW For the six-month period ended June 30, US$ 000 US$ 000 Unaudited Unaudited OPERATING ACTIVITIES Collections from inventory sale 356, ,552 Payments to suppliers of goods and services (221,512) (228,649) Payment and on behalf of employees (33,506) (41,190) Income tax paid (13,316) (27,245) Other taxes paid (23,068) (32,036) Recovery of taxes - 1,938 Other 1,018 2,909 Net cash generated from operating activities 65, ,279 INVESTING ACTIVITIES Selling of property, plant and equipment Purchase of property, plant and equipment and investments (26,989) (57,595) Purchase of intagible assets (17,029) - Net cash used in investing activities (44,018) (57,481) FINANCING ACTIVITIES Payment of borrowings (5,307) (3,345) Interests paid of borrowings (8,041) (8,228) Payment of dividends (16,750) (27,137) Net cash used in financing activities (30,098) (38,710) Net (decrease) increase in cash and cash equivalents (8,486) 11,088 Cash and cash equivalents of cash at the beginning of the period 440, ,693 Exchange difference on cash and cash equivalents 571 (1,511) Cash and equivalents of cash at the final of the period 432, ,