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

Transcription

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

2 This report analyzes the most important operating and financial results related to the development of Compañía Minera Milpo SAA and Subsidiaries, on the basis of accounting data included in the Individual and Consolidated Financial Statements for the Third Quarter of 2016 ("3Q16"), and First Nine Months of 2016 ("9M16"), according to International Financial Reporting Standards (IFRS). Corporate Strategy Summary During the 3Q16, Milpo continued implementing its five-pillar corporate strategy: 1. Mining Operations and Brownfields: At Cerro Lindo activities continue to stabilize and increase its capacity to 20,000 tpd. Meanwhile, in the Pasco Mining Complex, which comprises El Porvenir and Atacocha Units, the third stage of the operational integration was completed, with the startup of a new energy transmission line (138kV) that supplies both processing plants. 2. Corporate Office: The People Development System continues to be implemented. Is important to point out that Milpo was awarded with the "ABE 2016 for Labor Social Responsibility" by the Good Employers Association (ABE for its acronym in Spanish), in recognition of its good labor practices. 3. Copper projects: In the case of Magistral, the Environmental Impact Assessment (EIA) of the project for a treatment capacity of up to 30,000 tpd was approved by the Ministry of Energy and Mines, which adds to the Feasibility Study previously approved by PROINVERSIÓN for a 10,000 tpd treatment capacity. 4. Polymetallic projects: The engineering and technical analysis continue for Aripuaná and Shalipayco projects, respectively. In Bongará, works related to the construction of the access road to the project continue and will reduce logistics costs. 5. M&A: Regarding the Private Initiative presented by Milpo in 2015 for the option to buy the Michiquillay Copper project (located in Cajamarca), Milpo is still waiting for the definition of the next steps. 1 1

3 Selected Operational and Financial Data Since the individual financial statements of Minera Milpo SAA (separated) only include the operations corresponding to the Cerro Lindo Mining Unit and the corporate office, this management report is focused on the consolidated results of Milpo and its subsidiaries, whose most important aspects are detailed below. Highlights 9M16 Unit 2Q16 3Q16 Fine Metal in Concentrate Production Zinc t 61,851 67,436 67,914-1% 195, ,897-5% Copper t 10,558 9,751 10,677-9% 30,653 29,293 5% Lead t 12,544 13,648 10,358 32% 38,684 33,777 15% Silver Content oz 2,138,085 2,150,123 1,838,040 17% 6,325,629 5,619,947 13% Cash Cost US$/t % % Cash Cost Zn Eq. US$/t Zn eq 1,247 1,259 1,239 2% 1,246 1,267-2% Revenues US$ MM % % EBITDA US$ MM % % Net Profit US$ MM % % EBITDA Margin % 37% 44% 23% 40% 32% CAPEX US$ MM % % FCF US$ MM % % Net Debt / EBITDA x times M16 During the 9M16, revenues of US$ million and EBITDA of US$ million were reached, higher by 9% and 35%, respectively, with regards to those generated during the same period of 2015, due to the higher production of lead and copper, and the higher payable value of lead, mainly due to the higher silver and gold contents. Similarly, during the 3Q16 revenues of US$ million and EBITDA of US$ 91.9 million were reached, higher by 44% and 182%, respectively, compared to those of the, due to the higher production of lead and silver contents, and the higher price of metals such as zinc and lead. EBITDA margin of 40% in the 9M16 (greater than the 32% obtained in ) and 44% in the 3Q16 (greater than the 23% obtained in ). Cash cost of US$/t 32.8 during 9M16 (US$1,246 / t Zn eq), 2% below the cash cost obtained during the, mainly associated to the higher treated ore and the cost optimization at Cerro Lindo. Cash balance above US$ 500 million at the end of September 2016, with a negative leverage ratio of x (Net debt / EBITDA). Consolidated Net Income of US$107.4 million, 159% higher than that generated during the. Increased lead contents in concentrate production (+ 15% respect to that of ) due to the higher production in the three mining units, mainly in El Porvenir and Atacocha due to higher ore grades and higher treated ore. Also, there was an increase of 5% in the production of copper compared to that of, mainly due to the higher production at Cerro Lindo associated with the higher treated ore. Increased silver content by 13% when compared to that of the, reaching 6.3 million ounces. This is mainly due to the higher production of lead with higher silver content at El Porvenir and Atacocha Units, and the higher production of copper with higher silver content at Cerro Lindo. 2 2

4 I. GENERAL ASPECTS MARKET CONTEXT The 3Q16 started to show a recovery in metal prices levels such as zinc, silver and lead explained by the economic stability data in China, and the good market fundamentals especially of zinc and lead. With regards to zinc, although international prices over the period of 9M16 did not exceed the levels of 2015, since June 2016 such metal began to show a recovery in its price reaching US$/t 2,253 during the 3Q16, 22% above that of. This recovery is also based on the market fundamentals of this metal given the narrowness of global inventories, which added to the higher consumption of zinc in the automotive sector in China, generating a positive rising pressure. In the case of lead, the average quoted price in the 3Q16 was US$/t 1,872, 9% above that of, as a result of the reduction of the global supply of this metal, mainly associated to the lower production of lead in China due to the restrictions in production associated to local environmental regulations. On the other hand, in the case of copper, the start-up of major new projects as well as decisions to expand the capacity of existing operations, maintain high inventory levels in the market, generating a pressure that still prevents the recovery of the copper price in the short term. As for precious metals, both silver and gold, so far in 2016 have increased their price due to the higher industrial consumption in the case of silver, and for gold, due to fears generated on the market by the Brexit effect, as well as the decision of the FED to postpone the increase in the referenced interest rate. Metal Prices Metal * Unit 2Q16 3Q16 MACROECONOMIC FACTORS Zinc (US$ / t) 1,915 2,253 1, % 1,948 2, % Copper (US$ / t) 4,730 4,774 5, % 4,724 5, % Lead (US$ / t) 1,719 1,872 1, % 1,778 1, % Silver (US$ / oz) % % * Average LME (London Metal Exchange) prices - Settlement price 9M16 Exchange Rate The average exchange rate during the 9M16 was S/ per US$ while in the similar period of 2015, it was S/. 3.14, which represented a 7% 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 currencies in the balance sheet, income statement and cash flow. Inflation The annualized inflation during 9M16 was 3.13%, lower than that obtained in the same 2015 period where it reached 3.90% (Source: BCRP). Oil At the end of September 2016, Brent oil price was at 48.6 US$/barrel, higher than the 36.0 US$/barrel price recorded at the end of 2015 (Source: Thomson Reuters). 3 3

5 II. FINANCIAL PERFORMANCE Income Statement REVENUES US$ Million 2Q16 3Q16 9M16 Revenues % % Cost of Sles (90.9) (100.8) (89.2) 13% (282.4) (273.0) 3% Depreciation (18.1) (17.3) (19.7) -12% (53.8) (64.1) -16% Gross Profit % % Amortization (0.8) (0.9) (1.1) -14% (2.5) (5.4) -53% Selling Expenses (5.0) (5.1) (5.1) 1% (15.2) (18.2) -17% Administrative Expenses (5.8) (6.7) (7.7) -13% (19.4) (20.7) -6% Other Operating Results, net (8.7) (2.3) (8.6) -73% (7.7) (21.9) -65% Operational Profit % % Financial Expenses, net (4.4) (4.9) (3.9) 25% (14.6) (12.4) 18% Income Tax 1 (2.8) (16.4) (6.6) 147% (34.4) (34.2) 1% Net Profit % % EBITDA % % EBITDA Margin (%) 37% 44% 23% 40% 32% (1) Includes Mining Taxes During the 9M16, revenues were US$ million, 9% higher than those achieved in the same 2015 period, due to the higher production of lead and copper, and a higher payable value of the concentrates (mainly due to the higher content of silver and gold). It is worth to mention that during the 3Q16, revenues were US$ million, 44% higher compared to those of, explained by the higher production of lead and silver, and the recovery of metal prices mainly of zinc, lead and silver. During 9M16, the level of fine tonnes sold of lead and copper increased by 13% and 5%, respectively, compared to that sold in, due to the greater aforementioned production, 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 transfer price analysis regularly commissioned to external professionals. 4 4

6 Revenues Distribution - 9M16 Revenues by Mining Unit Revenues by Metal El Porvenir 21% Atacocha 14% Cerro Lindo 65% 48% Gold 4% Silver 18% Copper 20% Lead 10% Consolidated Sales by Metal (fmt) Metal Unit 2Q16 3Q16 Zinc fmt 60,867 67,821 67,503 0% 195, ,470-5% Copper fmt 10,508 9,773 10,576-8% 30,541 29,183 5% Lead fmt 12,135 13,048 10,216 28% 37,798 33,592 13% Total Milpo fmt 83,509 90,642 88,296 3% 264, ,245-2% 9M16 OPERATING COSTS The cost of sales during the 9M16 was 3% higher than that of the same period of 2015, mainly due to the higher treated volume of the period. However, at the consolidated cash cost level, in the 9M16 a reduction of 2% was achieved compared to that generated in (US$/t 32.8 vs. US$/t 33.6) due to the higher operational scale of Cerro Lindo and the cost optimization initiatives in the three mining units. 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 any metals market volatility. OPERATING EXPENSES In terms of operating expenses, like those reported in the previous quarter, an important decrease was observed at every expenditure level with respect to 2015, due to the activities focused on their optimization. As for sales expenses, a 17% reduction with respect to those of was obtained, due to lower transport and storage costs. As for administrative expenses, a 6% 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 a more efficient and reduced staff organization. Also, the expenses related to Greenfields and Prospective Projects were optimized, prioritizing those with more maturity, in line with the Group s growth strategy, which allowed a 65% decrease in Other Expenses in the 9M16, compared to those of the same period of

7 PERFORMANCE As a result of the operational performance aforementioned, the EBITDA generated during the 9M16 was US$ million, 35% higher than that obtained in the same 2015 period. It is worth mentioning that, along with the better operating results obtained in the quarter, the higher metal prices mainly of zinc, silver and lead compared to those of the, allowed generating an EBITDA of US$ 91.9 million in the quarter, 182% above that recorded in the same period of In terms of consolidated Net Income, it reached US$ million in the 9M16, an increase of 159% over the same period of last year, mainly due to the higher EBITDA. INVESTMENTS With regards to Capex, during the 9M16 the Company investments were US$ 56.3 million, 25% lower than those accomplished in the same period of Sustaining investments and others accumulated US$ 39.6 million in the 9M16 and were related to the operational integration process of Pasco, which continues to be executed as planned. These investments are related mainly to the tailings dam elevation at El Porvenir, investments related to the new transmission line (whose installation was completed during the 3Q16), and the deepening of the shaft at El Porvenir. Additionally, the sustaining Capex included the acquisition of new equipment for loading and hauling inside the mine for all operating units; as well as the modernization in the infrastructure of the desalination plant in Cerro Lindo. On the other hand, 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 stake percentage of 75% in the Shalipayco zinc project. Capex US$ Million 2Q16 3Q16 9M16 Expansion % % Sustaining and Others % % Total Milpo % % Capex distribution 30% Expansion 70% Sustaining and others 6 6

8 LIQUIDITY AND CONSOLIDATED DEBT Given the higher EBITDA level during the period, a positive free cash flow of US$ 80 million at the end of September 2016 was generated. prices, mainly of zinc in relation to that of December 2015, thereby raising the amount of accounts receivable, an effect that will be offset throughout the year. It is worth mentioning that, the investment in working capital during the 9M16, is the result of the increase in metal 9M16 Free Cash Flow Generation At the end of September 2016, the level of Net Cash was positive and increased to US$ million. In terms of leverage, the ratio of net debt / EBITDA remained negative at -0.64x as of September 2016 (-0.50x at the end of December 2015), and the average maturity term of the financial debt is 6.6 years, having no relevant debt maturity in the short term. Regarding credit ratings, on March 31, 2016, Fitch Ratings revised the credit rating granted to Milpo from BBB to BBBwith a negative outlook. On the other hand, on February 19, 2016, Standard & Poor's changed the credit rating of Milpo from BB+ to BB, with a stable outlook. In both cases, modifications in the rating were the result of the Votorantim downgrade, Milpo s main shareholder, also due to Brazil s sovereign debt ratings reduction. However, in both cases, the aforementioned risk rating agencies highlight the robust financial and liquidity position of Milpo which allow the Company to develop its future plans and adequately address the environment of volatile metal prices. Liquidity and Indebtedness Position Net Debt/EBITDA (US$ million) 4Q15 1Q16 2Q16 3Q16 September December US$ million Total Cash Financial Debt x x x x x

9 III. BUSINESS AND OPERATIONAL PERMORMANCE BY MINING UNIT CERRO LINDO MINING UNIT Production per Metal and Cash Costs Unit 2Q16 3Q16 Fine Metal in Concentrate Production Zinc t 39,931 46,258 45,833 1% 130, ,697-5% Copper t 10,359 9,463 10,233-8% 29,916 27,810 8% Lead t 3,440 4,956 3,815 30% 12,296 12,112 2% Silver Content oz 900, , ,449 15% 2,689,663 2,550,282 5% Cash Cost US$/t % % Revenues US$ MM % % EBITDA US$ MM % % EBITDA Margin % 48% 53% 48% 50% 51% 9M16 During the 9M16, the Cerro Lindo unit increased its volume of treated ore by 9%, which allowed an increase in the production of copper (+ 8%), lead (+ 2%) and silver contents (+5 %) over the same period of These results helped offset the lower zinc production. In terms of cash cost, a reduction of 4% was achieved when compared to that obtained in the (US$/t 27.7 vs US$/t 28.7), due to economies of scales achieved by the higher treatment capacity and the acquisition of largest equipment. Regarding strategic exploration activities performed at Cerro Lindo, continuing with those made in 2015, during the 9M16 around 50,000 meters of diamond drilling were executed, focused on explorations to identify new ore bodies on the surface, re-categorization and validation of resources, geomechanics and services. PASCO OPERATIONS El Porvenir Mining Unit Production per Metal and Cash Costs Unit 2Q16 3Q16 Fine Metal in Concentrate Production Zinc t 16,273 16,219 15,415 5% 48,286 45,886 5% Copper t % % Lead t 4,767 4,082 4,098 0% 13,133 11,617 13% Silver Content oz 736, , ,773 0% 2,075,712 1,859,225 12% Cash Cost US$/t % % Revenues US$ MM % % EBITDA US$ MM % % EBITDA Margin % 38% 44% 10% 38% 20% 9M16 At the El Porvenir mining unit, its volume of treated ore increased by 4% compared to that of the same period of 2015, which allowed a 5% increase in the fine metal content in concentrates production. 8 8

10 It is worth mentioning that the increase in production of zinc (+ 5%), lead (+ 13%) and silver contents (+ 12%) compared to that of the, was due to the higher treated ore and the higher ore grades. In terms of the cash cost, it remained in line compared to that of (US$/t 40.2 vs US$/t 39.9). Regarding the strategic exploration activities at El Porvenir, continuing with those carried out in 2015, during the 9M16 the unit performed around 55,500 meters of diamond drilling to re-categorize resources and explore new mineralized ore bodies. Atacocha Mining Unit Production per Metal and Cash Costs Unit 2Q16 3Q16 Fine Metal in Concentrate Production Zinc t 5,647 4,958 6,666-26% 17,351 23,314-26% Copper t % % Lead t 4,337 4,610 2,446 88% 13,255 10,048 32% Silver Content oz 501, , ,818 54% 1,560,253 1,210,441 29% Gold Content oz 3,625 4, % 10,009 4, % Cash Cost US$/t % % Revenues US$ MM % % EBITDA US$ MM n.a n.a. EBITDA Margin % 23% 27% -52% 17% -3% 9M16 During the 9M16, the explotation of the underground mine continued along with the operation of the Glory Hole San Gerardo, which allowed the unit to access to mineral with higher content of lead-silver and lower mining costs. Thus, during the 9M16 the production volume of lead and silver content increased to 32% and 29%, respectively, compared to that of the same period of These results helped offset the lower production of zinc and copper. On the other hand, during the 3Q16 there was an increase in production in fines terms which is explained by the higher production of lead (+ 88%) compared to that of the, which also had higher contents of silver (+ 54%) and gold (+ 335%). In terms of the cash cost, it was in line compared to that of the (US$/t 47.4 vs US$/t 47.4) and achieved a reduction of 11% when compared to that of (US$/t 47.5 vs US$/t 53.6) due to the higher ore treatment levels, which allow to continue with the downward trend in costs as shown in recent months. It is worth mentioning that the improved results in recent quarters, shows the effect of rescheduling the operations in 2015 and the access to the Glory Hole San Gerardo which has led to better production and costs compared to those of the. In relation to exploration activities in Atacocha, during 9M16, 49,000 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 ore bodies, as well as to increase inventory levels of reserves and resources. 9 9

11 IV. FINAL COMMENTS The Company continues to develop its strategy based on five pillars, which has enabled it to obtain good operational and financial results. In this way, it continues to prioritize the operational integration between the Pasco Units and the capacity expansion at Cerro Lindo, as well as the development of key engineering aspects and the obtaining of permits for the Polymetallic and Copper Greenfield projects. On the other hand, with respect to the Self-sustaining Private Initiative (IPA) presented by Milpo for the development of the Michiquillay copper project to PROINVERSIÓN, the Company is waiting for the definition of the next steps. San Borja, October 27 th, 2016 About Milpo Compañía Minera Milpo S.A.A. (Milpo), is a Peruvian mining company of regional scale dedicated to the exploration, extraction, processing and commercialization of zinc, copper and lead concentrates with contents of silver and gold, and is currently one of the main polymetallic producers in Perú. Milpo develops its operations with a clear commitment to social and environmental responsibility

12 Since 2010, Milpo has been part of Votorantim Metais Holding, the metals and mining division of the Votorantim Group, a strong global industrial and diversified conglomerate that has over 90 years of history and a presence in key sectors of the economy in more than 20 countries. Milpo currently maintains three underground polymetallic mining units in operation such as Cerro Lindo (Ica), El Porvenir (Pasco) and Atacocha (Pasco). It also features a portfolio of polymetallic and copper Greenfield projects with advanced exploration. For further information: Visit our website: or ri.milpo.com or us: investorrelations@milpo.com 11 11