COMPAÑIA MINERA MILPO CONSOLIDATED EARNINGS RELEASE THIRD QUARTER 2017 1
This report analyzes the most important operating and financial results related to the development of Compañía Minera Milpo SAA and Subsidiaries, based on accounting data included in the Individual and Consolidated Financial Statements for the Third Quarter of 2017 ("3Q17") and the Nine First Months of 2017 ( 9M17 ), according to International Financial Reporting Standards (IFRS). CORPORATE STRATEGY SUMMARY The operational and financial results, obtained during 3Q17, are based on the execution of Milpo s management strategy, which is focus on the continuous improvement of operations, the search for operational synergies through integration processes, the maintenance of competitive costs and a diversified production mix of zinc, copper, lead and by-products which, together with rising industrial metals prices, allows Milpo to continue obtaining outstanding profitability indicators. The most important aspects of the strategy are based on five fundamental pillars: 1. Mining Operations and Brownfields: At Cerro Lindo Mining Unit, the plant s processing capacity was stabilized at 20,000 tpd. Besides, the Pasco Mining Complex, which comprises El Porvenir and Atacocha units, continues with the operational integration process, consisting in the integration of the underground mines to achieve synergies at the infrastructure level. In this way, as part of the fourth and last stage, works continue to be carried out to deepen the shaft at El Porvenir and to develop tunnels in both units. In addition, both Cerro Lindo and the Pasco Mining Complex, sustainment labors to reinforce safety standards inside the underground mines continued. 2. Corporate Office: During the quarter, after concluding the stage of Personnel Committees, each employee got feedback and developed an Individual Development Plan with a supervisor; this process ensures that each person will have a map of development for the next evaluation cycle. 3. and 4. Polymetallic & Copper Projects: In the Greenfield projects, Shalipayco and Magistral, during the quarter a preliminary economic study was concluded where certain aspects related to the expected production per each mine were defined among other variables. 5. M&A: The Company continues seeking opportunities aligned with its growth strategy. 2
SELECTED OPERATIONAL AND FINANCIAL DATA Metal Unit 2Q17 3Q17 3Q16 3Q17 vs. 3Q16 Zinc production fmt 53,739 50,388 67,436-25% 156,667 195,807-20% Copper production fmt 11,996 11,869 9,751 22% 33,266 30,653 9% Lead production fmt 11,146 10,934 13,648-20% 32,144 38,684-17% Silver contents oz 1,934,967 1,835,369 2,150,123-15% 5,402,411 6,325,629-15% Gold contents (Pasco) oz 8,449 6,345 6,502-2% 21,715 16,920 28% Cash Cost US$/t 35.1 35.1 33.4 5% 35.3 32.8 8% Revenues US$ MM 210.5 223.9 206.7 8% 627.8 537.2 17% EBITDA US$ MM 89.2 96.8 91.9 5% 263.9 212.6 24% Net Profit US$ MM 51.0 54.2 52.4 3% 141.3 107.4 32% EBITDA margin % % 42% 43% 44% 42% 40% CAPEX US$ MM 10.8 8.2 11.9-31% 25.0 56.3-56% FCF US$ MM 37.6 58.8 76.3-23% 55.5 80.1-31% Net Debt / EBITDA x times -1.20-1.36-0.64-1.36-0.64 9M17 HIGHLIGHTS 9M17 Revenues of US$ 627.8 million and EBITDA of US$ 263.9 million, results higher by 17% and 24%, respectively, compared to those of due to the higher metal prices, which compensated the lower production in fine terms of zinc and lead. Likewise, during the 3Q17, revenues reached US$ 223.9 million and EBITDA US$ 96.8 million, figures above those recorded in 2Q17 and 3Q16, due to the higher metal prices. EBITDA margin of 42% and 43% in 9M17 and 3Q17, respectively. Consolidated Net Income of US$ 141.3 million in 9M17, 32% higher than that obtained during, due to the higher EBITDA. Similarly, during the 3Q17 Consolidated Net Income reached US$ 54.2 million, 3% higher than that of the same period of 2016. During the year, the production of copper fine metal increased, respect to that of, because of the higher head grade and the higher recovery of this metal in Cerro Lindo. However, the production of zinc and lead fines decreased due to the lower treated ore at El Porvenir, respect to that period of the previous year, and due to the lower head grade of zinc and lead in Cerro Lindo. Lower treated ore levels were related to increasing safety activities into the underground mines to reinforce safety aspects, which also had costs impact. Gold contents in the Pasco Complex increased 28%, respect to that of, reaching about 22 thousand ounces in 9M17 mainly due to the higher gold grade in the treated ore of Atacocha. Cash balance of US$ 795.6 million at the end of September 2017. In terms of leverage, the Net Debt / EBITDA ratio remained negative at -1.36x at September 2017 (-1.43x at December 2016). It is important to mention that in October 2017, according to the Board s approval, the company payed a cash dividend of US$ 335 million. 3
I. GENERAL ASPECTS MARKET CONTEXT During the quarter, the upward trend of international base metal prices remained due to the uncertainty about supply, a weaker dollar and a global growth above expectations mainly from China, which give clear signs to the market of a higher demand of these metals in the coming years thus increasing concerns about supplies. Regarding zinc, in 3Q17, the average price reached US$/t 2,962, 31% higher than that of 3Q16, due to investors uncertainty regarding a possible zinc deficit and expectations that the reactivation of certain small project would not be enough to cover the demand of this metal in the coming years. In the case of copper, during the 3Q17, the average price increased by 33%, respect to that of 3Q16, reaching US$/t 6,347. This was a result of the lower strength of dollar, uncertainty over copper supplies, and stronger demand than anticipated as a result of the continued strength of global economic and manufacturing activity that has driven the production of intermediate copper products in the past months. In relation to lead, in the quarter, a limited global supply associated to the lower level of inventories that has impulse the average price toward US$/t 2,334, 25% higher than that of 3Q16 is still observed. Thus, the gap between supply and demand, as well as the major environmental inspections in China boosted the price of this metal during the 3Q17. On regards to precious metals, the average price of silver and gold decreased during the 3Q17 respect to 3Q16 because of positive global economic data. METAL PRICES Metal * Unit 2Q17 3Q17 3Q16 3Q17 vs. 9M17 3Q16 Zinc (US$ / t) 2,598 2,962 2,253 31% 2,781 1,948 43% Copper (US$ / t) 5,663 6,347 4,774 33% 5,948 4,724 26% Lead (US$ / t) 2,165 2,334 1,872 25% 2,259 1,778 27% Silver (US$ / oz) 17.3 16.8 19.6-14% 17.2 17.1 1% Gold (US$ / oz) 1,257 1,278 1,335-4% 1,251 1,258-1% * Average LME (London Metal Exchange) prices - Settlement price MACROECONOMIC FACTORS Exchange Rate The average exchange rate during 9M17 was S/. 3.27 per US$ while in the same period of 2016, it was S/. 3.37, which represented a 3.1% appreciation of the Peruvian Sol (Source: BCRP). It is worth to mention 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 9M17 was 2.94%, lower than that obtained in 2016 where it reached 3.13% (Source: BCRP). Oil At the end of September 2017, Brent oil price was 57.54 US$/barrel, higher than the 56.82 US$/barrel price recorded at the end of 2016 (Source: Thomson Reuters). 4
II. FINANCIAL PERFORMANCE INCOME STATEMENT US$ Million 2Q17 3Q17 3Q16 3Q17 vs. 3Q16 Revenues 210.5 223.9 206.7 8% 627.8 537.2 17% Cost of Sales (104.8) (102.5) (100.8) 2% (304.6) (282.4) 8% Depreciation (17.7) (16.5) (17.3) -5% (52.7) (53.8) -2% Gross profit 88.0 104.9 88.6 18% 270.4 201.0 35% Amortization (0.9) (0.9) (0.9) 2% (2.6) (2.5) 2% Selling Expenses (4.4) (4.4) (5.1) -13% (13.6) (15.2) -10% Administrative Expenses (5.1) (5.6) (6.7) -17% (16.6) (19.4) -14% Other Operating Results, net (7.3) (14.6) (2.3) 540% (29.0) (7.7) 277% Operational profit 70.4 79.5 73.7 8% 208.7 156.3 34% Financial Expenses, net (4.0) (3.5) (4.9) -29% (14.1) (14.6) -4% Income Tax (15.4) (21.8) (16.4) 33% (53.2) (34.3) 55% Net Profit 51.0 54.2 52.4 3% 141.3 107.4 32% EBITDA 89.2 96.8 91.9 5% 263.9 212.6 24% EBITDA Margin (%) 42% 43% 44% 42% 40% 9M17 REVENUES So far this year, revenues rose US$ 627.8 million, 17% higher than the results generated in the same period of the previous year. This increase was associated to the higher prices of base metals that compensated the lower volume of production in zinc and lead fines in the three mining units due to the lower head grades of these metals in the case of Cerro Lindo and Atacocha, and the lower treated ore in El Porvenir. During the 3Q17, revenues were US$ 223.9 million, higher the results obtained in the 3Q16 due to the higher metal prices that compensated the lower production in fine terms of zinc and lead in the three Mining Units. In the other hand, during the first nine months of the year, zinc represented 47% of the sales, followed by copper with 27%, silver with 13%, lead with 9% and gold with 4%. As for the breakdown of sales by mining unit, Cerro Lindo represented 69% of consolidated sales, followed by El Porvenir with 18% and Atacocha with 13%. It is worth mentioning that the main customer for Milpo's zinc concentrates is Votorantim Metais Cajamarquilla S.A. As for the production of copper and lead, the main customers are Glencore, Trafigura and Louis Dreyfus. Likewise, as other transactions with related parties, the sales of zinc concentrates to the Cajamarquilla zinc refinery are negotiated upon under market conditions, all of which are subject to evaluation through transfer pricing studies regularly commissioned to external professionals. 5
REVENUES BREAKDOWN 9M17 EVENUES DISTRIBUTION 2016 REVENUES BY METAL REVENUES BY MINING UNIT Copper 27% Atacocha 13% Zinc 47% Gold 4% Silver 13% Lead 9% El Porvenir 18% Cerro Lindo 69% CONSOLIDATED SALES BY METAL (FMT) Metal Unit 2Q17 3Q17 3Q16 3Q17 vs. 9M17 3Q16 Zinc fmt 52,995 49,877 67,821-26% 156,224 195,722-20% Copper fmt 12,097 11,570 9,773 18% 33,096 30,541 8% Lead fmt 12,256 10,943 13,048-16% 31,863 37,798-16% Total Milpo fmt 77,348 72,390 90,642-20% 221,183 264,062-16% OPERATING COSTS During 9M17, the cost of sales increased obtaining a consolidated cash cost of US$/t 35.3, 8% higher than that obtained in. The higher unit cash cost was associated to the lower treated ore and an increase in total sustainment costs with shotcrete in the three mining units. activities inside the three underground mines, through the increased use of shotcrete, bolts and meshes, in order to increase safety inside the mine. These activities will continue in the following months and other actions are being implemented to offset these cost increases. It is worth to mention that since the end of 2016, a new policy was implemented to reinforce all the sustainment OPERATING EXPENSES So far this year, operational expenses increased significantly compared to those of as a result of higher expenses intended to exploration of Brownfield projects that were partially compensated with lower sales and administrative expenses. During the 3Q17, the same effect is observed and the increase in expenses was mainly due to the same exploration activities. Thus, sales expenses were reduced by 10% and 13%, compared to and 3Q16, respectively, mainly due to the lower ground transport costs at Cerro Lindo and lower volume sold. While in administrative expenses a reduction of 14% and 17%, was obtained compared to and 3Q16, respectively, as a result of the cost optimization plan in the corporate office. 6
PROFITABILITY During 9M17 and 3Q17, an EBITDA of US$ 263.9 million and US$ 96.8 million was obtained, 24% and 5% higher than those in and 3Q16, respectively, due to the higher revenues as a result of the increase in base metal prices. registered in the same period of 2016, mainly due to the higher EBITDA. Regarding the quarter results, the increase was also significant with respect to the previous quarter and the same period of 2016. In consolidated terms, during 9M17, a net income of US$ 141.3 million was obtained, 32% higher than that INVESTMENTS During 9M17, investments of US$ 25.0 million were made, 56% lower than those of the previous year, which included an increase in Milpo participation in the Shalipayco zinc project. The investments made in the first nine months of the year are mainly related to the operational integration process of the Pasco Mining Complex, which includes the tailing dam elevation and the modification of the primary crushing at El Porvenir, the acquisition of machinery, and the improvement of the infrastructure at Glory Hole San Gerardo. CAPEX US$ (million) 2Q17 3Q17 3Q16 3Q17 vs. 3Q16 9M17 Expansion 0.0 0.3 0.3-14% 0.6 16.7-97% Sustaining and Others 10.8 8.0 11.6-31% 24.4 39.6-38% Total Milpo 10.8 8.2 11.9-31% 25.0 56.3-56% LIQUIDITY AND INDEBTEDNESS As of September 2017, the Company closed with a cash balance of US$ 795.6 million. In 9M17, the free cash flow was positive at US$ 56 million due to the higher EBITDA that compensated the investment in working capital associated with the increase of accounts receivable due to higher metal prices, and the payment of taxes and worker s participation in 1Q17. Also, when analyzing the cash flow performance in 3Q17, a positive cash flow of US$ 58.8 million was observed. FREE CASH FLOW BRIDGE 9M17 7
Thus, at the end of the quarter, the net cash level was positive and reached US$ 454 million, maintaining a solid financial position. In terms of leverage, the Net Debt/EBITDA ratio remained negative at -1.36x as of September 2017 (- 1.43x at the end of December 2016 and -0.64x at the end of September 2016), and the average maturity term of the financial debt was 5.5 years, having no relevant debt maturities in the short term. It is worth to mention that, on September 19, 2017, the Board of Directors approved a dividend distribution on account of profits for 2017 and freely disposable reserves. The amount of dividends in cash was distributed on October 16, 2017, for a total amount of US$ 335 million. After paying such dividend, the leverage ratio remained negative at -0.36x times ebitda. Regarding risk ratings, at the date of elaboration of this report, Milpo remained with a credit risk rating of BBBwith negative outlook by Fitch Ratings and BB+ with negative outlook granted by Standard & Poor s. Milpo's rating is aligned with the risk rating of Nexa Resources S.A. (formerly Votorantim Metais Holding) and Votorantim S.A., which in turn are a reflection of the risk rating of Brazil's sovereign debt. Both rating agencies highlight Milpo s robust financial and liquidity position, which allow the Company to develop its plans and adequately address the environment of volatile metal prices. LIQUIDITY AND INDEBTEDNESS POSITION Net Debt/EBITDA (US$ million) September December US$ million 2017 2016 Total Cash 795.6 751.1 Financial Debt 341.4 345.5-100 -300-500 -700 3Q16 4Q16 1Q17 2Q17 3Q17-158 -406-362 -397-454 -0.64x -1.43x -1.18x -1.20x -1.36x 2. 1. 0. (0 (1 8
III. BUSINESS AND OPERATIONAL PERFORMANCE CERRO LINDO MINING UNIT PRODUCTION BY METAL AND CASH COST Metal Unit 2Q17 3Q17 3Q16 3Q17 vs. 9M17 3Q16 Zinc fmt 37,048 35,024 46,258-24% 111,338 130,169-14% Copper fmt 11,785 11,780 9,463 24% 32,783 29,916 10% Lead fmt 3,210 3,070 4,956-38% 10,081 12,296-18% Silver contents oz 879,761 839,563 974,603-14% 2,521,926 2,689,663-6% Cash Cost US$/t 29.5 28.8 28.5 1% 29.2 27.7 5% Revenues US$ MM 137.4 154.5 133.2 16% 426.2 347.7 23% EBITDA US$ MM 73.2 88.4 70.9 25% 236.2 172.5 37% EBITDA margin % 53% 57% 53% 55% 50% During 9M17, a lower production of zinc and lead compared to the same period of the previous year was observed, which was partially offset by a 10% increase in copper fines related to the higher head grades in this metal. On the other hand, when analyzing 3Q17, Cerro Lindo Mining Unit increased the volume of treated ore by 4% compared to 3Q16. Thus, copper production increased by 24% mainly due to the higher head grade and the higher recovery of this metal. However, the production in fine terms of zinc and lead decreased 24% and 38%, respectively, due to the lower head grades than those observed in 3Q16. During 9M17, cash cost reached US$/t 29.2, higher than that obtained in, due to a higher variable costs related to shotcrete sustainment, chimneys construction and other underground labors. However, the cash cost of 3Q17 was US$/t 28.8, lower than that of 2Q17, due to the higher treated ore, which allowed to offset the higher variable costs related to underground labors and maintenance services. Revenues reached US$ 426.2 million and EBITDA of US$236.2 million in 9M17, higher by 23% and 37%, respectively, compared to. The increase in revenues is related to the higher metal prices, mainly zinc and copper, which allowed to compensate the lower volume of production. Also, EBITDA margin of Cerro Lindo stood at 55% on average for 9M17 and 57% during 3Q17, above that registered in the same periods of 2016. Regarding the strategic exploration activities at Cerro Lindo, during 9M17 the unit performed around 71,654 meters of diamond drilling, focused on explorations to identify new mineralized bodies, recategorization and validation of mineral resources found in 2016, and for geo-metallurgical studies. PASCO MINING COMPLEX EL PORVENIR MINING UNIT PRODUCTION BY METAL AND CASH COST 9 Metal Unit 2Q17 3Q17 3Q16 3Q17 vs. 9M17 3Q16 Zinc fmt 12,087 10,688 16,219-34% 32,287 48,286-33% Copper fmt 181 63 185-66% 403 522-23% Lead fmt 3,903 3,803 4,082-7% 10,520 13,133-20% Silver contents oz 643,489 568,019 658,135-14% 1,686,555 2,075,712-19% Cash Cost US$/t 50.0 56.3 40.3 40% 54.7 40.2 36% Revenues US$ MM 43.3 40.9 42.8-5% 113.9 114.3 0% EBITDA US$ MM 11.8 10.1 18.8-46% 30.5 42.9-29% EBITDA margin % 27% 25% 44% 27% 38%
During 9M17, production in fine terms decreased by 33% in zinc and 20% in lead compared to, mainly due to the lower treated ore and the lower head grades of these metals. In addition, when analyzing 3Q17, in El Porvenir Mining Unit, the production volume of zinc and lead decreased, compared to 3Q16, due to the lower treated ore. Cash cost was US$/t 54.7 in 9M17 and US$/t 56.3 in 3Q17, increasing 36% and 40% compared to and 3T16, respectively. This increase is associated with the lower treated ore and the higher costs incurred in the shotcrete sustainment activities carried out to improve thee mine safety. It is worth to mention that during 9M17, US$ 113.9 million of revenues were reached, similar to that obtained in, due to the higher metal prices, with an EBITDA of US$ 30.5 million and a margin of 27%. Regarding the strategic exploration activities in El Porvenir, continuing with those carried out in 2016, during the 9M17 some 54,398 meters of diamond drilling were carried out aimed at the reclassification of resources and the exploration of new mineralized bodies, mainly toward the north with the objective of defining mineralization in the integration area between El Porvenir and Atacocha. ATACOCHA MINING UNIT PRODUCTION BY METAL AND CASH COST Metal Unit 2Q17 3Q17 3Q16 3Q17 vs. 9M17 3Q16 Zinc fmt 4,604 4,675 4,958-6% 13,042 17,351-25% Copper fmt 30 26 103-74% 80 215-63% Lead fmt 4,032 4,061 4,610-12% 11,543 13,255-13% Silver contents oz 411,717 427,787 517,385-17% 1,193,931 1,560,253-23% Gold contents oz 5,968 4,612 4,226 9% 15,686 10,009 57% Cash Cost US$ / t 41.4 42.3 47.5-11% 42.4 47.4-11% Revenues US$ MM 30.7 30.2 30.7-2% 81.7 75.3 9% EBITDA US$ MM 8.3 8.9 8.2 8% 20.8 13.1 59% EBITDA margin % 27% 29% 27% 25% 17% During 9M17 and 3Q17 period, in the Atacocha Mining Unit, treated ore increased, which made it possible to compensate the lower grades that affected production in fine terms of zinc and lead. On the other hand, the gold content in the lead and copper concentrates was increased due to the greater contributions of Glory Hole San Gerardo. Something similar was observed when analyzing 9M17 production in relation to. In terms of the unit s cost cost, a reduction of 11% was obtained compared to and 3Q16 (US$/t 42.4 vs US$/t 47.4 and US$/t 42.3 vs US$/t 47.5) due to the higher treatment ore from Glory Hole San Gerardo and its lower operating costs. Regarding the results obtained in 9M17, revenues reached US$ 81.7 million and EBITDA of US$ 20.8 million, 9% and 59% higher, respectively, compared to, due to the higher metal prices, and the higher payable value of lead and copper for the higher gold content. In terms of exploration activities in Atacocha, during 9M17, around 57,730 meters of diamond drilling and reverse circulation were executed to find, reclassify, and increase the certainty of the mineral resources in the area of the San Gerardo Glory Hole and inside the mine, concentrated at Level 3,300. 10
IV. SUBSEQUENT EVENTS As reported by the release to the market on October 27, Nexa Resources (formerly VM Holding S.A.), an indirect shareholder of Compañía Minera Milpo S.A.A., announced the pricing of its initial public offering for US$ 496 million and began trading its shares on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX), under the ticker symbol NEXA. Additionally, Milpo s Board of Directors approved the adequacy of the name Milpo and its subsidiaries in order to incorporate the new brand Nexa. The change of the legal denomination name will be submitted for approval to the Board and the General Shareholders s Meeting. V. FINAL COMMENTS The company continues consolidating its operations, maintaining a robust financial position through adequate cash generation, high liquidity and low indebtedness that allow it to face the volatility of international metals prices, and to develop projects and future initiatives. The recovery of the international price of zinc and copper in recent months, based on market fundamentals, confirms a positive scenario for the development of its operations and projects. Finally, in Management's opinion, there are not uncertain transactions or events that have not been included in the Company's Financial Statements or that may cause that those statements presented may not be necessarily indicative of future economic results or future financial position. San Borja, November 10, 2017 11
5 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 Peru. Milpo develops its operations with a clear commitment to social and environmental responsibility. Milpo is part of Nexa Resources (formerly Votorantim Metais Holding), the metals and mining division of Votorantim S.A., a strong global industrial and diversified conglomerate that has over 100 years of history and a presence in key sectors of the economy in more than 23 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: www.milpo.com or ri.milpo.com or email us: milpoir@nexaresources.com ABOUT NEXA RESOURCES Nexa Resources, is born from the union of Compañía Minera Milpo and Votorantim Metais, leading mining companies in Peru and Brazil. The new brand "Nexa" symbolizes the moment of expansion and integration of both companies, preserving the legacy and good practices of each one. Nexa maintains the DNA, values and beliefs that have forged the identity of Milpo and Votorantim Metais. Nexa was born as a zinc leader in Latin America and ready to be one of the biggest competitors in the global market. We transform resources into value, managing sustainable mining with the best technology. For more information: Visit our website: www.nexaresources.com 12
EXHIBIT I: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENT OF INCOME 13
EXHIBIT II: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION 14
EXHIBIT III: COMPAÑIA MINERA MILPO S.A.A. AND SUBSIDIARIES CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOW 15