Compania Minera Atacocha S.A.A.

Transcription

1 Dec12 Jan13 Feb13 Mar13 Apr13 May13 Jun13 Jul13 Aug13 Sep13 Oct13 Nov13 Dec13 EQUITY RESEARCH Initial Coverage December 30th 2013 Alberto Arispe Edder Castro Head of Research Analyst (511) (511) Mining Industry Compania Minera Atacocha S.A.A. Fair Value PEN 0.11 UNDERWEIGHT Cia. Minera Atacocha S.A.A. Equity's Fair Value (PEN MM) Share's Fair Value (PEN) Recommendation Market Capitalization (PEN MM) Share's Market Price (PEN) Shares Outstanding* (MM) Upside ADTV LTM (PEN) Range 52 weeks YTD Change Dividend Yield LTM Trading (LSE: ATACOBC1) Underweight % 142, % 0.0% LSE Limited stock of reserves decreases flexibility in order to reduce costs Kallpa Securities SAB initiates coverage of Compania Minera Atacocha S.A.A. (Atacocha) recommending to underweight its shares within a benchmark portfolio for the Peruvian market. Our PEN 0.11 fair value per ATACOBC1 share is 15.5% below its PEN 0.13 market price as of closing of December 27th Atacocha is a polymetallic mining company that operates in the region of Pasco. The company is subsidiary of Compania Minera Milpo S.A.A. (Milpo) which controls 88.19% of the shares with voting rights. Since August 2nd 2010, Milpo is indirect subsidiary of Votorantim Participacoes S.A. (it currently has a 50.1% stake). (*) MM Class A common shares and MM Class B common shares. ADTV: Average Daily Traded Volume LTM: Last Twelve Months Source: Bloomberg, Kallpa SAB We value Atacocha using a Discounted Cash Flow to the Firm methodology at an 11.83% discount rate. We project activities for a 6 yearperiod (up to 2019) as we consider reserves and resources updated as of closing of Financial Ratios P / Sales P / E P / BV EV / EBITDA EPS (USD) ROE ROA n.a % 4.2% 2013e 0.44 n.a % 6.0% 2014e 0.41 n.a % 0.4% EV: Market Cap. + Preferred Equity + Total Debt Cash & Cash Eq. Source: SMV, Kallpa SAB Chart Nº 1: ATACOBC1 vs. Zinc Spot PEN USD/Lb ATACOBC1 Zinc Spot (right axis) It is worth mentioning that we apply penalties to the resources in accordance to their classification (10% to measured resources, 20% to indicated resources and 30% to inferred resources). This occurs since resources are linked to a lower exploitation certainty. Additionally, mineral grades from resources may vary in relation with results from new drillings (which are necessary so they become reserves). The company has registered operating losses since 3Q2013 due to lower production levels that occurred by a decrease in the treated tonnage during 2012, and due to lower copper and silver grades. Additionally, 2013 brought the effect of the fall in metal prices (more pronounced in precious metals: 27.6% YTD and 33.8% YTD for gold and silver, respectively). However, Atacocha managed to obtain a positive Operating Income in 3Q2013 when increasing its production level, which allowed the company to increase Net Sales in 23.0% YoY. For the next years, Management is implementing cost reduction plans (a merger between Atacocha and Minera Atasilver S.A.C. and the operating integration with Milpo s El Porvenir mine) and projects in order to increase the productivity of its operations (Pique 447, which aims to decrease mineral transport costs within the mine in Pasco). Only implementing Pique 447, Management plans to reduce its cost per treated metric ton by USD/TM 5.0 (from USD/MT 46.5 in 2013 to USD/MT 41.5 in 2015) Considering these facts, we have estimated a PEN 0.11 fair value per ATACOBC1 share. However, we consider that the valuation s fundamentals are already internalized in the market price. Hence, we give an underweight recommendation. Source: Bloomberg

2 Company's Financial Summary INCOME STATEMENT (USD MM) Net Sales Cost of Sales Gross Income Sales Expenses Administrative Expenses Other Expenses, Net Operating Income Interest Income Interest Expenses Income Before Taxes Taxes Net Income Shares Outstanding Average (MM) Earnings Per Share EPS (USD) Depreciation & Amortization EBITDA e 2014e BALANCE SHEET (USD MM) e 2014e Cash & Cash Equivalents Accounts Receivable Inventory Deferred Expenses Current Assets Net Fixed Assets Other Long Term Assets Non Current Assets Total Assets Short Term Debt Accounts Payable Short Term Provisions Current Liabilities Long Term Debt Long Term Provisions Non Current Liabilities Net Equity Total Liabilities + Equity MARGINS AND GROWTH RATES (%) Gross Margin Operating Margin EBITDA Margin Net Margin Sales' Growth Operating Income's Growth EBITDA's Growth Net Income's Growth e 2014e CASH FLOW (USD MM) e 2014e 1.2% 0.5% 8.0% Net Income % 11.3% 0.4% Depreciation & Amortization % 19.7% 26.8% Changes in Working Capital % 10.4% 0.6% Other Adjustments % 8.3% 6.5% Operating Cash Flow % 53.1% n.a. Investment Cash Flow % 18.2% 44.5% Financing Cash Flow % 28.6% n.a. Free Cash Flow FINANCIAL RATIOS Current Assets / Current Liabilities Average days of Inventory Total Debt / Equity Total Debt / EBITDA Payout Ratio Dividends per Share (USD) ROE ROA ROIC e 2014e CHART N 2: SHAREHOLDERS ATACOAC % % 0.0% 0.0% 8.2% 11.5% 0.8% 4.2% 6.0% 0.4% 88.2% 4.0% 7.4% 0.3% Votorantim Group Others VALUATION P / Sales P / E EV / EBIT EV / EBITDA P / BV e 2014e CHART N 3: ESTIMATED SALES 2013 n.a. n.a. n.a. n.a. n.a. n.a % Zinc Lead MANAGEMENT Victor Gobitz Colchado CEO 7.6% 55.7% Copper Persio Morassutti Paulo Nogueira Leal CFO Manager Human Resources 13.5% Silver Graham Speirs Drummond Manager Projects Lenin Salazar Dulanto Manager Mining Unit Jose Luis Alcalá Valencia Manager Operations Source: Atacocha, Kallpa SAB Initial Coverage 2

3 Index I. Investment thesis: Underweight... 4 II. Compania Minera Atacocha S.A.A i. ii. iii. iv. v. Company's description 5 Reserves and resources 6 Net Sales 7 Cost reduction strategy 7 Tax system 7 III. Valuation.. 8 i. Production 8 ii. iii. iv. v. vi. vii. Price vector 9 Operating costs.. 9 CAPEX.. 10 Discount rate 10 Risks.. 10 Catalysts 11 IV. Scenario analysis 12 V. Sensitivity analysis 13 VI. Multiple Analysis 13 VII. Annex 1: Financial Statements 14 Initial Coverage 3

4 I. Investment thesis: Underweight i. 100% Peru risk: The company operates a single polymetallic mine (underground) in the province and the region of Pasco. Its operations are constituted by a mineral center and a treatment plant located in the districts of San Francisco de Asis de Yarusyacan and Yanacancha, respectively. Given this, the continuity of Atacocha s operations is subject to environmental, social and tax regulations imposed to the mining industry by the Peruvian Government. Additionally, the country s political conjuncture and the country s economic performance may impact the company s results. ii. Exposure to Zinc: Although Atacocha is considered a polymetallic mining company, more than 50% of its revenues correspond to the zinc content on its concentrates. In relevance terms, it is followed by silver and lead, with 23% and 14% stakes, respectively. The remaining stake corresponds to copper. It is worth mentioning the positive view that analysts have over lead and zinc prices (around 70% of its revenues) for the next years. The positive perspective over zinc and lead prices is due to a decrease in the global supply before mine shutdowns in Canada, Australia and Ireland; and before a higher future demand, respectively. iii. Negative Operating Margins: The company has been generating operating losses since 3Q2012, explained by lower production levels, by a strong inflationary pressure over production costs in the mining industry during 2012, and by the fall in metal prices in However, Atacocha has managed to generate a positive operating income in 3Q2013 after implementing cost reduction policies (tariff renegotiations with suppliers, prioritization of projects, among others). We consider that results from this period are a good reflex of the company s future results and that Pique 447 project will improve financial margins. iv. Short Life of Mine: The company s life of mine is only 1 year if we only consider reserves (2012) and it can be extended to 8 years considering resources (indicated, measured and inferred). However, if reserves, indicated resources and measured resources are only taken into account, the company s Life of Mine would be approximately 4 years (2017). Given the limited stock of reserves, Atacocha is executing an aggressive exploration plan in order to reclassify part of its resources as reserves, increasing mineral stocks. This reduces flexibility in order to adjust costs before lower metal prices and reduces financial margins. However, it is a necessary expenditure in order to ensure the future continuity of the company s operations. v. Potential for higher mineral grades in the future: Unlike other mines, it is expected that Atacocha s mineral grades will be higher in the next years. This due to the fact that average grades from reserves and resources (zinc, lead, silver, and copper) largely exceed the grades from the minerals treated during the previous years. Silver average grade for 2012 was 1.30 Oz/MT, below the average silver grade from resources (2.33 Oz/MT). This also occured with the average grades from zinc and lead since their average grades in 2012 were 3.40% and 0.80%, respectively; while the grades from their resources were 4.55% and 1.61%, respectively. vi. Social risk and environmental penalties: As of closing of November 2013, the company does not have any social conflict reported in Defensoria del Pueblo (Peruvian Ombudsman Agency). Additionally, the company focuses part of its resources towards initiatives of social development regarding education, heath, and nutrition in the districts of Yanacancha, San Francisco de Asis de Yarusyacan and Ticlayan. Consequently, we do not anticipate potential social conflicts that may affect the mining unit s operations and therefore, our valuation. Regarding the possibility of receiving penalties for environmental issues, in August 29th 2012 there was a leakage from the sedimentation pool which downloaded in Huallaga River. Nevertheless, the event was totally fixed in September 1st 2012 thanks to a contingency plan developed by Atacocha. However, it is unknown if this event will have any monetary penalty, since up to date, the process continues. vii. Support from Votorantim Group: Atacocha is subsidiary of Compania Minera Milpo S.A., which is part of Votorantim Group through Votorantim Metais Ltda. This Brazilian group has presence in 22 countries and operates in different industries such as cement, metals, iron and steel, power and energy, agro industry, finance, among others. Initial Coverage 4

5 II. Compania Minera Atacocha S.A.A. i. Company s description Compania Minera Atacocha S.A.A. was founded in February 8th, 1936 and it was constituted to carry out exploration and exploitation activities in its own mining deposits or in rented deposits, in order to produce zinc, copper and lead concentrates. In November 2008, Atacocha started to form part of Milpo Group, through its subsidiary Milpo Andina Peru S.A.C., with a 68.51% indirect stake in the common shares with voting rights (Class A). Later, on August 5th 2010, the company started to form part of Votorantim Group which obtained a 44.40% indirect stake in Compania Minera Milpo S.A.A. s shares. Chart N 4: Compania Minera Atacocha S.A.A. Timeline 1936: Atacocha's foundation 2008: Milpo acquired 68.51% of Class A common shares 2009: Average capacity of 4,100 TDP 2010: Votorantim Group acquired 44.40% of Milpo 2013: Merger with Cia. Minera Atasilver S.A.C. Source: Atacocha Currently, Milpo Andina Peru S.A.C. has an 88.19% stake in Atacocha s Class A shares. Additionally, Votorantim Group maintains a 50.06% stake in Compania Minera Milpo S.A.A. Atacocha s presence within Votarantim Group is appreciated in the following chart: Chart N 5: Votorantim Group Organization chart Votorantim Participaciones S.A % Votorantim Industrial S.A. 91.9% Votorantim Metais Ltda. 99.9% Votorantim Metais Zinco Others 68.5% Votorantim Invest. Lat. America (VILA) 100.0% Rayrock Antofagasta 100.0% Votorantim Andina S.A. (VASA) 100.0% Minera Pampa de Cobre 99.7% Votorantim Metais Cajamarquilla S.A % Minera El Muki S.A. 50.1% Compania Minera Milpo S.A.A % Milpo Andina Peru 88.2% Compania Minera Atacocha 100.0% S.A.C. S.A.A. Minera Atasilver S.A.C., Atacocha Initial Coverage 5

6 Chart N 6: Operations' geographical location Mines Projects/Explorations, Atacocha Antamina Atacocha Colquijirca (El Brocal) UEA Chungar (Volcan) Santander (Trevali) El Porvenir (Milpo) San Gregorio (El Brocal) Toromocho The company carries out its operations through a mining center and a 4,400 TPD treatment plant located in the mining center. It is located in the districts of San Francisco de Asis de Yarusyacan and Yanacancha, which belong to the province and the region of Pasco. The polymetallic mine, where the mineral extraction is carried out, is underground and it is located 4,040 meters above sea level. Additionally, Atacocha mining unit is located near polymetallic mines from other important Peruvian mining companies (El Brocal, Milpo and Volcan among others). ii. Reserves and resources Below, we present Atacocha s stock of reserves and resources, updated as of closing of 2012: Table N 1: Stock of reserves and resources Reserves MT %Zn %Pb %Cu Oz Ag/MT Proved Reserves 18, Probable Reserves 2,031, Total Reserves 2,049, Resources MT %Zn %Pb %Cu Oz Ag/MT Measured Resources 53, Indicated Resources 3,453, Measured Resources in bridges 24, Indicated Resources in bridges 494, Total Resources (a) 3,507, Inferred Resources (b) 7,599, Inferred Resources (a + b) 11,625, Total Reserves and Resources 13,674,651 Reserves' Cut Off NSR: USD/MT Source: Atacocha It is appreciated that reserves only represent 15% of Atacocha s total mineral stocks. Additionally, inferred resources, which have a low certainty of being exploited because it is necessary to perform more drillings, represent 56% of the total mineral stocks. Consequently, given the composition of total mineral stocks and the current production capacity, we may agree that Atacocha has a 1year Life of Mine (2014) if considering reserves, 4year if considering reserves, measured resources and indicated resources (2017) and 8year (2021) if considering total reserves and resources. Given this panorama, Atacocha is carrying out an exploration plan (Atacocha, San Gerardo and Santa Barbara) in order to increase its life of mine and to ensure the future continuity of its operations. However, maintaining the rate of exploration expenditures decreases flexibility in order to adjust costs in a conjuncture of lower metal prices, which has been appreciated in the fall of its main financial margins. However, Atacocha has operated in the last 5 years with reserves that ensured a life of mine between 1 and 3 years. That is to say, it is a kind of mine that keeps the mineral underground, but it is not economically profitable to invest in, cataloging such metallurgic potential into resources or reserves due to the monetary cost that it represents in the short term. Initial Coverage 6

7 iii. Net Sales Atacocha sales zinc, copper and lead concentrates, which have some silver percentage. Concentrates are sold according to their metallic content. However, the value from these concentrates is affected by a penalty that depends on how clean they are from other substances such as arsenic (this is common in polymetallic mines that operate in Peru). In 2012, zinc represented more that 50% of Atacocha s revenues. In terms of importance, silver and lead followed, both representing 40.0% of the revenues. The rest corresponded to copper. It is worth mentioning that Atacocha does not carry out coverage operations over its estimated production, which generate that its revenues are subject to metal prices volatility. Chart N 7: Sales by concentrate 2012 Chart N 8: Sales by metallic content % Zinc 4.8% Zinc concentrates 28.4% Copper Copper concentrates 53.7% Lead concentrates 5.6% Lead 80.2% 12.3% Silver Source: Atacocha iv. Cost reduction strategy The company has been implementing policies directed to cost reduction through the optimization of productive and administrative processes, and through the development of new projects that seek to improve current productivity levels. In regard with the optimization of productive and administrative processes, Atacocha will take over Compania Minera Atasilver S.A.C. (in accordance to the agreed in the General Shareholders Meeting carried out on December 10th 2013) aiming to reduce certain administrative expenses that are inherent to the existence of 2 legal persons. Additionally, the company will carry out an operating integration plan between its mining unit and El Porvenir s mining unit (belonging to Compania Minera Milpo S.A.A.) aiming to reduce administrative expenses and to generate synergies in the production process of both operations. In regard with the development of new projects that will improve current operations productivity, Atacocha will implement Pique 447 project in order to reduce mineral transport costs inside the mine. That is to say, it will transport mineral through an elevator rather than through heavy machinery. The company invested USD 2.26 MM in that project during 3Q2013. According to the company s guidance, works in Pique 447 will conclude in v. Tax system On September 28th 2011, through Law and Law 29789, it was established the Impuesto Especial a la Mineria IEM (Special Mining Tax) and the Ley de Regalias Mineras (Mining Royalties Law), which came into effect since Both payments take as a basis the quarterly Operating Income and propose a tax scale by ranges depending on the period s Operating Margin. Subsequently, it was approved Law and there were defined the parameters of the Ley del Gravamen Especial a la Mineria GEM (Law of the Special Mining Tax). This law only applies to companies that maintained an existing tax stability contract on the date of approval of the law for the Special Mining Tax and Mining Royalties. Given that, on the date in which the law of the Special Mining Tax and Mining Royalties were promulgated, Atacocha did not count with a tax stability contract, so the company is subject to the payment of the Special Mining Tax and Mining Royalties. Initial Coverage 7

8 III. Valuation We value Atacocha using a Discounted Cash Flow to the Firm methodology with an 11.83% discount rate. Our projection is for 6 years (2019) using the stock of reserves and resources updated as of closing of 2012 (including a 10% penalty for measured resources, a 20% penalty for indicated resources and a 30% penalty to inferred resources). Consequently, we did not consider neither a perpetuity nor a long term growth within our projections. On the other hand, we considered that the company will not have debt within its long term capital structure since we project that the company will finish mineral exploitation in Additionally, during the projection s last year we liquidate the company applying a 25% penalty over the accounts receivable and the inventory, we assume that 100% of the accounts payable are paid and that the net fixed assets terminal value is cero. Table N 2: Atacocha's valuation through DCF Cash Flow (USD 000') e 2014e 2015e 2016e 2017e 2018e 2019e + EBIT Taxes + Deprecition & Amortization CAPEX Working Capital + Terminal Value* Cash Flow to the Firm 24,445 14,447 31,198 31,047 1,379 8,770 7,531 8,906 32,153 10,583 9,506 4,373 11,528 1,733 31,665 9,000 4,636 8, ,514 20,000 2,000 7,100 5,958 1,455 27,835 20,000 1,964 10,373 11,080 4,454 25,686 18,000 1,330 12,981 11,561 4,615 24,761 10, ,600 7,045 3,111 23,456 10, ,079 5,423 2,611 21,777 35,065 19,713 30,189 (*) Liquidation of assets disbursements due to the mine shutdown Equity's Valuation Common shares COKe 11.83% Class A* 534,557, % 69, Firm's Value (USD 000') 40, Class B 427,550, % 46, Debt (USD 000') 12, TOTAL 962,107, % 116,035 + Cash (USD 000') Equity's FV (USD 000') Exchange rate Equity's FV (PEN 000') 13, (*) Class A common shares have a 15% premium since they have voting rights. This effect is included in the 41, adjusted percentage stake , Numb. of shares Adj. stake % Equity FV Below, we present the details of our main assumptions: i. Production Our estimations for future zinc, lead, copper and silver production have an increasing trend in the next years. Despite of this situation, we consider that our production estimations are conservative since grades from reserves and resources as of closing of 2012 are much higher than the grades used to project Atacocha s future production. Consequently, we project that the average production level per metal ( ) will be the following: 47,682 MT of zinc, 10,469 MT of lead, 1,708 MT of copper and 1.67 MM ounces of silver. Chart Nº 9: Zinc and lead estimated prod. MT MT Chart Nº 10: Copper and silver estimated prod. MT MM Oz 50,000 Zinc 11,000 1,800 Copper ,500 Lead (right axis) 10,500 1,700 Silver (Right axis) ,000 10,000 1, ,500 9,500 1, , e 2014e 2015e 2016e 2017e 2018e 2019e 9,000 1, e 2014e 2015e 2016e 2017e 2018e 2019e 1.50 Initial Coverage 8

9 ii. Price vector As a policy from Kallpa SAB, our price vector is updated semiannually and it is projected in a 5 yearperiod ( ). Additionally, the price level considered in the last year (2018) reflects the long term level that we estimate for each metal. Finally, our price vector share the same trend of prices estimated by the analysts consensus (considering only estimations updated in the last two months), but trying to be more conservative. Additionally, we use the long term price level in 2019, since the horizon of our price vector is lower than the horizon of our projection period. Table N 3: Estimated price vector 2013e 2014e 2015e 2016e 2017e 2018e Silver (USD/Oz.) Copper (USD/Lb.) Zinc (USD/Lb.) Lead (USD/Lb.) Source: Bloomberg, Kallpa SAB In regard with base metals, copper price has a negative trend due to the production start up of several copper projects; that it to say, the global supply will increase and it is expected an stable demand in the next years that is highly correlated to the Chinese economy s growth. On the other hand, zinc and lead prices present an upward trend explained by the reduction of the global supply in the following years and by a higher future demand, respectively. In regard with silver, Atacocha s only precious metal, we expect that from 2014, the annual average price will be USD/Oz However, we anticipate that next year will be volatile in regard with precious metals due to the reduction of the program of repurchase of assets executed by the FED. A sample of this volatility was appreciated on December 19th 2013, a date subsequent to the announcement of the first monthly cut from USD 85,000 MM to USD 75,000 MM. iii. Operating costs As of closing of 3Q2013, the cost per treated MT was USD/MT 45.0, showing a continuous improvement in the company s operating efficiency since 4Q2012. This was achieved by the combined effect of a production increase and the renegotiation of tariffs with suppliers before a context of lower metal prices. In our projection we consider that the costs decreasing trend will keep on until This is because we expect that Pique 447 will be 100% operating as of closing of 2Q2014 (according to the company s guidance, it will be operating in late 2013). Therefore, the complete effect of lower transport costs will be observed in Additionally, since 2015 we apply a 2.0% annual inflation cost accompanying zinc and lead prices growth. However, we project that the company will adjust in 5.0% the cost per treated MT in 2018 (the long term period in our price vector). } Chart Nº 11: Cost per treated MT USD/MT Chart Nº 12: Cost per treated MT Estimations USD/MT Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q e 2014e 2015e 2016e 2017e 2018e 2019e Initial Coverage 9

10 iv. CAPEX For the next years, we expect that Atacocha s annual CAPEX will oscilate between USD 10 MM and USD 20 MM. Expansion projects will be executed between 2014 and 2016 given that the company must invest in Pique 447 and in the expansion of its tailing fields, which can operate until 1Q2015 given their current capacity. Chart Nº 13: Estimated CAPEX USD MM 25,000 Expansion CAPEX Manteinance CAPEX 20, ,000 10, , e 2014e 2015e 2016e 2017e 2018e 2019e v. Discount rate Given that, we assume that the company will not have debt within its long term capital structure, the appropriate discount rate would be the COKe. We estimate an 11.83% COKe, which is the result of assuming a 4.50% risk free rate (which includes a 3.0% risk free rate in a mature market and a 1.50% country risk). We estimate a 1.13 beta, which is a weighted average of betas from base metal mining companies and precious metal mining companies. Chart N 14: Discount rate's calculation COK 11.83% Rf 3.00% Beta 1.13 Risk premium 6.50% Country risk 1.50% vi. Risks a. b. c. Volatility in metal prices: It is expected a higher volatility in metal prices next year, since the FED will carry out cuts in its bonds repurchase program. This might affect the company s revenues. Operating risk: There is a possibility that the annual production level decreases by strikes or by the exploitation of parts of the mine with lower mineral grades. Additionally, there is a risk so that Management s efforts, which aim to decrease costs, do not achieve our expectations (USD/MT by 2015). Social risk: In the mining industry, there is always the possibility of a social conflict and Atacocha is not the exception of the rule. However, the company has had no major problems with the communities in the province of Pasco during the last years and does not have any social conflict registered in Defensoria del Pueblo. d. Penalties regarding environmental issues: Since it is still unknown if Atacocha must pay a fine due to the leakage of sediments that occurred in August 2012, there is a possibility that the company will pay monetary penalties regarding such issue. Initial Coverage 10

11 vii. Catalysts a. Higher production: Since grades from reserves and resources are higher than grades from the mineral treated during previous years, it might occur that the head grade for the next years has an upward trend (even higher than our estimation). This would allow the company to obtain higher revenues at the same cost level per treated MT. b. Higher cost savings: According to Management, the implementation of Pique 447 would generate that the cost per treated MT decreases in USD 5.0. That is to say, it would pass from USD/MT 46.5 (estimated in late 2013) to USD/MT 41.5 as of closing of 2015 (the year that the mineshaft will be 100% operating throughout the entire year). If the project allows to obtaining such cost savings, the cost per treated MT would be lower than the estimated level for 2015 (USD/MT 43.0). Consequently, the higher operating efficiency will improve financial margins. c. Long term debt: One assumption from the valuation is that since Atacocha will finish its operations in 2019, the company will not need to assume debt in the next years given that its cash generation capacity will be enough. However, this assumption may change in accordance with Management s decisions. If the company maintains debt within its long term capital structure, our discount rate could be lower, having a positive impact over the equity s present value. d. Reserves and resources increase: Given that the company will keep on expending between USD 8 MM and USD 10 MM annually towards exploration expenses (included in the cost of sales), it is probable that the life of mine will be renewed year on year. Consequently, our projection horizon might increase. Initial Coverage 11

12 IV. Scenario analysis We sensitize the valuation s main key variables in order to perform the following scenario analysis: a. Base scenario FV: PEN 0.110: Under this scenario, we assume an 11.83% discount rate (COKe) and a USD/Lb long term zinc price. Finally, we assume that Pique 447 s implementation will allow to decrease the cost per treated MT to USD/MT 43.0 in 2015, followed by a 2.0% annual inflation cost for the next years. b. Optimistic scenario FV: PEN 0.137: Under this scenario, we reduce our discount rate (COKe) in 100 basic points (10.83%) and we consider USD/Lb 0.95 as long term zinc price. Finally, we assume that the cost per treated MT is USD/MT 41.0 (according to Management s guidance) in 2015 after cost savings from Pique 447. It is worth mentioning that the 2.0% annual inflation cost is maintained from c. Pessimistic scenario FV: PEN 0.087: Under this scenario, we increase our discount rate (COKe) in 100 basic points (12.83%) and we consider a USD/Lb 0.85 long term zinc price. Finally, we include a USD/MT 45.0 cost per treated MT, that is to say, assuming that the cost savings from Pique 447 are cero. This last assumption is exaggerated, even though it is valid for this scenario, because if the project is not able to generate cost savings, there would be no sense in carrying it out. It is worth mentioning that the 2.0% annual inflation cost in maintained from Chart Nº 15: Scenario analysis Pessimistic scenario USD/MT Treated 45.0 Zinc LT USD/Lb COKe +100 pts Base scenario COKe 100 pts Zinc LT USD/Lb USD/MT Treated 41.0 Optimistic scenario Initial Coverage 12

13 V. Sensitivity analysis: Discount rate vs. long term zinc price (USD/Lb.) Our fair value is calculated over the base of assumptions that are assumed by the analyst. However, investors can evaluate the variation of this fair value before changes in the main assumptions such as our discount rate or our estimated long term zinc price. Table N 4: FV's sensitivity to discount rate (COKe) and to long term zinc price (USD/Lb.) COKe / Zinc LT % % % % % VI. Multiple Analysis Table N 5: Companies comparable to Atacocha Company Cía. Minera Atacocha SA Peru 45 n.d. n.d. BHP Billiton Ltd Australia 171, Teck Resources Ltd Canada 14, Assore Ltd South Af. 4, Boliden AB Sweden 4, Volcan Cía. Minera SAA Peru 2, Compañía Minera MILPO SA Peru Nyrstar Belgium 538 n.d. n.d. Minmetals Land Ltd Hong Kong Sociedad Minera El Brocal Peru Average 19, Source: Bloomberg, Kallpa SAB Country Market Cap. (USD MM) P/E 12M P/E 2014 EV/EBITDA 12M EV/EBITDA 2014 P/BV ROE ROA % 12.9% % 8.1% % 2.5% % 18.2% % 4.5% % 7.7% % 3.8% % 4.6% % 1.3% % 1.5% % 2.7% Chart Nº 16: P/BV vs. EV/EBITDA 2014 EV/EBITDA Nyrstar El Brocal Source: Bloomberg, Kallpa SAB Volcan Minmetals Atacocha Boliden Milpo Market Cap P/BV Chart Nº 17: ROE vs. ROA ROA Market Cap. 15% Volcan 10% Boliden 5% Minmetals Milpo 0% 5% Nyrstar El Brocal 10% Atacocha 15% 30% 20% 10% 0% 10% 20% ROE Source: Bloomberg, Kallpa SAB Atacocha has a projected EV/EBITDA 2014 of 1.54x, much lower than the average from identified comparable companies (5.14x). In the same way, it presents a P/BV of 0.46x in the last 12 months, while the industry s average registers a P/BV of 1.19x. This may be explained by the negative profitability (ROE and ROA) registered in the last 12 months. Initial Coverage 13

14 VII. Annex 1: Financial Statements INCOME STATEMENT (USD MM) e 2014e 2015e Net Sales Cost of Sales Gross Income Administrative Expenses Sales Expenses Other Expenses Operating Income Interest Income Interest Expenses Income Before Taxes Taxes Net Income Shares Outstanding MM Earnings Per Share EPS Depreciation & Amortization EBITDA BALANCE SHEET (USD MM) Cash & Cash Equivalents Accounts Receivable Inventory Other Short Term Assets Current Assets Net Fixed Assets Other Long Term Assets Non Current Assets TOTAL ASSETS Short Term Debt Accounts Payable Other Short Term Liabilities Current Liabilties Long Term Debt Other Long Term Liabilities Non Current Liabilities TOTAL LIABILITIES Equity Legal Reserves and Other Reserves Accumulated Results NET EQUITY LIABILITIES + EQUITY CASH FLOW (USD MM) Net Income Depreciation & Amortization Changes in Working Capital Other Adjustments Operating Cash Flow Investment Cash Flow Financing Cash Flow Free Cash Flow e 2014e 2015e e 2014e 2015e Initial Coverage 14

15 Appendix Disclaimer Analyst certification The analyst that prepared this report hereby certifies that: i) the opinions and views expressed in this valuation report, in regard with the issuer and with the company s overview, reflected his/her personal opinion and ii) No part of his/her salary compensation was, is or will be related directly or indirectly to the recommendations expressed in this report. The economic compensation of the analyst that prepared this report is based in several factors, including but not limited to Kallpa Securities SAB s profitability and the profits generated by its different areas, including investment banking. In addition, the analyst does not receive any kind of economic compensation from the companies he/she covers. This valuation report was prepared by Kallpa Securities SAB s employees that maintain the position of Analyst. Persons involved in the elaboration of this report are authorized to maintain shares. Share prices in this report are based on market prices as of closing of the day prior to the publication of this report, unless it is strictly stated. General statement This document is for informative purposes only. Under no circumstances it should be used / be considered as an offer of sale or an application of purchase of shares or any other securities mentioned in this document. The information herein has been obtained from sources which are believed to be reliable, but Kallpa Securities SAB does not guarantee the trustfulness or accuracy of the content of this report, or the future market values of shares or other securities mentioned in this document. The views and opinions expressed in this document constitute our opinion at the time of this report and are subject to change without any notice. Kallpa Securities SAB does not guarantee analysis updates before any change in the circumstances of the market. The products referred in this document may not be available for purchase in some countries. Kallpa Securities SAB has reasonably designed policies to prevent or to control the exchange of nonpublic information used by areas such Research and Investment, Capital Markets, among others. Definition of qualification ranges Kallpa Securities SAB has 5 qualification ranges: Overweight +, Overweight, Neutral, Underweight and Underweight. The analyst will assign the coverage one of these ranges. Underweight < 30% > + 30% Overweight + Underweight 30% to 15% +15% to +30% Overweight Neutral 15% to 0% 0% to +15% Neutral The range assigned to each company covered by the analyst in these reports is based on the analysis/monitoring Kallpa Securities SAB has been developing for the company. In some cases, the analyst can express his/her shortterm points of view to traders, vendors and some Kallpa Securities SAB s clients but this point of view may differ in time by market volatility and other factors. The fair value calculated by Kallpa SAB is based in one or more valuation methodologies commonly used by financial analysts, including but not limited to discounted cash flows, In Situ valuations or any other applicable methodology. It should be noted that the publication of a fair value does not imply any guarantee that the value will be achieved. Initial Coverage 15

16 KALLPA SECURITIES SOCIEDAD AGENTE DE BOLSA MANAGEMENT Alberto Arispe CEO (511) COMMERCIAL CAPITAL MARKETS CORPORATE FINANCE Enrique Hernández Ricardo Carrión Andrés Robles Manager Manager Manager (51 1) (51 1) (51 1) EQUITY RESEARCH Marco Contreras Edder Castro Humberto León Juan Franco Lazo Analyst Analyst Analyst Assistant (51 1) (51 1) (51 1) (51 1) TRADING Eduardo Fernandini Javier Frisancho Jorge Rodríguez Head Trader Trader Trader (51 1) (51 1) (51 1) CHACARILLA OFFICE MIRAFLORES OFFICE Hernando Pastor Daniel Berger Walter León Representative Representative Representative (51 1) (51 1) (51 1) AREQUIPA OFFICE TACNA OFFICE Jesús Molina Ricky García Gerson Del Pozo Representative Representative Representative (51 54) (51 54) (51 52) OPERATIONS SYSTEMS Mariano Bazán Ramiro Misari Analyst Treasury Head of IT (51 1) (51 1) INTERNAL CONTROL Elizabeth Cueva Internal Control Officer (51 1) Initial Coverage 16