Compania Minera Milpo PEN 2 - Kallpa SABkallpasab.com/reportes/Cia. Minera Milpo S.A.A. - Initial...

Alberto Arispe Edder Castro

Head of Research Analyst

(511) 630 7500 (511) 630 7529

[email protected] [email protected]

Cia. Minera Milpo S.A.A.

Equity's Fair Value (PEN MM)

Share's Fair Value (PEN)

Recommendation Buy

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

(*) Include 1,099 MM common shares and 11.6 MM investment shares

ADTV: Average daily traded volume

LTM: Last twelve months

Financial Ratios

P / E

P / BV

EV / EBITDA

Debt / EBITDA

EBITDA / Interest expen.

EPS (USD)

ROE

ROA

Source: Bloomberg

In 2014, the company will seek an operating integration between Atacocha

and El Porvenir mines, both located in the region of Cerro de Pasco, in

order to reduce costs. Additionally, the company will continue its

exploration campaign in order to increase the mineral inventory from its

operating mines as well as its projects. In this way, it may increase the life

of mine of its current operations and propitiate the economic viability of its

Greenfield and brownfield projects.

Considering these factors, we have estimated a PEN 2.75 fair value per

MILPOC1 share. Hence, we give a buy recommendation.

6.6% 7.7% 7.4%

EV: Market Cap. + Preferred Equity + Total Debt - Cash & Cash eq.

Source: SMV, Kallpa SAB

0.059 0.082 0.080

14.6% 17.1% 16.2%

1.39 1.19 1.14

17.80 17.90 18.68

It is worth mentioning that our FV includes In Situ values from the project

portfolio (Greenfield and brownfield), and that we apply penalties to the

resources in accordance to their classifications (10% to measured

resources, 20% to indicated resources and 30% to inferred resources).

This, since resources are related to lower certainty levels with regard to

their exploitations, and to average mineral grades. The value from these

projects represents 19.2% of our FV or PEN 0.53 per share.

11.66 9.19 9.57

1.59 1.56 1.54

3.22 2.82 2.75

As of closing of 2013, Milpo’s net income increased 238.7% YoY, since it

increased El Porvenir mine’s production capacity (from 5,100 to 5,600

TPD) and Cerro Lindo’s production capacity (from 10,500 to 15,000 TPD).

This strategy compensates the fall in global prices for base and precious

metals, as well as the production paralyzation of copper cathodes.

EQUITY RESEARCH | Initial Coverage February 27th 2014

Mining Industry Fair Value

Compania Minera Milpo PEN 2.75BUY

We value Milpo using a Discounted Cash Flow to the Firm methodology

with a 10.37% discount rate and a 1.5% long term growth rate. We project

the company’s financial statements in an 8 years period which identifies

two stages: 2014 – 2019, where Atacocha’s operations culminate in the

last year and the subsidiary is liquidated; and 2020 – 2021, where El

Porvenir and Cerro Lindo mines are the only mining units that operate (the

base for our perpetuity period).

Source: Bloomberg, Kallpa SAB

2013 2014e 2015e

29.8% Milpo is a polymetallic mining company which operates 3 mines in Peru

(Atacocha, El Porvenir and Cerro Lindo). Aside its mining units, the

company has an interesting copper and zinc Greenfield portfolio (Magistral,

Hilarion and Pukaqaqa), and a copper brownfield portfolio (Chapi and

Ivan). Additionally, it is part of Votorantim Participacoes S.A., which has a

50.1% stake over Milpo’s common shares.

482,971

1.13 - 2.75

0.5%

0.0%

LSE

(LSE: MILPOC1) Zinc Play with potential diversification towards copper

3,051.81

2.75 Kallpa Securities SAB initiates coverage of Compania Minera Milpo

S.A.A. (Milpo) with a buy recommendation. Our PEN 2.75 fair value (FV)

per MILPOC1 share is 29.8% above its PEN 2.12 price, as of closing of

February 26th 2014.

2,350.83

2.12

1,110.58

0.80

0.85

0.90

0.95

1.00

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2.75

3.00

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Ju

n-1

3

Ju

l-1

3

Au

g-1

3

Se

p-1

3

Oct-

13

Nov-1

3

Dec-1

3

Ja

n-1

4

Fe

b-1

4

USD/Lb. PEN

Chart Nº 1: MILPOC1 vs. Zinc Spot

MILPOC1 Zinc Spot

mailto:[email protected]


Mining | Compania Minera Milpo S.A.A.

INCOME STATEMENT (USD MM) BALANCE SHEET (USD MM)

Net Sales Cash & Cash Equivalents

Cost of Sales Accounts Receivable

Gross Income Inventory

Amortization of Intangibles Other short - term assets

Sales Expenses Current assets

Administrative Expenses Fixed Assets, net

Other Expenses, net Other Long Term Assets

Operating Income Non Current Assets

Net Interest Expenses Total Assets

Income Before Taxes Short Term Debt

Taxes Accounts Payable

Net Income Short Term Provisions

Minority Interest Current Liabilities

Attributable to Milpo Long Term Debt

Long Term Provisions and Deferred Taxes

Shares Outstanding - Average (MM) Non Current Liabilities

Earnings per share - EPS (USD) Equity Attributable to Milpo

Depreciation & Amortization Minority Interest

EBITDA Total Liabilities + Equity

MARGINS AND GROWTH RATES CASH FLOW (USD MM)

Gross Margin Net Income

Operating Margin Depreciation & Amortization

EBITDA Margin Changes in Working Capital

Net Margin Other Adjustments

Sales' Growth Operating Cash Flow

Operating Income's Growth Investment Cash Flow

EBITDA's Growth Financing Cash Flow

Net Income's Growth Free Cash Flow

FINANCIAL RATIOS

Current Assets / Current Liabilities

Inventory Turnover (days)

Debt / Equity

Debt / EBITDA

Dividends per share (USD)

ROE

ROA

ROIC

VALUATION

P / Sales

P / E

EV / EBIT

EV / EBITDA

P / BV

MANAGEMENT

Victor Gobitz Colchado CEO

Persio Morassutti CFO

Eugenio Ferrari Mineral Resources - Corp. Manager

Graham Speirs Drummond Projects - Corp. Manager

Edward Medina Barcena Cerro Lindo mining unit - Manager

Jose Luis Alcalá Valencia Pasco mining operations - Manager

Source: Milpo, Kallpa SAB

www.kallpasab.com Initial Coverage 2

1.59 1.56 1.54

CHART N° 3: FAIR VALUE'S COMPOSITION

6.19 5.80 5.87

3.22 2.82 2.75

1.16 1.11 1.11

11.66 9.19 9.57

2013 2014e 2015e

12.3% 11.4% 11.3%

6.6% 7.7% 7.4%

14.6% 17.1% 16.2%

1.39 1.19 1.14

- 0.073 0.088

52.54 52.61 52.61

0.72 0.67 0.64

2013 2014e 2015e CHART N° 2: SHAREHOLDERS AS OF AUGUST 2013

3.02 3.15 3.25

238.7% 26.9% -4.0% 228.71 2.05 -2.84

14.4% 11.2% 2.1% 128.64 -102.17 -87.25

117.7% 4.0% -1.7% -66.42 -155.36 -166.12

4.2% 4.5% 0.3% 166.49 259.57 250.54

10.0% 12.1% 11.6% -23.30 19.22 0.38

37.6% 40.0% 40.7% -11.76 -5.11 -0.31

19.5% 19.5% 19.1% 129.81 154.41 163.10

38.6% 39.9% 40.0% 71.74 91.05 87.37

2013 2014e 2015e 2013 2014e 2015e

270.6 300.8 307.0 1,211.3 1,218.3 1,221.0

129.8 154.4 163.1 36.3 35.9 37.8

0.059 0.082 0.080 526.8 536.2 543.3

99.7 110.2 110.5

1,111 1,111 1,111 456.6 460.2 460.5

71.7 91.1 87.4 356.9 350.0 350.0

-6.1 -0.4 1.9 191.6 186.0 179.4

65.7 90.7 89.3 21.0 29.8 29.8

-59.9 -38.9 -38.3 150.0 149.3 149.6

125.6 129.6 127.5 20.5 6.9 -

-15.2 -16.8 -16.4 1,211.3 1,218.3 1,221.0

140.8 146.4 143.9 632.2 632.8 637.7

-55.3 -45.1 -45.3 179.8 180.5 182.9

-36.5 -39.1 -39.2 452.3 452.2 454.8

-24.7 -25.3 -25.4 579.1 585.6 583.3

-20.5 -44.3 -47.7 4.6 4.6 4.6

277.7 300.3 301.5 64.6 66.1 66.2

-442.5 -452.1 -452.9 167.6 170.5 171.0

720.2 752.4 754.4 342.4 344.5 341.6

Company's financial summary

2013 2014e 2015e 2013 2014e 2015e

18.7%

50.1%

8.3%

22.9% Peruvian Pension Funds

Votorantim Group

Carvel Inc.

Others

80.8%

6.2%

3.7%

4.9%

4.3%

Direct operations

Magistral

Hilarion

Pukaqaqa

Chapi Sulphides

http://www.kallpasab.com/


I. 4

II. 6

i.

ii.

iii.

iv.

v.

vi.

vii.

viii.

ix.

III. 13

i. Production ………………………………………………………………………………………………………………………………………..

ii. Price vector ………………………………………………………………………………………………………………………………………..

iii.

iv.

v.

vi.

vii.

viii.

IV. 18

V. 19

VI. 20

VII. 21


Catalysts ………………………………………………………………………………………………………………………………………..17

Scenario analysis ………………………………………………………………………………………………………………………………………..

Sensitivity analysis ………………………………………………………………………………………………………………………………………..

Multiple Analysis ………………………………………………………………………………………………………………………………………..

Annex 1: Financial Statements ………………………………………………………………………………………………………………………………………..

Indebtedness …………………………………………………………………………………………………………………………..15

Discount rate ………………………………………………………………………………………………………………………………………..16

Risks ………………………………………………………………………………………………………………………………………..16

13

14

Operating costs …………………………………………………………………………………………………………………………..14

CAPEX …………………………………………………………………………………………………………………………..15

Cost reduction strategy ………………………………………………………………………………………………………………………………………..12

Tax regime ………………………………………………………………………………………………………………………………………..12

Valuation ………………………………………………………………………………………………………………………………………..

Greenfield project portfolio……………………………………………………………………………………………………………………………………..9

Production ………………………………………………………………………………………………………………………………………..11

Net sales ………………………………………………………………………………………………………………………………………..11

Operating mining units ………………………………………………………………………………………………………………………………………..7

Mineral inventory: Reserves and resources ………………………………………………………………………………………………………………………………………..7

Brownfield project portfolio ………………………………………………………………………………………………………………………………………..9

Index

Investment thesis: Buy …………………………………………...……………………………………………………………………………..

Compania Minera Milpo S.A.A. ………………………………...……………………………………………………………………………………………….

Company's description ………………………………………………………………………………………………………………………………………..6



www.kallpasab.com

Greenfield projects, which are located in Peru, are Hilarion (zinc), Magistral (copper) and Pukaqaqa (copper). These

prospects are potential mining units that will support the company’s future growth. As well as with brownfield projects,

the company carried out exploration activities in 2013, seeking to reclassify inferred and indicated resources into

reserves.

vi. Social risk and environmental sanctions: As of closing of January 2014, the company does not have environmental

conflicts reported in Defensoria del Pueblo. Additionally, Milpo focuses part of its resources in social development

initiatives regarding education, healthcare and nutrition purposes, in districts where the company develops its mining

activities. Consequently, we do not anticipate potential social conflicts that would affect the company’s operations,

hence our valuation.

Initial Coverage 4

These projects increase the company’s operations scale, generating productivity improvements that are reflected in

higher financial margins. In this way, 2012’s operating margin passed from 9.4% to 19.5% in 2013. In the same way,

2012’s EBITDA passed from 34.2% to 37.6% in 2013. It is worth mentioning that this was achieved in spite of the fall

in metal prices reached in 2013, and to the paralyzation of copper operations regarding the production of copper

cathodes.

iv. A life of mine longer than 10 years: The life of mine from Atacocha, El Porvenir and Cerro Lindo, considering only

their reserve inventories (updated as of 2012), is 1 year, 5 years and 7 years, respectively. However, considering only

reserve inventories result in a conservative measure for the life of mine. However, if considering the reserve and

resource inventories, operations in Atacocha, El Porvenir and Cerro Lindo will continue for 8 years, 19 years and 13

years, respectively.

Despite the fact that the company’s mineral inventory allows to maintaining the same production level for at least until

2019 (we estimate that in 2019 Atacocha will have consumed its mineral inventory and the subsidiary will be

liquidated), the company will keep on investing in exploration activities in order to replace and to increase its reserve

and resource inventory. In this way, the company will ensure the continuity of its operations in the future.

v. An interesting project portfolio: Milpo differentiates its project portfolio in brownfield and Greenfield projects.

Brownfield projects are Chapi (Moquegua, Peru) and Ivan (Antofagasta, Chile), which are copper mines paralyzed

since 2012 by a reduction in head grades towards unprofitable exploitation levels. These mining deposits were

exploited by two Milpo’s subsidiaries: Minera Pampa de Cobre S.A. and Minera Rayrock Antofagasta Ltd.,

respectively. During 2013, the company focused its efforts in exploring such mining deposits as well as nearby

prospects in order to find promising mineralization zones.

Given this, the continuity of Milpo’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 economic

performance might impact the company’s results.

ii. Exposure to zinc: Although Milpo is considered a polymetallic mining company, approximately 50% of its income

correspond to the zinc content of its concentrates. In terms of relevance, it is followed by copper (considering copper

cathodes and concentrates) and silver with 30% and 14% stakes, respectively. The remaining stake correspond to

lead.

It is worth mentioning the positive view that analysts have over lead and zinc prices (approximately 60% of the

company’s income) for next years. The positive perspective over zinc and lead prices is due to a decrease in the

global supply by mine shutdowns in Canada, Australia and Ireland; and to a higher demand directed to the automotive

industry, respectively. With regard to copper price, it will be subject of China’s economic performance, since China is

the main copper purchaser worldwide.

iii. Higher scale of operations improves financial margins: In 2013, Milpo culminated the projects regarding capacity

expansions in El Porvenir mine (a 10% increase to 5,600 TPD), and Cerro Lindo mine (a 43% increase to 15,000

TPD), both related to a USD 200 MM CAPEX.

I. Investment thesis: Buy

i. 100% Peru risk: Currently, the company operates 3 mining units: Atacocha and El Porvenir, both located in the region

and province of Pasco; and Cerro Lindo, located in the province of Chincha (region of Ica). These 3 mining units are

polymetallic deposits which are characterized for being underground mines.



www.kallpasab.com

vii. Support from Grupo Votorantim: Milpo is part of Votorantim Group through Votorantim Metais Ltda., which is

Milpo’s major shareholder with a 50.1% stake. This Brazilian group has presence in 22 countries and operates in

cement, metal, steel, energy, agro industry and financial industries, among others.

Initial Coverage 5

With regard to the possibility of receiving sanctions from environmental issues, in August 29th 2012, there was a

leakage of sediments from a sedimentation pond in Atacocha mining unit, which released sediments into Huallaga

River. However, the event was 100% fixed in September 1st 2012 thanks to a developed contingency plan.



Chart N° 4: Compania Minera Milpo S.A.A.'s timeline

Source: Milpo

Chart N° 5: Grupo Votorantim's organization chart



i. Company's description

Compania Minera Milpo S.A.A. was founded in April 6th 1949. It was constituted in order to carry out the exploration,

exploitation and commercialization of lead, zinc and copper concentrates in its own mining deposits. Its operating

mining units are located in Peru (the regions of Pasco and Ica).

El Porvenir mining unit is the polymetallic deposit with which Milpo began operations in 1949. Then, the company

directed its efforts to diversify its metal portfolio. Consequently, it began operations in two copper mines: Ivan (1999)

and Chapi (2006). Finally, the company sought to obtain a higher scale through the opening and the acquisition of two

additional polymetallic mines, Cerro Lindo (2007) and Atacocha (2008), respectively.

In August 5th 2010, the company formed part of Economic Group Votorantim, which obtained a 44.4% indirect stake

over Compania Minera Milpo S.A.A.’s class A shares. Currently, Grupo Economico Votorantim is Compania Minera

Milpo S.A.A.’s major shareholder with a 50.1% stake. Grupo Votorantim’s current presence in Milpo is appreciated in

the following organization chart:

Recently, in February 10th 2014, Compania Minera Atacocha S.A.A. merger with Minera Atasilver S.A.C. in order to reduce

administrative expenses inherent to the existence of 2 juridical persons.

II. Compania Minera Milpo S.A.A.

1949:

Milpo's foundation

(El Porvenir)

1999:

Ivan's beginning of operations

2006:

Chapi's beginning of operations

2007:

Cerro Lindo's beginning of operations

2008:

Milpo acquires 68.5% of

Atacocha.

2010:

Votorantim acquires 44.4% of

Milpo.

2012:

Temporary stoppages in

Iván and Chapi.

Votorantim Participaciones S.A.

Votorantim Industrial S.A.

Votorantim Metais Ltda.

Votorantim Metais - Zinco

Votorantim Invest. Lat. America (VILA)

Votorantim Andina S.A. (VASA)

Votorantim Metais - Cajamarquilla S.A.

Compañía Minera Milpo S.A.A.

Others

Minera Rayrock Antofagasta Ltd.

Minera Pampa de Cobre S.A.

Minera El Muki S.A.

Milpo Andina Peru S.A.C.

Compañía Minera Atacocha S.A.A.

Minera Atasilver S.A.C.

100.0%

91.9%

99.9%

68.5%

100.0%

99.7%

50.1%

100.0%

100.0%

100.0%

100.0% 88.2% 100.0%



Chart N° 6: Operations and projects - Geographical location


www.kallpasab.com

The reserve and resource inventory from Grupo Milpo’s mining units is updated as of 2012. If considering the total

reserve and resource inventory and the mining units’ installed capacities, it is calculated that the company’s operations

are able to continue for more than 10 years. However, it is expected that the production will decrease in 2019, given

that Atacocha will operate until that year, in accordance to our estimations.

Initial Coverage 7

Given the nearness between its operations and those from El Porvenir mining unit, the company will develop

the integration of its operations in 2014, in order to reduce costs.

c) Cerro Lindo Mining Unit

The mine began operations in 2007 with a 5,000 TPD capacity. In 2011, its capacity was doubled to 10,000

TPD; and in late 2012, it reached a 15,000 TPD capacity related to a USD 175 MM CAPEX.

iii. Mineral inventory: Reserves and resources

This mining unit is adjacent to

Atacocha mining unit (which also

belongs to Milpo). Additionally, it is

located near polymetallic mines from

other important Peruvian mining

companies (El Brocal and Volcan,

among others).

b) Atacocha Mining Unit

It is a polymetallic underground mine located 4,050 meters above sea level, which operates in the region of

Cerro de Pasco from 1936. It was acquired by Milpo in November 2008 and it produces zinc, lead and copper

concentrates with silver content. Currently, this mining unit operates through a treatment plant at a 4,400 TPD

capacity.

ii. Operating mining units

a) El Porvenir Mining Unit

It is a polymetallic underground mine

located 4,200 meters above sea level,

which operates in the region of Cerro

de Pasco since 1949. It is considered

Peru’s deepest underground mine and

one of the deepest mines in Latin

America, the extraction is carried out

1,250 meters below the ground

surface.

It is Grupo Milpo’s most efficient mine and it began operations in July 2007. It is a polymetallic underground

mine located 1,820 meters above sea level, which operates in the region of Ica (province of Chincha). It

produces zinc, lead and copper concentrates with silver content, through a flotation process carried out in its

treatment plant.

The mineral extraction is carried out in

its own concentrating plant through a

flotation process, which produces zinc,

lead a copper concentrates with silver

content. Currently, the concentrating

plant has a 5,600 TPD capacity (its

capacity was 5,100 TPD until 2011).

Milpo's Mines

Greenfield Projects - Milpo

Operating Mines

Projects/Explorations

Antamina

Atacocha

El Porvenir

Colquijirca (El Brocal)

San Gregorio (El Brocal) UEA Chungar (Volcan)

Toromocho (Chinalco) Santander (Trevali)

Cerro Lindo

Rondoní (Volcan)

Uchucchacua (BVN)

Hilarión

Magistral

Pukaqaqa

Corihuarmi ( Minera MRL)

Julcani (BVN)

Antapite (BVN)

Mina Justa (Minsur)

Yauricocha (Sierra Metals) Cobriza (Doe Run)



Table N° 1: Reserve and resource inventory as of 2012 - Atacocha

Reserves' cut - off - NSR: USD/MT 50.57

Source: Atacocha

Table N° 2: Reserve and resource inventory as of 2012 - El Porvenir


Source: Milpo

Table N° 3: Reserve and resource inventory as of 2012 - Cerro Lindo


Source: Milpo

www.kallpasab.com

Total reserves and resources 75,399,977

Initial Coverage 8

Total de resources (a + b) 39,822,111 2.30 0.27 0.8 0.81

Inferred resources (b) 10,987,995 1.59 0.13 0.77 0.57

Total resources (a) 28,834,116 2.57% 0.32% 0.80% 0.90

Indicated resources 9,163,872 2.29% 0.28% 0.77% 0.84

Measured resources 19,670,244 2.69% 0.34% 0.83% 0.92

Resources MT %Zn %Pb %Cu Ag Oz./MT

Total reserves 35,577,866 3.07 0.34 0.74 0.86


Cerro Lindo has a 7 years life of mine, only if considering its reserve inventory (2020). However, if considering the total

reserve and resource inventory, its life of mine would extend up to 13 years (2026). Of the mining unit’s total mineral

inventory, reserves (minerals with the highest exploitation certainty) represent 47.2%; while inferred resources represent

14.6%.

Cerro Lindo Mining Unit

Reserves MT %Zn %Pb %Cu Ag Oz./MT



Total resources (a) 14,385,995 4.54 0.7 0.32 1.5




Total reserves 8,737,558 3.87 0.87 0.24 1.90


El Porvenir Mining Unit




El Porvenir has a 5 years life of mine, only if considering its reserve inventory (2018). However, if considering its total reserve

and resource inventory, the life of mine would extend up to 19 years (2032). Of the mining unit’s total mineral inventory,

reserves represent 21.9%; while inferred resources (minerals with the lowest exploitation certainty) represent 42.1%.

Total resources (a) 4,025,935 4.84 1.73 0.41 2.37

Indicated resources 3,947,963 4.82 1.73 0.40 2.37

Measured resources 77,972 5.70 1.72 0.46 2.07


Ag Oz./MT

Total reserves 2,049,506 3.27 1.11 0.26 1.81

Atacocha has a 1 year life of mine (2014) only if considering its reserve inventory. However, if considering the total reserve

and resource inventory, its life of mine would extend up to 8 years (2012). This due to the limited reserve inventory, which

represents 15% of its total mineral inventory.

Given the mine’s short operating horizon, during 2013 the subsidiary focused an important part of its resources towards

exploration expenses, seeking to increase the mining unit’s life of mine. Additionally, this mine has the best zinc, lead, copper

and silver grades among Grupo Milpo’s operating mining units.

Atacocha Mining Unit

Reserves MT %Zn %Pb %Cu



Table N° 4: Reserve and resource inventory as of 2012 - Chapi Sulphides

(*) Referential cut - off grade Cu: 0.30%

Source: Milpo

www.kallpasab.com

a) Magistral project

It is a copper - molybdenum porphyry, located in the northeast extreme of Cordillera Blanca. It is located 140

kilometers from the port of Chimbote (province of Pallasca, region of Ancash) and its altitude ranges between

3,900 and 4,400 meters above sea level. Exploration drilling campaigns have been carried out in Magistral from

1969. This project was acquired through an international bid carried out by Proinversion, which awarded the

concessions (13,150 hectares) that belonged to Inca Pacific Resources Inc.

The project is in pre – feasibility stage and it is focused on updating the feasibility study carried out by its

previous owner. Additionally, it was carried out a drilling campaign in 2013, which aimed to increase resources,

to reclassify inferred and indicated resources, and to investigate the depth and extension of the mineralized

body.

Initial Coverage 9

b) Ivan Mining Unit

This mining unit began operations in 1999 and it belongs to Minera Rayrock Ltda., which is Milpo’s subsidiary

(100% stake). It is a mining deposit located northeast of Antofagasta (Chile) at a 750 meters above sea level

altitude. This open pit mine used to produce copper cathodes through its own refinery. However, it suspended

its activities in April 2012, since it did not have enough economic reserves. The latter is a consequence of a

decrease in mineral grades and an increase in operating costs.

Currently, exploration works have been carried out in Sierra Medina and Sierra Valenzuela copper projects. It is

expected that Milpo will publish an estimated resource inventory for these 2 projects in 2014; after culminating

exploration studies, additional drillings, underground topographic cartographies, and complying international

standards. Additionally, Milpo has explored Pias and Antena prospects in such Chilean region.

v. Greenfield project portfolio

Total resources (a + b) 222,242,529 0.53%


Total resources (a) 193,265,773 0.54%

Inferred resources (b) 28,976,756 0.48%

Measured resources 74,425,363 0.59%

Indicated resources 118,840,410 0.51%

Total reserves 0 0.00%

Resources (*) MT %Cu

a) Chapi Mining Unit

Currently, exploration works have been carried out in San Jose and Chapi Sulphides copper projects, near San

Jose plant (Chapi). Of the latter, there is information regarding its resource inventory. Additionally, Milpo is

exploring several nearby copper prospects: Pampa Negra, Calendaria, Cambar, Justicia, El Fiscal and

Angostura.

Chapi Sulphides* project

Reserves MT %Cu

iv. Brownfield project portfolio

This mining unit began operations in 2006 and it belongs to Minera Pampa de Cobre S.A., which is Milpo’s

subsidiary (100% stake). It is a mining deposit located in the province of Sanchez Cerro, region of Moquegua,

which used to produce copper cathodes. However, operations in this mining unit are temporally suspended from

November 2012, since it reached a limited mineral inventory which did not support a profitable operation.



Table N° 5: Reserve and stock inventory as of 2007 - Magistral

(*) Referential cut - off grade Cu: 0.40%

Source: Milpo

Table N° 6: Reserve and resource inventory as of 2012 - Hilarion

(*) Referential cut - off grade Zn: 3.50%

Source: Milpo

Table N° 7: Reserve and resource inventory as of 2012 - Pukaqaqa

(*) Referential cut -off grade Cu: 0.30%.

Source: Milpo


Total resources (a + b) 280,543,595 0.48% 1.08 0.08


Total resources (a) 209,884,188 0.49% 1.07 0.08

Inferred resources (b) 70,659,407 0.43% 1.12 0.07

Measured resources 70,065,763 0.54% 1.18 0.08

Indicated resources 139,818,425 0.47% 1.01 0.08

Total reserves 0 0.00% 0.00 0.00

Resources* MT %Cu Ag g/MT Au g/MT

Pukaqaqa project

Reserves MT %Cu Ag g/MT Au g/MT


c) Pukaqaqa project

It is a skarn type copper, gold and silver deposit. It is located 11 kilometers northeast the city of Huancavelica

(region of Huancavelica) and it presents variable altitudes between 4,000 and 4,700 meters above sea level.

Additionally, the following prospects are located within the project’s surface (11,102 hectares): Bella Sol,

Acerococha, Carlotita and Rumimaki.

Currently, like in other Greenfield projects, drilling campaigns have been developed in order to reclassify

inferred and indicated resources with diamond drillings.

Total resources (a + b) 41,638,904 4.85% 0.65% 0.06% 1.01

Inferred resources (b) 21,562,518 5.09% 0.51% 0.09% 0.9

Total resources (a) 20,076,386 4.59% 0.79% 0.04% 1.13



Resources* MT %Zn %Pb %Cu Ag Oz./MT

Total reserves 0 0.00% 0.00% 0.00% 0.00

Hilarion project


Total reserves and resources 250,954

b) Hilarion project

It is poly metallic project which has confirmed the presence of zinc, lead, copper and silver concentrates. It is

located 80 kilometers southeast Huaraz (region of Ancash) and its altitude ranges between 4,500 and 5,200

meters above sea level. Additionally, the following prospects are located within the project’s surface (8,152

hectares): El Padrino, Caupijanca, San Martin, Puntahuay and Solitajanca.

Currently, the project is in pre – feasibility stage and it is focused on reclassifying inferred and indicated

resources with diamond drillings from surface and underground works.

Inferred resources (b) 55,399 0.551% 0.023%

Total resources (a + b) 250,954 0.522% 0.046%

Indicated resources 86,716 0.510% 0.047%

Total resources (a) 195,555 0.513% 0.052%

Resources* MT %Cu %Mo

Measured resources 108,839 0.516% 0.056%

Magistral project

Reserves MT %Cu %Mo

Total reserves 0 0.000% 0.000%



Chart N° 7: 2013e's production by mining unit

Table N° 8: Production by metal

Zinc

Lead

Copper

Silver**

(*) DMT: Dry metric tons

(**) Silver production is expressed in ounces.

Table N° 9: Volume sold (DTM) Table N° 10: Sales by products (USD 000')

(*) DMT: Dry metric ton

Source: Milpo Source: Milpo

Chart N° 8: Sales by metal Chart N° 9: Sales by mining unit

Source: Milpo Source: Milpo

www.kallpasab.com

720,164

Taking into account the mineral content, zinc is the most important metal since it represents approximately 50% of the

company’s sales (2013), followed by copper and silver with 30% and 15% stakes, respectively. Taking into account

mining units, Cerro Lindo represented approximately 65% of the company’s income in 2013, while El Porvenir and

Atacocha represented 20% and 15%, respectively.

Initial Coverage 11

Copper Cathodes 80,875 110,688 59,274 10,811

TOTAL 566,351 737,889 696,309

Copper Cc. 238,176 246,790 261,373 275,643

Copper Cathodes 6,417 12,799 7,537 1,493

Lead Cc. 78,465 116,337 112,721 138,791

Copper Cc. 194,976 109,952 127,564 142,368

Zinc Cc. 168,835 264,074 262,941 294,919

Lead Cc. 39,135 38,273 40,198 58,324

2010 2011 2012 2013

Zinc Cc. 264,150 369,690 413,780 471,756

Source: Milpo

Source: Milpo

vii. Net sales

(DMT)* 2010 2011 2012 2013

The company’s sales have grown 6.2% in average during the last four years (2010 – 2013). This is principally due to

the production increase previously explained. The volume sold from zinc and lead concentrates increased 15.6% and

10.5% in average annually from 2010. However, the volume sold from copper cathodes decreased 30.5% in average

during the last 4 years due to lower production levels in Ivan and Chapi mines, by lower mineral grades.

5,676,849 4,810,042 4,753,000 6,159,465

21,269 21,899 22,915 34,388

26,782 31,955 38,530 37,340

(DMT)* 2010 2011 2012 2013e

191,830 194,274 214,157 260,007

vi. Production

As of closing of 2013, Cerro Lindo is Grupo Milpo’s most important mining unit, producing more than 50% of zinc and

copper production, and more than 40% of silver production. El Porvenir mine stands out by representing 37% of the

company’s lead production, the highest stake for this metal among the group’s mining units.

Milpo produces zinc, lead and copper concentrates with silver content. However, it is worth mentioning that it used to

produce copper cathodes in Ivan and Chapi mines. The company’s production has been growing year on year due to

expansion projects carried out in its mining units. Consequently, zinc, lead, copper and silver production increased

7.9%, 12.8%, 8.7% and 2.1% annually between 2010 and 2013, respectively (see details in Table 8).

17% 28%

4%

25%

28%

37%

9%

27%

55%

35%

87%

47%

0%

20%

40%

60%

80%

100%

Zinc Lead Copper Silver

Atacocha El Porvenir Cerro Lindo

48% 40% 41%

49%

5%

4% 5%

7%

25%

26% 30%

28%

13%

16% 15%

14% 9%

15% 9% 2%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013

Zinc Lead Copper Silver Copper Cathodes

22% 18% 15% 14%

28% 25% 26%

21%

40%

43% 51% 64%

9% 15%

9% 2%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013

Atacocha El Porvenir Cerro Lindo Chapi e Iván



www.kallpasab.com

Subsequently, it was approved Ley N° 29790 and there were defined the parameters for the Ley del Gravamen

Especial de la Mineria – GEM (Special Mining Tax Burden Law). This law only applies to those mining companies that

had a valid tax stability contract on the date of approval of both the Special Mining Tax Law and the Mining Royalties

Law.

Given that on the date of approval of both laws, Cerro Lindo had had a tax stability contract, this mining unit is subject

to the payment of GEM. On the other hand, Atacocha and El Porvenir mining units are subject to the payment of IEM

and mining royalties.

Initial Coverage 12

The company has been implementing policies focused on a cost reduction through the optimization of productive and

administrative processes, and through the development of new projects which aim to improve current productivity

levels.

With regard to the optimization of productive and administrative processes, Compania Minera Atacocha S.A.A. took

over Compania Minera Atasilver S.A.C. (in accordance to what was agreed in the General Annual Meeting held in

December 10th 2013), in order to reduce certain administrative expenses inherent to the existence of two juridical

persons.

Additionally, the company will execute an operating integration plan between Atacocha and El Porvenir mining units,

both located in the region of Pasco. This strategy seeks to decrease administrative expenses and to generate

synergies in the productive processes from both operations.

With regard to 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 using heavy machinery. It is expected to culminate this project in early

2H2014.

ix. Tax regime

viii. Cost reduction strategy

In September 28th 2011, through Ley N° 29788 and 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 force from 2012.

Both payments take as a basis the quarterly operating income and propose a tax scale by ranges in accordance with

the period’s operating margin.



Table N° 11: Milpo's valuation through DCF

Cash flow (USD 000')

+ EBIT

- Taxes

+ Depreciation & Amortization

- CAPEX

- ∆ Working capital

+ Atacocha's terminal value*

Cash flow to the firm

(*) Liquidation of assets - disbursements regarding the mine's shutdown

WACC FV - Direct operations (USD 000')

Firm's value (USD 000') FV - Magistral (USD 000')

- Debt (USD 000') FV - Hilarión (USD 000')

+ Cash (USD 000') FV - Pukaqaqa (USD 000')

- Minority Interest (USD 000') FV - Chapi sulphides (USD 000')

Equity's FV (USD 000')

Exchange rate

Common shares

Common shares*

Investment shares

TOTAL

www.kallpasab.com

Below, we present details from our main assumptions:

i. Production

Our estimations regarding future zinc and lead production have a stable trend up to 2019. On the other hand, we

anticipate that copper and silver production will have an increasing trend during next years due to higher mineral

grades. From 2020, one year after Atacocha’s shutdown (in accordance to our estimations), the company will present

an important production decrease.

Initial Coverage 13

1,110,579,132 100.00% 3,051,807

(*) Class A common shares have a 15% premium due to voting rights. This effect is included in the

adjusted stake (%).

Source: Kallpa SAB

Consequently, we estimate a PEN 2.75 fair value (FV) per common share (MILPOC1) and a PEN 2.34 FV per investment

share (MILPOI1), considering a 15% premium for common shares due to voting rights. Additionally, it is worth mentioning

that our FV excluding the value from its projects is PEN 2.23. That is to say, 80.8% of the calculated FV is obtained from

direct operations.

1,098,962,569 99.11% 3,024,631 2.75

11,616,563 0.89% 27,176 2.34

Equity's Fair Value (PEN 000') 3,051,807

Shares outst. Adj. stake % Equity FV

-58,833 46,692

Equity's value - Direct operations (USD 000') 877,994 1,086,052

2.81

971,892 67,461

-377,471 40,248

342,406 53,656

60,559 46,302 40,960

Equity's valuation - Direct operations Equity's valuation

10.37% 877,994

89,594 121,025 100,851 111,868 112,369 80,117

-390

- - - - - - -15,763 - -

-210,000 -226,000

-35,061 14,113 66 107 412 267 743 -6,197

195,178 208,651 214,439

-86,026 -155,000 -168,000 -170,000 -175,000 -185,000 -200,000

129,812 154,408 163,097 171,214 177,253 182,603

68,650

-59,914 -38,870 -38,250 -40,440 -40,078 -28,311 -27,520 -16,140 -15,739

2020e 2021e

140,783 146,374 143,938 150,987 149,782 110,559 107,921 69,988

The first stage goes from 2014 to 2019, a year in which Atacocha’s reserves and resources are totally consumed and the

subsidiary is liquidated. The second stage (the perpetuity’s basis) is 2020 and 2021, where only El Porvenir and Cerro Lindo

mining units operate. It is worth mentioning that when Atacocha is liquidated, we assume a 25% penalty over its accounts

receivable and inventory value, the accounts payable are fully paid, the net fixed assets’ residual value is cero, and the costs

regarding the mine’s shutdown are executed.

Additionally, we value the company’s projects (Hilarion, Magistral, Pukaqaqa and Chapi Sulphides) with an In Situ

methodology, considering In Situ copper and zinc prices of USD/Lb. 0.025 and USD/Lb. 0.010, respectively. It was applied a

10% penalty over measured resources, a 20% penalty over indicated resources and 30% penalty over inferred resources, in

each of the valued projects.

2013 2014e 2015e 2016e 2017e 2018e 2019e

We value Milpo using a Discounted Cash Flow to the Firm methodology with a 10.37% discount rate and a 1.5% long term

growth rate inherent to our perpetuity. Our projection is for 8 years (2022), where 2 stages are identified:

III. Valuation



Source: Kallpa SAB Source: Kallpa SAB

Silver (USD/Oz.)

Copper (USD/Lb.)

Zinc (USD/Lb.)

Lead (USD/Lb.)



With regard to base metals, copper price has a negative trend due to the beginning of operations of several copper

projects; that is to say, the global supply will increase, and it is expected a stable demand during the next years which

is highly correlated to the Chinese economy’s growth. On the other hand, zinc and lead prices present an upward

trend which is explained by a reduction in the global supply during the next years, and by a higher demand in the

automotive industry, respectively.

With regard to silver price, Milpo’s only precious metal, we expect that the average price will reach USD/Oz. 19.0 from

2014. However, we anticipate that precious metal prices will be volatile this year due to a reduction in the program of

repurchase of assets carried out by FED. A sample of this volatility was observed in December 18th 2013 and January

29th 2014, dates which announced USD 10,000 MM cuts in the repurchase of assets carried out by FED.

iii. Operating costs

As of closing of 2013, Milpo’s consolidated cash cost reached USD/MT 34.9, while last year’s average was USD/MT

35.0. That is to say, the average consolidated cash cost decreased 3.0% YoY (2012’s average cash cost was

USD/MT 36.1). This is explained by an increase in installed capacities from El Porvenir and Cerro Lindo, and by a tariff

renegotiation with suppliers before a context with lower metal prices.

By mining unit, Atacocha’s cash cost has continuously decreased from 3Q2013. It decreased 14.5% YoY in average

during 2013, until reaching USD/MT 44.3 as of closing of 4Q2013. El Porvenir’s cash cost has not decreased

significantly from 4Q2012 to 4Q2013. It only decreased 0.5% YoY, but it stands out the decreasing trend in costs from

the peak registered in 1Q2013. Finally, Cerro Lindo’s cash cost reached USD/MT 30.7 as of closing of 4Q2013, Grupo

Milpo’s lowest cash cost. However, it is worth mentioning the decreasing trend registered in 2013 (see details in Chart

12).

0.97 1.00 1.02 1.05 1.05 0.90

0.87 0.93 0.95 1.00 1.00 0.90

3.33 3.15 3.10 3.00 3.00 2.70

23.9 19.0 19.0 19.0 19.0 18.0

ii. Price vector

According to Kallpa SAB’s policies, our price vector is updated semiannually and it is projected in a 5 years period

(2014 – 2018). 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 shares the same trend as that of prices estimated by the analysts’

consensus (there are only considered updated estimations in the last 2 months), but being more conservative.

Additionally, we use the long term price level from 2019, since the price vector’s horizon is shorter than the projection

period’s horizon.

Table N° 12: Estimated price vector

2013 2014e 2015e 2016e 2017e 2018e

15,000

20,000

25,000

30,000

35,000

40,000

45,000

150,000

175,000

200,000

225,000

250,000

275,000

300,000

325,000

350,000

2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e

MT

Chart Nº 10: Zinc and Lead - Est. production

Zinc

Lead (Right axis)

MT

4.50

5.00

5.50

6.00

6.50

7.00

7.50

30,000

32,500

35,000

37,500

40,000

42,500

45,000

2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e

MT

Chart Nº 11: Copper and Silver - Est. production

Copper

Silver (Right axis)

MM Oz.



Source: Kallpa SAB, Milpo Source: Kallpa SAB, Milpo

Source: Kallpa SAB, Milpo

www.kallpasab.com

To date, it is known the Greenfield and brownfield projects that belong to Milpo’s portfolio, but it is still unclear which of

them will be the company’s focus of interest. That is to say, the company does not have CAPEX and production

estimations for any of these projects. Hence, we project that the company will only invest in maintenance for fixed

assets (machinery, equipment, buildings, etc.) as well as for intangibles (increase in mining concessions and

exploration expenses).

v. Indebtedness

The company’s debt as of closing of 2013 is conformed by international bonds (USD 350 MM), bank loans and

financial leasing operations. The debt’s book value is USD 337.5 MM. Given that Milpo’s cash generation capacity has

increased due to the implementation of its expansion projects, in spite of the fall in metal prices, we do not anticipate

that its debt level will increase during the next years. We expect that from 2015, 100% of Milpo’s debt will correspond

to the corporate bonds issued in March 2013.

Consequently, we project that the debt/EBITDA ratio will gradually decrease until 2017 (by an increase in depreciation

as long as the mines’ antiquity increases). From 2018, that ratio will reach approximately 1.25, explained by a fall in

metal prices. For the same reason, the EBITDA/Interest expenses ratio will decrease from 2018 (see details in Chart

15).

Initial Coverage 15

We expect that the cash cost will slightly decrease within our projection in 2015, due to the operating integration

between Atacocha and El Porvenir mines, to lower administrative expenses as a consequence of the merger between

Compania Minera Atacocha S.A.A. and Minera Atasilver S.A.C., and to the construction of Pique 447 which will

reduce transport and energy costs in Atacocha mine.

Additionally, we project a -5.0% cost adjustment in 2018 (long – term period in our price vector) and a -2.3% new

adjustment in 2020 due to the cessation of operations in Atacocha mining unit, the mine with the highest cash cost in

Grupo Milpo.

iv. CAPEX

35.0 35.0

34.5 34.5 34.5

32.8 32.8

32.0 32.0

30.0

31.0

32.0

33.0

34.0

35.0

36.0

2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e

USD/MT

Chart Nº 13:Estimated consolidated cash cost

50.8 51.5

55.9

51.8 49.4

46.6 45.0 44.3

35.2 37.2

36.2

40.3 46.1

42.2 42.0 40.1

28.6 28.5

31.9

28.6 29.3 29.3

31.9 30.7

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

1T12 2T12 3T12 4T12 1T13 2T13 3T13 4T13

Chart Nº 12: Cash cost by mining unit

Atacocha El Porvenir Cerro Lindo

USD/MT

86

155 168 170 175 185

200 210 226

0

50

100

150

200

250

2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e

USD MM

Chart Nº 14: Estimated CAPEX

Maintenance CAPEX



Source: Kallpa SAB

Chart N° 16: WACC's breakdown

Source: Kallpa SAB

www.kallpasab.com

d. Sanctions regarding environmental issues: Given that it is still unknown if Atacocha must pay a fine for the

leakage of sediments that occurred in August 2012, there is a possibility that the company has to pay a

monetary penalty regarding such event.

b. Operating risks: There is a possibility that the annual production level decreases due to strikes, or due to the

exploitation of zones with lower mineral grades. Additionally, there is a risk that the Management’s efforts

directed to decrease costs do not achieve the expected results (USD/MT 34.50 in 2015).

c. Social risk: In the mining industry, there is always the possibility of social conflicts and Milpo is not the

exception of the rule (in current mining units as well as in projects and prospects). However, the company has

not had significant problems with the communities where it has carried out mining activities in the last years,

and it does not have social conflicts reported in Defensoria del Pueblo.

Initial Coverage 16

vi. Discount rate

We estimate a 10.37% discount rate (WACC), which results from assuming a 4.50% risk free rate (which includes a

3.00% risk free rate from mature markets and a 1.5% country risk) and a 6.5% risk premium. We estimate a 1.68

leveraged beta, which is the weighted average of betas from base metal and precious metal mining companies.

Consequently, we obtain a 15.45% COKe. Finally, we assume a 4.29% COKd, which is the weighted average from

different kind of debts that the company maintains as of closing of 2013.

vii. Risks

a. Volatility in metal prices: It is expected a higher volatility in metal prices in 2014, since FED will finish the cuts

in the program of repurchase of bonds initiated in late 2013. This might affect the company’s results.

14

15

16

17

18

19

20

21

0.9

1.0

1.1

1.2

1.3

1.4

1.5

2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e

EBITDA/ Int. expen.

Debt/ EBITDA

Chart Nº 15: Indebtedness ratios

Debt/EBITDA

EBITDA/Int. exp.

WACC

10.37%

COKe

15.45%

Rf

3.00%

Beta

1.68

Risk premium

6.50%

Country risk

1.50%

E/(D+E)

60.00%

COKd

4.29%

D/(D+E)

40.00%

(1-T)

70.00%



www.kallpasab.com

d. Increase in reserves and resources: The company will keep on directing its resources towards exploration

activities, which will allow to increase the life of mine from its direct operations, and to increase the mineral

inventory from expansion projects. Consequently, In Situ values from projects (Greenfield and brownfield) might

increase, generating positive effects over our FV.

Initial Coverage 17

a. Progresses in projects and prospects: According to the project portfolio’s annual progress, the possibility that

the company develops any of these projects will increase. The latter will allow the inclusion of such projects

within the Discounted Cash Flow to the Firm valuation; that it to say, they will cease to be valued with an In Situ

methodology (a more conservative methodology).

Additionally, if any of the current prospects includes an interesting mineral inventory, the company may consider

the prospect within its project portfolio. The latter would be positive for the fair value, since the prospect would

be valued through In Situ or Discounted Cash Flow to the Firm methodologies.

b. Higher cost savings: Our cash cost estimations are conservative since they only contemplate a USD/MT 0.5

fall in 2015, since most measures will reduce operating and administrative costs in Atacocha mining unit (Grupo

Milpo’s least efficient subsidiary). However, if better synergies are obtained, the company’s financial margins

and profitability might improve.

c. An increase in the long term debt: One assumption within our valuation is that the company will not need to

obtain additional debt in the next years since its cash generation capacity will be fair enough. Nevertheless, this

assumption might change as long as the projects’ statuses progress. In the event that the company’s cash

generation capacity is not fair enough to cover the projects’ CAPEX, the company will need to increase its debt

stock. This will increase the debt’s weight within the long term equity’s structure, our discount rate would be

lower, and it would have a positive effect over the equity’s present value.

e. Guidance 2014’s publication: It is still pending Milpo’s announcement with regard to this year’s guidance,

which will occur as soon as the Conference Call regarding 4Q213’s results is carried out. Consequently, the

estimations might change, depending on the company’s plans.

viii. Catalysts



Source: Kallpa SAB


We sensitize the main key variables in our valuation model in order to carry out the following scenario analysis

a. Baseline Scenario – FV PEN 2.75: Under this scenario, we assume a 10.37% discount rate (WACC) and a USD/Lb.

0.90 long term zinc price. Finally, we assume that due cost reduction policies (operating and administrative costs)

carried out by Management, the cash cost would reach USD 34.5 in 2015 and it will maintain such level up to 2017

(one year before our long – term period)

b. Optimistic Scenario – FV PEN 3.52: Under this scenario, we reduce our discount rate (WACC) in 100 basic points

(9.37%), and we consider a PEN/Lb. 0.95 long term zinc price. Finally, due to cost reduction policies (operating and

administrative costs) carried out by Management, the cash cost would reach USD 33.5 in 2015 and it will remain

constant until 2017 (one year before our long term period).

c. Pessimistic Scenario – FV PEN 2.16: Under this scenario, we increase our discount rate (WACC) in 100 basic points

(11.37%) and we consider a PEN 0.85 long term zinc price. Finally, we assume a USD 36.0 cash cost in 2015,

assuming that the policies implemented by Management will not have the so awaited effect, and quite the contrary,

there will be inflation pressures over costs. Such cost level will remain constant until 2017 (one year before our long

term period).

IV. Scenario analysis

2.16

2.75

3.52

- 0.08

- 0.30

- 0.21

+ 0.27

+ 0.46 + 0.04

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

3.60

Pessimistic Scenario

USD/MT treated 36.5

Zinc LT USD/Lb. 0.85

WACC +100 pbs

Baseline Scenario

WACC -100 pbs

Zinc LT USD/Lb. 0.95

USD/MT Treated 33.5

Optimistic Scenario

Chart Nº 17: Scenario analysis

USD



Sensitivity analysis

Table N° 13: FV's sensitivity to discount rate (WACC) and to long term growth (g)

Source: Kallpa SAB

Table N° 14: FV's sensitivity to long term copper price (USD/Lb.) and to long term zinc price (USD/Lb.)

Source: Kallpa SAB


3.89 4.30

3.30 2.47 2.81 3.22 3.57 3.96 4.30 4.70

3.00 2.06 2.40 2.81 3.16 3.55

3.08 3.48

2.70 1.65 1.99 2.40 2.75 3.15 3.48 3.89

2.40 1.24 1.58 1.99 2.34 2.74

1.00 1.05

2.10 0.83 1.17 1.58 1.93 2.33 2.67 3.07

Copper LT /

Zinc LT0.75 0.80 0.85 0.90 0.95

2.67 2.74

12.37% 2.25 2.28 2.32 2.37 2.41 2.47 2.52

11.37% 2.39 2.44 2.49 2.54 2.60

3.24 3.38

10.37% 2.56 2.62 2.68 2.75 2.83 2.92 3.02

9.37% 2.77 2.84 2.92 3.02 3.12

2.50% 3.00%

8.37% 3.02 3.12 3.23 3.36 3.50 3.67 3.87

V.

Our fair value is calculated over the base of assumptions that are assumed by the analyst. However, investors can evaluate

variations in this fair value before changes in the main assumptions such as our discount rate, our long term growth rate and

our estimated long term zinc and silver prices.

WACC / g 0.00% 0.50% 1.00% 1.50% 2.00%



Multiple Analysis

Table N° 15: Mining companies comparable to Milpo


Source: Bloomberg, Kallpa SAB Source: Bloomberg, Kallpa SAB


5.50 1.16 5.2% 4.1% 3.1%

Milpo has a 9.19x estimated P/E 2014, quite below the average from identified comparable companies (14.27x). In the same

way, it has a 2.78 estimated EV/EBITDA 2014, while the industry’s average is 5.50x. Both multiples register an upside above

55.0%; that is to say, this methodology’s upside exceeds the 29.8% upside obtained through the fundamental analysis

(Discounted Cash Flow to the Firm methodology).

Average 20,536 12.62 14.27 7.55

n.d. 1.18 0.39 -25.0% -12.9% n.d.

5.63 1.01 -2.4% -1.5% 1.3%

Cia Minera Atacocha SA Peru 38 n.d. 39.17

Sociedad Minera El Brocal Peru 386 n.d. 13.82 15.77

7.38 3.09 0.51 3.9% 1.3% 1.1%

5.99 0.53 -19.2% -5.8% 5.4%

Minmetals Land Ltd Hong Kong. 400 11.33 3.44

Nyrstar Belgium 690 n.d. n.d. 6.92

6.22 5.29 1.06 14.6% 7.7% 3.3%

6.38 1.21 5.6% 3.2% 3.9%

Volcan Cia Minera SAA Peru 1,894 8.03 7.06

Boliden AB Sweden 4,267 21.54 15.02 7.66

n.d. 11.98 2.18 33.7% 29.0% 1.4%

6.45 0.77 5.3% 2.7% 3.9%

Assore Ltd Sth. Africa 5,537 9.14 11.97

Teck Resources Ltd Canada 12,787 14.27 16.32 6.04

7.30 6.24 2.40 20.8% 10.4% 4.1%

2.78 1.59 14.6% 6.6% n.d.

BHP Billiton Ltd Australia 178,528 12.34 12.47

P/BV ROE ROADividend

Yield

Compañía Minera MILPO SA Peru 837 11.66 9.19 3.09

VI.

Company CountryMarket Cap.

(USD MM)

P/E

12M

P/E

2014

EV/EBITDA

12M

EV/EBITDA

2014

Boliden Volcan

Milpo

Assore

Minmetals

El Brocal

Atacocha

-

2

4

6

8

10

12

14

0 5 10 15 20 25 30 35 40

EV/EBITDA 2014

P/E 2014

Chart Nº 18: P/E 2014 vs. EV/EBITDA 2014

Market Cap.

Boliden Volcan

Milpo

Assore

Minmetals

El Brocal

Atacocha

-20%

-10%

0%

10%

20%

30%

40%

-30% -20% -10% 0% 10% 20% 30% 40%

ROA

ROE

Chart Nº 19: ROE vs. ROA

Market Cap.



Annex 1: Financial statements

Net Sales

Cost of Sales

Gross Income

Amortization of Intangibles

Operating Expenses

Sales Expenses

Other Expenses

Operating Income

Interest Income

Interest Expenses

Income Before Taxes

Taxes

Net Income

Minority Interest

Attributable to Milpo

Shares Outstanding - Average (MM)

Earnings per share - EPS (USD)

Depreciation & Amortization

EBITDA

BALANCE SHEET (USD MM)

Cash & Cash Equivalents

Accounts Receivable

Inventory

Other Short Term Assets

Current Assets

Fixed Assets, net

Other Long Term Assets

Non Current Assets

TOTAL ASSETS

Short Term Debt

Accounts Payable

Other Current Liabilities

Current Liabilities

Long Term Debt

Other Long Term Liabilities

Non Current Liabilities

TOTAL LIABILITIES

Equity

Legal Reserves and Others

Accumulated and Unrealized Results

Minority Interest

NET EQUITY ATTRIBUTABLE TO MILPO

TOTAL 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

Source: Kallpa SAB


29.07 -84.53 229.23 2.05 -2.84 10.76

16.34 -25.70 128.64 -102.17 -87.25 -84.92

-265.98 -243.60 -66.42 -155.36 -166.12 -166.44

278.71 184.77 167.01 259.57 250.54 262.12

2.00 25.40 -22.78 19.22 0.38 3.28

12.68 -30.01 -11.76 -5.11 -0.31 -3.17

124.07 171.78 129.81 154.41 163.10 171.21

2016e

139.96 17.60 71.74 91.05 87.37 90.80

2011 2012 2013 2014e 2015e

973.37 1,033.15 1,211.28 1,218.34 1,220.99 1,235.24

495.63 496.72 563.08 572.15 581.07 590.51

45.52 42.36 36.29 35.93 37.81 41.37

33.90 38.54 111.18 120.61 127.65 133.53

68.97 68.59 68.59 68.59 68.59 68.59

644.73

347.23 347.23 347.02 347.02 347.02 347.02

477.75 536.43 648.20 646.20 639.92

113.06

229.35 255.43 456.64 460.19 460.49 463.06

85.16 107.38 99.71 110.19 110.49

181.67

144.19 148.05 356.93 350.00 350.00 350.00

248.40 281.01 191.56 186.01 179.43

151.12

35.31 34.50 21.02 29.76 29.84 30.55

125.77 145.03 150.00 149.32 149.59

1,235.24

87.31 101.48 20.55 6.93 - -

973.37 1,033.15 1,211.28 1,218.34 1,220.99

181.71

602.23 699.49 632.18 632.77 637.67 636.46

198.60 185.49 179.83 180.53 182.86

598.78

403.64 514.00 452.35 452.24 454.81 454.74

371.14 333.66 579.10 585.58 583.32

66.87

1.09 0.58 4.55 4.55 4.55 4.55

62.56 66.99 64.58 66.07 66.19

352.37

109.27 152.40 167.57 170.50 170.97 174.99

198.23 113.70 342.41 344.45 341.61

322.20

2011 2012 2013 2014e 2015e 2016e

329.97 236.45 270.60 300.78 307.04

0.085

124.07 171.78 129.81 154.41 163.10 171.21

0.125 0.016 0.059 0.082 0.080

90.80

1,116.9 1,116.9 1,110.6 1,110.6 1,110.6 1,110.6

134.28 21.18 71.74 91.05 87.37

94.36

5.69 -3.58 -6.07 -0.36 1.88 3.56

139.96 17.60 65.67 90.70 89.25

134.80

-58.83 -40.04 -59.91 -38.87 -38.25 -40.44

198.80 57.64 125.58 129.57 127.50

-

-8.89 -9.34 -17.79 -16.81 -16.44 -16.19

1.78 2.30 2.59 - -

-46.33

205.91 64.67 140.78 146.37 143.94 150.99

-16.19 -39.98 -55.26 -45.14 -45.27

-32.61 -41.76 -36.49 -39.14 -39.25 -40.17

-51.15

-20.61 -23.32 -24.69 -25.33 -25.39 -25.99

-40.51 -70.21 -20.45 -44.30 -47.67

-457.57

315.83 239.95 277.68 300.28 301.51 314.63

-422.06 -451.03 -442.48 -452.11 -452.93

2016e

737.89 690.97 720.16 752.39 754.44 772.19

VII.

INCOME STATEMENT (USD MM) 2011 2012 2013 2014e 2015e



www.kallpasab.com

Buy +

Sell -30% to -15% +15% to +30% Buy

Hold -15% to 0% 0% to +15% Hold

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 short-term 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.

22Initial Coverage

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 non-public information used by

areas such Research and Investment, Capital Markets, among others.

Definition of qualification ranges

Kallpa Securities SAB has 5 qualification ranges: Buy +, Buy, Hold, Sell and Sell - . The analyst will assign the coverage one of

these ranges.

Sell - < - 30% > + 30%



KALLPA SECURITIES SOCIEDAD AGENTE DE BOLSA

MANAGEMENT

Alberto ArispeCEO(511) 630 [email protected]

COMMERCIAL CAPITAL MARKETS CORPORATE FINANCE

Enrique Hernández Ricardo Carrión Andrés RoblesManager Manager Manager(51 1) 630 7515 (51 1) 630 7500 (51 1) 630 [email protected] [email protected] [email protected]

EQUITY RESEARCH

Marco Contreras Edder Castro Humberto León Fiorella TorresSenior Analyst Analyst Analyst Assistant(51 1) 630 7528 (51 1) 630 7529 (51 1) 630 7527 (51 1) 630 7500

[email protected] [email protected] [email protected] [email protected]

TRADING

Eduardo Fernandini Javier Frisancho Jorge RodríguezHead Trader Trader Trader(51 1) 630 7516 (51 1) 630 7517 (51 1) 630 7518

[email protected] [email protected] [email protected]

CHACARILLA OFFICE MIRAFLORES OFFICE

Hernando Pastor Daniel Berger Walter LeónRepresentative Representative Representative(51 1) 626 8700 (51 1) 652 6453 (51 1) 243 8024


AREQUIPA OFFICE

Jesús Molina Ricky GarcíaRepresentative Representative(51 54) 272 937 (51 54) 272 937

[email protected] [email protected]

OPERATIONS IT

Alan Noa Mariano Bazán Ramiro MisariHead of Operations Analyst - Treasury Head of IT(51 1) 630 7523 (51 1) 630 7522 (51 1) 630 7500


INTERNAL CONTROL

Elizabeth CuevaController(51 1) 630 7521

[email protected]

www.kallpasab.com 23Initial Coverage





















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