Compania Minera Milpo

Transcription

EQUITY RESEARCH | Initial Coverage
February 27th 2014
Mining Industry
Alberto Arispe
Edder Castro
Head of Research
(511) 630 7500
[email protected]
Analyst
(511) 630 7529
[email protected]
Cia. Minera Milpo S.A.A.
Compania Minera Milpo
(LSE: MILPOC1)
Equity's Fair Value (PEN MM)
Fair Value
PEN 2.75
BUY
Zinc Play with potential diversification towards copper
3,051.81
Share's Fair Value (PEN)
2.75
Recommendation
Buy
Market Capitalization (PEN MM)
2,350.83
Share's Market Price (PEN)
2.12
Shares Outstanding* (MM)
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.
1,110.58
Upside
LSE
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.
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).
29.8%
ADTV - LTM (PEN)
482,971
Range 52 weeks
1.13 - 2.75
YTD Change
0.5%
Dividend Yield - LTM
0.0%
Trading
(*) Include 1,099 MM common shares and 11.6 MM investment shares
ADTV: Average daily traded volume
LTM: Last twelve months
Source: Bloomberg, Kallpa SAB
Financial Ratios
2013
2014e
2015e
P/E
11.66
9.19
9.57
P / BV
1.59
1.56
1.54
EV / EBITDA
3.22
2.82
2.75
Debt / EBITDA
1.39
1.19
1.14
EBITDA / Interest expen.
17.80
17.90
18.68
EPS (USD)
0.059
0.082
0.080
ROE
14.6%
17.1%
16.2%
ROA
6.6%
7.7%
7.4%
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.
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.
EV: Market Cap. + Preferred Equity + Total Debt - Cash & Cash eq.
Source: SMV, Kallpa SAB
Chart Nº 1: MILPOC1 vs. Zinc Spot
USD/Lb.
PEN
MILPOC1
3.00
Zinc Spot
1.00
2.75
2.50
0.95
2.25
2.00
0.90
1.75
1.50
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.
0.85
1.25
Source: Bloomberg
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
0.80
Feb-13
1.00
Considering these factors, we have estimated a PEN 2.75 fair value per
MILPOC1 share. Hence, we give a buy recommendation.
Mining | Compania Minera Milpo S.A.A.
Company's financial summary
INCOME STATEMENT (USD MM)
Net Sales
Cost of Sales
2013
2014e
2015e
BALANCE SHEET (USD MM)
2013
2014e
2015e
720.2
752.4
754.4
Cash & Cash Equivalents
342.4
344.5
341.6
Accounts Receivable
167.6
170.5
171.0
64.6
66.1
66.2
-442.5
-452.1
-452.9
Gross Income
277.7
300.3
301.5
Inventory
Amortization of Intangibles
-20.5
-44.3
-47.7
Other short - term assets
4.6
4.6
4.6
Sales Expenses
-24.7
-25.3
-25.4
Current assets
579.1
585.6
583.3
Administrative Expenses
-36.5
-39.1
-39.2
Fixed Assets, net
452.3
452.2
454.8
Other Expenses, net
-55.3
-45.1
-45.3
Other Long Term Assets
179.8
180.5
182.9
Operating Income
140.8
146.4
143.9
Non Current Assets
632.2
632.8
637.7
1,221.0
Net Interest Expenses
-15.2
-16.8
-16.4
Total Assets
1,211.3
1,218.3
Income Before Taxes
125.6
129.6
127.5
Short Term Debt
20.5
6.9
Taxes
-59.9
-38.9
-38.3
Accounts Payable
150.0
149.3
Net Income
65.7
90.7
89.3
Minority Interest
-6.1
-0.4
1.9
Attributable to Milpo
71.7
91.1
87.4
Short Term Provisions
149.6
21.0
29.8
29.8
Current Liabilities
191.6
186.0
179.4
Long Term Debt
356.9
350.0
350.0
99.7
110.2
110.5
Long Term Provisions and Deferred Taxes
Shares Outstanding - Average (MM)
1,111
1,111
1,111
Non Current Liabilities
456.6
460.2
460.5
Earnings per share - EPS (USD)
0.059
0.082
0.080
Equity Attributable to Milpo
526.8
536.2
543.3
Depreciation & Amortization
129.8
154.4
163.1
Minority Interest
36.3
35.9
37.8
EBITDA
270.6
300.8
307.0
Total Liabilities + Equity
1,211.3
1,218.3
1,221.0
2013
2014e
2015e
CASH FLOW (USD MM)
2013
2014e
2015e
Gross Margin
38.6%
39.9%
40.0%
Net Income
71.74
91.05
87.37
Operating Margin
19.5%
19.5%
19.1%
129.81
154.41
163.10
EBITDA Margin
37.6%
40.0%
40.7%
Changes in Working Capital
-11.76
-5.11
-0.31
Net Margin
10.0%
12.1%
11.6%
Other Adjustments
-23.30
19.22
0.38
4.2%
4.5%
0.3%
Operating Cash Flow
166.49
259.57
250.54
117.7%
4.0%
-1.7%
Investment Cash Flow
-66.42
-155.36
-166.12
14.4%
11.2%
2.1%
Financing Cash Flow
128.64
-102.17
-87.25
Net Income's Growth
238.7%
26.9%
-4.0%
Free Cash Flow
228.71
2.05
-2.84
FINANCIAL RATIOS
2013
2014e
2015e
CHART N° 2: SHAREHOLDERS AS OF AUGUST 2013
MARGINS AND GROWTH RATES
Sales' Growth
Operating Income's Growth
EBITDA's Growth
Current Assets / Current Liabilities
3.02
3.15
3.25
52.54
52.61
52.61
Debt / Equity
0.72
0.67
0.64
Debt / EBITDA
1.39
1.19
1.14
-
0.073
0.088
ROE
14.6%
17.1%
16.2%
ROA
6.6%
7.7%
7.4%
ROIC
12.3%
11.4%
11.3%
Inventory Turnover (days)
Dividends per share (USD)
18.7%
22.9%
Peruvian Pension
Funds
Votorantim Group
8.3%
Carvel Inc.
Others
50.1%
VALUATION
P / Sales
2013
2014e
2015e
1.16
1.11
1.11
11.66
9.19
9.57
EV / EBIT
6.19
5.80
5.87
EV / EBITDA
3.22
2.82
2.75
P / BV
1.59
1.56
1.54
P/E
CHART N° 3: FAIR VALUE'S COMPOSITION
4.3%
3.7%
Direct operations
4.9%
6.2%
Magistral
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
Hilarion
Pukaqaqa
80.8%
Chapi Sulphides
Source: Milpo, Kallpa SAB
www.kallpasab.com
Initial Coverage
2
Index
I.
Investment thesis: Buy …………………………………………...……………………………………………………………………………..
4
II.
Compania Minera Milpo S.A.A. ………………………………...……………………………………………………………………………………
6
III.
i.
Company's description ………………………………………………………………………………………………………………………
6
ii.
Operating mining units ………………………………………………………………………………………………………………………
7
iii.
Mineral inventory: Reserves and resources ………………………………………………………………………………………………
7
iv.
Brownfield project portfolio ……………………………………………………………………………………………………………………
9
v.
Greenfield project portfolio……………………………………………………………………………………………………………………
9
vi.
Production ……………………………………………………………………………………………………………………………………
11
vii.
Net sales ………………………………………………………………………………………………………………………………………
11
viii.
Cost reduction strategy ………………………………………………………………………………………………………………………
12
ix.
Tax regime ……………………………………………………………………………………………………………………………………
12
Valuation ………………………………………………………………………………………………………………………………………..
13
i.
Production ……………………………………………………………………………………………………………………………………
13
ii.
Price vector ……………………………………………………………………………………………………………………………………
14
iii.
Operating costs …………………………………………………………………………………………………………………………..
14
iv.
CAPEX …………………………………………………………………………………………………………………………..
15
v.
Indebtedness …………………………………………………………………………………………………………………………..
15
vi.
Discount rate …………………………………………………………………………………………………………………………………
16
vii.
Risks ………………………………………………………………………………………………………………………………………..
16
viii.
Catalysts ………………………………………………………………………………………………………………………………………
17
IV.
Scenario analysis ……………………………………………………………………………………………………………………………………
18
V.
Sensitivity analysis ……………………………………………………………………………………………………………………………………
19
VI.
Multiple Analysis ………………………………………………………………………………………………………………………………………
20
VII.
Annex 1: Financial Statements ………………………………………………………………………………………………………………………
21
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Initial Coverage
3
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.
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.
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.
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.
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Initial Coverage
4
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.
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.
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Initial Coverage
5
II.
Compania Minera Milpo S.A.A.
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.
Chart N° 4: Compania Minera Milpo S.A.A.'s timeline
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.
Source: Milpo
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:
Chart N° 5: Grupo Votorantim's organization chart
Votorantim Participaciones S.A.
100.0%
Votorantim Industrial S.A.
91.9%
Votorantim Metais Ltda.
99.9%
Votorantim Metais Zinco
Others
68.5%
Votorantim Invest.
Lat. America (VILA)
100.0%
Minera Rayrock
Antofagasta Ltd.
100.0%
Minera Pampa de
Cobre S.A.
100.0%
Votorantim Andina
S.A. (VASA)
99.7%
Votorantim Metais Cajamarquilla S.A.
100.0%
Minera El Muki S.A.
50.1%
Compañía Minera
Milpo S.A.A.
100.0%
Milpo Andina Peru
S.A.C.
88.2%
Compañía Minera
Atacocha S.A.A.
100.0%
Minera Atasilver S.A.C.
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.
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Initial Coverage
6
ii.
Operating mining units
Chart N° 6: Operations and projects - Geographical location
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.
Magistral
Antamina
Rondoní (Volcan)
Hilarión
Uchucchacua (BVN)
a)
Atacocha
El Porvenir
Colquijirca (El Brocal)
UEA Chungar (Volcan)
San Gregorio (El Brocal)
Santander (Trevali)
Toromocho (Chinalco)
Yauricocha (Sierra Metals)
Cobriza (Doe Run)
Corihuarmi ( Minera MRL)
Pukaqaqa
Julcani (BVN)
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).
Cerro Lindo
Antapite (BVN)
Milpo's Mines
Greenfield Projects - Milpo
Operating Mines
Projects/Explorations
Mina Justa (Minsur)
b)
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).
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.
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
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 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
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.
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Initial Coverage
7
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.
Table N° 1: Reserve and resource inventory as of 2012 - Atacocha
Atacocha Mining Unit
Reserves
Total reserves
MT
%Zn
%Pb
%Cu
Ag Oz./MT
2,049,506
3.27
1.11
0.26
1.81
MT
%Zn
%Pb
%Cu
Ag Oz./MT
Measured resources
77,972
5.70
1.72
0.46
2.07
Indicated resources
3,947,963
4.82
1.73
0.40
2.37
Total resources (a)
4,025,935
4.84
1.73
0.41
2.37
Inferred resources (b)
7,599,210
4.40
1.54
0.41
2.31
Total de resources (a + b)
11,625,145
4.55
1.61
0.41
2.33
Total reserves and resources
13,674,651
Resources
Reserves' cut - off - NSR: USD/MT 50.57
Source: Atacocha
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%.
Table N° 2: Reserve and resource inventory as of 2012 - El Porvenir
El Porvenir Mining Unit
Reserves
MT
%Zn
%Pb
%Cu
Ag Oz./MT
8,737,558
3.87
0.87
0.24
1.90
MT
%Zn
%Pb
%Cu
Ag Oz./MT
Measured resources
5,381,683
5.00%
0.96%
0.27%
1.92
Indicated resources
9,004,312
4.27%
0.54%
0.36%
1.25
Total resources (a)
14,385,995
4.54
0.7
0.32
1.5
16,786,780
3.85
0.82
0.34
1.73
31,172,775
4.17
0.77
0.33
1.63
39,910,333
Total reserves
Resources
Source: Milpo
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%.
Table N° 3: Reserve and resource inventory as of 2012 - Cerro Lindo
Cerro Lindo Mining Unit
Reserves
Total reserves
MT
%Zn
%Pb
%Cu
Ag Oz./MT
35,577,866
3.07
0.34
0.74
0.86
MT
%Zn
%Pb
%Cu
Ag Oz./MT
19,670,244
2.69%
0.34%
0.83%
0.92
Indicated resources
9,163,872
2.29%
0.28%
0.77%
0.84
Total resources (a)
28,834,116
2.57%
0.32%
0.80%
0.90
10,987,995
1.59
0.13
0.77
0.57
39,822,111
2.30
0.27
0.8
0.81
75,399,977
Resources
Measured resources
Source: Milpo
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8
iv.
Brownfield project portfolio
a)
Chapi Mining Unit
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.
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.
Table N° 4: Reserve and resource inventory as of 2012 - Chapi Sulphides
Chapi Sulphides* project
Reserves
Total reserves
Resources (*)
MT
%Cu
0
0.00%
MT
%Cu
Measured resources
74,425,363
0.59%
Indicated resources
118,840,410
0.51%
Total resources (a)
193,265,773
0.54%
28,976,756
0.48%
Total resources (a + b)
222,242,529
0.53%
222,242,529
(*) Referential cut - off grade Cu: 0.30%
Source: Milpo
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
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.
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Table N° 5: Reserve and stock inventory as of 2007 - Magistral
Magistral project
Reserves
Total reserves
MT
%Cu
%Mo
0
0.000%
0.000%
MT
%Cu
%Mo
108,839
0.516%
0.056%
Indicated resources
86,716
0.510%
0.047%
Total resources (a)
195,555
0.513%
0.052%
55,399
0.551%
0.023%
250,954
0.522%
0.046%
250,954
Resources*
Measured resources
(*) Referential cut - off grade Cu: 0.40%
Source: Milpo
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.
Table N° 6: Reserve and resource inventory as of 2012 - Hilarion
Hilarion project
Reserves
Total reserves
Resources*
MT
%Zn
%Pb
%Cu
Ag Oz./MT
0
0.00%
0.00%
0.00%
0.00
MT
%Zn
%Pb
%Cu
Ag Oz./MT
Measured resources
7,881,811
4.56%
0.94%
0.04%
1.35
Indicated resources
12,194,575
4.61%
0.69%
0.04%
0.99
Total resources (a)
20,076,386
4.59%
0.79%
0.04%
1.13
21,562,518
5.09%
0.51%
0.09%
0.9
41,638,904
4.85%
0.65%
0.06%
1.01
41,638,904
(*) Referential cut - off grade Zn: 3.50%
Source: Milpo
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.
Table N° 7: Reserve and resource inventory as of 2012 - Pukaqaqa
Pukaqaqa project
Reserves
Total reserves
MT
%Cu
Ag g/MT
Au g/MT
0
0.00%
0.00
0.00
MT
%Cu
Ag g/MT
Au g/MT
Measured resources
70,065,763
0.54%
1.18
0.08
Indicated resources
139,818,425
0.47%
1.01
0.08
Total resources (a)
209,884,188
0.49%
1.07
0.08
70,659,407
0.43%
1.12
0.07
280,543,595
0.48%
1.08
0.08
280,543,595
Resources*
(*) Referential cut -off grade Cu: 0.30%.
Source: Milpo
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vi.
Production
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).
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.
Chart N° 7: 2013e's production by mining unit
100%
Table N° 8: Production by metal
(DMT)*
2010
2011
2012
2013e
Zinc
191,830
194,274
214,157
260,007
Lead
21,269
21,899
22,915
34,388
26,782
Copper
31,955
38,530
35%
80%
60%
87%
37%
37,340
40%
27%
5,676,849 4,810,042 4,753,000 6,159,465
Silver**
47%
55%
28%
20%
(*) DMT: Dry metric tons
28%
0%
Source: Milpo
25%
9%
4%
17%
(**) Silver production is expressed in ounces.
Zinc
Lead
Atacocha
Copper
El Porvenir
Silver
Cerro Lindo
Source: Milpo
vii.
Net sales
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.
Table N° 9: Volume sold (DTM)
(DMT)*
2010
264,150
Zinc Cc.
Table N° 10: Sales by products (USD 000')
2010
2011
2011
2012
2013
369,690
413,780
471,756
Zinc Cc.
2012
2013
168,835
264,074
262,941
294,919
Lead Cc.
39,135
38,273
40,198
58,324
Lead Cc.
78,465
116,337
112,721
138,791
Copper Cc.
194,976
109,952
127,564
142,368
Copper Cc.
238,176
246,790
261,373
275,643
6,417
12,799
7,537
1,493
Copper Cathodes
80,875
110,688
59,274
10,811
(*) DMT: Dry metric ton
TOTAL
566,351
737,889
696,309
720,164
Source: Milpo
Source: Milpo
Copper Cathodes
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.
Chart N° 8: Sales by metal
100%
80%
9%
Chart N° 9: Sales by mining unit
9%
15%
13%
15%
40%
5%
4%
48%
41%
40%
40%
49%
43%
51%
25%
26%
64%
21%
20%
18%
15%
14%
0%
0%
2010
Zinc
www.kallpasab.com
2%
28%
22%
Source: Milpo
9%
7%
5%
40%
60%
30%
26%
15%
80%
28%
60%
9%
14%
16%
25%
20%
100%
2%
2011
Lead
Copper
2012
Silver
2010
2013
Atacocha
Copper Cathodes
2011
El Porvenir
2012
Cerro Lindo
2013
Chapi e Iván
Source: Milpo
Initial Coverage
11
viii.
Cost reduction strategy
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
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.
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.
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III.
Valuation
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:
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.
Table N° 11: Milpo's valuation through DCF
2013
2014e
2015e
2016e
2017e
2018e
2019e
+ EBIT
140,783
146,374
143,938
150,987
149,782
110,559
107,921
69,988
68,650
- Taxes
-59,914
-38,870
-38,250
-40,440
-40,078
-28,311
-27,520
-16,140
-15,739
+ Depreciation & Amortization
129,812
154,408
163,097
171,214
177,253
182,603
195,178
208,651
214,439
- CAPEX
-86,026
-155,000
-168,000
-170,000
-175,000
-185,000
-200,000
-210,000
-226,000
- ∆ Working capital
-35,061
14,113
66
107
412
267
743
-6,197
-390
Cash flow (USD 000')
-
+ Atacocha's terminal value*
-
89,594
Cash flow to the firm
121,025
-
-
100,851
-
111,868
112,369
2020e
2021e
-
-15,763
-
-
80,117
60,559
46,302
40,960
(*) Liquidation of assets - disbursements regarding the mine's shutdown
Equity's valuation - Direct operations
Equity's valuation
10.37%
WACC
FV - Direct operations (USD 000')
877,994
FV - Magistral (USD 000')
67,461
- Debt (USD 000')
971,892
-377,471
FV - Hilarión (USD 000')
40,248
+ Cash (USD 000')
342,406
FV - Pukaqaqa (USD 000')
53,656
- Minority Interest (USD 000')
-58,833
FV - Chapi sulphides (USD 000')
46,692
Equity's value - Direct operations (USD 000')
877,994
Equity's FV (USD 000')
Firm's value (USD 000')
1,086,052
2.81
Exchange rate
Equity's Fair Value (PEN 000')
Common shares
Shares outst.
Adj. stake %
Equity
FV
Common shares*
1,098,962,569
99.11%
3,024,631
2.75
Investment shares
11,616,563
0.89%
27,176
2.34
1,110,579,132
100.00%
3,051,807
TOTAL
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.
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.
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Chart Nº 10: Zinc and Lead - Est. production
Chart Nº 11: Copper and Silver - Est. production
MT
350,000
325,000
MT
Zinc
MM Oz.
MT
45,000
45,000
7.50
40,000
42,500
7.00
35,000
40,000
6.50
30,000
37,500
6.00
25,000
35,000
5.50
20,000
32,500
5.00
15,000
30,000
Copper
Silver (Right axis)
Lead (Right axis)
300,000
275,000
250,000
225,000
200,000
175,000
150,000
Source: Kallpa SAB
ii.
4.50
2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e
2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e
Source: Kallpa SAB
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
Silver (USD/Oz.)
23.9
19.0
19.0
19.0
19.0
18.0
Copper (USD/Lb.)
3.33
3.15
3.10
3.00
3.00
2.70
Zinc (USD/Lb.)
0.87
0.93
0.95
1.00
1.00
0.90
Lead (USD/Lb.)
0.97
1.00
1.02
1.05
1.05
0.90
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).
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Initial Coverage
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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.
Chart Nº 12: Cash cost by mining unit
Chart Nº 13:Estimated consolidated cash cost
USD/MT
USD/MT
60.0
55.0
36.0
55.9
50.8
51.8
51.5
49.4
35.0
50.0
46.6
45.0
40.0
40.3
37.2
35.0
34.5
34.5
34.5
46.1
42.2
42.0
33.0
40.1
35.0
32.8
32.8
32.0
30.0
25.0
35.0
44.3
34.0
36.2
35.2
45.0
31.9
28.6
28.5
1T12
2T12
31.9
28.6
29.3
29.3
4T12
1T13
2T13
32.0
30.7
32.0
31.0
20.0
3T12
Atacocha
El Porvenir
3T13
4T13
30.0
2013
Cerro Lindo
Source: Kallpa SAB, Milpo
iv.
2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e
CAPEX
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).
Chart Nº 14: Estimated CAPEX
USD MM
250
Maintenance CAPEX
200
150
100
168
170
175
2015e
2016e
2017e
155
50
185
2018e
200
210
2019e
2020e
226
86
0
2013
2014e
2021e
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).
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Initial Coverage
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Chart Nº 15: Indebtedness ratios
Debt/
EBITDA
EBITDA/
Int. expen.
1.5
21
1.4
20
19
1.3
18
1.2
17
1.1
16
Debt/EBITDA
1.0
EBITDA/Int. exp.
0.9
15
14
2013 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e
Source: Kallpa SAB
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.
Chart N° 16: WACC's breakdown
WACC
10.37%
COKe
15.45%
Rf
3.00%
Beta
1.68
E/(D+E)
60.00%
Risk premium
6.50%
COKd
4.29%
D/(D+E)
40.00%
(1-T)
70.00%
Country risk
1.50%
Source: Kallpa SAB
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.
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.
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.
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e.
viii.
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.
Catalysts
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.
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.
www.kallpasab.com
Initial Coverage
17
IV.
Scenario analysis
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).
Chart Nº 17: Scenario analysis
USD
3.60
+ 0.46
+ 0.04
3.52
3.40
3.20
+ 0.27
3.00
2.80
2.60
- 0.21
2.75
WACC
+100 pbs
Baseline
Scenario
- 0.30
2.40
- 0.08
2.20
2.16
2.00
Pessimistic
Scenario
USD/MT
treated 36.5
Zinc LT
USD/Lb. 0.85
WACC
-100 pbs
Zinc LT
USD/Lb. 0.95
USD/MT
Treated 33.5
Optimistic
Scenario
Source: Kallpa SAB
www.kallpasab.com
Initial Coverage
18
V.
Sensitivity analysis
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.
Table N° 13: FV's sensitivity to discount rate (WACC) and to long term growth (g)
WACC / g
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
8.37%
3.02
3.12
3.23
3.36
3.50
3.67
3.87
9.37%
2.77
2.84
2.92
3.02
3.12
3.24
3.38
10.37%
2.56
2.62
2.68
2.75
2.83
2.92
3.02
11.37%
2.39
2.44
2.49
2.54
2.60
2.67
2.74
12.37%
2.25
2.28
2.32
2.37
2.41
2.47
2.52
Source: Kallpa SAB
Table N° 14: FV's sensitivity to long term copper price (USD/Lb.) and to long term zinc price (USD/Lb.)
Copper LT /
Zinc LT
0.75
0.80
0.85
0.90
0.95
1.00
1.05
2.10
0.83
1.17
1.58
1.93
2.33
2.67
3.07
2.40
1.24
1.58
1.99
2.34
2.74
3.08
3.48
2.70
1.65
1.99
2.40
2.75
3.15
3.48
3.89
3.00
2.06
2.40
2.81
3.16
3.55
3.89
4.30
3.30
2.47
2.81
3.22
3.57
3.96
4.30
4.70
Source: Kallpa SAB
www.kallpasab.com
Initial Coverage
19
VI.
Multiple Analysis
Table N° 15: Mining companies comparable to Milpo
Company
Market Cap.
(USD MM)
Country
Compañía Minera MILPO SA
Peru
P/E
12M
P/E
2014
EV/EBITDA
12M
EV/EBITDA
P/BV
2014
ROE
ROA
Dividend
Yield
14.6%
837
11.66
9.19
3.09
2.78
1.59
6.6%
n.d.
BHP Billiton Ltd
Australia
178,528
12.34
12.47
7.30
6.24
2.40 20.8% 10.4%
4.1%
Teck Resources Ltd
Canada
12,787
14.27
16.32
6.04
6.45
0.77
2.7%
3.9%
Assore Ltd
Sth. Africa
5,537
9.14
11.97
n.d.
11.98
2.18 33.7% 29.0%
1.4%
Boliden AB
Sweden
4,267
21.54
15.02
7.66
6.38
1.21
5.6%
3.2%
3.9%
Peru
1,894
8.03
7.06
6.22
5.29
1.06 14.6%
7.7%
3.3%
Volcan Cia Minera SAA
Nyrstar
5.3%
Belgium
690
n.d.
n.d.
6.92
5.99
0.53 -19.2% -5.8%
5.4%
Hong Kong.
400
11.33
3.44
7.38
3.09
0.51
1.3%
1.1%
Sociedad Minera El Brocal
Peru
386
n.d.
13.82
15.77
5.63
1.01
-2.4% -1.5%
1.3%
Cia Minera Atacocha SA
Peru
38
n.d.
39.17
n.d.
1.18
0.39 -25.0% -12.9%
n.d.
20,536
12.62
14.27
7.55
5.50
1.16
Minmetals Land Ltd
Average
3.9%
5.2%
4.1%
3.1%
Chart Nº 18: P/E 2014 vs. EV/EBITDA 2014
Chart Nº 19: ROE vs. ROA
EV/EBITDA
2014
Market Cap.
14
ROA
Market Cap.
40%
12
Assore
30%
10
20%
Boliden
8
Volcan
10%
Boliden
6
Minmetals
El Brocal
4
2
5
Atacocha
Atacocha
10
El Brocal
-10%
0
15
20
Milpo
0%
Milpo
Minmetals
Assore
Volcan
25
30
35
40
P/E
2014
-20%
-30%
-20%
-10%
0%
10%
20%
30%
40% ROE
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).
www.kallpasab.com
Initial Coverage
20
VII.
Annex 1: Financial statements
INCOME STATEMENT (USD MM)
Net Sales
Cost of Sales
2011
2012
2013
2014e
2015e
2016e
737.89
690.97
720.16
752.39
754.44
772.19
-422.06
-451.03
-442.48
-452.11
-452.93
-457.57
Gross Income
315.83
239.95
277.68
300.28
301.51
314.63
Amortization of Intangibles
-40.51
-70.21
-20.45
-44.30
-47.67
-51.15
Operating Expenses
-20.61
-23.32
-24.69
-25.33
-25.39
-25.99
Sales Expenses
-32.61
-41.76
-36.49
-39.14
-39.25
-40.17
Other Expenses
-16.19
-39.98
-55.26
-45.14
-45.27
-46.33
Operating Income
205.91
64.67
140.78
146.37
143.94
150.99
Interest Income
1.78
2.30
2.59
-
-
-
-8.89
-9.34
-17.79
-16.81
-16.44
-16.19
198.80
57.64
125.58
129.57
127.50
134.80
Taxes
-58.83
-40.04
-59.91
-38.87
-38.25
-40.44
Net Income
139.96
17.60
65.67
90.70
89.25
94.36
Interest Expenses
Income Before Taxes
Minority Interest
5.69
-3.58
-6.07
-0.36
1.88
3.56
Attributable to Milpo
134.28
21.18
71.74
91.05
87.37
90.80
Shares Outstanding - Average (MM)
1,116.9
1,116.9
1,110.6
1,110.6
1,110.6
1,110.6
Earnings per share - EPS (USD)
0.125
0.016
0.059
0.082
0.080
0.085
124.07
171.78
129.81
154.41
163.10
171.21
EBITDA
329.97
236.45
270.60
300.78
307.04
322.20
2011
2012
2013
2014e
2015e
2016e
Cash & Cash Equivalents
198.23
113.70
342.41
344.45
341.61
352.37
Accounts Receivable
109.27
152.40
167.57
170.50
170.97
174.99
62.56
66.99
64.58
66.07
66.19
66.87
1.09
0.58
4.55
4.55
4.55
4.55
Current Assets
371.14
333.66
579.10
585.58
583.32
598.78
Fixed Assets, net
403.64
514.00
452.35
452.24
454.81
454.74
Other Long Term Assets
198.60
185.49
179.83
180.53
182.86
181.71
Non Current Assets
602.23
699.49
632.18
632.77
637.67
636.46
TOTAL ASSETS
973.37
1,033.15
1,211.28
1,218.34
1,220.99
1,235.24
Short Term Debt
87.31
101.48
20.55
6.93
Accounts Payable
125.77
145.03
150.00
35.31
34.50
21.02
Current Liabilities
248.40
281.01
Long Term Debt
144.19
148.05
85.16
Non Current Liabilities
TOTAL LIABILITIES
Equity
BALANCE SHEET (USD MM)
Inventory
Other Short Term Assets
Other Current Liabilities
Other Long Term Liabilities
-
-
149.32
149.59
151.12
29.76
29.84
30.55
191.56
186.01
179.43
181.67
356.93
350.00
350.00
350.00
107.38
99.71
110.19
110.49
113.06
229.35
255.43
456.64
460.19
460.49
463.06
477.75
536.43
648.20
646.20
639.92
644.73
347.23
347.23
347.02
347.02
347.02
347.02
Legal Reserves and Others
68.97
68.59
68.59
68.59
68.59
68.59
Accumulated and Unrealized Results
33.90
38.54
111.18
120.61
127.65
133.53
Minority Interest
45.52
42.36
36.29
35.93
37.81
41.37
NET EQUITY ATTRIBUTABLE TO MILPO
495.63
496.72
563.08
572.15
581.07
590.51
TOTAL LIABILITIES + EQUITY
973.37
1,033.15
1,211.28
1,218.34
1,220.99
1,235.24
2011
2012
2013
2014e
2015e
2016e
CASH FLOW (USD MM)
Net Income
139.96
17.60
71.74
91.05
87.37
90.80
124.07
171.78
129.81
154.41
163.10
171.21
Changes in Working Capital
12.68
-30.01
-11.76
-5.11
-0.31
-3.17
2.00
25.40
-22.78
19.22
0.38
3.28
Operating Cash Flow
278.71
184.77
167.01
259.57
250.54
262.12
Investment Cash Flow
Other Adjustments
-265.98
-243.60
-66.42
-155.36
-166.12
-166.44
Financing Cash Flow
16.34
-25.70
128.64
-102.17
-87.25
-84.92
Free Cash Flow
29.07
-84.53
229.23
2.05
-2.84
10.76
Source: Kallpa SAB
www.kallpasab.com
Initial Coverage
21
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 Sell
Hold
< - 30%
-30% to -15%
-15% to 0%
> + 30%
+15% to +30%
0% to +15%
Buy +
Buy
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.
www.kallpasab.com
Initial Coverage
22
KALLPA SECURITIES SOCIEDAD AGENTE DE BOLSA
MANAGEMENT
Alberto Arispe
CEO
(511) 630 7500
[email protected]
COMMERCIAL
CAPITAL MARKETS
CORPORATE FINANCE
Enrique Hernández
Manager
(51 1) 630 7515
[email protected]
Ricardo Carrión
Manager
(51 1) 630 7500
[email protected]
Andrés Robles
Manager
(51 1) 630 7500
[email protected]
Edder Castro
Analyst
(51 1) 630 7529
[email protected]
Humberto León
Analyst
(51 1) 630 7527
[email protected]
Javier Frisancho
Trader
(51 1) 630 7517
[email protected]
Jorge Rodríguez
Trader
(51 1) 630 7518
[email protected]
EQUITY RESEARCH
Marco Contreras
Senior Analyst
(51 1) 630 7528
[email protected]
Fiorella Torres
Assistant
(51 1) 630 7500
[email protected]
TRADING
Eduardo Fernandini
Head Trader
(51 1) 630 7516
[email protected]
CHACARILLA OFFICE
Hernando Pastor
Representative
(51 1) 626 8700
[email protected]
MIRAFLORES OFFICE
Daniel Berger
Representative
(51 1) 652 6453
[email protected]
Walter León
Representative
(51 1) 243 8024
[email protected]
AREQUIPA OFFICE
Jesús Molina
Representative
(51 54) 272 937
[email protected]
Ricky García
Representative
(51 54) 272 937
[email protected]
OPERATIONS
Alan Noa
Head of Operations
(51 1) 630 7523
[email protected]
IT
Mariano Bazán
Analyst - Treasury
(51 1) 630 7522
[email protected]
Ramiro Misari
Head of IT
(51 1) 630 7500
[email protected]
INTERNAL CONTROL
Elizabeth Cueva
Controller
(51 1) 630 7521
[email protected]
www.kallpasab.com
Initial Coverage
23

Compania Minera Milpo

Transcription

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