Management Discussion and Analysis

Volcan Compañía Minera S.A.A. and Subsidiaries

Management Discussion and Analysis

Second Quarter 2022

Principal Results:

Consolidated Volcan

Jan-Mar

Apr-Jun

Apr-Jun

var %

Jan-Jun

Jan-Jun

var %

2022

2022

2021

2022

2021

Sales Prices¹

Zinc (USD/MT)

3,684

3,920

2,884

35.9

3,796

2,817

34.8

Lead (USD/MT)

2,310

2,162

2,112

2.4

2,239

2,082

7.5

Copper (USD/MT)

9,815

9,325

8,536

9.2

9,605

7,824

22.8

Silver (USD/Oz)

23.8

23.0

27.2

-15.3

23.4

26.9

-13.1

Gold (USD/Oz)

1,879

1,885

1,849

1.9

1,881

1,830

2.8

Operating Results

Mineral treatment² (thousands MT)

2,085

2,195

2,075

6

4,280

4,072

5.1

Zinc Production (thousands FMT)

52.7

52.3

53.1

-1.4

105.0

104.3

0.7

Lead Production (thousands FMT)

13.6

13.3

12.7

4.7

27.0

25.6

5.4

Copper Production (thousands FMT)

1.1

0.8

1.0

-26.3

1.8

2.1

-12.9

Silver Production (millions Oz)

3.6

3.4

4.0

-14.7

7.1

7.9

-10.0

Gold Production (thousands Oz)

8.0

5.3

6.6

-18.7

13.3

12.0

10.9

Unitary Cost (USD/TM)

3

55.5

55.7

51.9

7.3

55.6

51.4

8.3

Total Investments (MM USD)

41.8

57.6

36.9

56.0

99.4

65.0

53.0

Financial Results (MM USD)

Sales before adjustments

263.6

244.8

228.5

7.1

508.4

439.7

15.6

Sales Adjustments

15.8

-31.6

3.1

-15.8

1.2

Settlement of prior period adjustments

6.6

13.8

3.1

340.2

20.5

6.2

229.2

Adjustment for open positions

4

9.2

-45.4

3.3

-36.2

-0.1

Hedging results

0.0

0.0

-3.4

-100.0

0.0

-4.9

-100.0

Sales after adjustments

279.4

213.2

231.5

-7.9

492.6

440.9

11.7

Profit before IR

52.8

-5.8

29.4

47.0

42.0

11.8

Income tax

-12.1

-0.6

-12.9

-95.0

-12.7

-24.1

Profit before exceptionals

40.7

-6.4

16.6

34.3

17.9

91.8

Exceptional adjustments

-2.6

-5.8

0.0

0.0

-8.4

0.0

Net profit

38.2

-12.2

16.6

25.9

17.9

44.8

5

125.6

61.3

97.7

-37.3

186.9

186.8

0.1

EBITDA

1

These prices are the initial billing prices, which are provisional, as the adjustments are made when settlements of prior periods are received from customers.

2

Includes treated tons at Oxides Plant

  1. Unit cost does not include the infill drilling costs
  2. The open comercial positions refer to shipments that don´t have final settlements yet, therefore they are exposed to adjustments due to metal prices variations in the future. The financiancial provisions, sales adjustments up to March 2022 reflects the sensitivity to a determined future price curve.
  3. Does not consider exceptional adjustments.

Source: Volcan Cia. Minera

1

Management Discussion and Analysis

1. Executive Summary

  • The Company's sales before adjustments increased by 7.1%, from USD 228.5 MM in
    2Q21 to USD 244.8 MM in 2Q22, mainly explained by better zinc, copper and gold prices, and higher lead production, partly offset by lower lead and silver prices and lower production of zinc, copper, silver and gold. However, the negative trend in metal prices at the end of the quarter required significant negative open commercial provisions by USD - 45.4 MM. The London Metal Exchange (LME) price projections used to calculate these financial provisions are shown in the table below.

Table 1: LME price projections at the end of 2Q22

Sales prices

Actual

Projection

1

2Q22

Jul-22

Aug-22

Sep-22

Zinc (USD/MT)

3,920

3,173

3,162

3,152

Lead (USD /MT)

2,162

1,912

1,911

1,908

Copper (USD /MT)

9,325

8,252

8,250

8,247

Silver (USD /Oz)

23.0

20.4

20.4

20.4

Gold (USD /Oz)

1,885

1,807

1,811

1,814

1

Source: London Metal Exchange

Negative provitions were partially compensated by settlement of prior period adjustments by USD 13.8 MM, in this way net sales adjustments amounted to USD -31.6 MM in 2Q22 and USD 3.1 MM in 2Q21. Total sales after adjustments decreased by 7.9%, from USD 231.5 MM in 2Q21 to USD 213.2 MM in 2Q22.

Chart 1: 2Q22 vs 2Q21 variations impact on net sales (USD MM)

  • The price of zinc increased from 2,884 USD/MT in 2Q21 to 3,920 USD/MT in 2Q22 (35.9%), lead from 2,112 USD/MT to 2,162 USD/MT (2.4%), copper from 8,536 USD/MT to 9,325 USD/MT (9.2%), and gold from 1,849 USD/Oz to 1,885 USD/Oz (1.9%). On the contrary, silver price decreased by 15.3% from 27.2 USD/Oz in 2Q21 to 23.0 USD/Oz in 2Q22.
  • Total treated volumes increased by 5.8%, mainly due to greater volumes processed at Cerro de Pasco and Chungar. However, zinc production decreased by 1.4%, from 53.1 thousand FMT in 2Q21 to 52.3 thousand FMT in 2Q22; copper decreased by 26.3%, from 1.0 thousand FMT in 2Q21 to 0.8 thousand FMT in 2Q22, and silver decreased by 14.7%,

2

Management Discussion and Analysis

from 4.0 MM Oz in 2Q21 to 3.4 MM Oz in 2Q22, mainly due to suspensions of operations to ensure safety standards at the Andaychagua Mine in Yauli and greater use of lower grade stockpiles in Alpamarca. Gold production decreased by 18.7%, from 6.6 thousand Oz in 2Q21 to 5.3 thousand Oz in 2Q22, mainly explained by lower grades of the ore processed at the Oxides Plant. Lead fines production increased by 4.7%, from 12.7 thousand FMT in 2Q21 to 13.3 thousand FMT in 2Q22, due to greater production at Cerro de Pasco and Chungar.

  • Consolidated unit cost increased by 7.3%, from 51.9 USD/MT in 2Q21 to 55.7 USD/MT in 2Q22, mainly explained by high local and global inflation that impacts most of the main expense items, such as labor, goods, supplies, reagents, energy, fuel, etc. Moreover, rehabilitations of previous works at the main mining units have increased.
  • Profit before exceptional items decreased from USD 16.6 MM in 2Q21 to USD -6.4 MM in 2Q22, mainly due to lower gross profit as a result of negative open commercial provisions and the higher cost of goods sold. Exceptional adjustments were USD -5.8 MM, consequently net profit was USD -12.2 MM in 2Q22 vs. USD 16.6 MM in 2Q21.
    Chart 2: 2Q22 vs 2Q21 variations impact on net profit (USD MM)
  • EBITDA decreased by 37.3%, from USD 97.7 MM in 2Q21 to USD 61.3 MM in 2Q22, due to lower gross profit.
  • Total investments increased from USD 36.9 MM in 2Q21 to USD 57.6 MM in 2Q22, mainly due to the increased execution of developments and infrastructure investments at Yauli, and the expansion of tailings dams at Yauli, Alpamarca and Cerro de Pasco.
  • Year-to-date(Jan-Jun), sales after adjustments increased by 11.7%, from USD 440.9 MM in 2021 to USD 492.6 MM in 2022, EBITDA increased by 0.1%, from USD 186.8 MM in 2021 to USD 186.9 MM in 2022, profit before exceptional items increased by 91.8%, from USD 17.9 MM in 2021 to USD 34.3 MM MM in 2022, and net profit increased from USD 17.9 MM in 2021 to USD 25.9 MM in 2022.

3

Management Discussion and Analysis

2. Consolidated Results

2.1 Production

Table 2: Consolidated Production

Consolidated

Jan-Mar

Apr-Jun

Apr-Jun

var %

Jan-Jun

Jan-Jun

var %

Production

2022

2022

2021

2022

2021

Mineral extraction (thousands MT)

1,981

2,054

2,153

-4.6

4,035

4,127

-2.2

Polymetallic ore

1,755

1,814

1,924

-5.8

3,568

3,680

-3.1

Oxides ore

226

241

229

5.2

467

447

4.5

Mineral treatment (thousands MT)

2,085

2,195

2,075

5.8

4,280

4,072

5.1

Concentrator Plants

1,859

1,954

1,846

5.9

3,813

3,626

5.2

Silver Oxides Plant

226

241

229

5.2

467

447

4.5

Fine Content

Zinc (thousands FMT)

52.7

52.3

53.1

-1.4

105.0

104.3

0.7

Lead (thousands FMT)

13.6

13.3

12.7

4.7

27.0

25.6

5.4

Copper (thousands FMT)

1.1

0.8

1.0

-26.3

1.8

2.1

-12.9

Silver (millions Oz)

3.6

3.4

4.0

-14.7

7.1

7.9

-10.0

Gold (thousands Oz)

8.0

5.3

6.6

-18.7

13.3

12.0

10.9

Source: Volcan Cia. Minera

Extracted ore volumes decreased by 4.6%, from 2.153 MM MT in 2Q21 to 2.054 MM in 2Q22, mainly explained by the suspension of operations at the open pit in Alpamarca since mid-May to assess alternatives for its final operational stage, and the suspensions of operations to ensure safety standards at the Andaychagua Mine in Yauli, partially offset by greater extracted volumes at Chungar, Cerro de Pasco and Óxidos. However, treated volumes increased by 5.8%, from 2.075 MM MT in 2Q21 to 2.195 MM MT in 2Q22, due to the increased use of ore from stockpiles at Alpamarca, which offset the lower volumes extracted at the open pit.

Total treated volumes increased by 5.8%, mainly due to greater volumes processed at Cerro de Pasco and Chungar. However, zinc production decreased by 1.4%, from 53.1 thousand FMT in 2Q21 to 52.3 thousand FMT in 2Q22; copper decreased by 26.3%, from 1.0 thousand FMT in 2Q21 to 0.8 thousand FMT in 2Q22, and silver decreased by 14.7%, from

4.0 MM Oz in 2Q21 to 3.4 MM Oz in 2Q22, mainly due to suspensions of operations to ensure safety standards at the Andaychagua Mine in Yauli and greater use of lower grade stockpiles at Alpamarca. Gold production decreased by 18.7%, from 6.6 thousand Oz in 2Q21 to 5.3 thousand Oz in 2Q22, mainly explained by lower grades of the ore processed at the Oxides Plant. Lead fines production increased by 4.7%, from 12.7 thousand FMT in 2Q21 to 13.3 thousand FMT in 2Q22, due to greater production at Cerro de Pasco and Chungar.

Year-to-date(Jan-Jun), the extraction volume decreased by 2.2% as compared to the same period in the previous year, from 4.127 MM MT in 1H21 to 4.035 MM MT in 1H22. The treated volume increased by 5.1%, from 4,072 MM MT in 1H21 to 4,280 MM MT in 1H22. With regard to fines, zinc production grew by 0.7%, from 104.3 thousand FMT in 1H21 to

105.0 thousand FMT in 1H22, lead production by 5.4%, from 25.6 thousand FMT to 27.0 thousand FMT, copper production decreased by 12.9%, from 2.1 thousand FMT to 1.8

4

Management Discussion and Analysis

thousand FMT, silver by 10.0% from 7.9 MM Oz to 7.1 MM Oz, and gold production grew by 10.9%, from 12 thousand Oz in 1H21 to 13.3 thousand Oz in 1H22.

2.2 Cost of Production

Table 3: Consolidated Cost of Production

Consolidated

Jan-Mar

Apr-Jun

Apr-Jun

var %

Jan-Jun

Jan-Jun

var %

Production Cost

2022

2022

2021

2022

2021

Production Cost (MM USD)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Mine Cost

51.8

52.5

51.8

1.3

104.3

99.9

4.3

Plant and Other Cost

61.2

66.2

57.8

14.5

127.4

110.6

15.2

Sub total Production Cost (MM USD)

113.0

118.7

109.6

8.3

231.7

210.5

10.1

Inflill drilling cost

2.9

4.2

7.0

Total Production Cost (MM USD)

115.9

122.8

109.6

12.1

238.7

210.5

13.4

S/.

-

S/.

-

S/.

-

S/. -

S/.

-

S/.

-

S/. -

Unit Cost (USD/MT)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Mine Cost

26.2

25.6

24.1

6.2

25.8

24.2

6.7

Plant and Other Cost

29.4

30.2

27.9

8.2

29.8

27.2

9.6

Sub total unitary cost (USD/TM)

55.5

55.7

51.9

7.3

55.6

51.4

8.3

Infill drilling cost

1.5

2.0

1.7

Total Unitary Cost (USD/TM)

57.0

57.7

51.9

11.2

57.4

51.4

11.7

Source: Volcan Cia. Minera

Since 2022, infill drilling costs are considered a production cost. Infill drilling is carried out to increase the certainty of the reserves and reduce risk in mining plans. In 2Q22, this cost amounted to USD 4.2 MM. It is important to note that infill drilling was previously reported under local exploration investments at the operating units.

The absolute cost of production, excluding infill drilling, increased by 8.3%, from USD 109.6

  1. in 2Q21 to USD 118.7 MM in 2Q22, while unit cost grew by 7.3%, from 51.9 USD/MT in 2Q21 to 55.7 USD/MT in 2Q22. This is mainly explained by increased shotcrete activities in previous works, and by local and international inflation that has impacted labor, goods, supplies, reagents, energy, and fuel costs, among others. The Company is doubling its efforts to control and lower costs through different initiatives organized systematically through the "Volcan Avanza" project.

Year-to-date, the absolute cost of production, excluding infill drilling, increased by 10.1%, from USD 210.5 MM in 1H21 to USD 231.7 MM in 1H22, while unit cost grew by 8.3%, from 51.4 USD/MT in 1H21 to 55.6 USD/MT in 1H22.

The quarter-over-quarter evolution of the unit cost of production in the last five years is shown in the chart below:

5

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Volcan Compañia Minera SAA published this content on 02 August 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 August 2022 04:09:02 UTC.