Volcan Compañía Minera A : Management Discussion Analysis - 2023 1Q

Management Discussion and Analysis

Volcan Compañía Minera S.A.A. and Subsidiaries

Management Discussion and Analysis

First Quarter 2023

Principal Results:

Consolidated Volcan		Jan-Mar	Jan-Mar	var %
		2023		2022
Sales Prices¹
Zinc (USD/MT)				3,117		3,684	-15.4
Lead (USD/MT)				2,143		2,310	-7.3
Copper (USD/MT)				8,900		9,815	-9.3
Silver (USD/Oz)				22.5		23.8	-5.4
Gold (USD/Oz)				1,892		1,879	0.7
Operating Results
Mineral treatment² (thousands MT)			2,274		2,085	9.1
Zinc Production (thousands FMT)			56.5		52.7	7.1
Lead Production (thousands FMT)			13.2		13.6	-3.0
Copper Production (thousands FMT)		1.3		1.1	18.7
Silver Production (millions Oz)			3.5		3.6	-4.2
Gold Production (thousands Oz)			3.7		8.0	-53.2
Unit Cost (USD/TM)	3			50.4		54.3	-7.2
Total Investments (MM USD)			36.2		42.7	-15.1
Financial Results (MM USD)
Sales before adjustments			220.7		263.6	-16.3
Sales Adjustments				0.4		15.8	-97.3
	Settlement of prior period adjustments		8.9		6.6	34.1
	Adjusments for open positions	4		-8.5		9.2
Sales after adjustments			221.1		279.4	-20.9
Net profit before exceptionals			1.5		40.7	-96.4
	Exceptional adjustments			-0.7		-2.6	-71.8
Net profit				0.8		38.2	-98.0
	5			S/.	-	S/.	-
				71.4		125.6	-43.2
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 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.
3. Does not consider exceptional adjustments.

Source: Volcan Cia. Minera

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Management Discussion and Analysis

1. Executive Summary

• The Company's sales before adjustments decreased by 16.3%, from USD 263.6 MM in
  1Q22 to USD 220.7 MM in 1Q23, explained by lower prices of the main metals produced by the Company.
• The price of zinc decreased from 3,684 USD/MT in 1Q22 to 3,117 USD/MT in 1Q23 (15.4%), lead from 2,310 USD/MT to 2,143 USD/MT (7.3%), copper from 9,815 USD/MT to 8,900 USD/MT (9.3%), silver from 23.8 USD/Oz to 22.5 USD/Oz (5.4%), and gold increased from 1,879 USD/Oz to 1,892 USD/Oz (0.7%).
• Sales adjustments totaled USD 0.4 MM in 1Q23 as compared to USD 15.8 MM in 1Q22, and as a result sales after adjustments decreased by 20.9%, from USD 279.4 MM to USD 221.1 MM as shown in the figure below.

Figure 1: 1Q23 vs 1Q22 variations impact on net sales (USD MM)

• Total processed volumes increased by 9.1% due to increased treated ore volumes at Cerro de Pasco, Chungar and Yauli. The production of zinc fines increased by 7.1%, from 52.7 thousand FMT in 1Q22 to 56.5 thousand FMT in 1Q23; while the production of copper increased by 18.7%, from 1.1 thousand FMT in 1Q22 to 1.3 thousand FMT in 1Q23. Meanwhile, lead production decreased by 3.0%, from 13.6 thousand FMT in 1Q22 to 13.2 thousand FMT in 1Q23 and silver production decreased by 4.2%, from 3.6 MM Oz in 1Q22 to 3.5 MM Oz in 1Q23. Gold production decreased by 53.2%, from 8.0 thousand Oz in 1Q22 to 3.7 thousand Oz in 1Q23, mainly due to lower grades of the ore processed at the Oxides Plant.
• Consolidated unit cost decreased by 7.2%, from 54.3 USD/MT in 1Q22 to 50.4 USD/MT in 1Q23. This is mainly explained by the execution of improvement initiatives in the operations, and greater volumes treated at Chungar, Cerro de Pasco and Yauli.
• Profit before exceptional items decreased from USD 40.7 MM in 1Q22 to USD 1.5 MM in 1Q23, mainly due to reduced sales as a result of lower metals prices, partially offset by the lower cost of goods sold resulting from a lower cost of production.

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Management Discussion and Analysis

Figure 2: 1Q23 vs 1Q23 variations impact on net profit before exceptional items (USD MM)

• Exceptional expenses totaled USD 0.7 MM, mainly related to the impairment of long-term investments in Cerro de Pasco. As a result, net profit amounted to USD 0.8 MM in 1Q23 versus USD 38.2 MM in 1Q22.
• EBITDA decreased by 43.2%, from USD 125.6 MM in 1Q22 to USD 71.4 MM in 1Q23, due to lower sales resulting from lower metals prices.
• Total investments decreased by 15.1%, from USD 42.7 MM in 1Q22 to USD 36.2 MM in 1Q23, as a result of investment prioritization in the operating units.

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Management Discussion and Analysis

2. Consolidated Results

2.1 Production

Table 1: Consolidated Production

Consolidated	Jan-Mar	Jan-Mar	var %
Production	2023	2022
Mineral extraction (thousands MT)	2,149	1,981	8.5
Polymetallic ore	1,911	1,755	8.9
Oxides ore	238	226	5.5
Mineral treatment (thousands MT)	2,274	2,085	9.1
Concentrator Plants	2,035	1,859	9.5
Silver Oxides Plant	238	226	5.5
Fine Content
Zinc (thousands FMT)	56.5	52.7	7.1
Lead (thousands FMT)	13.2	13.6	-3.0
Copper (thousands FMT)	1.3	1.1	18.7
Silver (millions Oz)	3.5	3.6	-4.2
Gold (thousands Oz)	3.7	8.0	-53.2
Source: Volcan Cia. Minera

Extracted ore volumes increased by 8.5%, from 1,981 thousand MT in 1Q22 to 2,149 thousand MT in 1Q23, due to higher extracted volumes at Yauli, Chungar and Cerro de Pasco. Similarly, treated volumes increased by 9.1%, from 2,085 thousand MT in 1Q22 to 2,274 thousand MT in 1Q23, as a result of increased extraction.

The production of zinc fines increased by 7.1%, from 52.7 thousand FMT in 1Q22 to 56.5 thousand FMT in 1Q23, mainly due to greater volumes and higher grades in the ore treated at Yauli and Chungar, partially offset by lower fines at Cerro de Pasco, a result of lower grades. The production of copper increased by 18.7%, from 1.1 thousand FMT in 1Q22 to 1.3 thousand FMT in 1Q23. Conversely, lead production decreased by 3.0%, from 13.6 thousand FMT in 1Q22 to 13.2 thousand FMT in 1Q23, due to lower grades at Yauli and Alpamarca, partially offset by better grades of the ore processed at Chungar. Silver production decreased by 4.2%, from 3.6 MM Oz in 1Q22 to 3.5 MM Oz in 1Q23, and gold production decreased by 53.2%, from 8.0 thousand Oz in 1Q22 to 3.7 thousand Oz in 1Q23, due to lower grades in the ore processed at the Oxides Plant.

2.2 Cost of Production

The absolute cost of production, not considering infill drilling, rose by 1.1%, from USD 113.0

1. in 1Q22 to USD 114.3 MM in 1Q23, mainly due to greater extracted and treated volumes. Unit cost decreased by 7.2%, from 54.3 USD/MT in 1Q22 to 50.4 USD/MT in 1Q23. This is mainly explained by the execution of improvement initiatives in the operating units, and greater volumes treated at Chungar and Yauli.

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Management Discussion and Analysis

Table 2: Consolidated Cost of Production

Consolidated	Jan-Mar	Jan-Mar	var %
Production Cost		2023		2022
Production Cost (MM USD)		0.0		0.0		0.0
Mine Cost		44.0		51.8	-15.0
Plant and Other Cost		70.2		61.2		14.7
Sub total Production Cost (MM USD)		114.3		113.0		1.1
Inflill drilling cost		2.3		2.9	-18.8
Total Production Cost (MM USD)		116.6		115.9		0.6
		S/.	-	S/.	-	S/.	-
Unit Cost (USD/MT)		0.0		0.0		0.0
Mine cost	1		19.5		24.9	-21.9
Plant and Other Cost		30.9		29.4		5.2
Sub total Unitary Cost (USD/MT)		50.4		54.3		-7.2
Infill drilling cost		1.1		1.5	-25.2
Total Unitary Cost (USD/MT)		51.5		55.8		-7.7

• Mine unit cost considers the adjustment of Alpamarca unit cost Source: Volcan Cia. Minera

The evolution of the unit cost over the last five years is shown in the figure below. As observed, unit cost in 1Q23 was similar to 1Q21.

Figure 3: Evolution of the Unit Cost without Infill Drilling (USD/MT)

2.3 Investments

Investments in the operating units decreased by 18.3%, from USD 40.9 MM in 1Q22 to USD 33.4 MM in 1Q23, as a result of the streamlining of investments in the operating units.

Growth investments related to the Romina project were USD 2.9 MM in 1Q23. Total investments decreased by 15.1%, from USD 42.7 MM in 1Q22 to USD 36.2 MM in 1Q23.

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