Compania Minera Atacocha S.A.A.

EQUITY RESEARCH | Initial Coverage
December 30th 2013
Alberto Arispe
Edder Castro
Mining Industry
Head of Research
(511) 630 7500
aarispe@kallpasab.com
Analyst
(511) 630 7529
ecastro@kallpasab.com
Compania Minera
Atacocha S.A.A.
Cia. Minera Atacocha S.A.A.
(LSE: ATACOBC1)
Equity's Fair Value (PEN MM)
116.03
Share's Fair Value (PEN)
Fair Value
PEN 0.11
UNDERWEIGHT
Limited stock of reserves decreases flexibility in order
to reduce costs
0.11
Recommendation
Underweight
Market Capitalization (PEN MM)
125.07
Share's Market Price (PEN)
0.13
Shares Outstanding* (MM)
962.11
Upside
-15.5%
ADTV - LTM (PEN)
Kallpa Securities SAB initiates coverage of Compania Minera Atacocha
S.A.A. (Atacocha) recommending to underweight its shares within a
benchmark portfolio for the Peruvian market. Our PEN 0.11 fair value per
ATACOBC1 share is -15.5% below its PEN 0.13 market price as of closing
of December 27th 2013.
142,008
Range 52 weeks
0.10 - 0.27
YTD Change
-45.8%
Dividend Yield - LTM
0.0%
Trading
LSE
(*) 534.6 MM Class A common shares and 427.6 MM Class B common
shares.
ADTV: Average Daily Traded Volume
LTM: Last Twelve Months
Source: Bloomberg, Kallpa SAB
Financial Ratios
2012
2013e
2014e
P / Sales
0.40
0.44
0.41
P/E
n.a.
n.a.
n.a.
P / BV
0.46
0.51
0.52
1.83
1.87
1.06
-0.009
-0.011
-0.001
ROE
-8.2%
-11.5%
-0.8%
ROA
-4.2%
-6.0%
-0.4%
EV / EBITDA
EPS (USD)
EV: Market Cap. + Preferred Equity + Total Debt - Cash & Cash Eq.
Source: SMV, Kallpa SAB
Atacocha is a polymetallic mining company that operates in the region of
Pasco. The company is subsidiary of Compania Minera Milpo S.A.A. (Milpo)
which controls 88.19% of the shares with voting rights. Since August 2nd
2010, Milpo is indirect subsidiary of Votorantim Participacoes S.A. (it
currently has a 50.1% stake).
We value Atacocha using a Discounted Cash Flow to the Firm methodology
at an 11.83% discount rate. We project activities for a 6 year-period (up to
2019) as we consider reserves and resources updated as of closing of
2012.
It is worth mentioning that we apply penalties to the resources in
accordance to their classification (10% to measured resources, 20% to
indicated resources and 30% to inferred resources). This occurs since
resources are linked to a lower exploitation certainty. Additionally, mineral
grades from resources may vary in relation with results from new drillings
(which are necessary so they become reserves).
The company has registered operating losses since 3Q2013 due to lower
production levels that occurred by a decrease in the treated tonnage during
2012, and due to lower copper and silver grades. Additionally, 2013 brought
the effect of the fall in metal prices (more pronounced in precious metals: 27.6% YTD and -33.8% YTD for gold and silver, respectively). However,
Atacocha managed to obtain a positive Operating Income in 3Q2013 when
increasing its production level, which allowed the company to increase Net
Sales in 23.0% YoY.
Chart Nº 1: ATACOBC1 vs. Zinc Spot
USD/Lb.
PEN
ATACOBC1
0.30
Zinc Spot (right axis)
1.00
0.25
0.95
0.20
0.90
0.15
For the next years, Management is implementing cost reduction plans (a
merger between Atacocha and Minera Atasilver S.A.C. and the operating
integration with Milpo’s El Porvenir mine) and projects in order to increase
the productivity of its operations (Pique 447, which aims to decrease
mineral transport costs within the mine in Pasco). Only implementing Pique
447, Management plans to reduce its cost per treated metric ton by
USD/TM 5.0 (from USD/MT 46.5 in 2013 to USD/MT 41.5 in 2015).
0.85
0.10
Source: Bloomberg
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
Apr-13
May-13
Mar-13
Feb-13
Jan-13
0.80
Dec-12
0.05
Considering these facts, we have estimated a PEN 0.11 fair value per
ATACOBC1 share. However, we consider that the valuation’s fundamentals
are already internalized in the market price. Hence, we give an
underweight recommendation.
Mining | Compania Minera Atacocha S.A.A.
Company's Financial Summary
INCOME STATEMENT (USD MM)
Net Sales
Cost of Sales
2012
2013e
2014e
111.21
101.98
108.65
BALANCE SHEET (USD MM)
2012
2013e
2014e
Cash & Cash Equivalents
22.47
15.89
13.86
Accounts Receivable
39.96
39.10
41.65
Inventory
15.67
16.21
17.26
-109.86
-101.49
-100.00
Gross Income
1.35
0.49
8.65
Sales Expenses
-4.96
-3.82
-4.07
Deferred Expenses
0.07
0.07
0.07
Administrative Expenses
-4.85
-4.69
-4.99
Current Assets
78.17
71.25
72.84
0.93
-3.50
-
Net Fixed Assets
105.97
83.30
73.79
-7.53
-11.53
-0.41
0.25
-
-
Other Expenses, Net
Operating Income
Interest Income
Other Long Term Assets
7.21
7.75
7.75
Non Current Assets
113.17
91.05
81.54
154.38
Interest Expenses
-1.84
-0.85
-0.24
Total Assets
191.34
162.31
Income Before Taxes
-9.11
-12.38
-0.65
Short Term Debt
13.97
8.89
-
0.84
1.73
-
Accounts Payable
37.52
33.89
33.39
-8.27
-10.64
Taxes
Net Income
-0.65
Short Term Provisions
Current Liabilities
Shares Outstanding - Average (MM)
Earnings Per Share - EPS (USD)
962
962
962
-0.009
-0.011
-0.001
Long Term Debt
0.94
0.20
0.22
52.43
42.98
33.61
8.89
-
-
Long Term Provisions
32.18
32.12
34.22
Non Current Liabilities
41.07
32.12
34.22
Depreciation & Amortization
32.15
31.66
29.51
Net Equity
EBITDA
24.62
20.14
29.10
Total Liabilities + Equity
MARGINS AND GROWTH RATES (%)
2012
2013e
2014e
CASH FLOW (USD MM)
Gross Margin
1.2%
0.5%
8.0%
Operating Margin
-6.8%
-11.3%
EBITDA Margin
22.1%
19.7%
Other Adjustments
-9.14
-1.33
2.11
Operating Cash Flow
14.37
16.39
26.86
Investment Cash Flow
-10.58
-9.00
-20.00
Financing Cash Flow
-12.03
-13.97
-8.89
-8.24
-6.58
-2.03
Net Margin
Sales' Growth
Operating Income's Growth
EBITDA's Growth
97.85
87.20
86.55
191.34
162.31
154.38
2012
2013e
2014e
Net Income
-8.27
-10.64
-0.65
-0.4%
Depreciation & Amortization
32.15
31.66
29.51
26.8%
Changes in Working Capital
-0.37
-3.30
-4.11
-7.4%
-10.4%
-0.6%
-17.5%
-8.3%
6.5%
-130.8%
53.1%
n.a.
-55.8%
-18.2%
44.5%
Net Income's Growth
-163.0%
28.6%
n.a.
FINANCIAL RATIOS
2012
2013e
2014e
Current Assets / Current Liabilities
1.49
1.66
2.17
50.71
57.21
57.21
0.23
0.10
-
Average days of Inventory
Free Cash Flow
CHART N° 2: SHAREHOLDERS - ATACOAC1
11.8%
Total Debt / Equity
Total Debt / EBITDA
0.93
0.44
Payout Ratio
0.0%
0.0%
Dividends per Share (USD)
-
Votorantim Group
0.0%
-
-
-
ROE
-8.2%
-11.5%
-0.8%
ROA
-4.2%
-6.0%
-0.4%
ROIC
-4.0%
-7.4%
-0.3%
VALUATION
2012
2013e
2014e
P / Sales
0.40
0.44
0.41
P/E
n.a.
n.a.
n.a.
EV / EBIT
n.a.
n.a.
n.a.
EV / EBITDA
1.83
1.87
1.06
P / BV
0.46
0.51
0.52
Others
88.2%
CHART N° 3: ESTIMATED SALES - 2013
Zinc
23.2%
Lead
MANAGEMENT
7.6%
Victor Gobitz Colchado
CEO
Persio Morassutti
CFO
Paulo Nogueira Leal
Manager - Human Resources
Graham Speirs Drummond
Manager - Projects
Lenin Salazar Dulanto
Manager - Mining Unit
Jose Luis Alcalá Valencia
Manager - Operations
13.5%
55.7%
Copper
Silver
Source: Atacocha, Kallpa SAB
www.kallpasab.com
Initial Coverage
2
Mining | Compania Minera Atacocha S.A.A.
Index
I.
Investment thesis: Underweight …………………………………………...…………………………………………………………………………
4
II.
Compania Minera Atacocha S.A.A. ………………………………...………………………………………………………………………………
5
III.
i.
Company's description ………………………………………………………………………………………………………………………
5
ii.
Reserves and resources ………………………………………………………………………………………………………………………
6
iii.
Net Sales ………………………………………………………………………………………………………………………………………
7
iv.
Cost reduction strategy ………………………………………………………………………………………………………………………
7
v.
Tax system ……………………………………………………………………………………………………………………………………
7
Valuation ………………………………………………………………………………………………………………………………………..
8
i.
Production ………………………………………………………………………………………………………………………………………
8
ii.
Price vector ……………………………………………………………………………………………………………………………………
9
iii.
Operating costs …………………………………………………………………………………………………………………………..
9
iv.
CAPEX …………………………………………………………………………………………………………………………..
10
v.
Discount rate ……………………………………………………………………………………………………………………………………
10
vi.
Risks ………………………………………………………………………………………………………………………………………..
10
vii.
Catalysts ………………………………………………………………………………………………………………………………………
11
IV.
Scenario analysis ………………………………………………………………………………………………………………………………………
12
V.
Sensitivity analysis ……………………………………………………………………………………………………………………………………
13
VI.
Multiple Analysis ………………………………………………………………………………………………………………………………………
13
VII.
Annex 1: Financial Statements ………………………………………………………………………………………………………………………
14
www.kallpasab.com
Initial Coverage
3
Mining | Compania Minera Atacocha S.A.A.
I.
Investment thesis: Underweight
i.
100% Peru risk: The company operates a single polymetallic mine (underground) in the province and the region of
Pasco. Its operations are constituted by a mineral center and a treatment plant located in the districts of San Francisco
de Asis de Yarusyacan and Yanacancha, respectively.
Given this, the continuity of Atacocha’s operations is subject to environmental, social and tax regulations imposed to
the mining industry by the Peruvian Government. Additionally, the country’s political conjuncture and the country’s
economic performance may impact the company’s results.
ii.
Exposure to Zinc: Although Atacocha is considered a polymetallic mining company, more than 50% of its revenues
correspond to the zinc content on its concentrates. In relevance terms, it is followed by silver and lead, with 23% and
14% stakes, respectively. The remaining stake corresponds to copper.
It is worth mentioning the positive view that analysts have over lead and zinc prices (around 70% of its revenues) for
the next years. The positive perspective over zinc and lead prices is due to a decrease in the global supply before mine
shutdowns in Canada, Australia and Ireland; and before a higher future demand, respectively.
iii.
Negative Operating Margins: The company has been generating operating losses since 3Q2012, explained by lower
production levels, by a strong inflationary pressure over production costs in the mining industry during 2012, and by the
fall in metal prices in 2013.
However, Atacocha has managed to generate a positive operating income in 3Q2013 after implementing cost reduction
policies (tariff renegotiations with suppliers, prioritization of projects, among others). We consider that results from this
period are a good reflex of the company’s future results and that Pique 447 project will improve financial margins.
iv.
Short Life of Mine: The company’s life of mine is only 1 year if we only consider reserves (2012) and it can be
extended to 8 years considering resources (indicated, measured and inferred). However, if reserves, indicated
resources and measured resources are only taken into account, the company’s Life of Mine would be approximately 4
years (2017).
Given the limited stock of reserves, Atacocha is executing an aggressive exploration plan in order to reclassify part of
its resources as reserves, increasing mineral stocks. This reduces flexibility in order to adjust costs before lower metal
prices and reduces financial margins. However, it is a necessary expenditure in order to ensure the future continuity of
the company’s operations.
v.
Potential for higher mineral grades in the future: Unlike other mines, it is expected that Atacocha’s mineral grades
will be higher in the next years. This due to the fact that average grades from reserves and resources (zinc, lead, silver,
and copper) largely exceed the grades from the minerals treated during the previous years.
Silver average grade for 2012 was 1.30 Oz/MT, below the average silver grade from resources (2.33 Oz/MT). This also
occured with the average grades from zinc and lead since their average grades in 2012 were 3.40% and 0.80%,
respectively; while the grades from their resources were 4.55% and 1.61%, respectively.
vi.
Social risk and environmental penalties: As of closing of November 2013, the company does not have any social
conflict reported in Defensoria del Pueblo (Peruvian Ombudsman Agency). Additionally, the company focuses part of
its resources towards initiatives of social development regarding education, heath, and nutrition in the districts of
Yanacancha, San Francisco de Asis de Yarusyacan and Ticlayan. Consequently, we do not anticipate potential social
conflicts that may affect the mining unit’s operations and therefore, our valuation.
Regarding the possibility of receiving penalties for environmental issues, in August 29th 2012 there was a leakage from
the sedimentation pool which downloaded in Huallaga River. Nevertheless, the event was totally fixed in September 1st
2012 thanks to a contingency plan developed by Atacocha. However, it is unknown if this event will have any monetary
penalty, since up to date, the process continues.
vii.
Support from Votorantim Group: Atacocha is subsidiary of Compania Minera Milpo S.A., which is part of Votorantim
Group through Votorantim Metais Ltda. This Brazilian group has presence in 22 countries and operates in different
industries such as cement, metals, iron and steel, power and energy, agro industry, finance, among others.
www.kallpasab.com
Initial Coverage
4
Mining | Compania Minera Atacocha S.A.A.
II.
Compania Minera Atacocha S.A.A.
i.
Company’s description
Compania Minera Atacocha S.A.A. was founded in February 8th, 1936 and it was constituted to carry out exploration
and exploitation activities in its own mining deposits or in rented deposits, in order to produce zinc, copper and lead
concentrates.
In November 2008, Atacocha started to form part of Milpo Group, through its subsidiary Milpo Andina Peru S.A.C., with
a 68.51% indirect stake in the common shares with voting rights (Class A). Later, on August 5th 2010, the company
started to form part of Votorantim Group which obtained a 44.40% indirect stake in Compania Minera Milpo S.A.A.’s
shares.
Chart N° 4: Compania Minera Atacocha S.A.A. - Timeline
2008:
Milpo acquired
68.51% of Class A
common shares
1936:
Atacocha's foundation
2009:
Average capacity of
4,100 TDP
2013:
Merger with Cia.
Minera Atasilver
S.A.C.
2010:
Votorantim Group
acquired 44.40% of
Milpo
Source: Atacocha
Currently, Milpo Andina Peru S.A.C. has an 88.19% stake in Atacocha’s Class A shares. Additionally, Votorantim
Group maintains a 50.06% stake in Compania Minera Milpo S.A.A. Atacocha’s presence within Votarantim Group is
appreciated in the following chart:
Chart N° 5: Votorantim Group - Organization chart
Votorantim Participaciones S.A.
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%
Rayrock Antofagasta
100.0%
Votorantim Andina
S.A. (VASA)
100.0%
Minera Pampa de Cobre
99.7%
Votorantim Metais Cajamarquilla S.A.
100.0%
Minera El Muki S.A.
50.1%
Compania Minera
Milpo S.A.A.
100.0%
Milpo Andina Peru
S.A.C.
88.2%
Compania Minera Atacocha 100.0%
S.A.A.
Minera Atasilver S.A.C.
Source: Kallpa SAB, Atacocha
www.kallpasab.com
Initial Coverage
5
Mining | Compania Minera Atacocha S.A.A.
The company carries out its operations
through a mining center and a 4,400 TPD
treatment plant located in the mining center. It
is located in the districts of San Francisco de
Asis de Yarusyacan and Yanacancha, which
belong to the province and the region of
Pasco. The polymetallic mine, where the
mineral extraction is carried out, is
underground and it is located 4,040 meters
above sea level.
Chart N° 6: Operations' geographical location
Antamina
Atacocha
Colquijirca (El Brocal)
UEA Chungar (Volcan)
El Porvenir (Milpo)
San Gregorio (El Brocal)
Additionally, Atacocha mining unit is located
near polymetallic mines from other important
Peruvian mining companies (El Brocal, Milpo
and Volcan among others).
Santander (Trevali)
Toromocho
Mines
Projects/Explorations
Source: Kallpa SAB, Atacocha
ii.
Reserves and resources
Below, we present Atacocha’s stock of reserves and resources, updated as of closing of 2012:
Table N° 1: Stock of reserves and resources
Reserves
MT
%Zn
%Pb
%Cu
Oz Ag/MT
18,328
4.00
1.16
0.24
1.74
Probable Reserves
2,031,178
3.26
1.11
0.26
1.81
Total Reserves
2,049,506
3.27
1.11
0.26
1.81
MT
%Zn
%Pb
%Cu
Oz Ag/MT
Measured Resources
53,826
6.18
1.75
0.48
2.07
Indicated Resources
3,453,595
4.85
1.74
0.41
2.34
24,146
4.63
1.64
0.42
2.06
Proved Reserves
Resources
Measured Resources in bridges
Indicated Resources in bridges
494,368
4.64
1.65
0.37
2.60
Total Resources (a)
3,507,421
4.84
1.73
0.41
2.37
Inferred Resources (b)
7,599,210
4.40
1.54
0.41
2.31
Inferred Resources (a + b)
11,625,145
4.55
1.61
0.41
2.33
Total Reserves and Resources
13,674,651
Reserves' Cut Off - NSR: USD/MT 50.57
Source: Atacocha
It is appreciated that reserves only represent 15% of Atacocha’s total mineral stocks. Additionally, inferred resources,
which have a low certainty of being exploited because it is necessary to perform more drillings, represent 56% of the
total mineral stocks. Consequently, given the composition of total mineral stocks and the current production capacity,
we may agree that Atacocha has a 1-year Life of Mine (2014) if considering reserves, 4-year if considering reserves,
measured resources and indicated resources (2017) and 8-year (2021) if considering total reserves and resources.
Given this panorama, Atacocha is carrying out an exploration plan (Atacocha, San Gerardo and Santa Barbara) in
order to increase its life of mine and to ensure the future continuity of its operations. However, maintaining the rate of
exploration expenditures decreases flexibility in order to adjust costs in a conjuncture of lower metal prices, which has
been appreciated in the fall of its main financial margins.
However, Atacocha has operated in the last 5 years with reserves that ensured a life of mine between 1 and 3 years.
That is to say, it is a kind of mine that keeps the mineral underground, but it is not economically profitable to invest in,
cataloging such metallurgic potential into resources or reserves due to the monetary cost that it represents in the short
term.
www.kallpasab.com
Initial Coverage
6
Mining | Compania Minera Atacocha S.A.A.
iii.
Net Sales
Atacocha sales zinc, copper and lead concentrates, which have some silver percentage. Concentrates are sold
according to their metallic content. However, the value from these concentrates is affected by a penalty that depends
on how clean they are from other substances such as arsenic (this is common in polymetallic mines that operate in
Peru).
In 2012, zinc represented more that 50% of Atacocha’s revenues. In terms of importance, silver and lead followed, both
representing 40.0% of the revenues. The rest corresponded to copper. It is worth mentioning that Atacocha does not
carry out coverage operations over its estimated production, which generate that its revenues are subject to metal
prices’ volatility.
Chart N° 8: Sales by metallic content - 2012
Chart N° 7: Sales by concentrate - 2012
Zinc
15.0%
Zinc concentrates
4.8%
28.4%
Copper
Copper concentrates
53.7%
5.6%
Lead
Lead concentrates
80.2%
Source: Atacocha
iv.
12.3%
Silver
Source: Kallpa SAB
Cost reduction strategy
The company has been implementing policies directed to cost reduction through the optimization of productive and
administrative processes, and through the development of new projects that seek to improve current productivity levels.
In regard with the optimization of productive and administrative processes, Atacocha will take over Compania Minera
Atasilver S.A.C. (in accordance to the agreed in the General Shareholders Meeting carried out on December 10th
2013) aiming to reduce certain administrative expenses that are inherent to the existence of 2 legal persons.
Additionally, the company will carry out an operating integration plan between its mining unit and El Porvenir’s mining
unit (belonging to Compania Minera Milpo S.A.A.) aiming to reduce administrative expenses and to generate synergies
in the production process of both operations.
In regard with the development of new projects that will improve current operations’ productivity, Atacocha will
implement Pique 447 project in order to reduce mineral transport costs inside the mine. That is to say, it will transport
mineral through an elevator rather than through heavy machinery. The company invested USD 2.26 MM in that project
during 3Q2013. According to the company’s guidance, works in Pique 447 will conclude in 2013.
v.
Tax system
On September 28th 2011, through Law 29788 and Law 29789, it was established the Impuesto Especial a la Mineria –
IEM (Special Mining Tax) and the Ley de Regalias Mineras (Mining Royalties Law), which came into effect since 2012.
Both payments take as a basis the quarterly Operating Income and propose a tax scale by ranges depending on the
period’s Operating Margin.
Subsequently, it was approved Law 29790 and there were defined the parameters of the Ley del Gravamen Especial a
la Mineria – GEM (Law of the Special Mining Tax). This law only applies to companies that maintained an existing tax
stability contract on the date of approval of the law for the Special Mining Tax and Mining Royalties.
Given that, on the date in which the law of the Special Mining Tax and Mining Royalties were promulgated, Atacocha
did not count with a tax stability contract, so the company is subject to the payment of the Special Mining Tax and
Mining Royalties.
www.kallpasab.com
Initial Coverage
7
Mining | Compania Minera Atacocha S.A.A.
III.
Valuation
We value Atacocha using a Discounted Cash Flow to the Firm methodology with an 11.83% discount rate. Our projection is
for 6 years (2019) using the stock of reserves and resources updated as of closing of 2012 (including a 10% penalty for
measured resources, a 20% penalty for indicated resources and a 30% penalty to inferred resources). Consequently, we did
not consider neither a perpetuity nor a long term growth within our projections.
On the other hand, we considered that the company will not have debt within its long term capital structure since we project
that the company will finish mineral exploitation in 2019. Additionally, during the projection’s last year we liquidate the
company applying a 25% penalty over the accounts receivable and the inventory, we assume that 100% of the accounts
payable are paid and that the net fixed assets’ terminal value is cero.
Table N° 2: Atacocha's valuation through DCF
2011
2012
2013e
2014e
2015e
2016e
2017e
2018e
2019e
+ EBIT
24,445
-7,531
-11,528
-414
5,958
11,080
11,561
7,045
5,423
- Taxes
-14,447
-8,906
1,733
-
-1,455
-4,454
-4,615
-3,111
-2,611
Cash Flow (USD 000')
31,198
32,153
31,665
29,514
27,835
25,686
24,761
23,456
21,777
-31,047
-10,583
-9,000
-20,000
-20,000
-18,000
-10,000
-10,000
-
-1,379
-9,506
-4,636
-2,000
-1,964
-1,330
-106
689
-35,065
-
-
-
-
-
-
-
-
-19,713
8,770
-4,373
8,233
7,100
10,373
12,981
21,600
18,079
-30,189
+ Deprecition & Amortization
- CAPEX
- ∆ Working Capital
+ Terminal Value*
Cash Flow to the Firm
(*) Liquidation of assets - disbursements due to the mine shutdown
Equity's Valuation
Numb. of shares
Adj. stake %
Equity
FV
Class A*
534,557,407
59.53%
69,074
0.13
Class B
427,550,310
40.47%
46,960
0.11
TOTAL
962,107,717
100.00%
116,035
Common shares
11.83%
COKe
Firm's Value (USD 000')
- Debt (USD 000')
40,857.90
-12,485.00
+ Cash (USD 000')
13,068.00
Equity's FV (USD 000')
41,440.90
(*) Class A common shares have a 15% premium since they have voting rights. This effect is included in the
adjusted percentage stake.
2.80
Exchange rate
116,034.51
Equity's FV (PEN 000')
Source: Kallpa SAB
Below, we present the details of our main assumptions:
i.
Production
Our estimations for future zinc, lead, copper and silver production have an increasing trend in the next years. Despite
of this situation, we consider that our production estimations are conservative since grades from reserves and
resources as of closing of 2012 are much higher than the grades used to project Atacocha’s future production.
Consequently, we project that the average production level per metal (2014 – 2019) will be the following: 47,682 MT of
zinc, 10,469 MT of lead, 1,708 MT of copper and 1.67 MM ounces of silver.
Chart Nº 9: Zinc and lead estimated prod.
Chart Nº 10: Copper and silver estimated prod.
MT
MT
50,000
11,000
Zinc
MM Oz
MT
1,800
1.75
Copper
Lead (right axis)
Silver (Right axis)
1.70
47,500
10,500
1,700
10,000
1,600
1.65
45,000
1.60
42,500
40,000
2013e
Source: Kallpa SAB
www.kallpasab.com
2014e
2015e
2016e
2017e
2018e
2019e
9,500
1,500
9,000
1,400
1.55
1.50
2013e
2014e
2015e
2016e
2017e
2018e
2019e
Source: Kallpa SAB
Initial Coverage
8
Mining | Compania Minera Atacocha S.A.A.
ii.
Price vector
As a policy from Kallpa SAB, our price vector is updated semiannually and it is projected in a 5 year-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 share the same trend of prices estimated by the analysts’ consensus (considering
only estimations updated in the last two months), but trying to be more conservative.
Additionally, we use the long term price level in 2019, since the horizon of our price vector is lower than the horizon of
our projection period.
Table N° 3: Estimated price vector
2013e
2014e
2015e
2016e
2017e
2018e
Silver (USD/Oz.)
22.5
19.0
19.0
19.0
19.0
18.0
Copper (USD/Lb.)
3.30
3.15
3.10
3.00
3.00
2.70
Zinc (USD/Lb.)
0.86
0.93
0.95
1.00
1.00
0.90
Lead (USD/Lb.)
0.95
1.00
1.02
1.05
1.05
0.90
Source: Bloomberg, Kallpa SAB
In regard with base metals, copper price has a negative trend due to the production start up of several copper projects;
that it to say, the global supply will increase and it is expected an stable demand in the next years that is highly
correlated to the Chinese economy’s growth. On the other hand, zinc and lead prices present an upward trend
explained by the reduction of the global supply in the following years and by a higher future demand, respectively.
In regard with silver, Atacocha’s only precious metal, we expect that from 2014, the annual average price will be
USD/Oz 19.0. However, we anticipate that next year will be volatile in regard with precious metals due to the reduction
of the program of repurchase of assets executed by the FED. A sample of this volatility was appreciated on December
19th 2013, a date subsequent to the announcement of the first monthly cut from USD 85,000 MM to USD 75,000 MM.
iii.
Operating costs
As of closing of 3Q2013, the cost per treated MT was USD/MT 45.0, showing a continuous improvement in the
company’s operating efficiency since 4Q2012. This was achieved by the combined effect of a production increase and
the renegotiation of tariffs with suppliers before a context of lower metal prices.
In our projection we consider that the costs’ decreasing trend will keep on until 2015. This is because we expect that
Pique 447 will be 100% operating as of closing of 2Q2014 (according to the company’s guidance, it will be operating in
late 2013). Therefore, the complete effect of lower transport costs will be observed in 2015.
Additionally, since 2015 we apply a 2.0% annual inflation cost accompanying zinc and lead prices’ growth. However,
we project that the company will adjust in 5.0% the cost per treated MT in 2018 (the long term period in our price
vector).
Chart Nº 12: Cost per treated MT - Estimations
}Chart Nº 11: Cost per treated MT
USD/MT
USD/MT
47.0
57.5
46.0
55.0
52.5
50.8
44.7
44.5
45.0
51.8
51.5
43.9
49.4
50.0
44.0
43.0
43.0
46.6
47.5
45.0
45.0
42.0
42.5
41.0
42.5
42.5
2018e
2019e
40.0
40.0
1Q12
Source: Kallpa SAB
www.kallpasab.com
46.5
55.9
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
2013e
2014e
2015e
2016e
2017e
Source: Kallpa SAB
Initial Coverage
9
Mining | Compania Minera Atacocha S.A.A.
iv.
CAPEX
For the next years, we expect that Atacocha’s annual CAPEX will oscilate between USD 10 MM and USD 20 MM.
Expansion projects will be executed between 2014 and 2016 given that the company must invest in Pique 447 and in
the expansion of its tailing fields, which can operate until 1Q2015 given their current capacity.
Chart Nº 13: Estimated CAPEX
USD MM
25,000
Expansion CAPEX
20
20,000
Manteinance CAPEX
20
18
15,000
10,000
10
10
2017e
2018e
9
5,000
0
2013e
2014e
2015e
2016e
2019e
Source: Kallpa SAB
v.
Discount rate
Given that, we assume that the company will not have debt within its long term capital structure, the appropriate
discount rate would be the COKe. We estimate an 11.83% COKe, which is the result of assuming a 4.50% risk free
rate (which includes a 3.0% risk free rate in a mature market and a 1.50% country risk). We estimate a 1.13 beta,
which is a weighted average of betas from base metal mining companies and precious metal mining companies.
Chart N° 14: Discount rate's calculation
COK
11.83%
Rf
3.00%
Beta
1.13
Risk premium
6.50%
Country risk
1.50%
Source: Kallpa SAB
vi.
Risks
a.
Volatility in metal prices: It is expected a higher volatility in metal prices next year, since the FED will carry out
cuts in its bonds repurchase program. This might affect the company’s revenues.
b.
Operating risk: There is a possibility that the annual production level decreases by strikes or by the exploitation
of parts of the mine with lower mineral grades. Additionally, there is a risk so that Management’s efforts, which
aim to decrease costs, do not achieve our expectations (USD/MT 43.00 by 2015).
c.
Social risk: In the mining industry, there is always the possibility of a social conflict and Atacocha is not the
exception of the rule. However, the company has had no major problems with the communities in the province of
Pasco during the last years and does not have any social conflict registered in Defensoria del Pueblo.
d.
Penalties regarding environmental issues: Since it is still unknown if Atacocha must pay a fine due to the
leakage of sediments that occurred in August 2012, there is a possibility that the company will pay monetary
penalties regarding such issue.
www.kallpasab.com
Initial Coverage
10
Mining | Compania Minera Atacocha S.A.A.
vii.
Catalysts
a.
Higher production: Since grades from reserves and resources are higher than grades from the mineral treated
during previous years, it might occur that the head grade for the next years has an upward trend (even higher
than our estimation). This would allow the company to obtain higher revenues at the same cost level per treated
MT.
b.
Higher cost savings: According to Management, the implementation of Pique 447 would generate that the cost
per treated MT decreases in USD 5.0. That is to say, it would pass from USD/MT 46.5 (estimated in late 2013)
to USD/MT 41.5 as of closing of 2015 (the year that the mineshaft will be 100% operating throughout the entire
year). If the project allows to obtaining such cost savings, the cost per treated MT would be lower than the
estimated level for 2015 (USD/MT 43.0). Consequently, the higher operating efficiency will improve financial
margins.
c.
Long term debt: One assumption from the valuation is that since Atacocha will finish its operations in 2019, the
company will not need to assume debt in the next years given that its cash generation capacity will be enough.
However, this assumption may change in accordance with Management’s decisions. If the company maintains
debt within its long term capital structure, our discount rate could be lower, having a positive impact over the
equity’s present value.
d.
Reserves and resources increase: Given that the company will keep on expending between USD 8 MM and
USD 10 MM annually towards exploration expenses (included in the cost of sales), it is probable that the life of
mine will be renewed year on year. Consequently, our projection horizon might increase.
www.kallpasab.com
Initial Coverage
11
Mining | Compania Minera Atacocha S.A.A.
IV.
Scenario analysis
We sensitize the valuation’s main key variables in order to perform the following scenario analysis:
a.
Base scenario – FV: PEN 0.110: Under this scenario, we assume an 11.83% discount rate (COKe) and a USD/Lb.
90.0 long term zinc price. Finally, we assume that Pique 447’s implementation will allow to decrease the cost per
treated MT to USD/MT 43.0 in 2015, followed by a 2.0% annual inflation cost for the next years.
b.
Optimistic scenario – FV: PEN 0.137: Under this scenario, we reduce our discount rate (COKe) in 100 basic points
(10.83%) and we consider USD/Lb 0.95 as long term zinc price. Finally, we assume that the cost per treated MT is
USD/MT 41.0 (according to Management’s guidance) in 2015 after cost savings from Pique 447. It is worth mentioning
that the 2.0% annual inflation cost is maintained from 2016.
c.
Pessimistic scenario – FV: PEN 0.087: Under this scenario, we increase our discount rate (COKe) in 100 basic
points (12.83%) and we consider a USD/Lb 0.85 long term zinc price. Finally, we include a USD/MT 45.0 cost per
treated MT, that is to say, assuming that the cost savings from Pique 447 are cero. This last assumption is
exaggerated, even though it is valid for this scenario, because if the project is not able to generate cost savings, there
would be no sense in carrying it out. It is worth mentioning that the 2.0% annual inflation cost in maintained from 2016.
Chart Nº 15: Scenario analysis
0.140
0.137
0.130
+ 0.022
0.120
0.110
- 0.002
0.110
+ 0.001
+ 0.004
COKe
+100 pts
Base scenario
COKe
-100 pts
Zinc LT
USD/Lb. 0.95
- 0.004
0.100
- 0.017
0.090
0.087
0.080
0.070
0.060
Pessimistic
scenario
USD/MT
Treated 45.0
Zinc LT
USD/Lb. 0.85
USD/MT
Treated 41.0
Optimistic
scenario
Source: Kallpa SAB
www.kallpasab.com
Initial Coverage
12
Mining | Compania Minera Atacocha S.A.A.
V.
Sensitivity analysis: Discount rate vs. long term zinc price (USD/Lb.)
Our fair value is calculated over the base of assumptions that are assumed by the analyst. However, investors can evaluate
the variation of this fair value before changes in the main assumptions such as our discount rate or our estimated long term
zinc price.
Table N° 4: FV's sensitivity to discount rate (COKe) and to long term zinc price (USD/Lb.)
COKe
Zinc LT
/
0.75
0.80
0.85
0.90
0.95
1.00
1.05
9.83%
0.099
0.105
0.109
0.113
0.117
0.122
0.126
10.83%
0.098
0.103
0.107
0.111
0.116
0.120
0.124
11.83%
0.097
0.102
0.106
0.110
0.114
0.118
0.122
12.83%
0.096
0.101
0.105
0.108
0.112
0.116
0.120
13.83%
0.095
0.100
0.103
0.107
0.110
0.114
0.118
Source: Kallpa SAB
VI.
Multiple Analysis
Table N° 5: Companies comparable to Atacocha
Company
Country
Cía. Minera Atacocha SA
Market Cap.
(USD MM)
P/E
12M
P/E
2014
EV/EBITDA
12M
EV/EBITDA
2014
P/BV
ROE
ROA
Peru
45
n.d.
n.d.
2.65
1.54
0.46 -25.0% -12.9%
BHP Billiton Ltd
Australia
171,979
16.30
11.92
7.14
6.15
2.51 15.9%
8.1%
Teck Resources Ltd
Canada
14,783
14.07
14.45
6.39
6.26
0.85
2.5%
Assore Ltd
South Af.
4,583
10.11
10.21
8.81
7.89
2.36 27.2% 18.2%
Boliden AB
Sweden
4,088
15.19
13.57
7.40
5.99
1.19
8.0%
4.5%
Volcan Cía. Minera SAA
Peru
2,039
6.85
7.58
6.61
6.06
1.04 14.6%
7.7%
Compañía Minera MILPO SA
Peru
849
19.40
7.28
3.81
3.09
1.66
3.8%
Belgium
538
n.d.
n.d.
6.29
5.01
0.33 -14.1% -4.6%
Hong Kong
443
12.54
3.81
7.74
3.62
0.51
Peru
391
16.10
15.27
15.93
5.82
0.97
19,974
13.82
10.51
7.28
5.14
1.19
Nyrstar
Minmetals Land Ltd
Sociedad Minera El Brocal
Average
4.8%
8.5%
3.9%
1.3%
-2.4% -1.5%
4.1%
2.7%
Source: Bloomberg, Kallpa SAB
Chart Nº 16: P/BV vs. EV/EBITDA 2014
Chart Nº 17: ROE vs. ROA
EV/EBITDA
2014
Market Cap.
8
ROA
Market Cap.
15%
Volcan
7
Volcan
10%
6
Boliden
Boliden
Nyrstar
El Brocal
5
5%
Minmetals
4
Milpo
0%
Minmetals
3
-5%
2
Nyrstar
El Brocal
Milpo
Atacocha
-10%
1
Atacocha
0.0
0.5
Source: Bloomberg, Kallpa SAB
1.0
1.5
2.0 P/BV
-15%
-30%
-20%
-10%
0%
10%
20% ROE
Source: Bloomberg, Kallpa SAB
Atacocha has a projected EV/EBITDA 2014 of 1.54x, much lower than the average from identified comparable companies
(5.14x). In the same way, it presents a P/BV of 0.46x in the last 12 months, while the industry’s average registers a P/BV of
1.19x. This may be explained by the negative profitability (ROE and ROA) registered in the last 12 months.
www.kallpasab.com
Initial Coverage
13
Mining | Compania Minera Atacocha S.A.A.
VII.
Annex 1: Financial Statements
INCOME STATEMENT (USD MM)
2010
2011
2012
2013e
2014e
2015e
Net Sales
125.08
134.85
111.21
101.98
108.65
111.36
Cost of Sales
-75.65
-100.42
-109.86
-101.49
-100.00
-95.95
Gross Income
49.44
34.43
1.35
0.49
8.65
15.41
Administrative Expenses
-4.82
-4.63
-4.96
-3.82
-4.07
-4.34
Sales Expenses
-5.55
-6.53
-4.85
-4.69
-4.99
-5.11
Other Expenses
-1.54
1.18
0.93
-3.50
-
-
Operating Income
37.52
24.45
-7.53
-11.53
-0.41
5.96
0.16
0.32
0.25
-
-
-
Interest Income
Interest Expenses
-5.42
-2.73
-1.84
-0.85
-0.24
-
Income Before Taxes
32.27
22.04
-9.11
-12.38
-0.65
5.96
-14.45
-8.91
0.84
1.73
-
-1.46
Net Income
17.82
13.14
-8.27
-10.64
-0.65
4.50
Shares Outstanding - MM
962.1
962.1
962.1
962.1
962.1
962.1
Earnings Per Share - EPS
0.019
0.014
-0.009
-0.011
-0.001
0.005
Depreciation & Amortization
19.59
31.20
32.15
31.66
29.51
27.83
EBITDA
57.11
55.64
24.62
20.14
29.10
33.79
2010
2011
2012
2013e
2014e
2015e
Cash & Cash Equivalents
27.39
30.71
22.47
15.89
13.86
21.98
Accounts Receivable
45.76
34.12
39.96
39.10
41.65
42.69
9.81
13.06
15.67
16.21
17.26
17.70
Taxes
BALANCE SHEET (USD MM)
Inventory
Other Short Term Assets
1.02
0.27
0.07
0.07
0.07
0.07
Current Assets
83.98
78.16
78.17
71.25
72.84
82.44
Net Fixed Assets
119.73
117.14
105.97
83.30
73.79
65.95
2.16
6.00
7.21
7.75
7.75
7.75
Non Current Assets
121.89
123.14
113.17
91.05
81.54
73.70
TOTAL ASSETS
205.86
201.29
191.34
162.31
154.38
156.14
Short Term Debt
12.49
14.56
13.97
8.89
-
-
Accounts Payable
30.86
26.90
37.52
33.89
33.39
32.03
Other Short Term Liabilities
11.29
9.59
0.94
0.20
0.22
0.22
Current Liabilties
54.63
51.05
52.43
42.98
33.61
32.26
Long Term Debt
32.95
20.15
8.89
-
-
-
Other Long Term Liabilities
25.79
24.95
32.18
32.12
34.22
35.08
Other Long Term Assets
Non Current Liabilities
58.74
45.10
41.07
32.12
34.22
35.08
TOTAL LIABILITIES
113.37
96.15
93.49
75.10
67.83
67.34
Equity
307.65
307.65
307.65
201.43
201.43
201.43
Legal Reserves and Other Reserves
Accumulated Results
NET EQUITY
LIABILITIES + EQUITY
CASH FLOW (USD MM)
62.06
62.06
62.06
-277.22
-264.57
-271.86
-
92.49
105.14
97.85
87.20
86.55
88.80
205.86
201.29
191.34
162.31
154.38
156.14
-114.23
-114.88
-112.63
2010
2011
2012
2013e
2014e
2015e
Net Income
17.82
13.14
-8.27
-10.64
-0.65
4.50
Depreciation & Amortization
19.59
31.20
32.15
31.66
29.51
27.83
Changes in Working Capital
6.29
2.56
-0.37
-3.30
-4.11
-2.82
Other Adjustments
4.42
-3.94
-9.14
-1.33
2.11
0.86
Operating Cash Flow
48.11
42.95
14.37
16.39
26.86
30.37
Investment Cash Flow
-18.07
-31.05
-10.58
-9.00
-20.00
-20.00
Financing Cash Flow
-12.41
-8.59
-12.03
-13.97
-8.89
-2.25
17.63
3.32
-8.24
-6.58
-2.03
8.12
Free Cash Flow
Source: Kallpa SAB
www.kallpasab.com
Initial Coverage
14
Mining | Compania Minera Atacocha S.A.A.
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: Overweight +, Overweight, Neutral, Underweight and Underweight - . The analyst
will assign the coverage one of these ranges.
Underweight Underweight
Neutral
< - 30%
-30% to -15%
-15% to 0%
> + 30%
+15% to +30%
0% to +15%
Overweight +
Overweight
Neutral
The range assigned to each company covered by the analyst in these reports is based on the analysis/monitoring Kallpa Securities
SAB has been developing for the company. In some cases, the analyst can express his/her 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
15
Mining | Compania Minera Atacocha S.A.A.
KALLPA SECURITIES SOCIEDAD AGENTE DE BOLSA
MANAGEMENT
Alberto Arispe
CEO
(511) 630 7500
aarispe@kallpasab.com
COMMERCIAL
CAPITAL MARKETS
CORPORATE FINANCE
Enrique Hernández
Manager
(51 1) 630 7515
ehernandez@kallpasab.com
Ricardo Carrión
Manager
(51 1) 630 7500
rcarrion@kallpasab.com
Andrés Robles
Manager
(51 1) 630 7500
arobles@kallpasab.com
Edder Castro
Analyst
(51 1) 630 7529
ecastro@kallpasab.com
Humberto León
Analyst
(51 1) 630 7527
hleon@kallpasab.com
Javier Frisancho
Trader
(51 1) 630 7517
jfrisancho@kallpasab.com
Jorge Rodríguez
Trader
(51 1) 630 7518
jrodriguez@kallpasab.com
EQUITY RESEARCH
Marco Contreras
Analyst
(51 1) 630 7528
mcontreras@kallpasab.com
Juan Franco Lazo
Assistant
(51 1) 630 7500
jlazo@kallpasab.com
TRADING
Eduardo Fernandini
Head Trader
(51 1) 630 7516
efernandini@kallpasab.com
CHACARILLA OFFICE
Hernando Pastor
Representative
(51 1) 626 8700
hpastor@kallpasab.com
MIRAFLORES OFFICE
Daniel Berger
Representative
(51 1) 652 6453
dberger@kallpasab.com
AREQUIPA OFFICE
Jesús Molina
Representative
(51 54) 272 937
jmolina@kallpasab.com
Walter León
Representative
(51 1) 243 8024
wleon@kallpasab.com
TACNA OFFICE
Ricky García
Representative
(51 54) 272 937
rgarcia@kallpasab.com
Gerson Del Pozo
Representative
(51 52) 241 394
gdelpozo@kallpasab.com
OPERATIONS - SYSTEMS
Mariano Bazán
Analyst - Treasury
(51 1) 630 7522
mbazan@kallpasab.com
Ramiro Misari
Head of IT
(51 1) 630 7500
rmisari@kallpasab.com
INTERNAL CONTROL
Elizabeth Cueva
Internal Control Officer
(51 1) 630 7521
ecueva@kallpasab.com
www.kallpasab.com
Initial Coverage
16