VOLCAN COMPAA MINERA S.A.A.

AND SUBSIDIARIES
1ST QUARTER 2013 MANAGEMENTS
DISCUSSION AND ANALYSIS

US$ millions
Sales
EBITDA
Net Profit

Jan - Mar Jan - Mar

2013
2012
232.8
76.0
22.4

291.1
144.8
70.8

Var
(%)
-20.0%
-47.5%
-68.3%

I. Executive Summary
Q1 2013 results have been significantly affected by the following main reasons: 1.) The
7.8% fall in the price of Silver, metal that represents approximately 50% of the
Companys sales, 2.) The decline in the production of fines due to the suspension of
mining activities at the Raul Rojas open pit and the decrease in the ore contribution
from the Paragsha underground mine, located in our Cerro de Pasco Mining Unit, and
3.) The increase in production costs, affected by mining sector inflation across the
globe.
Additionally, International Financial Reporting Standards (IFRS) establish that any
variations in future prices of our open sales transactions are reflected in the Companys
net sales as provisions (Embedded Derivative and Sale Adjustments). During Q1 2013,
such provisions were negative US$ 8.3 million, whereas in Q12012, they totaled
positive US$ 24.8 million, an absolute negative difference of US$ 33.1 million in the net
sales of the company.
In this context of lower metal prices, it should be noted that the Company is taking
extreme measures in order to reduce costs and expense, improve its financial results
and preserve its cash position. Such measures are currently being applied despite the
fact that we perceive these price levels to be unsustainable in the medium term, due to
the fact that average production costs in the mining sector are very close to the current
price levels.
On the other hand, we are pleased to inform that the expansion from 4,200 to 5,200 tpd
of the Animn Plant in our Chungar mining unit was completed successfully in this
quarter. With this additional capacity Chungar will increase its annual silver production
by more than 2 million ounces. In addition, the Silver Oxides (Cerro de Pasco) and
Alpamarca Ro Pallanga projects are moving forward according to plan. We expect
both projects to be completed in Q4, generating an additional annual silver production of
more than 8 million ounces.
Finally, we would like to inform that between November 2012 and March 2013, the
investment grade rating assigned to Volcan Compaia Minera S.A.A., as part of the
bond issue that took place in February 2012, was reaffirmed by the 3 main international
rating agencies (Fitch Ratings, Standard & Poors, and Moodys). This reflects the
1

sound profile of the Company and the confidence on its growth plans, currently
underway.
The remainder of this report presents a brief analysis of the most significant economic
and financial results for Q1 2013.

II. General Overview:

For a proper analysis of the Company's results, it is important to describe the behavior
of certain quotes, macroeconomic variables and other relevant data that impact such
results.
1. During Q1 2013, average international prices for Zinc (Zn) and Lead (Pb) increased
by 0.4% and 9.8%, respectively, whereas the price for Silver (Ag), Cupper (Cu) and
Gold (Au), decreased by 7.8%, 4.6% and 3.5%, respectively, compared to the same
period of the previous year.
Table 1: Average Prices
Jan - Mar Jan - Mar
2013
2012
Zn (US$/MT)
Pb (US$/MT)
Ag (US$/Oz)
Cu (US$/MT)
Au (US$/Oz)

2,033
2,300
30.1
7,928
1,632

2,024
2,094
32.7
8,308
1,692

Var
(%)
0.4
9.8
(7.8)
(4.6)
(3.5)

Source: Metals Week - Platts

2. The average exchange rate during Q1 2013 was S/. 2.575 per U.S. Dollar. This rate
reflects a 4.0% appreciation of the Nuevo Sol if compared to the average rate during
Q1 2012 (S/. 2.683 per U.S. Dollar).
Source: bcrp.gob.pe

3. At the end of Q1 2013, Brent Crude oil price was quoted at US$ 110.02 per barrel,
which represents a 10.4% decline with regard to the quote at the end of Q1 2012
(US$ 122.8 per barrel), and a 6.1% decline with regard to the quote at the end of Q1
2011 (US$ 117.17 per barrel), and a 33.7% increase if compared to the quote of the
same period in 2010 (US$ 82.27 per barrel).
Source: Invertis

4. Inflation, measured based on the variations in the Consumer Price Index, and
annualized as of March 31, 2013, reached 2.59%. On the other hand, the
Wholesale Price Index registered an annual variation of 1.22%.
Source: bcrp.gob.pe

5. During the first two months of 2013, domestic production of Zinc and Lead increased
by 2.9% and 5.1%, respectively; meanwhile, Copper, Gold, and Silver production
declined by 0.5%, 21.1%, and 2.3%, respectively, as compared to the production
over the first two months of 2012.

Table 2: Perus metal production

Production
(Fines)
Copper
Gold
Zinc
Silver
Lead

Unit
MT
Fine Kg
MT
Fine Kg
MT

Jan - Feb Jan - Feb

Var (%)
2013
2012
186,353
23,181
214,322
541,136
40,731

187,344
29,382
208,306
554,075
38,763

(0.5)
(21.1)
2.9
(2.3)
5.1

Source: Ministry of Energy and Mines

6. As a result of lower prices and higher costs in the mining industry, the main global
mining companies have reported 2012 results that evidence a significant reduction in
their net profits. The following table shows some of these results, that characterize
the global context in which mining companies currently operate.
Table 3: 2012 vs. 2011 profit variations for global mining companies
Large Mining
Companies *

Average Variation
2012 / 2011

Sales

-10%

EBITDA

-31%

EBIT

-42%

Net Profit

-85%

Source: Bloomberg, companies web pages.

* Xstrata, Glencore, BHP Billiton, Vale do Rio Doce, Anglo American, Freeport McMoRan, Ro Tinto

III.
1.

Analysis of Operating Results

Production

On a consolidated basis, the volume of ore treated during Q1 2013 decreased by 23.5%
as compared to the volume of ore treated during Q1 2012. During such period, we can
observe a significant 74.3% decline in the volume treated in our Cerro de Pasco Mining
Unit, as compared to same period in 2012. This reduction is mainly explained by the
suspension of mining activities at the Raul Rojas open pit since September 2012, a
lower ore contribution from the Paragsha underground mine, and the end of the first
phase of successful ore treatment tests involving Silver pyrite stockpiles during
December 2012. It should be noted that at current production levels, our Cerro de
Pasco mining unit has a participation of only 9% in the total sales of the Company,
however, Volcan keeps evaluating new projects to be developed in the Raul Rojas open
pit, and that the metallurgical feasibility studies referred to the Silver Pyrite project
should be completed by the second half of the year. In the meantime, the Company is
deploying great efforts in making the current structure of the Cerro de Pasco Mining Unit
more efficient and bringing it to a suitable size.
The decrease in the volume treated in the Cerro de Pasco Mining Unit was partially
offset by treatment increases in the Yauli and Chungar Mining Units (2.5% and 1.1%,
respectively). We should note the increased volume of ore treated in the Chungar
3

Mining Unit during Q1 2013, despite the 10-day plant stoppage in January, needed to
conduct the final configuration of the recent plant expansion. This expansion project
has been successfully completed on schedule and according to the foreseen conditions,
allowing the Animon Plant to increase its treatment capacity by 20%. This expansion
will be fully evidenced in production volumes as of April 2013. In addition to the above,
we should note that from December 27th to January 14th production at our Chungar
mining unit was affected by the blockage of one of the main roads in the area, in the
neiborhood of the Huaychao Community, and by the unplanned repair of a primary mill
in March.
In the case of Yauli, we should mention that the expansion to 3,200 tpd of the
Andaychagua plant was conluded and that we expecet the expansion to 4,500 tpd of
the Victoria plant to be finished in june of this year.
Table 4: Treated ore (thousand MT)
Unit
Yauli
Cerro de Pasco
Chungar
Total Volcan

Jan - Mar Jan - Mar

2013
2012
894
163
394
1,451

872
636
390
1,898

Var
(%)
2.5
(74.3)
1.1
(23.5)

Regarding production of fines, it is worth mentioning that the production of Zinc fines
declined by 19.0%, from 75,697 MT in 2012 to 61,294 MT in Q1 2013. This is the result
of the above mentioned reduction in the Cerro de Pasco mining unit, and to lower Zinc
treatment grades registered in Yauli and Chungar, which are expected to be reverted in
the following months with production from new areas that have better grades, in our San
Cristobal mine, and due to the normalizatoin of production at the Animn mine in
Chungar, affected by pumping problems during Q12013.
On the other hand, the production of Lead fines declined by 9.7%, moving from 17,623
MT in 2012 to 15,907 MT in 2013. This decline is lower than that of Zinc, given that the
lower production in Cerro de Pasco was partially offset by a greater production in Yauli,
and particularly in Chungar, due to higher head grades of the ore treated.
In regards to silver production, ounces produced declined by 10.4%, from 5.4 million in
2012 to 4.9 million in 2013. In addition to the decline in production at the Cerro de
Pasco Unit, Yaulis production also declined, due to lower head grades, which are also
expected to be reverted during the months to come through increased treatment
volumes thanks to the expansions on the Andaychagua and Victoria plants. These
declines were partially offset by a significant increase in the silver production of
Chungar, which is mainly explained by higher head grades, particularly in the ore
coming from the Islay mine.
Lastly, the production of Copper fines has slightly decreased by 3.6%, from 736 MT in
2012 to 710 MT in 2013.

Table 5: Production of Fines

Unit

Jan - Mar Jan - Mar

2013
2012

Var
(%)

Zinc (MT)
Yauli
Cerro de Pasco
Chungar
Total Volcan

36,410
3,324
21,560
61,294

36,820
14,853
24,025
75,697

(1.1)
(77.6)
(10.3)
(19.0)

Lead (MT)
Yauli
Cerro de Pasco
Chungar
Total Volcan

7,262
1,851
6,794
15,907

7,065
5,690
4,869
17,623

2.8
(67.5)
39.5
(9.7)

Silver (Oz 000)

Yauli
Cerro de Pasco
Chungar
Total Volcan

2,670
609
1,581
4,861

2,770
1,362
1,294
5,426

(3.6)
(55.3)
22.3
(10.4)

440
270
710

505
231
736

(12.9)
16.9
(3.6)

Copper (MT)
Yauli
Chungar
Total Volcan

In Q4, the startup of the new Alpamarca - Ro Pallanga Mining Unit, in addition to the
Silver Oxides Project in Cerro de Pasco, will allow us to increase the treatment volumes
and production of silver fines, reducing unit costs and positively impacting the
Companys profitability.
Progress in Silver Oxides Plant in Cerro de Pasco:

Progress in Alpamarca Plant in new Alpamarca Ro Pallanga Operating Unit:

2.

Operating Costs

During the period ended on March 31, 2013, the unit costs of Yauli and Chungar Units
increased by 18.2% and 15.4%, respectively, compared to the same period of the
previous year. This increase lies below the estimated average sector inflation for the
industry of around 20%
Cost increases in our mining units are explained mainly by higher labor costs due to the
increasing demand of skilled personnel, higher energy rates due to greater nationwide
demand, increased prices of certain supplies such as explosives, oils and lime, and
more importantly, due to higher costs incurred in raising safety and maintenance
standards in our mining units.
On the other hand, the 74.3% decline in the volume treated at our Cerro de Pasco
mining unit had a significant impact on the calculation of unit production costs, since
fixed costs cannot be reduced in the same proportion in the short term. Even though
the Company has taken steps to adjust the structure of the Cerro de Pasco mining unit
and the absolute costs in dollars have already been reduced during Q1 2013, the
significant drop in treatment volume resulted in a 327% increase in the cost per ton of
this mining unit, from 38.7 US$/MT in Q1 2012 to 165.4 US$/MT in Q1 2013, although
the ore value is higher than the one reported last year. Even though the unit production
costs of the Cerro de Pasco mining unit underwent a significant increase, it should be
noted that the lower production volume at this unit results in a lower share of the
Companys total production volume, thus preventing a greater impact on the
consolidated unit cost.
In addition, the 4.0% appreciation of the Nuevo Sol with regard to the U.S. Dollar had a
negative impact on the total cost of the Company, given that approximately 40% of our
operating costs are expressed in Nuevos Soles.
Consequently, as a result of all of the above, Volcans consolidated unit cost of
production registered a 49.5% increase during Q1 2013, from 50.5 US$/MT in 2012 to
75.5 US$/MT in 2013.
6

During 2013, in addition to our constant quest for embracing efficiency improvement
opportunities and increasing productivity throughout the Company, the investments
made in Chungar Unit such as the Animon Plant expansion, the Baos V Hydroelectric
Power Plant and the Jacob Timmers Shaft, which is expected to start operations in midyear 2013, will help us offset certain factors that have been resulting in increased
production costs. In our Yauli unit, the expansions of the Andaychagua and Victoria
plants are additional exampes of the improvement initiatives that we have underway.
Table 6: Unit Cost of Production (US$/MT)

Costs
Yauli
Cerro de Pasco *
Chungar
Vinchos
Total Volcan

Absolute Production Cost

Cost per MT
(US$ millions)
(US$/MT)
Jan - Mar Jan - Mar Var
Jan - Mar Jan - Mar Var
2013
2012
(%)
2013
2012
(%)
60.3
49.9 20.9
71.1
60.2 18.2
15.0
24.2 (38.1)
165.4
38.7 327.0
27.2
22.8 19.2
63.7
55.2 15.4
1.9
1.9
(1.3)
54.3
69.7 (22.1)
104.3
98.8
5.6
75.5
50.5 49.5

* Cerro de Pascos production cost and Volcans consolidated production cost have been recalculated so as to include the Silver Pyrite ore treated
in the San Expedito Plant.

3.

Investments

During Q1 2013, investments made by Volcan on fixed and intangible assets amounted
to US$ 76.1 million, representing a 47.8% increase with regard to the investments made
in the same period of the previous year (US$ 51.5 million).
Investments made in the mining units during Q1 2013 totaled US$ 41.9 million. This
figure represents a slight increase compared to Q1 2012 investments, which totaled
US$ 40.1 million. Such operating investments made during Q1 2013 were mainly
addressed to mine development (US$ 13.4 million), equipment and mine infrastructure
(US$ 11.7 million), expansion and upgrades of concentrator plants (US$ 7.3 million),
explorations (US$ 3.4 million), construction of tailing storage facilities (US$ 2.7 million),
energy (US$ 1.7 million), and camps, environment, IT and other areas (US$ 1.2 million).
On the other hand, investments in regional explorations totaled US$ 2.3 million, a
16.8% increase compared to the same period of the previous year. These investments
are focused on the prospects with the greatest potential within the Companys portfolio,
in silver, polymetallic and copper, such as Zoraida, Palma, Ro Pallanga Noreste,
Pillcocha, Mijaigui and El Muki.
Finally, investments made on growth projects reached US$ 31.9 million during Q1 2013,
which represents a 236.1% increase if compared to Q1 2012. Such an increase is
mainly attributed to the progress on the execution of the Silver Oxides Project in Cerro
de Pasco and the Alpamarca - Ro Pallanga Project.

Table 7: Investments*
US$ (thousands)
Investments in Mining Units
Regional Explorations
Growth Projects and Others
Total

Jan - Mar Jan - Mar

2013
2012
41,881
2,251
31,930
76,062

40,051
1,928
9,501
51,480

Var
(%)
4.6
16.8
236.0
47.7

* The total indicated in this table does not reflect the same amount reported in the Cash Flow Statement of the quarterly Financial Statements, given
that the latter includes other items such as advances, Goodwill, municipal agreements, among others, and excludes investments made in Vichaycocha.

IV.

Analysis of Economic and Financial Results

1. Sales and Profits

The analysis of results presented below is based on the accounting figures reported in
Q1 2013 and Q1 2012 Financial Statements, which have been prepared according to
International Financial Reporting Standards (IFRS). It is worth mentioning that, as of
Q1 2013, the Companys Financial Statements and the Analysis of Results include the
impact of price hedging in the net sales figures. In the past, such impact was presented
as Options and Hedging, below the Operating Profit. The sales figure for 2012 has
been similarly restated so as to allow for a consistent comparison.
During Q1 2013, Volcans sales reached US$ 232.8 million, a 20.0% decline with regard
to the US$ 291.1 million reported for the same period in 2012. This is explained
primarily by lower production in Cerro de Pasco, due to the suspension of mining
activities at the Ral Rojas open pit, a 7.8% reduction in the price of silver and because
of the important negative effect of provisions resulting from variations in the forward
prices of our open sales transactions, which based on IFRS standards, have to be
included in our net sales figures. Such provisions are known as Embedded Derivatives
and Sales Adjustments, and are recorded on the last day of each month based on
forward prices of the metals sold by the Company, for the quotation periods of each sale
transaction that remains open. In addition, and as noted above, the net sales figures in
our Financial Statements will from now on also include the impact of price hedging.
The table below shows a summary of the above-described items, both for Q1 2013 and
Q1 2012:

Table 8: Variations as a result of the effect of pricing on sales (US$ thousands)

Jan - Mar Jan - Mar
Var (%)
2013
2012
Concentrate Sales
227,353 274,948 (17.3)
1
8,538
(9,942) (185.9)
Final Invoice adjustement
Sales before price adjustments 235,891 265,006 (11.0)
5,200
1,269
309.6
Hedges2
3
-6,654
9,757 (168.2)
Embedded Derivative
4
-1,675
15,075 (111.1)
Sales Adjustment
Price adjustments
-3,130
26,101 (112.0)
Net Sales
232,762
291,107 (20.0)
US$ (thousands)

Notes:
1 Final Settlement Adjustment: Referred to real adjustments that take place in order to
close sales transaction with customers, definitely.
2 Hedges: The result of price hedging activities throughout the period.
3 Embedded Derivatives: Provision for sale transactions yet to be settled (open), which
is determined by comparing the price at the time of sale against the forward price on the
estimated date of closing of such sale transaction.
4 Sales Adjustments: Provision for such sale transactions yet to be settled (open) but
having a defined closing date, and which is determined by comparing the price at the
time of sale against the forward price at the time of closing of such sale transaction.

Regarding the volume of concentrates sold, we can mention that Lead and Copper
concentrate sold (in Dry MT) during Q1 2013 increased by 4.5% and 127.5%,
respectively, as compared to the same period in 2012. However, copper concentrates
represent less than 3% of total concentrates sold by Volcan. On the other hand, Zinc
and Silver concentrate volumes sold declined by 38.6% and 11.0%, respectively.
These declines are mainly explained by the suspension of mining activities at the Raul
Rojas open pit in Cerro de Pasco.

Table 9: Sales Volume (DMT)

Product
Zinc Concentrate
Lead Concentrate
Copper
Silver Concentrate
Total

Jan - Mar Jan - Mar

Var (%)
2013
2012
100,621
163,754 (38.6)
28,601
27,361
4.5
10,777
4,738 127.5
3,876
4,356 (11.0)
143,875
200,209 (28.1)

It is evident that during Q1 2013 the share of the Yauli and Chungar mining units in the
Companys sales increased as a result of the decline in the production volume of Cerro
de Pasco. During the first quarter of the year, Yauli contributed 58% to the total sales of
the Company, followed by Chungar with 33% and by Cerro de Pasco with 9%.
Chart 1: Sales by Mining Unit (% of value in US$)
Sales by Mining Unit
Q1 2013
C. de
Pasco
9%
Chungar
33%

Yauli
58%

Sales by Mining Unit

Q1 2012

Chungar
25%

C. de
Pasco
23%

Yauli
52%

In regards to the composition of sales by metal, it is worth noting the stability of the
participation of silver in the Companys total sales, as it decreased only by one
percentage point quarter-to-quarter 47%, despite its price declining by 7.8%. At the
same time, the share of Zinc in the sales of the Company declined from 41% to 33%,
while the share of Lead increased from 8% to 12%. Even though the decrease in the
production volume of Cerro de Pasco had an impact on the Zinc and Lead concentrate
volumes sold, in the case of Lead, such decline was offset by higher grades. In
addition, the participation of Copper in the sales of the Company represented 7%, while
the share of Gold represented 1% of such sales during Q1 2013.

10

Chart 2: Sales by metal (%of value in US$)

Sales by Metal
Q1 2013

Sales by Metal
Q1 2012

Au
1%

Au
1%

Zn
33%

Ag
47%

Cu
7%

Zn
41%

Ag
48%

Pb
12%

Pb
8%
Cu
2%

2. Profitability
During Q1 2013, gross profit declined by 52% compared to the same period of the
previous year, from US$ 137.4 million to US$ 65.7 million. As a result, the gross margin
decreased from 47.2% during Q1 2012 to 28.2% during the same period in 2013. Such
declines are mainly explained by the following reasons:
1.) Negative effect of provisions resulting from variations in the forward prices of our
open sales transactions, which based on IFRS standards, have to be included in
our net sales figures (see definitions of Embedded Derivatives and Sales
Adjustments in the notes to Table 7). During Q1 2013, such provisions were
negative US$ 8.3 million, whereas in Q12012, they totaled positive US$ 24.8
million, an absolute negative difference of US$ 33.1 million in the net sales
of the company
2.) A 7.8% fall in the price of Silver, the metal with the largest participation in the
sales of the Company
3.) Higher volumes sold of third-party concentrates, increasing from 6,251 Dry MT in
Q1 2012 to 16,252 Dry MT in Q1 2013, thus increasing by 160%. It should be
mentioned that the profit margin obtained on sales of third-party concentrates is
typically lower than the one obtained from the sale of our own concentrates
4.) A 9.4% increase in depreciation and amortization expense, from US$ 28.1
million during Q1 2012 to US$ 30.8 million during Q1 2013, as a result of
greater investments made on fixed and intangible assets
5.) Increased production costs, partly as a result of generalized mining sector cost
increases, but also as a result of the new operating scenario in our Cerro de
Pasco mining unit, where unit production costs rose by 374%. As noted above,
such increase is the result of the suspension of mining activities at the Raul
Rojas open pit and the reduced production volume in the Paragsha underground
mine.
11

At the same time, Q1 2013 operating profit reached US$ 44.3 million, a 62% decline
compared to the US$ 116.5 million reported during Q1 2012. It should be noted that
administrative expenses declined by 2.1% from quarter-to-quarter.
Finally, net profit for Q1 2013 totaled US$ 22.4 million, a 68.3% decrease with regard to
the results obtained during Q1 2012.
Table 10: Main items of the Income Statement
US$ (thousands)

Jan - Mar 2013

Jan - Mar 2012 * Var (%)

Sales
Cost of Goods Sold
Gross Profit
Administrative Expenses
Selling Expenses
Other Income/(Expenses)
Operating Earnings
Financial Income / Expenses

232,762
(167,107)
65,655
(13,514)
(8,417)
529
44,253
(4,732)
(11,140)
(5,973)
22,409

291,108
(153,708)
137,400
(13,799)
(7,465)
410
116,545
(8,725)
(32,863)
(4,195)
70,763

Taxes
Royalties
Net Profit

100%
-72%
28%
-6%
-4%
0%
19%
-2%
-5%
-3%
10%

100%
-53%
47%
-5%
-3%
0%
40%
-3%
-11%
-1%
24%

(20.0)
8.7
(52.2)
(2.1)
12.7
29.1
(62.0)
(45.8)
(66.1)
42.4
(68.3)

* For detail on the composition of sales, please refer to Table No. 8

Q1 2013 EBITDA1 totaled US$ 76.0 million, a 47.5% decline compared to EBITDA
reported during the same period in 2012. Such decline is mainly explained by the
reduction in the gross margin, as noted in the above paragraphs. As a result, the
EBITDA margin over sales fell from 50% during Q1 2012 to 33% during the same period
in 2013.
Table 11: EBITDA

Net Profit (thousands US$)

EBITDA (thousands US$)
EBITDA/Sales

Jan - Mar Jan - Mar

Var (%)
2013
2012
22,409
70,763 (68.3)
75,963
144,827 (47.5)
33%
50%

EBITDA: Operating Profit + Depreciation and Amortization + Exceptional Expenses.

12

3. Liquidity and Creditworthiness

During Q1 2013, the operating cash flow generated by Volcan totaled US$ 28.0 million,
similar to the cash flow generated during the same period of the previous year. It
should be noted that, during the first quarter of each year, there is a concentration of
significant disbursements related to tax payments and workers profit-sharing. In
addition, in February 2013, the Company paid US$ 16-million in interest on the US$ 600
million bonds issued in February 2012
As a result thereof, the cash balance decreased from US$ 574.9 million at the end of
2012 to US$ 525.7 million at the end of Q1 2013.
Taking into consideration current debt levels and using Last Twelve Months EBITDA,
Volcans leverage ratio (Financial Debt / EBITDA) at the end of Q1 2013 was around
1.7x.
It is also important to mention that, between November 2012 and March 2013, the
investment grade rating assigned to Volcan Compaia Minera S.A.A., as part of the
bond issue that took place in 2012, was reaffirmed by the 3 main international rating
agencies (Fitch Ratings, Standard & Poors, and Moodys). This reflects the sound
profile of the Company and the confidence on its growth plans, currently underway.
The chart below shows the evolution of the Companys cash position and debt balance:
Chart 3: Cash Position and Debt Balance2 (US$ million)
800
700

Debt Balance

600

Cash Balance

661
616

607

575
526

500
400
650

300
200

706

706

706

705

Q2 12

Q3 12

Q4 12

Q1 13

154

99

120

102

90

61

Q2 11

Q3 11

Q4 11

100
0

Q1 12

The financial debt includes loans granted by financial institutions, leasing agreements, and others.

13

V.

Final Comments

1. During Q1 2013 a number of factors associated with the fluctuations in the

international prices of the metals we produce had a significant impact on the net
sales of the Company. On one hand, the price of Silver, metal that represents
around 50% of the Companys sales, had a quarterly average 7.8% lower than in the
same period of the previous year. Furthermore, the price of this metal also
registered a 20% decline in the first three weeks of April. Based on IFRS standards,
this downward trend, already evident at the end of March and present in the forward
prices of these metals, needed to be registered as a provision that negatively affects
our net sales figure for the period. The negative impact in Q1 2013 totaled US$ 8.3
million, compared to a positive impact of US$ 24.8 million in Q1 2012. Based on
available information, we believe that these price levels are unsustainable in the
medium term, due to the fact that average production costs in the mining sector are
very close to the current price levels
2. In addition, the sales volume registered by the Company during Q1 2013 was lower
than the one registered in the similar period of the previous year, with Zinc and
Silver concentrate volumes falling by 38.6% and 11%, respectively. Such lower
volumes were partially offset by greater sales of Lead and Copper concentrates,
which have a lower participation in the Companys sales
3. The above-noted lower price situation was fueled by higher costs, both as a result of
the decrease in the production volume of our Cerro de Pasco mining unit, as well as
by the inflationary pressured still prevailing in the sector. In such a scenario of
higher costs and current price levels, it is essential that mining companies are
implacable in their quest for cost optimization opportunities and the rigor with which
capital is allocated to investment projects. Volcan is aware of this situation and has
already taken extreme austerity measures that guarantee an optimal use of its cash
flow, giving priority to funding growth and cost reduction projects, as well as
production and all other safety and environment related matters.
4. During Q1 2013 the Animn Plant expansion in the Chungar mining unit was
completed, thus ramping up its production capacity from 4,200 tpd to 5,200 tpd.
Such expansion will allow us to generate additional silver production of
approximately 2 million ounces a year. The Silver Oxides project in Cerro de
Pasco, as well as the flotation plant aimed at treating the ore coming from the
Alpamarca open pit and the Ro Pallanga underground mine are on schedule. Both
projects are expected to be completed in Q4 2013, thus contributing nearly 8 million
ounces of silver to the Companys production in 2014, and helping Volcan become
a more profitable and competitive company
5. In parallel, the Company will remain focused on evaluating growth opportunities,
both, through its own projects, located in its concessions encompassing more than
340 thousand hectares, as well as through other options, which may be based either
in Peru or in other countries of the region

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