The Company
Volcan is a significant global producer of silver, zinc, copper and lead. It is the fourth-largest producer of zinc and silver worldwide and is currently the top producer of silver, zinc and lead concentrates in Peru. The company is engaged in the exploration, exploitation, and beneficiation of minerals, solely and through subsidiaries that perform extraction, concentration, and processing activities. The miner’s operations are mainly established in the central Peruvian region of Junin. Accounting for reserves and resources, the combined life of Volcan’s mining operations is 40 years.
The company owns three operating units: Yauli (54% of total revenues), Chungar (27%) and Cerro de Pasco (19%). In 2012 Volcan produced 297,000 tonnes of zinc, 72,500 tonnes of lead and 22m troy ounces of silver. Total revenues equalled $1.161bn and came primarily from silver (50%), followed by zinc (37%), lead (9%), copper (3%) and gold (1%).
Volcan’s net income of $211m in 2012 was 36% lower than the previous year. Weaker earnings can mostly be attributed to lower base metal prices and higher costs resulting from increased labour costs, but also because the company engaged in an infrastructure modernisation project. Indeed, margins for earnings before interest, taxes, depreciation and amortisation (EBITDA) fell to 39.6% in 2012 from 50.7% in 2011. Volcan has a market capitalisation of $2.4bn as of September 2013, 2% of that of the Lima Stock Exchange. Volcan trades at a price-to-earnings ratio of 7.88x, lower than the regional average.
Development Strategy
The company is improving its exploration activities with more investments, and reducing the cost of extraction at its major operations with a review of capital expenditure (capex) investments in all its operating units, better negotiation terms with suppliers and reduced expenses in its Lima headquarters. Its long-term growth plan is based on the expansion of current operations ( Chungar, Andaychagua and Victoria plant upgrades with an estimated capex of $25.5m), new short- and medium-term units (such as the Alpamarca-Rio Pallanga unit, producing silver oxides and pirites), regional explorations (San Sebastián, Palma and El Muqui) and further opportunities (greenfield projects).
Volcan plans to almost double its silver output over the next three years to tap higher metal prices. The main silver projects are expansions or new projects located in Cerro de Pasco (pirites and oxides), as well as in the Yauli, Chungar and Vinchos units. The development of silver oxides at Cerro de Pasco and the new Alpamarca-Rio Pallanga unit (with a total expected capex of $350m) will place Volcan at the top of Latin American silver producers in 2014, with joint production of 8m ounces of silver per year. The company is directing more focus on its silver and copper developments than those of zinc or lead to take advantage of their relatively better perspectives.
The company’s hydroelectric projects, such as Chancay (60 MW) and Belo Horizonte (180 MW), are expected to become value drivers for Volcan because they will help the company secure the supply of energy required for the execution of its future projects at reduced costs (around $2.20 per KWh).
In January of 2012 Volcan successfully sold $600m of 10-year bonds at 5.375%, which were eight times oversubscribed. Bondholders are mostly international institutional investors (48.8% from the US, 19% from the UK and roughly 10% each from Chile, Switzerland and Peru). As of June 2013, the company showed solid credit ratios such as a leverage of 1.4x ( financial debt-to-EBITDA ratio) and interests coverage of 20.4x (EBITDA-to-interest ratio), including an important cash position of $437.6m.
The abovementioned bond sale could be considered the first step of the company’s internationalisation strategy, perhaps pointing to future listings on stock exchanges in New York, Toronto or London. In addition to Lima’s stock exchange, Volcan is already listed in Madrid, Spain and Santiago de Chile, Chile.
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