Earnings Review

Milpo: 4Q09 earnings

BUY
Milpo
16 February 2010 Isabel Darrigrandi ida@celfin.com +562 490 5093 Cesar Perez-Novoa cp@celfin.com +562 490 5012

Metals & Mining | Peru

Higher than expected operating results

Milpo and subsidiaries reported consolidated 4Q09 revenue of US$144.0 million and Ebitda of US$98.8 million, 10% and 39% higher than our expectations. Milpos 4Q09 topline increased 231% YoY, largely due to the strong recovery in metal prices: the average LME price for zinc was up 77% YoY (US$2,118/ton); copper increased 70% (US$6,618/ton), lead was up 83% (US$2,264/ton) and silver increased 70% (US$17.31/oz) in the same period. The companys increased output of copper concentrate, which grew 71% YoY to reach 20,480 tons in 4Q09, also contributed to strong top line growth. Milpos 4Q09 Ebitda increased 156% YoY and Ebitda margin expanded by 1,400bps from 55% in 3Q09 to 69% in 4Q09 (Milpo had negative operating income in 4Q08), primarily as a result of lower cash costs at the three main polymetallic units: Porvenir saw an 8% YoY decrease (to US$21/ton), Cerro Lindo a 6% reduction (US$15.90/ton) and Atacocha, which came under Milpos management in 4Q08, a 36% decrease (US26.60/ton). Porvenir and Atacocha also delivered QoQ reductions in cash cost per ton. Cerro Lindo, however, had an 8% QoQ cash cost per ton increase, due to planned maintenance and improvements at the concentration plant. In 2009 Milpo and subsidiaries produced 371 thousand tons of zinc concentrate (YoY growth of 8%), 74 thousand tons of copper concentrate (YoY growth of 78%) and 39 thousand tons of lead concentrate (YoY decrease of 9%). Milpos 2009 revenue and Ebitda were US$401.3 million and US$206.0 million, respectively. Net income and EPS for the year were US$61.2 million and US$0.07 per share (see chart below for more detail)
6.71 9.03 35% BUY 849.2 1,998.1 MILPOC1 PE

Overview
Share price (S/./share) Target price (S/./share) Upside (%) Recommendation Shares outstanding (mn) Market Cap (US$mn) Ticker (Bloomberg) Source: Bloomberg, Celfin Capital.

but 4Q09 net income falls short

Despite strong operating results, Milpos 4Q09 net income of US$29.7 million came in 15% below our estimate, due to higher than expected income tax, worker participation contributions and minority interest. Minority interest was US$4 million in 4Q09, compared to a negative US$16.1 million in 4Q08. Milpos minority interest largely depends on Atacochas consolidated net income, which was a negative $50.1million in 4Q08 and a positive US$6.9 million in 4Q09.

Reserves and resources increase

In Milpos annual report, the company provides a non-audited update of its reserves and resources. Porvenirs reserves increased 36% while Cerro Lindos and Atacochas reserves decreased 9% each, compared to 2008. Measured and indicated resources increased at all three mining units: Porvenir by 35%; Cerro Lindo by 91% and Atacocha by 53%. Atacochas inferred resources increased by more than 11x, from 1.4 million in 2008 to 15.9 million in 2009.

Share price performance

9 8 7 6 5 4 3 2 1 0
Jan-09 Apr-09 Jul-09 Oct-09

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Jan-10

Lower short term and overall debt

Milpo significantly reduced its short-term debt burden, from US$147 million in 3Q09 to US$47 million in 4Q09, primarily by renegotiating debt at its Atacocha subsidiary. The company ended the year with US$113 million in cash (slight increase from 3Q09). Milpos debt/equity decreased from 87% in 2008 to 41% in 2009.

Reiterate our BUY recommendation

We reiterate our BUY recommendation and maintain our price objective at S/.9.03 per share, which represents 35% upside from the current share price of S/.6.71 per share. Milpo is currently trading at a discount to global peers: on an EV/Ebitda basis, Milpo is at 6.8x 2010 and 4.6x 2011. On a P/E basis, Milpo is at 13.1x 2010 and 8.2x 2011. Global peers are trading at an average 2010 EV/Ebitda of 9.5x, 2011 EV/Ebitda of 7.5x, 2010 P/E of 17.4x and 2011 P/E of 12.6x.
Milpo | Metals & Mining 1

Milpo

IGBVL

Sources: Bloomberg, Celfin Capital.

Milpo | Earnings Review

16 February 2010

P&L (US$ 000s)

4Q09E 130,830 200.7% (55,328) -12.9% (6,749) 68,753 52.6% -294.4% (5,887) -3.6% (6,541) 13.7% (2,617) -138.8% (15,045) 194.1% 53,708 41.1% -232.7% 17,301 71,009 54.3% 83.7% (2,728) -51.1% 0 -100.0% 50,980 39% -210.4% (4,078) 8% (10,417) 22% 28% 36,485 27.9% -183.9% 1,489 34,996 26.7% -228.0% 849,246,083 0.04 2009E 388,094 25.8% (204,445) 8.7% (30,675) 152,974 39.4% 85.2% (20,581) 22.1% (23,250) 17.5% (3,949) 6.6% (47,780) 18.4% 105,194 27.1% 148.9% 72,989 178,183 45.9% 9.4% (21,399) 301.1% 0 -100.0% 83,795 22% 127.7% (9,743) 12% (25,265) 34% 42% 48,787 12.6% 232.2% (17,698) 66,485 17.1% 115.8% 849,246,083 0.08 4Q09A 143,998 231.0% (51,756) -18.5% (18,018) 74,224 51.5% -309.9% (3,313) -45.8% (4,666) -18.9% (280) -104.2% (8,259) 61.5% 65,965 45.8% -263.0% 32,883 98,848 69% 155.7% (5,645) 1.3% (2,227) 1502.2% 58,093 40% -225.8% (6,434) 11% (17,939) 35% 42% 33,720 23% -177.6% 4,009 29,711 21% -208.6% 849,246,083 0.03 2009A 401,262 30.1% (200,873) 6.8% (41,944) 158,445 39.5% 91.8% (18,007) 6.8% (21,375) 8.0% (1,612) -56.5% (40,994) 1.6% 117,451 29.3% 177.9% 88,571 206,022 51.3% 26.5% (24,316) 355.8% (2,227) 1502.2% 90,908 23% 147.1% (12,099) 13% (32,787) 42% 49% 46,022 11% 213.4% (15,178) 61,200 15% 98.6% 849,246,083 0.07 4Q09 Act vs Est 10.1% -6.5% 167.0% 8.0% 2009 Act vs Est 3.4% -1.7% 36.7% 3.6%

Total revenue YoY Operating costs YoY Amortization of exploration costs Gross income Margen YoY Administrative expenses YoY Sales expenses YoY Other income/(expenses) YoY Total SG&A YoY Operating income Margen YoY D&A EBITDA Margen YoY Non-operating results Financial income (expense), net Growth Gain (loss) from exchange rate Growth Inc. before worker part. & inc. tax % of sales Growth Worker participation % of inc. before worker participation Income tax % of inc. after worker participation Effective tax rate Net income before min. Int. Margen Growth Minority interest Net income Margen Growth Shares outstanding EPS (US$)

-43.7% -28.7% -89.3% -45.1% 22.8% 13.0% 90.1% 39.2%

-12.5% -8.1% -59.2% -14.2% 11.7% 19.5% 21.3% 15.6%

106.9%

13.6%

14.0%

8.5%

57.8%

24.2%

72.2%

29.8%

-7.6%

-5.7%

169.3% -15.1%

-14.2% -7.9%

Sources: Public information provided by Milpo, Celfin Capital.

Milpo | Metals & Mining

Milpo | Earnings Review

16 February 2010

Operations
Mining unit summary El Porvenir Processed ore (MT) YoY Zn concentrate (MT) YoY Pb concentrate (MT) YoY Cu concentrate (MT) YoY Cerro Lindo Processed ore (MT) YoY Zn concentrate (MT) YoY Pb concentrate (MT) YoY Cu concentrate (MT) YoY Atacocha Processed ore (MT) YoY Zn concentrate (MT) YoY Pb concentrate (MT) YoY Cu concentrate (MT) YoY Total polymetallic units Processed ore (MT) YoY Zn concentrate (MT) YoY Pb concentrate (MT) YoY Cu concentrate (MT) YoY 4Q09E 450,450 11% 30,857 2% 3,517 -12% 2,273 63% 621,000 12% 33,243 -10% 1,970 -32% 20,783 134% 368,550 17% 29,787 6% 3,100 -23% 1,538 -7% 1,440,000 13% 93,886 -1% 8,587 -22% 24,594 106% 2009E 1,708,756 23% 117,636 19% 15,881 2% 7,654 80% 2,400,653 22% 143,354 4% 9,615 -16% 64,588 101% 1,410,312 12% 113,855 5% 12,264 -24% 6,214 16% 5,519,721 19% 374,845 9% 37,760 -12% 78,456 88% 4Q09A 453,887 12% 31,981 6% 2,922 -27% 2,762 98% 628,407 13% 29,568 -20% 3,215 11% 16,207 82% 383,233 22% 28,471 1% 4,116 2% 1,510 -9% 1,465,527 15% 90,020 -6% 10,253 -6% 20,480 71% 2009A 1,712,192 23% 118,760 21% 15,286 -2% 8,143 92% 2,408,060 22% 139,679 2% 10,860 -5% 60,013 86% 1,424,995 13% 112,539 4% 13,280 -17% 6,186 16% 5,545,247 20% 370,978 8% 39,426 -9% 74,342 78% 4Q09 Act vs Est 1% 4% -17% 22% 2009 Act vs Est 0% 1% -4% 6%

1% -11% 63% -22%

0% -3% 13% -7%

4% -4% 33% -2%

1% -1% 8% 0%

2% -4% 19% -17%

0% -1% 4% -5%

Sources: Public information provided by Milpo, Celfin Capital.

Milpo | Metals & Mining

Disclaimer

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