Volcan Compañía Minera A : Management Discussion Analysis - 2022 1Q

Volcan Compañía Minera S.A.A. and Subsidiaries

Management Discussion and Analysis

First Quarter 2022

Principal Results:

Consolidated Volcan

Jan-Mar 2022

Jan-Mar 2021

var %

Sales Prices¹

Zinc (USD/MT)

3,684

• 2,749 34.0

  Lead (USD/MT)

  2,286

• 2,056 11.2

  Copper (USD/MT)

  10,572

• 7,159 47.7

  Silver (USD/Oz)

  23.8

• 26.7 -10.8

  Gold (USD/Oz)

  1,879

• 1,804 4.2

Operating Results

Mineral treatment² (thousands MT) Zinc Production (thousands FMT) Lead Production (thousands FMT) Copper Production (thousands FMT) Silver Production (millions Oz)

2,085

1,997

4.4

52.7

51.2

2.9

13.6

12.8

6.0

1.1

1.1

0.2

3.6

3.8

-5.1

Gold Production (thousands Oz) Unitary Cost (USD/TM)3

8.0

5.4

46.6

55.5

50.8

9.3

Total Investments (MM USD)

41.8

28.0

49.1

Financial Results (MM USD)

Sales before adjustments Sales Adjustments

Settlement of prior period adjustments

Adjustment for open positions4

Hedging results

Sales after adjustments

263.6 15.8 6.6 9.2 0.0 279.4

211.2 -1.8 3.1 -3.4 -1.6 209.4

24.8

115.9

-100.0 33.4

Utility before IR

52.8

12.6

318.1

Income tax

-12.1

-11.3

Net profit before exceptionals

Exceptional adjustments 5

Net profit after exceptionals

40.7 -2.6 38.2

1.3 0.0 1.3

EBITDA6

125.6

89.0

41.1

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

• 3 For the unitary cost calculation the sub total production cost is being used becuase in the

1Q21 the infill drilling costs was not taken into account.

4 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. The financiancial provisions, sales adjustments up to March 2022 reflects the sensitivity to a determined future price curve.

5 The 1Q22 exceptional adjustments are made up of impairment of long term assets in Cerro de Pa s co .

6 Does not consider exceptional adjustments.

Source: Volcan Cia. Minera

1. Executive Summary

• • The Company's sales before adjustments increased by 24.8%, from USD 211.2 MM in

  1Q21 to USD 263.6 MM in 1Q22, mainly explained by better base metals prices, higher zinc, lead and gold production, and the reduction of concentrate inventories, partly offset by lower silver prices and production. In line with the positive evolution of metals prices, sales adjustments totaled USD 15.8 MM in 1Q22 as compared to USD -1.8 MM in 1Q21, and as a result sales after adjustments increased by 33.4%, from USD 209.4 MM in 1Q21 to USD 279.4 MM in 1Q22.

  Chart 1: 1Q22 vs 1Q21 variations impact on net sales (USD MM)

• • The price of zinc increased from 2,749 USD/MT in 1Q21 to 3,684 USD/MT in 1Q22 (34.0%), lead from 2,056 USD/MT to 2,286 USD/MT (11.2%), copper from 7,159 USD/MT to 10,572 USD/MT (47.7%), and gold from 1,804 USD/Oz to 1,879 USD/Oz (4.2%). On the contrary, silver price decreased by 10.8% from 26.7 USD/Oz to 23.8 USD/Oz.

• • Total treated volumes increased by 4.4% and zinc fines production by 2.9%, from 51.2 thousand FMT in 1Q21 to 52.7 thousand FMT in 1Q22, lead production by 6.0%, from 12.8 thousand FMT to 13.6 thousand FMT, copper production by 0.2%, from 1.07 thousand FMT to 1.08 thousand FMT, and gold production by 46.6%, from 5.4 thousand Oz in 1Q21 to 8.0 thousand Oz in 1Q22. However, silver production in 1Q22 was 3.6 MM Oz, a 5.1% reduction compared to 1Q21, mainly due to lower grades of this metal at Alpamarca, Animón and the Oxides Plant.

• • Consolidated unit cost increased by 9.3%, from 50.8 USD/MT in 1Q21 to 55.5 USD/MT in 1Q22, mainly explained by high local and global inflation that impact most of the main expense items, such as labor, goods, supply, reagents, energy, fuel, etc. Moreover, preparations and rehabilitations at the main mining units have increased.

• • Net profit before exceptional items increased from USD 1.3 MM in 1Q21 to USD 40.7 MM in 1Q22, mainly due to higher gross profit as a result of better metals prices and lower financial expenses related to the issuance and buyback of bonds carried out in 1Q21.

  The variations that had an impact on net profit are shown in detail in the chart below.

Chart 2: 1Q22 vs 1Q21 variations impact on net profit before exceptional items (USD MM)

• • EBITDA increased by 41.1%, from USD 89.0 MM in 1Q21 to USD 125.6 MM in 1Q22, mainly due to higher gross profit as a result of better base metals prices.

• • Total investments increased from USD 28.0 MM in 1Q21 to USD 41.8 MM in 1Q22, due to the withdrawal of limitations to project execution now that the effects of the pandemic are kept under control.

2. Consolidated Results

2.1 Production

Table 1: Consolidated Production

Consolidated Production

Mineral extraction (thousands MT)

Polymetallic ore

Oxides ore

Mineral treatment (thousands MT)

Concentrator Plants

Silver Oxides Plant

Fine Content

Zinc (thousands FMT) Lead (thousands FMT) Copper (thousands FMT) Silver (millions Oz)

Gold (thousands Oz)

Source: Volcan Cia. Minera

In 1Q22, extracted ore volumes increased by 0.3%, from 1.974 MM MT in 1Q21 to 1.981 MM MT in 1Q22. Similarly, treated volumes increased by 4.4%, from 1.997 MM MT in 1Q21 to 2.085 MM MT in 1Q22, mainly due to higher production volumes at Yauli, Cerro de Pasco and the Oxides Plant.

Total zinc fines production increased by 2.9%, from 51.2 thousand FMT in 1Q21 to 52.7 thousand FMT in 1Q22, lead production by 6.0%, from 12.8 thousand FMT to 13.6 thousand FMT, copper production by 0.2%, from 1.07 thousand FMT to 1.08 thousand FMT, and gold production by 46.6%, from 5.4 thousand Oz in 1Q21 to 8 thousand Oz in 1Q22, mainly due to higher grades of this metal in the treated ore at the Oxides Plant. However, silver production decreased by 5.1%, from 3.8 MM Oz in 1Q21 to 3.6 MM Oz in 1Q22, mainly explained by lower grades in the ore processed at Alpamarca, Animón and the Oxides Plant.

2.2 Cost of Production

Table 2: Consolidated Cost of Production

Consolidated Production Cost Production Cost (MM USD)

Jan-Mar 2022

Jan-Mar 2021

var %

Mine Cost

Plant and Other Cost

Sub total Production Cost (MM USD)

Inflill drilling cost

Total Production Cost (MM USD)

51.8 61.2 113.0 2.9 115.9

48.1 52.8 100.9 0.0 100.9

7.6 16.0 12.0

14.9

Unit Cost (USD/MT)

Mine Cost

Plant and Other Cost

Sub total Unit Cost (USD/TM)

Infill drilling cost

Total Unit Cost (USD/TM)

26.2	24.4	7.2
29.4	26.4	11.2
55.5	50.8	9.3
1.5	0.0
57.0	50.8	12.1

Source: Volcan Cia. Minera

Since 2022, infill drilling costs are considered a production cost. Infill drilling is carried out to increase the certainty of the reserves and reduce risk in mining plans. In 1Q22, this cost amounted to USD 2.9 MM. It is important to note that infill drilling was previously reported under local exploration investments at the operating units.

The absolute cost of production, excluding infill drilling, increased by 12.0%, from USD 100.9 MM in 1Q21 to USD 113.0 MM in 1Q22, while consolidated unit cost grew by 9.3%, from 50.8 USD/MT in 1Q21 to 55.5 USD/MT in 1Q22. This increase is mainly explained by the local and international inflation that has impacted labor, goods, supplies, reagents, energy, and fuel costs, among others. Mine preparations and sustaining liabilities from previous works also increased.

The Company is doubling its efforts to control and lower costs through different initiatives organized systematically through the "Volcan Avanza" project.

The evolution of the unit cost of production is shown in the chart below.

Chart 3: Evolution of the Unit Cost of Production excluding Infill Drilling (USD/MT)